Comfort Delgro, one of the index outperformers in the month of August with a 3.2% gain versus the STI’s 3.5% drop, is pursuing an IPO for its wholly owned Australia land transport unit – ComfortDelGro Corporation Australia – on the Australia Stock Exchange in the last quarter of 2021. This IPO will unlock for Comfort Delgro the value of its business assets in Australia, a move that Macquarie Research believes could be a stock price catalyst. 

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Here are excerpts of the MQ research report published on 31 August 2021: 

Key points

  • Headline PATMI reduced by 7%/1% for FY21E/22E on lower taxi earnings offset by higher government grants and inclusion of Auckland rail win.
  • Earnings look better in 2H21, subject to government efforts to contain the pandemic in each country. A return to office in SG should help.
  • Target Price fall slightly to S$1.93 (prior TP: S$1.96). Maintain Outperform.

Event

  • MQ updates its estimates for ComfortDelGro (CD) post its 1H21 results and recent Auckland rail franchise win.

Impact

  • Headline profit declined by 1 to 7% across the full year 2021to 2022. MQ’s estimated profit for the financial year of 2023 remains unchanged. Excluding government grants, the underlying decline for full year 2021 is higher at 26%, as MQ raise government grants to account for those provided by the UK and China. MQ previously did not account for these. Dividend for 2021 is revised up as MQ re-pegs it to headline earnings per share, from clean earnings per share prior.
  • Driving the earnings revision is a weaker than expected Taxi business, largely in Singapore. The unit posted a second quarter 2021 loss versus expectation of a profit and MQ’s earnings cut reflects that difference. Public Transport goes up largely due to higher government support baked in. Automotive is lower on a smaller taxi fleet with lower activity. MQ estimates the Auckland rail contract adds around $4 million per annum to profit before tax (+1%) starting 2022.
  • Looking into the second half of this year there are various push and pull factors in the business driven by each country’s handling of the pandemic. Generally, MQ expects earnings to improve from second quarter 2021 lows. Singapore has seen in a resurgence in cases, but with 80% of the population vaccinated a return to lockdown seems unlikely for now. The return to office (up to 50%) should also aid in the recovery. Australia has seen ridership worsen due to an extended lockdown. However, service frequencies remain unaffected. That said, the tailwind from higher ad hoc bus charters in the second quarter of 2021 will fade.
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Earnings and target price revision

  • FY21-22E headline EPS reduced by 7%/1% respectively. FY23E EPS unchanged. Target price lowered to S$1.93 due to revision in FY22 EPS.

Price catalyst
•    12-month price target: S$1.93 based on a Sum of Parts methodology.
•    Catalyst: Australia IPO listing, expected in 4Q21


Action and recommendation

  • MQ maintains Outperform on Comfort Delgro with slightly reduced 12-month target price of S$1.93 based on a Sum of Parts methodology. Key catalyst in MQ’s view is the Australia IPO, which will unlock value of its Australia business. 
  • Key risks: a) lower-than-expected listing multiple of 25 times price earnings ratio, b) delay in IPO timeline, and c) pandemic situation in Australia deteriorates further, negatively impacting earnings.