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'Buy' ComfortDelGro on share price weakness: analysts

The analysts are remaining upbeat on CDG's prospects even if it will no longer be a constituent of the STI on Sept 19.

Analysts are remaining positive on ComfortDelGro (CDG)’s prospects even after the transport operator was displaced by Emperador as a constituent on the benchmark Straits Times Index (STI) during the FTSE Russell’s quarterly review on Sept 1.

CDG entered into the STI as a constituent over 12 years ago on July 28, 2010. The recent update now marks the end of its tenure on the index.

Following the news, shares in CDG opened three cents lower or 2.14% to $1.37, which is one of its lowest levels since January.

“While [the] STI exclusion could put pressure on CDG’s near-term share price, we see support at $1.36, based on 13.1x FY2023 P/E (2 standard deviations or s.d. below its five-year historical mean),” write CGS-CIMB Research analysts Lock Mun Yee, Lim Siew Khee and Ong Khang Chuen in their strategy flash note dated Sept 2.

The analysts have kept their “add” call on CDG with an unchanged target price of $1.75 as they expect the transport operator to see a recovery in their earnings in the coming quarters.

The expected recovery will be due to the improved monetisation of its Singapore taxi business, higher rail ridership and increased charter activities on the back of the return in tourism, the analysts note.

CDG’s dividend yield of 5.9% is also deemed “attractive”, they add.

Furthermore, the analysts at CGS-CIMB are estimating CDG to achieve an earnings per share (EPS) growth of 27% y-o-y in the FY2022 with its key geographies returning to a “new normal” after the reopening from the Covid-19 pandemic.

The team at DBS Group Research are also keeping their recommendation unchanged at “buy” with the same target price of $1.95. This is given CDG’s unchanged fundamentals, an improving outlook and the upside from easing Covid-19 restrictions, as well as improving mobility.

Noting the counter’s removal from the MSCI in May 2020, which first saw a knee-jerk reaction from market watchers followed by a bounce back in its share price the week after, the DBS team believes a similar trend could follow.

Back in May 2020, CDG’s shares fell by 7.7% from $1.55 to $1.43 upon the announcement of its removal from the MSCI at the closing on May 12, 2020. In the week after post the removal, CDG’s share price bounced up by around 12% to close at $1.60, higher than the $1.55 before the announcement, the analysts say.

“With this removal, we expect an immediate knee-jerk reaction to CDG’s share price should it follow a similar trading pattern. That said, there has been expectations and talks of this removal for a while now in view of CDG’s market cap hovering around the bottom of the 30 constituents,” the analysts write.

“With this removal now a ‘certainty’, we take an opposing view given that it is a ‘removal’ of an overhang. While there could be near-term knee-jerk weakness in share price due to rebalancing by index funds, downside is likely to be confined within the coming few weeks, in our view,” they add. “We also highlight a possibility to bottom fish near or around Sept 19, when the constituent change takes effect.”

Emperador, the latest addition to the STI, will take the 20th spot with effect from Sept 19. The brandy maker’s free float of 15.1% just passed the 15% requirement for inclusion.

“We estimate Emperador to hold a constituent weight of 0.39% upon inclusion, which could translate into passive inflow worth 3.2x average daily trading volume (ADTV), or $2.74 million,” note the analysts from CGS-CIMB.

As at Sept 1, CDG’s market cap, at $3.03 billion, was the smallest among the 30 STI constituents. After its removal, the two smallest constituents on the STI are Keppel DC REIT with a market cap of $3.3 billion and Yangzijiang Shipbuilding with a market cap of $3.8 billion.

As at 2.57pm, shares in CDG are trading 3 cents lower or 2.14% down at $1.37.

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