Time to hop on
- Upgrade to Add as we see a fundamental inflection point – we estimate CD’s PATMI returning to yoy growth in 2Q23F and a stronger showing in 2H23F.
- Higher taxi monetisation could raise FY23F segment EBIT by 50% yoy; we also see UK operations returning to the black with better cost pass-through.
- Supported by stronger core earnings and potentially higher payout by subsidiary SBS Transit, we also expect higher base DPR by CD in FY23F.
Earnings recovery taking shape; upgrade to Add
We upgrade ComfortDelgro (CD) from Hold to Add as we see a fundamental inflection point – we estimate its PATMI could return to yoy positive growth in 2Q23F (+3% yoy) and see an even stronger showing in 2H23F (+65% yoy) on multiple earnings catalysts highlighted below. Valuation is currently undemanding at -1 s.d. below historical mean. Our TP of S$1.35 is based on 15.4x FY24F P/E (CD’s five-year historical average), from 13.8x previously. Re-rating catalysts include further adjustments in taxi monetisation and tender wins. Downside risks include slower margin recovery due to inability to pass on costs, and negative FX translation impact given strong Singapore dollar.
Catalyst 1: Raising taxi monetisation to drive earnings growth
We forecast taxi segment EBIT to rise 50% yoy to S$78m in FY23F. CD lowered its taxi rental rebate (Apr 23) and introduced platform fee for rides booked via its CDG Zig app (Jul 23) in Singapore; we see potential for commission rate increases in 4Q23F as the current industry landscape remains favourable for point-to-point transport players. Recent newsflow of several world-renowned artistes adding and selling out additional shows in their Singapore concert series also helps create a virtuous cycle and reinforces Singapore as an entertainment destination for tourists, and we see CD as a beneficiary.
Catalyst 2: Cost pass-through for UK public bus taking shape
We expect CD’s UK operations to return to EBIT positive in FY23F (FY22: -S$10.4m) as cost pass through to government helps with margin repair. Recall CD granted its London Metroline public bus drivers an 11% pay increase with 10% increase on back pay in Dec 22 to avert strike actions. With annual indexation of service fees on route anniversary, the higher costs absorbed by CD are being gradually passed on to the government. We also understand that recent tenders for route renewal are carried out at a premium as operators factor in higher cost buffers given elevated inflation and uncertainties.
Catalyst 3: Higher dividend payout ratio (DPR) possible?
We see room for higher base DPR for CD (FY23F: 80%) given stronger fundamental performance this year and potentially higher dividend payout from subsidiary SBS Transit (which has maintained 50% DPR despite turning net cash since FY20). CD has been actively rewarding shareholders with its excess cash – on top of its 70% base DPR, it declared 3.87 Scts special DPS in FY22 on 1) property disposal gain, and 2) in honour of its 20th anniversary of SGX listing. We think higher DPR can be supported given its
strong net cash position of S$715m and cash flow generation.
Time to hop on
Earnings recovery taking shape; upgrade to Add
We upgrade ComfortDelgro (CD) from Hold to Add as we see a fundamental inflection point – we estimate its PATMI could return to yoy positive growth in 2Q23F (+3% yoy) and see an even stronger showing in 2H23F (+65% yoy) on multiple earnings catalysts highlighted below.
We raise our FY23-25F EPS by 0.5-3.8% on higher taxi segment EBIT assumptions given CD’s recent move to increase platform fee. Valuation appears undemanding to us at 1 s.d. below historical mean. Our TP of S$1.35 is based on a higher 15.4x FY24F P/E (average of CD’s five-year historical average), from 13.8x (1 s.d. below mean) previously, on the improving fundamentals.
Re-rating catalysts include 1) stronger margin repair on cost pass-through for public transport segment, and 2) further hikes to CD’s commission fees chargeable for rides booked via CDG Zig app. Downside risks include 1) unsuccessful tender renewals for bus routes in Singapore, 2) negative FX translation impact given the strong Singapore dollar, and 3) intense competition resulting in lower public bus segment margins upon tender renewal.
Catalyst 1: Raising taxi monetisation to drive earnings growth
We forecast taxi segment EBIT to rise 50% yoy to S$78m in FY23F. CD lowered its taxi rental rebate (Apr 23) and introduced platform fee for rides booked via its CDG Zig app (Jul 23) in Singapore; we see potential for commission rate increases in 4Q23F as the current industry landscape remains favourable for point-to-point transport players.
