BUY with SGD1.77 TP, 23% upside and c.3% yield. ComfortDelGro should continue to see sustained earnings recovery over the next few quarters as business that was impacted by the pandemic, gradually returns to normalcy. There is also potential for further organic and inorganic growth opportunities outside Singapore, similar to the recently announced Darwin contract win. We believe sustained strong taxi demand could spring a positive earnings surprise. There also remains a risk of lower earnings if the UK sees a sharp decline in economic growth.
Darwin contract win. CD has won a contract to operate bus services in Darwin. It will become the sole operator of public bus transport services in Darwin, Palmerston, rural areas, and special needs services. The bus contract, which begins on1 July 2022, will last six years. The contracts areas are in addition to the Alice Springs, Batchelor, and Jabiru school services, which were awarded to CD in late 2021. CD also continues to operate the urban bus network contract in Alice Springs. We assess the contract win to be earnings neutral.
Further growth opportunities in public transport. In France, CD along with RATP, a French government-owned company and the largest rail operator in Paris, has been shortlisted for the rail tenders for the Greater Paris Express Line 15, 16, and 17. If the consortium wins the tender, these contracts will be for a minimum of six years and are expected to start full operations in 2025-26. In Sydney, Australia, CD will be submitting its bid to continue operating the bus services in regions 4 & 14. It is also submitting a tender to acquire new bus contract for region 12 of Sydney. CD has recently submitted a tender for new bus contracts in Perth, results of which could be announced towards end-2H22.
Inexpensive valuations. Our DCF-derived SGD1.77 TP implies 17.2x 2023F P/E. While this is tad higher than CD’s 10-year average of c.16x, it seems reasonable in view of its ongoing strong earnings recovery. It is currently trading at 13.9x 2023F P/E. Our TP includes a 12% ESG premium over the SGD1.58 fair value based on our proprietary in-house methodology.
Key downside risks: i) Continuing decline in taxi fleet size, ii) increased competition from ride-hailing players, c) lower-than-estimated margins for key businesses, d) reinstatement of strict COVID-19 measures, and e) the UK witnessing a sharp decline in economic growth.
