June 2, 2020

Weak 2Q20 earnings and exclusion from MSCI Index now priced in.

In line with our expectation of CD continuing to offer driver incentives, last week, it announced a 50% reduction in taxi rental rates for June. This will further worsen its taxi business losses for 2020. CD was also removed from the MSCI Singapore Index on 29 May. The rebalancing undertaken by index funds led to a 4% decline in its share price. While there could have been some spillover selling from last Friday, weakness in its share price on 1 Jun could also be due to the stock going ex-dividend. In terms of price action, we believe CD has already factored in the known negatives, which also includes a likely 30% lower DPS for FY20F. Its FY20F dividend yield now matches the yield offered by the STI.

Positives to come from improved public transport revenue and cash flow support from government budgets.

On the positive front, with the swift reopening of Singapore’s economy, we expect ridership of buses and trains to improve as we head towards 4Q20. This should translate to a QoQ improvement in public transport revenue. In addition, the extension of job support schemes for an additional month, as well as a higher percentage support to cover monthly wages for rail operators and point-topoint transport operators – announced under the latest Fortitude Budget – should enable CD to weather through the next two reporting quarters. We also believe that the company could leverage on its net cash balance sheet of SGD26.4m and available facilities of SGD700m to undertake an earnings-accretive acquisition.

Lower than historical average valuation, reasonable yield, and strong earnings recovery in 2021 supports our BUY rating.

Our DCF-based TP rises to SGD1.65, implying 15.5x FY21F P/E, in line with the stock’s 10-year average forward P/E. Barring the risks of delays in opening the economy in 2H20, a second wave of COVID-19 infections, or a material decline in margins for the public transport business leading to weakerthan-estimated earnings, we believe CD’s current share price, which offers a c.5% yield, provides a solid downside support and a good entry point for investors to start accumulating the stock ahead of the 26% growth in FY21F earnings.

Upgrade to BUY from Neutral, new SGD1.65 TP from SGD1.45, 15% upside with c.5% FY20F yield. ComfortDelGro has priced in the soft earnings for 2Q20F and its exclusion from the MSCI Singapore index. With the swift reopening of Singapore’s economy and additional cash flow support from the latest Fortitude Budget, 2H20 earnings could be better than Street’s estimate. Our FY20F profit is 17% above Street’s. With its 1- year forward P/E below the historical average, investors should start accumulating ahead of the expected strong rebound in FY21 earnings.

Maintain BUY by RHB. Share price closed at $1.49.