We estimate ComfortDelgro’s reduction of rental rebates for cabbies to help with revenue uplift of S$4m per quarter (assuming 8,800 taxis), while its imposition of platform fee could result in revenue uplift of c.S$5.6m per quarter assuming constant ride volumes (1Q23 trip volume: c.8m). Both items are likely to flow directly to the bottomline as CDG has been absorbing the relevant costs throughout the past few years (e.g. platform development costs for its CDG Zig app).
We note that point-to-point transport (P2P) players in Singapore have been actively carrying out fee adjustments YTD. Our channel checks show that P2P transport (ride hail + taxi) fares in 2Q23 have moderated slightly from the peak of 4Q22/1Q23 (but remain higher yoy) helped by further recovery of driver supply in Singapore, which has reached 94% of pre-pandemic levels as of May 23. Meanwhile, YTD trip demand remains strong (+5% yoy) – we think these factors are potentially enabling operators to raise fixed fees without having to be overly concerned about demand impact. Given the record-high certificate of entitlement (COE) prices this year, we believe that the supply-demand imbalance for the sector is unlikely to ease meaningfully in the near-term. Overall, we see healthy competitive landscape in Singapore as key players like Grab and Gojek continue to work towards their goal of adjusted EBITDA breakeven by end-FY23F.
Catalyst 2: UK cost pass-through
We expect CD’s UK operations to return to positive core EBIT in FY23F (FY22: -S$10.4m) as cost pass through to government helps with margin repair. The London public bus financing framework works slightly differently from Singapore and Australia’ models. Instead of multiple routes being packaged together for multi-year tender (annual indexation formulas apply at the beginning of the year), in London the public bus routes are being tendered on a route by route basis, with annual indexation of service fees happening at route anniversary.
CD has been incurring higher operating costs in the UK especially since 4Q22 (as it granted its London Metroline public bus drivers an 11% pay increase with 10% increase on back pay in Dec 22 to avert strike actions). With annual indexation of service fees on route anniversary, the higher costs absorbed by CD are being gradually passed on to the government. We also understand that recent tenders for route renewal are carried out at a premium as operators factor in higher cost buffers given elevated inflation and uncertainties.
Catalyst 3: Higher dividend payout ratio possible?
We see room for higher base dividend payout ratio for CD (FY23F: 80%) given stronger fundamental performance this year and potentially higher DPS payout from subsidiary SBS Transit. CD has been actively rewarding shareholders with its excess cash – on top of its 70% base dividend payout ratio, it declared 3.87 Scts special DPS in FY22 on 1) property disposal gain, and 2) in honour of its 20th anniversary of SGX listing. We think that CD’s higher dividend payout can be supported given its strong net cash position of S$715m and defensive cash flow generation.
We note that SBS Transit’s (SBUS) balance sheet has benefitted tremendously since the implementation of Bus Contracting Model (BCM), an asset-light business for Singapore’s public bus operations in 2016. The strong cash generation from the BCM helped SBUS turn from a net debt position of S$212m at end-FY16 to a net cash position of S$48m at end-FY20; the net cash balance has built up further to S$345m at end-FY22. Yet, SBUS’s dividend payout ratio has remained largely constant at 50% over the years (with the exception of FY20 where DPR was 25% due to Covid-19 impact). This ratio is lower vs. its parent company CD which has a base DPR of 50-80% and sister company Vicom which has a base DPR of 80-110% over the past five years. As such, we see a high likelihood of SBUS raising its DPR by end-FY23 to be more in-line with peers.
During its FY22 AGM, in response to questions on the growth of SBUS’s cash balance and whether the company would distribute higher dividends to shareholders, SBUS answered that: 1) the cash balance grew during a period when the company had received very substantial government grants related to
Covid-19 support from 2020-2021, which made the company profitable during such period, 2) a change of the company’s dividend policy and dividend payout percentage required proper timing to avoid any criticism of improper use of such government grants, and 3) going forward as the company accumulates cash balance from operating that is not reliant on government grants, SBUS Chairman assured that the board would have greater flexibility to return more of the excess cash balance not required for operations to shareholders, and enhance shareholders’ return.
