• For 2021, we expect a robust 143% y-o-y growth in net profit, coming off a low base in 2020.
• Looking forward, an expected recovery in ridership levels and new contract wins would boost 2022 earnings. Maintain BUY call on ComfortDelGro with a lower target price.

Public Transport: Favourable Tailwinds Ahead

• ComfortDelGro (SGX:C52)’s public transport segment is poised to experience a strong recovery due to upcoming beneficial tailwinds. Starting on 1 Jan 22, Singapore’s authorities have removed the work-from-home default arrangement, and up to 50% of fully vaccinated employees are now allowed to return to their workplaces. Bus and train fares in Singapore have also increased by 3-4 cents as authorities granted the maximum allowable fare adjustment quantum of 2.2% to help operators mitigate rising costs.
• Backed by a population that is majority fully-vaccinated, these tailwinds would help underpin ComfortDelGro’s public transport earnings from 2022 onwards.

Strengthening Global Footprint

• ComfortDelGro was awarded an S$1.13b eight-year contract to operate rail services in Auckland, New Zealand. The Auckland rail is the country’s largest rail network and the contract is expected to commence on 16 Jan 22. Based on our estimates, we expect a S$3m-4m annual boost to ComfortDelGro’s bottom line.
• ComfortDelGro also acquired the remaining stake of its subsidiary, Scottish City Link Coaches, for S$15.8m in 4Q21. Expected to complete in Feb 22, the acquisition would make ComfortDelGro the second largest inter-city coach operator in the UK with a market share of 11% and inter-city coach fleet size of 150 (previously: 100).

New Risk-profit Sharing Model

• SBS Transit announced that the Downtown Line (DTL) will transition to the New Rail Financing Framework Version 2 (NRFF V2) as of Jan 22. Under NRFF V2, 50% of DTL operating losses below 3.5% EBIT margin would be co-shared with the Land Transport Authority, resulting in roughly S$28m in annual savings for ComfortDelGro.
• However, SBS Transit (SGX:S61) would also release its rights to lease advertising spaces of the rail lines at end-23 and extended five existing bus contracts by three years at a lower service rate, with a loss of S$34m service revenue per year starting 30 Sep 22.
• Overall, we estimate that the new profit sharing model would have negligible impact on earnings.

Taxi: Gradual Recovery for 2022

• As Singapore transitions to payments for riders and tourists. Barring any new COVID-19 restrictions and outbreaks, we reckon that the taxi segment would face a slow but gradual recovery in 2022.

VTL Arrivals Impacted by Omicron

• The return of tourists via VTLs is expected to boost ridership levels as international borders reopen. However, VTL ticket sales have been temporarily suspended due to Omicron concerns and will only resume on 21 Jan 22 at 50% capacity. The suspension would soften both tourism arrivals and ridership levels in 1H22.
• We reckon Singapore’s authorities would restore VTL capacity back earliest in 2Q22, given that Omicron variant has been found to be less lethal compared to the Delta variant.

Overseas Markets Transition to Endemic Living

• Despite rising COVID-19 cases and hospitalisations, Australia’s Prime Minister mentioned that the country would not return to a lockdown. Also, a highly fully-vaccinated population has seen social distancing measures being relaxed and the resumption of interstate travel, supporting ComfortDelGro’s bus ridership levels. In the UK, facing record-high Omicron cases, the UK government is considering renewed lockdown measures to curb further spread within the country.

Earnings Revision

• No major changes to our COVID-19 measures would only be tightened as a last resort, underpinning ComfortDelGro’s recovery.

• Catalyst: Full easing of COVID-19 measures, bus tender contract wins, earnings-accretive overseas acquisitions.

Source: UOB Kay Hian Research - 11 Jan 2022