SINGAPORE (June 29): Although taxi operator ComfortDelGro last Friday issued a profit guidance announcing that it is expected to report a net loss of 1H20, Maybank Kim Eng remains bullish on the stock and recommends investors to “buy” on dips at a target price of $1.98.
“We believe investors should buy on price weakness as Comfort continues to focus on expanding its stable, non-volatile bus contracting model, which accounted for 63% of FY19 revenue,” says analyst Kareen Chan in a Sunday report.
Comfort’s expected 1H20 loss is likely due to impairment in its taxi division and significant Covid-19 impact, and operation weakness has already been factored into the analyst’s forecast.
Comfort did not indicate which division is subject to impairment, but the analyst believes that it is likely the taxi business from Covid-19 pressure and idle fleets.
The company previously took an earlier impairment charge of $27.3 million in FY19 for taxis in Singapore and China given competition from private-hire players. This represents 0.5% of FY19 total assets. A similar charge off now would imply an impairment of $26.2 million – a 17% downside to FY20 earnings per share (EPS) forecast.
Additionally, Comfort has been warning since March that its taxi division is likely to face losses due to the substantial amount of taxi rental reliefs of some $117 million given to taxi drivers amid Covid-19.
“This was expected and we have built in substantial weakness in our FY20E taxi EBIT. Going forward, we do not expect further material rental reliefs for taxis given Singapore’s Phase 2 re-opening,” says Chan.
Overall, taxi EBIT is expected to drop sharply to 2% in FY20, from 15.6% in FY19.
Nonetheless, the company’s structural growth is intact, and it stands to be a key beneficiary from rising ridership as Singapore emerges from the circuit breaker.
Historically, Comfort has also fared well after crises. The stock’s price rebounded by 75% and 90% in 8-10 months following SARS and the great financial crisis (GFC).
“Even with an impairment charge of $26.2 million, our conservative FY20 DPS of 4.3 cents (based on 60% payout ratio vs 73% 5-year average) is still well supported by free cash flow (FCF),” says Chan.
As at 1.15pm, shares in Comfort are trading at $1.49 or 1.3 times FY20 book with a dividend yield of 2.8%.
