Broker's take: Maybank Kim Eng upgrades ComfortDelGro to 'buy' on healthy share upside

MAYBANK Kim Eng has upgraded its recommendation on ComfortDelGro to "buy" and maintained its target price of S$2.76, with the transport operator trading at attractive valuations after underperforming the benchmark index over the past quarter despite no unexpected news developments.

Based on Monday's closing of S$2.41, its stock price represents a 15 per cent upside to the brokerage's discounted cash flow (DCF) based target price of S$2.76. As at the midday close, ComfortDelGro last traded two Singapore cents or 0.8 per cent up at S$2.43 on a volume of 2.81 million shares changing hands.

In a report dated Oct 1, Maybank Kim Eng analyst Luis Hilado noted that the share price performance of the transport operator "implies a 'no fare hike' scenario for Singapore public transport", which he does not think is justified.

In July, Singapore Transport Minister Khaw Boon Wan revealed that rail operators such as ComfortDelGro could receive grants from the government while the public transport council said last month that there are considerations being taken to implement a potential 7 per cent price hike.

Mr Hilado said: "We previously upgraded our forecasts for the former, but not the latter. We believe it is reasonable for at least one of these events to take place in FY2020 and (are) optimistic for both and hence maintain our current forecasts."

While ComfortDelGro's taxi business continues to face headwinds from ride-hailing firms, its management has indicated that second-half taxi margins could be lower in order to win back and retain drivers. These risks, Mr Hilado noted, were largely captured in consensus estimates for FY2019 earnings.

"Meanwhile, the company's strategic shift to a more regulated return bus contracting model type model and continued demand for public transport services will continue to mitigate and outpace such risks," he added.

Risks to Maybank Kim Eng's call are a worse than expected taxi business erosion and/or no fare hikes for public transport.