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Analysts mixed on ComfortDelGro's outlook after 3QFY2022 earnings miss

RHB has kept its TP unchanged at $1.80 while Maybank Securities and PhillipCapital have lowered their TPs to $1.60 and $1.75.

Analysts are mixed on their outlook for ComfortDelGro (CDG) after the transport operator reported a set of results for the 3QFY2022 ended Sept 30 that stood below expectations.

On Nov 14, CDG reported patmi of $34.3 million for the 3QFY2022, up by 32.9% y-o-y. In the 9MFY2022, CDG’s patmi stood at $153.0 million, up by 31.0% y-o-y.

CDG’s revenue for the quarter improved by 10.1% y-o-y to $969.5 million while its 9MFY2022 revenue increased by 7.9% y-o-y to $2.83 billion.

According to the group, the increase in its revenue for both the 3QFY2022 and 9MFY2022 were mainly attributable to the post-Covid-19 reopening and higher fuel prices. Taxi fare commissions also contributed to the y-o-y growth for the 3QFY2022.

While analysts from Maybank Securities, PhillipCapital and RHB Group Research all kept their “buy” calls, only RHB’s analyst Shekhar Jaiswal was the most optimistic about CDG.

Keeping his target price unchanged at $1.80, Jaiswal notes that the transport operator’s business update confirmed his assessment that CDG will continue to report y-o-y earnings growth.

While he expects CDG to book y-o-y earnings growth in the FY2023 on the back of an improving taxi segment and higher rail ridership, the analyst acknowledges that inflationary pressures from higher fuel and wage costs and a mismatch in the timing of cost increases versus being compensated for cost inflation translated into margin compression in the 3QFY2022.

To him, CDG’s quarterly revenue and patmi stood largely within his estimates even though consensus estimates note otherwise.

“To make comparisons fair, excluding government relief, CDG reported an ebit of $53.6 million (+170.7%) in 3QFY2022,” says Jaiswal.

“While the revenue growth was aided by improving economic activity levels in Singapore after the relaxation of Covid-19 restrictions, there was some inflationary cost pressure, especially for the public transport business,” he adds.

On CDG’s public transport unit, which booked “weak” q-o-q earnings, Jaiswal surmises that the group’s overseas public transport business reported a “much sharper” y-o-y decline in recurring ebit, especially from CDG’s UK business.

He adds that the timing mismatch is expected to persist into the 4QFY2022 as CDG is “still in discussions with the transport authority for appropriate cost adjustments”.

Furthermore, Jaiswal sees that there may be scope for higher dividend payouts from CDG with its net cash balance of $650 million.

“Unless it uses the cash to undertake a large acquisition, with no major capex scheduled for the rest of the year, we believe there could be scope for a higher (70%-80%) dividend payout ratio,” he writes.

“Excluding the 1.4 cents of special distribution per share (DPS) that was announced with [its] 1HFY2022 results, we currently estimate FY2022-FY2024 dividend payout ratio at 50%,” he adds.

At present, Jaiswal believes CDG’s valuation is “compelling”. The group’s share price has dropped by 17% in the last three months with its stock’s forward P/E now well below its 10-year average.

Target price cuts by Maybank Securities and PhillipCapital

Unlike their counterpart at RHB, Maybank’s Eric Ong and PhillipCapital’s Paul Chew have both cut their target prices after CDG’s earnings stood below their expectations.

Ong has reduced CDG’s target price to $1.60 from $1.75 previously, while PhillipCapital’s Chew has lowered his target price estimate to $1.75 from $1.80 before.

Ong has also cut his earnings per share (EPS) estimates for the FY2022 to FY2024 by 15%. Similarly, PhillipCapital’s Chew has cut his patmi estimate for the FY2022 by 24% to $207.3 million.

In Ong’s view, CDG’s miss is attributed entirely to the group’s public transport services, especially its overseas operations, given the elevated costs and foreign exchange (forex) headwinds.

He also notes that the near-term challenges for CDG’s overseas operations, where the group’s core operating profit of $22.5 million for its public transport services was “off the mark” due to the inflationary cost pressures.

“Management claimed the margin pressure was due to driver shortage across all operating geographies, and the time lag to pass on higher costs (its public bus service fees only see indexation from wage and consumer price index (CPI) on an annual basis),” notes Maybank’s Ong.

On a positive note, Ong, like RHB’s Jaiswal, acknowledges that CDG’s taxis and private hire vehicles remain a bright spot with its sequential growth.

“While there are still some reliefs granted in China in response to new outbreaks, we expect this targeted scheme to gradually taper off as the country looks more likely to further fine-tune its dynamic zero Covid policy in 2023,” says Ong.

To Ong, CDG’s three bus contracts in Sydney, Australia, are also expected to contribute positively.

“The new Region 4 contract will start in April 2023 and run for eight years while the new Region 14 contract will commence in May 2023 and run for seven years. We estimate ebit contribution of about $12 million on a full-year basis,” he adds.

To PhillipCapital’s Chew, the surge in CDG’s profitability for its Singapore operations and its healthy free cash flows were a plus, while the multiple bumps overseas were a negative to CDG’s outlook.

The analyst adds that he expects the rebound in CDG’s Singapore rail and taxi operations to rebound in the coming 4QFY2022.

“An additional boost for taxi revenue will come from an increase in booking commission from 4% to 5%, effective October. Although taxi rental rebates are expected to maintain at 15%, booking commission effective rental cover is 1.5x (i.e. 5% commission is equivalent to 7.5% recovery in taxi rentals),” he writes.

For the FY2023, Chew estimates that CDG’s rail operations will enjoy an uplift from the fare adjustment of 13.5%.

“Part of the increase will stem from the higher passenger fares of 2.9% (effective Dec 26), with the balance a government subsidy instead of fare increases. The headwind for Singapore earnings will be the lower bus contracting fees from five packages, as announced a year ago,” he says.

“The margin pressure on overseas bus operations will persist until cost recovery is implemented. The anniversary dates for cost recovery were not disclosed but we expect an improvement in margins from overseas operations to gradually improve over the next three quarters,” he adds.

Shares in CDG closed 2 cents lower or 1.6% down at $1.23 on Nov 23.

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