ComfortDelGro upgraded to Buy by DBS as competition threats recede

ComfortDelGro taxiComfortDelGro taxi

DBS upgraded ComfortDelGro to Buy from Hold, saying there’s a “window of opportunity” to enter the stock after its recent decline, amid signs the taxi fleet contraction may be at an end and that competition escalation isn’t likely.

The upgrade was made before Singapore’s competition regulators on Thursday issued a ruling that the Uber-Grab merger violated the Competition Act and proposed remedies to restore competition.

“The trend of rapid taxi fleet contraction seen since late 2016 seems to be firmly over, in our view,” DBS said in a note on Wednesday, pointing to Uber’s exit from the Singapore market.

It noted that the company’s taxi fleet was at 12,627 as of April, down from 15,800 in April 2017, but fairly flat compared with March; DBS forecast the fleet would rise to around 13,000 by the end of the year, with ComfortDelGro placing orders for 700 new taxis, of which 200 have already been delivered and rented out.

DBS said a further escalation of competition appeared unlikely, noting that while media reports indicated Go-Jek was interested in entering the Singapore market, ComfortDelGro was widely speculated to be its partner, although there was been no confirmation.

“That said, we believe that the likelihood of irrational competition is low given Grab’s already-dominant position. In fact, Go-Jek has established local companies for Vietnam and Thailand, but we have yet to see its progress in Singapore,” DBS said.

DBS raised its profit forecasts by 4 percent for this year and next, but lowered its revenue projects by around 2.7-4.5 percent on the adoption of new accounting rules. It projected a smaller 3 percent profit decline in fiscal 2018, followed by a return to growth of 5 percent for fiscal 2019.

It said it still expected an on-year decline in profit in the second quarter, but of a smaller magnitude than in the first quarter, suggesting an operational improvement.

“We project operations to improve sequentially in the second half of 2018, reversing back into growth profile in fiscal 2019F. With competition ceding, we believe downside risks are limited, coupled with its public transport exposure, which is relatively resilient through economic cycles,” it said.

It raised its target price to S$2.59 from S$2.12 and noted that the stock was yielding around 4.6 percent.

Shares of ComfortDelGro ended Thursday flat at S$2.37.

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