Excerpts from UOB KH report
Analyst: Llelleythan Tan
|ComfortDelGro Corporation (CD SP)
New Year, New Beginning
Looking forward, an expected recovery in ridership levels and new contract wins would boost 2022 earnings.
Maintain BUY with a lower target price of S$1.90 (S$1.99).
• Public transport: Favourable tailwinds ahead. ComfortDelgro’s (CD) 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 S 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 CD’s public transport earnings from 2022 onwards.
• Strengthening global footprint. CD 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 CD’s bottom line.
CD 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 CD 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 (SBST) 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 coshared with the Land Transport Authority, resulting in roughly S$28m in annual savings for CD.
However, SBST 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 endemic living, the taxi segment is poised to benefit from the easing of work-from-home as a default starting 2022.
Taxi ridership is bound to increase as more of Singapore’s workforce head back to their workplaces while there will be new/increasing tourist arrivals from Vaccinated Travel Lanes (VTL). Also, the tapering of taxi rental rebates would boost taxi profitability, with the expected rebate end date on 31 Jan 22.
Following the temporary suspension of physical credit card payments in 4Q21, CD would also begin installing physical credit card terminals in their taxis from 2Q22, increasing the flexibility of 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 CD’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.
• No major changes to our 2021-23 revenue and net profit forecasts. On the back of favourable tailwinds, we expect 2021-22 revenue to grow at 8.1% yoy and 5.0% yoy respectively while net profit is expected to grow at 142.6% yoy and 51% yoy respectively.
• Maintain BUY with a lower target price of S$1.90 (previously: S$1.99). We use a lower 18.2x 2022F PE (from 19.2x), pegged to +1SD of CD’s average five-year mean (vs sevenyear previously).
• Attractive COVID-19 recovery play. We reckon ComfortDelgro (CD SP) is a great proxy to Singapore’s recovery from the COVID-19 pandemic. At its last closing price of S$1.34, CD is trading at the lowest price of 2020. This is unjustified given that CD is going into 2022 on the back of stronger tailwinds as compared to 2020 when Singapore’s underwent COVID-19 lockdowns, multiple phases of social distancing measures and the implementation of taxi rebates. As Singapore steams ahead with its transition to endemic living, we expect ridership levels and earnings to grow, creating huge upside potential for CD.
• Omicron risk. We are mindful of an ongoing Omicron wave in Singapore that may worsen and hinder ridership levels. However, Singapore’s authorities have mentioned that current COVID-19 measures would only be tightened as a last resort, underpinning CD’s recovery.
SHARE PRICE CATALYST
• Full easing of COVID-19 measures, bus tender contract wins, earnings-accretive overseas acquisitions
Full report here.