ComfortDelgro poised for stronger earnings growth, higher dividend payout: CGS CIMB

SINGAPORE – ComfortDelGro (CD) is poised for a strong earnings recovery during the upcoming quarter and potential higher dividend payout ahead.

This is according to a July 4 report by investment house CGS CIMB, which pasted a $1.35 price target on the stock of the listed bus and taxi operator – a 13 per cent upside from current levels.

The report by analyst Ong Khang Chuen said: “We upgrade ComfortDelGro from hold to add as we see a fundamental inflection point – we estimate its profit after tax and minority interests (Patmi) could return to year-on-year (yoy) positive growth in the second quarter of 2023 (up 3 per cent yoy) and see an even stronger showing in the second half of 2023 (rising 65 per cent yoy) on multiple earnings catalysts.”

The report also said valuation of the stock is currently undemanding and below the historical mean.

“Our target price of $1.35 is based on 15.4 times forward 2024 price-earnings (CD’s five-year historical average), from 13.8 times previously. Re-rating catalysts include further adjustments in taxi monetisation and tender wins.”

But it added that downside risks include slower margin recovery due to inability to pass on costs, and negative foreign exchange translation impact given the strong Singapore dollar.

CD’s stock has been struggling over the past few years, no thanks to a fall in ridership during the Covid-19 pandemic. It has failed to take off in a meaningful way despite the passing of the pandemic as it wrestles with competition from private hire operators, shortage of workers and rising costs.

The stock has averaged $1.16 this year, and hit a June 2023 low of $1.02 as investors took a dim view of its prospects.

But, according to CGS CIMB, the worst is over and the outlook is rosier than at any time in the past three years.

It forecasts earnings before interest and taxes rising a significant 50 per cent year-on-year to $78 million for financial year 2023, which ends on Dec 31.

“CD lowered its taxi rental rebate (on April 1) and introduced platform fee for rides booked via its CDG Zig app (on July 1) in Singapore. We see potential for commission rate increases in the fourth quarter of 2023 as the current industry landscape remains favourable for point-to-point transport players.”

Meanwhile, it also expects CD’s British operations to return to positive earnings this year after a loss of $10.4 million in 2022, as cost pass-through to the government will help with margin repair.

CGS CIMB also sees room for higher base dividend payout ratio (DPR) given stronger fundamental performance this year and potentially higher dividend payout from subsidiary SBS Transit. The latter has maintained a 50 per cent dividend payout ratio despite turning net cash since FY2020.

“CD has been actively rewarding shareholders with its excess cash – on top of its 70 base DPR, it declared 3.87 cents special dividend per share in FY2022 on property disposal gain, and in honour of its 20th anniversary of SGX listing,” the report noted. “We think higher DPR can be supported given its strong net cash position of $715 million and cash flow generation.”

The report came the same day that CD announced that its indirect subsidiary in Australia had bagged an A$200 million (S$180.5 million) outer metropolitan bus contract in Sydney, New South Wales.

CD shares closed one cent up at $1.19 on Wednesday.