ComfortDelGro: Looking forward to another year of strong growth
- Reiterate BUY with higher TP of S$1.80 on back of positive engines firing
- Further share price re-rating on the back of (i) growth in Taxi & Private Hire segment, (ii) the UK’s public transport recovery, (iii) strategic bolt-on acquisitions
- FY23 net profit slightly ahead, momentum to continue; payout ratio at 80%
- FY24F/25F earnings forecasts raised by 6-9%; room for consensus to catch up
We reiterate our positive counter view on three key reasons, with continued earnings recovery and earnings upgrade by market consensus underpinning a further re-rate. CDG stock has delivered a market-beating total return of > 30% from a low of S$1.01 in Jun ‘23. Nonetheless, we believe the ride is still not over, based on three key reasons: (i) Multiple growth levers in a growing Singapore point-to-point (P2P) market; (ii) the worst being over for the public transport segment; and (iii) sensible bolt-on acquisitions to drive future growth.
We revised our FY24/35F forecasts up by 6%/ 9%, and project net profit to grow by 24% to S$224m in FY24F, 8% above consensus. We believe there is room for consensus to catch up as quarters unfold.
1. Multiple levers in a growing Singapore P2P market
We reiterate our prior view that the market’s view on the group’s taxi fleet as a profitability trend could be missing the picture. The shift towards commission sharing provides multiple levers for its taxi business to enjoy upsides, namely from fare increases, a higher number of rides, and higher proportion of ride hailing vs. street hailing.
Recently, we also saw the government announcing measures to level the playing field between taxis and private hires: (i) Extending the statutory lifespan of taxis from eight-10 years, and (ii) inspection frequency for taxis under three years old to be reduced from biannually to annually.
We summarise our views on the Singapore P2P landscape and outlook for CDG as follows:
Segment | Performance in 2023 (y-o-y) | Outlook & DBS estimates | Commentaries |
P2P industry overall sales ($) | +7.4% | Outlook: ↗️ DBS estimates: +6% | - In 2023, overall industry sales growth of +7.4% was driven by ridership growth (taxi and ride-hail) of +4.1% and average fare growth of +3.3% - In 2024F, we project overall growth of +6% on a +3% ridership growth and a +3% pricing effect |
Total Rides (#) | +4.1% | Outlook: ↗️ DBS estimates: +3% | - Resilient demand from a combination of major events (Singapore Airshow, Taylor Swift concert, amongst others) and growing consumer preference for affordable convenience |
Pricing ($)
| +3.3% | Outlook: ↗️ DBS estimates: +3% | - In-line with MAS’s headline inflation target of +2.5-3.5% |
P2P Vehicle Count (#) | +8.5% | Outlook: ↗️ DBS estimates: +5% | - Assume a 2% quarterly growth, in line with 2023’s growth trend - Year to end with P2P vehicle count at 72k, 2% under the pre-COVID high of 74k |
Platform fees ($) | S$0.70 | Outlook: ➡️ DBS estimates: S$0.70 | - Increase unlikely, as quantum is in line with competition - We expect platform fees to accordingly more than double and increase from an est. S$5m in FY23A to S$13m in FY24F on an annualized basis, coupled with booking volume growth |
Booking commissions (%) | 5% | Outlook: ↗️ DBS estimates: 7% | - Major growth driver given headroom for higher commissions relative to market leader Grab’s rate of 20.3% compared to CDG’s 7% for taxis (10% for CDG’s cars and 12% for non-CDG’s cars) - Gojek-CDG platform integration (likely in 2Q24) to allow drivers on both platforms to benefit from higher job flow, justifying an increase in booking commissions - Accordingly, we assumed a reasonable 1%-point increase in commission rate FY25F onwards |
Source: Singapore Department of Statistics and Land Transport Authority (LTA)
Beyond 2024, the company has been working on new features for its Zig app, amongst which is an auction mechanism. We believe this feature could be similar to InDrive, where passengers are able to quote their fare and nearby drivers could accept, decline, or counter. This would ensure more transparency and fairness in terms of fares vs. an algorithm-driven black box, promoting healthy growth for the industry.
2. Worst is mostly over in the public transport segment
The group’s public transport segment should see continued improvement in operating profit in FY24F, driven by a turnaround in its UK business, and higher fares in Singapore rail, which mitigates lower contribution from buses and concession fee payable.
