CGS-CIMB: ComfortDelGro still a long-term growth stock as ride-hailing fears ease

ComfortDelGro taxi in SingaporeComfortDelGro taxi in Singapore

ComfortDelGro remains a “viable long-term growth stock,” as concerns over disruption from ride-hailing firms ease, CGS-CIMB said in a note on Thursday after a recent non-deal roadshow to meet investors in Kuala Lumpur.

“Investors concur with CD’s view that both Grab and Go-JEK may have shifted their key growth emphasis from ride-hailing to other businesses such as insurance and mobile payment, which would bode well for CD’s Singapore taxi business,” the brokerage said.

“We think the likelihood of ride-hailing competition intensifying hereon is slim,” it added, and pointed to potential taxi-earnings upside from fleet replacement with new hybrid models which fetch higher rental rates and the net expansion of the taxi fleet.

The newer hybrid taxi models could fetch daily rental rates around S$120 a day, compared with S$80-S$90 a day for some of the older diesel models, CGS-CIMB estimated.

There were other signs that ride-hailing firm Go-JEK’s entry into Singapore wasn’t bringing another price war, similar to when Uber and Grab entered the market.

CGS-CIMB said it has observed that Go-JEK has cut its cash incentives in January, with its peak-hour fares rising to around S$22-S$24 from around S$20 on average in January, closer to Grab’s rates.

“While this could bring about better gross fare earnings for Go-JEK drivers, it could also slow down or deter new users from joining its ride-hailing platform, in our view,” it said.

The brokerage also pointed to the difficulty the ride-hailing services may have luring new drivers to their platforms.

“We think that in general, CD’s taxi drivers are still able to get more rides (from street hails in addition to app bookings) than Grab or Go-JEK drivers and thus, potentially have better earnings than private hire-car drivers,” the note said.

In addition, the brokerage was upbeat on ComfortDelGro’s strategy of seeking growth via acquisitions, which the taxi-operator said would continue.

“In response to questions on whether CD would tone down its acquisition spree, CD reaffirmed that it would continue to seek growth through viable earnings-accretive acquisitions,” the note said. “It would probably be looking to extend its operating presence further in
Australia due to a stable economic environment and good margins (in the teens).”

ComfortDelGro also has “wide debt headroom” of around S$800 million to fund acquisitions, CGS-CIMB said.

The brokerage kept an Add call on the stock with a S$2.74 target price. It estimated the share price was at 15.5 times 2020 price-to-earnings ratio, below its seven-year historical average of 16.7 times, and had a 2019 dividend yield of 4.6 percent.

“An affirmed expansion of its taxi fleet in the coming months and further earnings-accretive M&A could re-rate the stock,” CGS-CIMB said.

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