Highlights

ComfortDelGro - Positive on Long-Term Outlook

Date: 22/07/2019

Source  :  RHB
Stock  :  ComfortDelGro       Price Target  :  2.65      |      Price Call  :  HOLD
        Last Price  :  2.40      |      Upside/Downside  :  +0.25 (10.42%)
 


  • Maintain NEUTRAL and DCF-based SGD2.65 Target Price, 5% downside.
  • We remain confident of COMFORTDELGRO (SGX:C52)’s earnings growth, aided by contributions from recent acquisitions, and its public transport unit’s growth. Any reduction in Singapore rail losses amidst higher transport fares or government grants received could lift earnings and our Target Price.
  • We leave our estimates unchanged as details have been sparse. We like the defensive nature of ComfortDelGro’s earnings. Still, the stock looks fairly priced – trading at 18.3x 2019F P/E (5-year average: 15 x).

Earnings Sensitivity of Public Transport Business Revenue

  • Although the public transport business is expected to be the key driver of earnings growth during the forecast period, its growth has been dragged by loss making rail business in Singapore.
  • ComfortDelGro’s North East MRT line (NEL) is operating under the new rail financing framework, which puts a cap on operating margin. And its Downtown MRT line (DTL) has been incurring losses amidst lower-than-estimated ridership and fares. There have been discussions on the revision in public transport fare and allotment of the temporary enhanced maintenance grant to support the increase in rail operating costs. However, details have been sparse.
  • We believe that the reduction in rail losses could lift our Target Price – every 5% change in our public transport revenue estimate should boost our Target Price by 5%.

New Acquisitions Are Potential Re-rating Catalysts

  • ComfortDelGro undertook SGD479m worth of acquisitions in 2018. New acquisitions, which have been earnings-accretive, offer EBIT margins that are higher than that of its existing businesses.
  • At a net gearing of 30% – a level that management is comfortable with – ComfortDelGro would have access to SGD800m of funding to support further acquisitions of earnings-accretive businesses.

Stretched Valuations Despite Revival in Earnings Growth Support Our NEUTRAL Rating

  • We maintain that ComfortDelGro’s public undertaken in 2018.
  • Amidst the recent rally in ComfortDelGro's share price, ComfortDelGro’s forward taxi fleet contraction.
  • Downside risks are increased existing businesses.

Source: RHB Invest Research - 22 Jul 2019

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