We summarise our views on the CDG’s Public Transport segment as follows:
Segment | Performance in 2023 | Outlook & DBS estimates | Commentaries |
Overall public transporzt | Rev: +2.5% OP: -4.5% (excluding one-off Alperton disposal gain) | Outlook: ↗️ DBS estimates Rev: +6.6% OP: +18.1% | - Significant operating profit jump, driven by the UK’s business turnaround, offset by lower profit at Singapore business |
Singapore | Rev: +0.8% OP: -4.1% | Outlook: ↘ DBS estimates Rev: +4.4% OP: -4.0% | - In 2023, operating profit was down due to higher fuel and electricity costs, which was hedged based on higher prices in 2022 - In 2024F, revenue is expected to grow on the back of fare prices being 7% higher as well as higher performance incentives, slightly offset by loss of Jurong West package (effective Sep ‘24) - Operating margin to see slight compression (from 5.0% to 4.6%) due to concession fee payable to LTA 2024 onwards in exchange for retaining its advertising business, which will more than offset the benefits of easing fuel and electricity cost and higher fare prices |
Australia* | Rev: +6.5% (in A$ terms) OP: -3.3% (in A$ terms) | Outlook: ➡️ DBS estimates Rev: +3.5% OP: +3.5% | - In 2023, Australia business likely saw significant revenue uplift in A$ terms on elevated inflation indexation, while operating profit likely declined given renewed lower margin contracts kicking in - In 2024F, we expect growth to be largely driven by inflation, expected at +3.5% by the Reserve Bank of Australia, with operating margin to remain flat at about 6% |
UK*
| Rev: +10.9% (in GBP terms) OP: n.m. (loss making in FY22 due to one-off bus driver payout and indexation lag effect) | Outlook: ↗️ DBS estimates Rev: +7.0% OP: +432.9% | - In 2023, the UK business likely saw significant revenue uplift in GBP terms on elevated inflation indexation, which, coupled with new higher margin contract renewals, helped operating profit turn positive from 2H23 - In 2024, we expect growth to be largely driven by lagged inflation indexation of 7%, while operating profit should see significant uptick on improved operating margin of 3% as indexation effect kicks in while cost eases and contracts are renewed at much higher margin |
Source: Company, DBS Bank Ltd (*rough estimates as the company does not break down its public transport segment by geographies) | |||
Source: Company, DBS Bank Ltd (*rough estimates as the company does not break down its public transport segment by geographies)
3. Strategic bolt-on acquisitions to drive international growth
With the elevated interest rate environment, the company has identified attractive opportunities on the market. Given its solid balance sheet, it is well-positioned to opportunistically acquire with growth intentions. Management has conveyed that its acquisition criteria are (i) reasonable valuation, (ii) being earnings accretive, and (iii) within its domain and geographical expertise. We forecast the recent two acquisitions to contribute +3.1% pro-rata to FY24F earnings and +5.4% to FY25F earnings.
Management has signalled that it remains on the lookout for further acquisitions at ~S$100-200m ticket size. It has also stated its willingness to go into a net debt position if required. We believe this is a great sign that the company is actively managing capital by sourcing for attractive deals to drive continued growth of the company.
How are we confident in our consensus forecast?
Our FY24F earnings projection of S$224m is 7.7% above the consensus of S$208m. We believe our estimate is achievable based on the following:
- Reasonable earnings uplift of S$9m: We can safely assume the company is able to achieve a FY24B (base case) of S$208m, derived from annualising 4Q23 earnings. Stripping out the S$7m incremental contribution from the two acquisitions, we assume a reasonable earnings uplift of S$9m, driven largely by a 2% higher booking commission, a 7% public transport fare increase, and continued a turnaround in UK public transport.
- UK public transport operating margin upside surprise: We believe we have been conservative in our UK public transport operating margin recovery, having factored in margin recovery to a 3% level in FY24F, conservative given that it is below the typical 6-9% pre-COVID range and contracts have been renewed at a 10%+ margin. An earlier-than-expected recovery to the 5% margin could contribute an additional S$13m additional earnings uplift to our FY24F estimates.
What are the key events to watch out for in the upcoming year?
1Q24
UK Greater Manchester bus packages: We believe these new bus packages – if secured – would come at attractive operating margins of 5-10% given more sensible bidding environments in the UK.
2Q24
Gojek integration with Zig platform: Platform integration would allow drivers to receive bookings from commuters using both Gojek and Zig platforms. This will improve the stream of job flow for drivers and position the platforms to better compete with Grab.
