ComfortDelGro Corp

Price target:

UOB Kay Hian ‘buy’ $1.72

Favourable tailwinds

UOB Kay Hian analysts Llelleythan Tan Yi Rong and Heidi Mo have become more bullish about ComfortDelGro Corp, as they kept their “buy” call along with a higher target price of $1.72 from $1.66.

“We maintain our expectations that ComfortDelGro would post a strong 1QFY2024 driven by favourable tailwinds for both the public transport services and taxi segments,” state the analysts in their April 23 note.

The land transport operator has several things going. In its 1QFY2024 ended March, its rail ridership increased by 8.8% y-o-y and up 6.2% q-o-q, which puts this at a level 2% higher than the pre-pandemic 2019.

“Backed by higher rail fares implemented in Dec 2023 along with increased margins from ongoing UK bus contract renewals, we maintain our expectations that ComfortDelGro’s public transport services segment would post higher revenue and profitability for 1QFY2024,” write Tan and Mo. Still, they say ComfortDelGro’s rail business is likely unprofitable for now.

Pre-pandemic, ComfortDelGro’s Downtown Line incurred an operating loss of $46.1 million. They estimate this segment was still unprofitable in the most recent FY2023 with $15 million in the red.

“However, with the higher rail fares implemented in December 2023, we expect margins for ComfortDelGro’s rail segment to improve and reach near breakeven levels in 2024,” they say.

Another plus point for ComfortDelGro was that it recently won a series of new contracts worth $720 million to run bus services in the UK.

Tan and Mo, using an assumption of 8% operating margins, estimates that these new contracts will help generate an additional $12 million in operating profit and will increase ComfortDelGro’s earnings for FY2025 and FY2026 by around 3 to 4%.

“With improving fundamentals, a lush 5.5% dividend yield and a robust balance sheet, we reckon that most negatives have already been priced in.”

The analysts’ higher target of $1.72 is based on 16 times FY2024 earnings, which is higher than the 15 times used.

“Despite the recent strong share price performance, we opine that there is still upside at current price levels,” state Tan and Mo. —