Further earnings recovery taking shape
- CD’s PATMI grew to S$50m (+9% qoq, +54% yoy) in 3Q23, roughly in line with expectations, boosted by margin recovery in its UK public bus business.
- We see further earnings recovery in the UK as CD enjoys a further uplift from service fee indexations and new contract wins at significantly better rates.
- Singapore operations largely stable in 3Q23 amid industry competition and higher utilities costs. Reiterate Add on further earnings recovery in 4Q23F.
3Q23: Further earnings recovery taking shape
ComfortDelgro’s (CD) PATMI grew to S$50m (+9% qoq, +54% yoy) in 3Q23, roughly in line with our preview of S$52m. The sequential PATMI improvement was driven by 1) strong margin recovery in its UK public bus business, 2) improved taxi segment earnings post the introduction of platform fee in Jul 2023, and 3) lower taxi rental discounts in China with normalisation of activities post-Covid reopening. 9M23 PATMI made up 69%/72% of our/Bloomberg consensus’ FY23F – we expect further earnings recovery in 4Q23F.
UK operations returned to profitability in 3Q23
CD’s UK operations returned to positive EBIT in 3Q23 at S$6.1m (1H23: -S$5.8m, FY22: -S$10.4m). Recall that CD granted its London Metroline public bus drivers an 11% pay increase, with a 10% increase in back pay in Dec 2022, to avert strike action. With annual indexation of service fees on route anniversary (c.70% completed in 9M23), the higher costs absorbed by CD are being gradually passed on to the government. CD has also achieved some tender wins for more bus routes in London at significantly higher service fees yoy, which it expects to flow through in 4Q23F and early-FY24F. The higher service fees are enabled by elevated inflation in the UK in recent years, as well as easing competitive pressure in the London bus market, according to management.
Singapore operations stable in 3Q23
Singapore operations EBIT rose a slight 2% qoq in 3Q23 to S$53.6m, as the higher profits from implementation of taxi platform fee was partially offset by 1) lower taxi commissions with stronger industry competition pressuring fares, and 2) higher electricity costs for its rail operations under SBS Transit. For its taxi business, CD said its priority is to maintain a healthy driver supply, while it fine-tunes its pricing algorithm to minimise cancellation rates for bookings via its CDG Zig app. For its rail operations, CD said it has contracts in place to lock in electricity rates for 4Q23F and expects tariffs to ease slightly in FY24F. We believe a rail fare adjustment of 7%, which will be in place by end-Dec 2023 according to Singapore’s Public Transport Council, should also help to cushion CD’s cost pressures.
Reiterate Add
Reiterate Add as we see CD’s earnings recovery picking up steam in 2H23F with 84% yoy PATMI growth. Our S$1.55 TP is based on 16.2x FY24F P/E (0.5 s.d. above CD’s fiveyear historical average). Re-rating catalysts include stronger earnings improvement in its UK operations, and new tender wins. Downside risks include slower margin recovery due to the inability to pass on costs, and negative forex translation impact given the strong Singapore dollar.
