• Keep BUY and SGD1.75 TP, 28% upside with c.4% yield. The exclusion of ComfortDelGro from the STI removes a technical overhang and lets investors focus on its fundamental earnings outlook, which we believe remains strong amidst the recent removal of most COVID-19 related curbs in Singapore. While we expect CD to report a sequential improvement in earnings, investors could be waiting to assess: i) The impact of the amended lower service fee from Sep 2022 onwards; and ii) whether CD extends the taxi rental rebates beyond end-Sep 2022.

• Exclusion from the STI clears one technical uncertainty. CD will soon be out of the STI, and we see this as a much-needed relief, as a technical overhang on its share price is now cleared. Investors can now realign their focus on assessing the impact of near-term events on company earnings outlook, which in our view remains quite robust on the backdrop of its rail and taxi businesses witnessing higher ridership and demand respectively.

• Revisiting the taxi rental rebate will be next. CD has seen a consistent decline in its taxi fleet size and a sharp rise in demand, which has helped to support the earnings growth for its drivers. This offers CD an opportunity to reduce or do away with the 15% rental rebates that it is currently offering its taxi drivers until end-Sep 2022. The SGD5 daily rental rebate (offered by the Government to taxi drivers, as part of the SGD1.5bn support package) announced in June, has already ended in August.

• Investors could still be waiting to assess the earnings impact from lower bus service revenue. We expect CD to see an improvement in its Singapore rail ridership in the coming months. We believe the YoY higher rail ridership and transition of the Downtown Line to the New Rail Financing Framework 2 should translate into the YoY higher rail earnings. Nevertheless, investors could still be waiting to assess the impact of lower bus service revenue, which took effect this month, on CD’s public transport earnings. Our view is that the improvement in the rail business should help offset some reduction in its bus service fees.

• Valuations now look a lot more compelling. CD’s share price has declined by c.7% since mid-August, and is trading at 13.9x 2023F P/E vs its 10-year average forward P/E of c.16x. Our DCF-derived SGD1.75 TP implies 17.7x 2023F P/E, which – although higher than its historical average – seems reasonable, amidst the earnings recovery. Our TP includes a 12% ESG premium over the SGD1.56 fair value.

• Key downside risks: i) Extension of taxi rental rebates beyond Sep 2022; ii) lower public transport earnings from reduced Singapore bus revenue amidst amended contracts; iii) continued decline in its taxi fleet size; and iv) the sharp decline in economic growth in the UK.

Source: RHB Research - 8 Sep 2022