UK tailwinds fuel earnings growth in FY24F
- We forecast CD to record PATMI of S$53m in 4Q23F (+6% qoq, +108% yoy), with UK margin expansion offsetting Singapore’s seasonally weaker results.
- FY24F PATMI could expand by another 15% yoy, riding on favourable industry dynamics in the UK and further growth of taxi segment, in our view.
- Reiterate Add with a higher TP of S$1.60 as we roll over valuation base year.
4Q23F preview: PATMI likely to double yoy
We project ComfortDelgro (CD) to record a PATMI of S$53m for 4Q23F (+6% qoq, +108% yoy), wrapping up FY23F with a commendable 33% core PATMI growth. We expect the qoq earnings growth in 4Q23F to be driven by further margin expansion of its UK public bus business, which we think can more than offset Singapore’s seasonally weaker results. Assuming an 80% dividend payout ratio, we estimate 6.7Scts DPS for FY23F, which translates into a healthy dividend yield of 4.8%.
UK margin expansion remains the key profit driver in FY24F
We forecast CD to record another 15% yoy PATMI growth in FY24F, with continued tailwinds from: 1) UK margin expansion, and 2) taxi segment growth. Recall CD’s UK operations first returned to positive EBIT of S$6.1m in 3Q23 (1H23: -S$5.8m, FY22: – S$10.4m) as annual indexation of service fees on route anniversary (c.70% completed in 9M23) allowed CD to pass on the higher costs it had absorbed over the past year back to the UK government. Notably, CD has also achieved tender wins for bus routes in London at elevated margins, which it attributed to easing competitive pressure and operators increasingly pricing in larger cost buffers to cushion against potential shocks, given that the UK public bus service fees’ indexation mechanism has proven to be less effective during periods of elevated inflation.
Taxi segment earnings should continue to improve
CD’s taxi commission hike in Singapore by 2% pts since 1 Jan 2024, coupled with lower taxi rental discounts in China with normalisation of activities post-Covid reopening, should aid taxi segment EBIT growth by 15% yoy in FY24F. On 22 Dec 2023, CD also announced the acquisition of A2B, the second largest player in Australia’s domestic personal transport market. CD will fund the total consideration of A$165m by existing cash and bank facilities. The transaction is valued at c.9x trailing EV/EBITDA and is expected to be completed in 1H24F. We estimate minimal EPS accretion at 1.4% of FY25F.
Reiterate Add as we continue to like CD for its FY24F earnings growth and resiliency, while providing a decent dividend yield of 5.5% (FY24F). We raise our TP to S$1.60 as we roll over our valuation base year to FY25F, still pegged to 16.2x P/E (0.5 s.d. above CD’s five year 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.