Accumulate ComfortDelGro on dips given good track record: UOB

SINGAPORE (May 28): UOB Kay Hian recommends investors "buy" ComfortDelGro (CDG) on dips with a target price of $2.77 following the group’s results announcement.

See: Brokers shift gear to 'hold' for ComfortDelGro after good run

CDG on May 14 announced that its 1Q19 earnings have increased by 6.2% y-o-y to $70.4 million, due to higher revenue, driven by strong contributions from recent acquisitions made in 2017 and 2018.

Revenue grew by 7.8% y-o-y to $947.3 million, with the topline growth coming mainly from the Public Transport Services, Automotive Engineering Services and Driving Centre businesses, but this was offset in part by lower income from the Taxi and Bus Station businesses.

In all, operating profit for 1Q grew 12.2% or $11.7 million on-year to $107.4 million, which the group says would have been $1.7 million higher if not for negative foreign currency impacts resulting from the weaker AUD, GBP and RMB.

See: ComfortDelGro posts 6.2% higher 1Q earnings of $70.4 mil on topline boost from acquisitions

Despite growth in the group’s 1Q19 earnings, CDG missed UOB’s estimates by a whisker.

However, UOB has a more bullish view on the stock compared to consensus which has a more neutral stance.

CDG’s management has indicated that it will participate in bus tenders in Australia, with upcoming locations in Perth and Adelaide in consideration.

In a May 15 report, analyst Lucas Teng says, “Competition in the tenders may prove difficult, as extended criteria such as on-demand services are included in tender requirements. CDG’s operational track record, however, puts it in good stead.”

In efforts to compete with private hire apps in Singapore, CDG has introduced a dynamic pricing model to its booking app. With this model, fares will be adjusted according to demand and supply, though peak surges will be limited.

“Competition in the tenders may prove difficult, as extended criteria such as on-demand services are included in tender requirements. CDG’s operational track record, however, puts it in good stead,” says Teng.

Private hires are also putting in counter-measures, such as “Droplet”, an insurance offered in partnership between Grab and NTUC to guard against surge pricing during rainy days, encouraging customer stickiness.

CDG’s management also noted that the enhancements to the app will be introduced on a progressive basis.

As at 11.05am, shares in CDG are trading 2 cents lower at $2.43 or 2.1 times FY19 book with a dividend yield of 4.4%.