ComfortDelGro on track for recovery, but speed bumps ahead
ComfortDelGro (CDG), the leading land transport operator in Singapore, was among the worst-hit stocks during the pandemic, as commuting traffic collapsed because of movement restrictions. On Feb 24, CDG reported a 63.3% y-o-y improvement in its earnings for 2HY2022 ended December 2022 to hit $57.8 million. The 2HFY2022 earnings have brought the FY2022 total to $173 million, 40.7% higher y-o-y. Revenue for the year was up 7.9% to $3.78 billion.
To add icing to the cake, the company declared a final dividend of 1.76 cents. To mark its 20th anniversary of listing, CDG plans to pay a special dividend of 2.46 cents too, bringing its full-year payout equivalent to a yield of around 7%.
CDG also controls 75% of separately-listed SBS Transit, which reported earnings for FY2022 ended December 2022 of $68 million, up 31.7% in FY2021. SBS Transit plans to pay a total FY2022 dividend of 10.9 cents, equivalent to a payout ratio of 50%. Another separately-listed subsidiary, Vicom, rode on the pick-up in business activities and reported FY2022 earnings of $26.2 million, up 5.7%. It plans a total FY2022 dividend of 6.64 cents, implying a payout ratio of 90%.
While CDG is eager to share the spoils with its shareholders, the company’s management notes that various operational challenges remain. Passenger traffic in Singapore, for one, has recovered back to just 90% of the pre-pandemic levels. As work from home becomes a growing norm, there might be a chunk of commuters that have disappeared, even with the pandemic over.
With CDG also having a significant presence in the UK, Australia and China, which had suffered from strict lockdowns until early this year, its FY2022 numbers understandably have some way to go before recovering to pre-2019 levels, says managing director and group CEO Cheng Siak Kian at the results briefing on Feb 24.
“For both the Downtown Line and NorthEast Line, [ridership] is close to 90% now, which is not as good as pre-Covid but much better than what we had in the last few years,” says Cheng. He has also shared that the number of taxi drivers has declined from about 11,000 as at end-2019 to 8,500 in early 2023.
As taxi drivers have been slow to take back the wheel, demand for both taxis and private hire vehicles (PHVs) has outpaced supply. “As you know, the rents [for taxis and PHVs] have been discounted for some time because of Covid-19, but Covid-19 is pretty much over,” says group deputy CEO Derek Koh. “We have maintained the discount for now because last year was a challenging year… and we are hoping to also attract more people to come back.”
CDG chairman Lim Jit Poh acknowledges that the demand for taxis now is more than what the group can handle. At this point, Lim, who is due to retire from his position after the company’s AGM this April, shares that street-hailing taxis are still significant today and about 50% of the taxi bookings are from street hailing, while the rest are through its mobile app and phone bookings.
Driving profits
Yet, despite being well-positioned to capture the recovery, CDG’s share price has yet to reflect this trend. As at Feb 28, the company’s shares are trading at $1.21, representing a 15.8% decline from the past 12 months. In fact, since January, CDG is trading at around all-time lows.
Besides looking after its Singapore operations, which contribute nearly 60% of its revenue, Cheng says CDG will continue to grow its overseas business by taking part in bus and rail tenders in countries it already operates in, as well as in new geographies. Markets shortlisted include Paris and some Scandinavian countries. Cheng says CDG will be pursuing similar arrangements as that of its $1.3 billion contract won in Auckland, New Zealand, on Aug 21, 2021, through a 50/50 joint-venture company between CDG and UGL Rail Services, an Australian rail operations and maintenance company under Cimic.
Cheng is aware the challenge is not merely growing revenue, but controlling costs as well. “Significant increases in inflation levels are affecting operations across the company. We are watching these closely and continuing to keep a tight lid on costs,” he adds.
With a net cash position, Cheng believes CDG can fund its overseas growth readily. Revenue generated in the various markets is usually spent, or reinvested back in the local operations, providing a natural currency hedge.
