A comfort pick
- Strong mobility recovery in Singapore — CD’s rail ridership is back to 88% of pre-Covid levels, while P2P fares remained high despite easing pump prices.
- Overseas operations also improving, but recent AUD and GBP weakness could dampen pace of earnings recovery (forex translation impact).
- Maintain Add. Valuation attractive at 14% FCF yield and forward P/E, at 2 s.d. below historical mean, while offering defensive business model and net cash.
Singapore rail ridership back to 88% of pre-Covid levels
Mobility in Singapore has improved at a rapid clip YTD — as of Aug 2022, ComfortDelgro’s (CD) daily rail ridership has returned to 88% of 2019 levels, ahead of our expectations of 85% by end-2022F (FY21 average: 61%). Meanwhile, demand-supply mismatch of point-to-point (P2P) transport (which includes both ride hailing and taxi) led fares to remain at high levels in 3Q22 (+c.30% yoy) despite easing pump prices. Improved driver net earnings paved way for CD to raise its commission rate for app bookings to 5% in Oct 2022 (4% previously). We see further room to raise rates as CD’s commission rates remain lower vs. peers (Gojek: promotional rate of 10% till end-2022; Grab: 20%).
Forex headwinds could dampen overseas operations recovery
While we continue to expect operational improvements in overseas operations in 3Q22F from: 1) improving charter volumes in the UK and Australia, and 2) lower taxi rental rebates in China, recent AUD and GBP weakness could lead to negative forex translation impact, dampening CD’s earnings recovery in 2H22F. In aggregate, overseas operations contribute 43%/28% of CD’s revenue/core operating profit in 1H22. Assuming 10%/15% depreciation of A$/£ against S$, we see a potential 3.6% hit on CD’s operating profit. Taking into account forex headwinds and potential near-term margin pressure from rising inflation, we lower our FY22-24F EPS by 2.0%-7.6%. We still forecast a sequential core net profit improvement in 2H22F to S$94m (+9% hoh, +50% yoy).
A defensive pick at 13.6% free cash flow yield; reiterate Add
Apart from the Covid-19 pandemic, CD has outperformed the MSCI Singapore Index over the past five periods of economic weakness over its 18 years of listing history. We attribute this to its defensive business model (public transport operations, vehicle inspection and testing services) and strong balance sheet. Trading at 2 s.d. below historical mean (12.9x FY23F P/E), we believe the market has more than priced in the negatives from recent developments (i.e. CD’s exclusion from the Straits Times Index on 19 Sep, recent GBP volatility, and expectations of interest rates staying higher for longer). Reiterate Add, as we expect further earnings recovery as CD’s key geographies return to a “new normal”. Our S$1.56 TP is based on a lower FY23F P/E of 15.9x (5-year historical average) from 16.8x.
Catalysts and risks
Re-rating catalysts include further adjustments in taxi monetisation and tender win announcements. Downside risks include prolonged strict Covid-restrictions in China.
