• Maintain BUY and SGD1.80 TP, 46% upside with a c.4% FY22F yield. ComfortDelGro’s 3Q22 business update confirmed our assessment that it will continue to report YoY earnings growth. However, inflationary pressures from higher fuel and wage costs and a mismatch in the timing of cost increases vs being compensated for cost inflation translated into margin compression that quarter. CD should book YoY earnings growth in 2023, thanks to an improving taxi segment and higher rail ridership. Its valuation is compelling after the recent share price correction.

• Strong YoY revenue and profit growth in 3Q22. CD’s 3Q22 revenue and PATMI are largely in line with our estimates. It reported revenue of SGD969.5m (+10.1% YoY) and PATMI of SGD34.3m (+32.9% YoY). To make comparisons fair, excluding government relief, CD reported an EBIT of SGD53.6m (+170.7%) in 3Q22. While the revenue growth was aided by improving economic activity levels in Singapore after the relaxation of COVID-19 restrictions, there was some inflationary cost pressure, especially for the public transport business.

• Public transport unit booked weak QoQ earnings. The group’s public transport EBIT declined by 38% in 3Q22. Adjusting for numbers reported by SBS Transit, we assess that CD’s overseas public transport business reported a much sharper YoY decline in recurring EBIT. The impact was largely from the UK business, higher operating costs and the mismatch between timing and correlation of indexation of contract costs. The timing mismatch is expected to persist in 4Q22, as CD is still in discussions with the transport authority for appropriate cost adjustments.

• The taxi business continued to report improvements. The taxi business made a strong recovery thanks to higher revenue from lower COVID-19-related rental discounts, higher call volumes, and newly introduced commissions. CD will extend the rental discount for the rest of 2022 and has increased the commission rate for call bookings to 5% from 4%, which will help partially offset the rental discounts.

• Scope for higher dividend payouts. CD reported a net cash balance of c.SGD650m. Unless it uses the cash to undertake a large acquisition, with no major capex scheduled for the rest of the year, we believe there could be scope for a higher (70-80%) dividend payout ratio. Excluding the 1.4 cents of special DPS that was announced with 1H22 results, we currently estimate 2022-2024 dividend payout ratio at 50%.

• Valuation is compelling. CD’s share price has dropped by 17% in last three months and the stock's forward P/E is now well below its 10-year average, making the valuation quite compelling. Our TP includes a 12% ESG premium over the DCF-derived SGD1.60 fair value.

Source: RHB Research - 17 Nov 2022