UK public transport turning a corner
- 9M23 revenue in line with expectations at 72% of FY23F estimates, with earnings slightly ahead at 75%
- 3Q23 earnings improved sequentially to S$49.9m (+9% q-o-q) on back of positive contribution from UK Public Transport
- FY23F/24F earnings raised by 1.7%/3.4% on higher margins for UK Public Transport and Taxi & Private Hire segment
- Maintain BUY with slightly higher TP of S$1.67
Maintain BUY with higher revised TP of S$1.67. We maintain our BUY recommendation on ComfortDelGro Group (CDG) with higher revised TP of S$1.67 on earlier than expected UK Public Transport turnaround and higher margins for Taxi & Private hire segment.
3Q23 slightly ahead of expectations; 9M23 revenue/PATMI at 72%/75% of our FY23F estimates. 9M23 revenue and PATMI came in at S$2.86bn and S$128m respectively, with revenue tracking in line with expectations and PATMI tracking slightly ahead, on expectations of 4Q23 performance to be similar to 3Q23 (3Q23 PATMI of S$49.9m).
UK Public Transport turned profitable in 3Q23. UK Public Transport segment reported operating profit of S$6.1m, a turnaround from four consecutive quarters of losses. This was due to UK fare indexation kicking in and renewal of contracts at much higher margins as the bidding environment has turned more sensible and less aggressive, according to management. Current significant indexation effect is expected to extend into 1H23 before moderating.
Taxi & Private Hire margin continues to improve with introduction of platform fees and lower rental discounts in China. Operating margin for this segment continues to trend upwards from 18.3% in 2Q23 to 19.3% in 3Q23. However, revenue growth slowed to +5% q-o-q, S$6.8m, largely attributable to S$5-6m in platform fees (effective Jul-23). China operation is expected to remain soft with recovery to pre-COVID level likely in 2H24.
PATMI is trending ahead of FY23F estimates, forming 75% of estimates and expect 4Q23 to perform at least on par with 2Q23. UK Public Transport segment has recovered earlier than expected and should see further profitability improvement going into 1H24F. Singapore Public Transport and Other Segments could see a slight sequential tapering off in 4Q23 on higher operating costs and expenses respectively. Overall, on a net basis, we believe the company should be on track to achieve at least the same level of profitability as 2Q23 in 4Q23, thus coming in slightly ahead our original FY23F estimates.
Taxi & Private Hire segment seeing heightened competition. Overall bookings have remained stable q-o-q whereas the number of private hire vehicles (proxy for drivers) in the Singapore market has increased. Management also alluded to aggressive fare pricing by competitors but noted that consumer demand for P2P transport remains strong. Accordingly, we have factored in relatively stable Taxi & Private Hire operating profit for FY24F despite ridership growth tailwinds.
We believe that with industry players heading towards profitability, competition in the P2P transport should ease and CDG’s diversified private hire operations position it well to emerge as one of the survivors in this market.
Singapore Public Transport to see revenue and profitability uplift from 7% fare revision and increasing ridership. We believe continued ridership growth and the upcoming 7% fare revision effective 23 Dec-23 should provide top and bottom-line uplift to Singapore Public Transport segment. Accordingly, we raised our revenue and earnings assumption for the group’s Singapore rail operations in FY24F.
Valuation and forecasts
FY23F/24F earnings raised marginally by 1-4%. We raised our FY23F/24F earnings by +1.7%/+3.4% factoring in higher operating margins for Public Transport (UK and SG) and Taxi & Private Hire segments.
Reiterate BUY, TP at S$1.67on higher FY24F book value and earnings. We based our TP on a blended valuation of 5-year average historical PB and EV/EBITDA at 1.3x and 5x, respectively. Based on our revised earnings estimate, the current price represents an attractive 4.9%/6.0% FY23F/FY24F dividend yield. The sequential improvement seen in 3Q23 and for the past two quarters should lend confidence to the recovery trajectory of the group, and that the worst has passed. With expected earnings recovery in FY24F, valuations at 1.1x PB and 13.4x PE look undemanding, along with its strong balance sheet. We reiterate BUY with revised TP of S$1.67.