Trimming target prices
Analysts have mostly kept a rather optimistic outlook on the company’s growth, but
have all cut their target prices. CGS-CIMB Research’s Ong Khang Chuen has kept his “hold” call but with a lower target price of $1.20, from $1.30 previously.
“Weaker public transport segment led to another quarter of sequential decline for core ebit to $41 million (–19% q-o-q) in 4QFY2022. Nevertheless, FY2022 dividends surprised on the upside (about 7% yield) as CDG announced final and special dividends that amounted to 4.2 cents per share,” says Ong.
However, Ong expects the taxi segment to be the bright spot in FY2023, with an ebit growth of 39% seen for the current FY2023. He warns, however, that the driver supply for taxis and ride-hailing remains tight and is unlikely to ease in the near term due to high certificate of entitlement prices.
“Coupled with the healthy competitive landscape (with private hire platforms focusing on the path to profitability), we believe CDG has an opportunity to further raise monetisation of its app platform, either through a commission rate increase or implementation of platform fees,” says Ong, while noting that CGS charges 5% in commission fee for app bookings, as compared to Gojek’s 15% and Grab Holdings’ 20%.
Overall, Ong expects the public transport segment to see margin relief in FY2023, supported by the implementation of rail fare hikes in Singapore and the public bus contract’s annual indexation for wages and general consumer price index (which will allow CDG to pass on the higher costs absorbed over the past year).
Meanwhile, DBS Group Research and RHB Group Research have a slightly more bullish outlook, as they have kept their “buy” calls on the stock but have slashed their target prices. Andy Sim of DBS expects the economic reopening to help boost the company. “While operations were impacted during Covid-19, we expect its prospects to improve with the reopening, particularly its pointto-point operations in Singapore and China,” says Sim.
For now, Sim has cut his earnings estimate to $1.66 from $1.85 for the current FY2023 and the following FY2024 to take into account higher salary costs. “While we have trimmed back our forecasts, we believe the market has yet to price in the recovery in the taxi segment and the potential of higher dividend payout, given the strong cash flow nature of the business,” says Sim.
Zig upgrading
To stem declining taxi rental income, CDG has introduced booking commissions on its re-launched ride-hailing platform app, Zig.
CDG’s Koh shares that the company is in the process of upgrading Zig and plans to push out the upgrades by the middle of this year. The upgraded platform will allow users to book their choice of taxis, PHVs or luxury cars. Koh also shared that while 50% of the taxi jobs come through street hailing, the other 50% are through booking, of which 85% of the bookings come from the Zig app.
“With full re-opening, we expect revenue growth of 4.3%, mostly coming from taxi segments,” says Sim.
There are some investors who see CDG as a business suffering from structural decline with the taxi fleet dropping steadily. Nonetheless, Sim sees “significant upside headroom” with its commission level of 5% versus the 20% charge by Grab. “In addition, with full re-opening, we see a profit upside of about $17 million from the reversal of rental discounts in China and Singapore, giving us confidence that the odds are in favour of CDG being a value play,” says Sim.
RHB’s Shekhar Jaiswal too has dropped his target price down to $1.40 from $1.60. CDG’s earnings met his expectations but Jaiswal is concerned about margin pressure on its bus contracts, no thanks to higher costs and lower service fees. “We believe the ongoing improvement in Singapore’s rail ridership, bus charter in Australia and coach services in the UK will continue to support higher earnings for public transport services, despite higher operating costs, the uncertainty over the timing of indexation formulas, and lower bus service fees,” says Jaiswal, who expects this to translate into 11%–14% earnings growth during FY2023–FY2025.
He expects Singapore taxi revenues to improve, and taxi rental rebates to be gradually phased out in 2023. Taxi revenues in China should also improve with the economic reopening. Some key downside risks include the company losing the Bukit Merah and Jurong West Bus Packages or retaining them at lower-than-estimated service fees; higher-than-estimated operating costs; and weak taxi earnings from a failure to gradually phase out rental rebates.
Overall, CDG’s stock is trading at an attractive FY2023 P/E of 13.6x, compared to the 16x forward P/E mean since January 2015, notes Jaiswal.