In his most recent June 22 note, citing a more moderate inflation outlook in the UK, Chee is now of the view that margin compression in UK public transport to be "less severe" than initial expectations.
His view is further boosted by reasons such as "more restrained" wage demands by the unions, and the company's continued success in securing new tenders at double-digit margins.
In addition, Vicom, CDG's separately listed subsidiary, should benefit from a higher mix of high-margin mandatory on-board unit installations from Malaysian vehicles ahead of the new ERP system from Jan 1 2027.
On the other hand, Chee expects 2QFY2026 earnings to decline by 10%-15%, mainly dragged by Addison Lee, the UK private hire business, as its attractive contract with a major Middle Eastern airline is impacted by significantly lower flight frequency amid the ongoing Iran war, although operations should gradually recover in 2HFY2026.
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Chee has raised his FY2026 earnings estimates by 7% and FY2027's by 12% to reflect a less bearish UK public transport outlook and higher margins at Vicom.
Due to "subdued" financing costs and "increasingly shareholder-friendly actions", Chee expects a higher dividend payout ratio of 85% up from 80% now.
He notes that with 3-month SORA trending at around 1%, CDG should be comfortable maintaining its current debt levels while placing greater emphasis on shareholder returns.
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"In addition, the recent share buybacks suggest that shareholder returns may be a higher priority than we had previously expected," he adds.
From a previously reduced target price of $1.11, Chee now values the company at $1.30, using 5.1x forward EV/ebitda multiple, which is 0.5 sd above its 5-year average, on higher FY2026 ebitda.
"We believe the slight premium is justified by the potential for an 85% payout ratio. At our target price, the stock offers a yield of about 6%, which we believe aligns with investor expectations," says Chee.
Key "upside" risks include an improving competitive landscape in taxi and private hire, while downside risks include a sharp spike in UK inflation and lower-than-expected dividend payout.
ComfortDelGro shares as at 9.06 am traded at $1.29, down 0.77%. It is down 12.84% year to date.