LTA review of P2P industry structure and regulatory framework: We believe we would receive updates with the formal timelines of recently-announced changes to taxi lifespan and lower inspection frequency for newer taxis amongst others.
4Q24
Seletar bus package: SBS Transit won the previous contract, which will end in Mar ‘25. Based on the bids for the Jurong West and Bukit Merah bus packages, we believe the winning bid would remain around S$480m over the next five years (similar to the previous contract value) and the winning operator would likely be a toss-up between SBS Transit and SMRT.
Jurong Regional & Cross Island Line: These rail networks will be awarded on a gross cost model basis for the initial years, with the government bearing the revenue risk until ridership ramps up to a more sustainable level. We believe SMRT and SBS Transit will likely secure one line each to ensure that the local operator landscape remains competitive.
Results commentaries
FY23 posted another year of strong recovery (net profit +26.7% y-o-y excluding a one-off S$30.5m Alperton asset disposal gain) on strong growth in its Taxi & Private Hire segment. ComfortDelGro Group (CDG) reported its FY23 results with revenue and net profit up 2.6% and 4.3% (factoring in Alperton asset disposal gain) y-o-y to S$3.9bn and S$180.5m respectively.
4Q23 revenue and operating profit up 4.5% and 81.9% y-o-y respectively. Top-line growth was largely driven by UK Public Transport given the kicking in of indexation and renewal of contracts at higher rates. On operating profit, a significant increase was driven by (i) the low base from UK Public Transport business, which recorded a S$18m one-off bus driver back pay deal charge, (ii) reduction of taxi rebates in China on re-opening recovery, and (iii) improved profitability of local Singapore Taxi & Private Hire segment with the introduction of platform fees (effective Jul ‘22).
Final dividend of 3.76 Scts declared, bringing total FY23 dividend to 6.66 Scts. While the company did not declare any special dividend for FY23, it increased its overall dividend payout ratio to 80%. On an ordinary dividend basis, the FY23 total dividend of 6.66 Scts represents a 44.5% increase compared to 4.61 Scts in FY22.
Segmental commentaries
Public Transport: Revenue saw a 2.5% y-o-y increase, largely on UK public transport recovery on indexation and contract renewal. Operating profit – excluding Alperton disposal gains – was down 4.5% y-o-y. This was attributable to higher fuel and electricity costs at Singapore Public Transport business and lower margins for renewed Australian bus contracts, offset slightly by UK public transport recovery.
Taxi & Private Hire: Revenue saw a 3.6% y-o-y increase, largely coming from introduction of S$0.70 platform fee and higher booking commissions. The above-mentioned factors, coupled with lower rental discount, contributed to a 59% y-o-y increase in operating profit.
Other Private Transport/Inspection & Testing Services/Other segments: Revenue and operating profits for these segments remain relatively stable y-o-y.
Access more at DBS Insights Direct
FY Dec | 2H2022 | 1H2023 | 2H2023 | % chg y-o-y | % chg h-o-h |
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Revenue | 1,938 | 1,862 | 2,018 | 4.2 | 8.4 |
Other Oper. (Exp)/Inc | (1,839) | (1,747) | (1,863) | 1.3 | 6.7 |
Operating Profit | 99 | 115 | 155 | 56.6 | 34.2 |
Other Non Opg (Exp)/Inc | 11 | 15 | 15 | 29.5 | (2.7) |
Associates & JV Inc | 0 | 1 | 1 | 66.7 | (44.4) |
Net Interest (Exp)/Inc | (8) | (9) | (14) | (61.9) | (46.2) |
Exceptional Gain/(Loss) | 0 | 2 | 0 | - | nm |
Pre-tax Profit | 102 | 124 | 156 | 53.2 | 26.4 |
Tax | (19) | (24) | (31) | 63.0 | 32.1 |
Minority Interest | (25) | (22) | (23) | 8.0 | 7.0 |
Net Profit | 58 | 79 | 102 | 76.5 | 29.9 |
Net profit bef Except. | 58 | 77 | 102 | 76.5 | 33.0 |
EBITDA | 290 | 312 | 354 | 21.9 | 13.4 |
Margins (%) |
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Opg Profit Margins | 5.1 | 6.2 | 7.7 |
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Net Profit Margins | 3.0 | 4.2 | 5.1 |
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