Brokers’ take

Compiled by Lynette Tan

COMFORTDELGRO | NEUTRAL

JULY 22 CLOSE: $2.80

TARGET PRICE: $2.80

RHB Research Institute, July 22

We remain confident of ComfortDelGro's (CD) earnings growth, aided by contributions from recent acquisitions and its public transport unit's growth.

The public transport business is expected to be the key driver of earnings growth during the forecast period, although its growth has been dragged by loss-making rail business in Singapore.

CD's North East MRT line is operating under the new rail financing framework, which puts a cap on operating margin. And its Downtown MRT line has been incurring losses amid lower-than-estimated ridership and fares.

There have been discussions on the revision in public transport fare and allotment of the temporary enhanced maintenance grant to support the increase in rail operating costs. But details have been sparse.

We believe that the reduction in rail losses could lift our target price - every 5 per cent change in our public transport revenue estimate should boost our target price by about 5 per cent.

In addition, CD undertook $479 million worth of acquisitions last year.

New acquisitions, which have been earnings accretive, offer earnings before interest and taxes margins that are higher than that of its existing businesses.

At a net gearing of 30 per cent, CD would have access to about $800 million of funding to support further acquisitions of earnings-accretive businesses.

BANKS | NEUTRAL

CGS-CIMB, July 22

We expect Q2 2019 forecast earnings to be characterised by lower trading income, positive quarter-on-quarter net interest margin (NIM) performance across all three banks and normalised credit costs (absence of general provision writebacks and oil and gas impairments).

We expect to see 1 to 2 basis points (bp) NIM expansion across the Singapore banks in Q2 2019 as tailwind effects of their mortgage repricing efforts come through.

Broadly, the banks raised board rates, in some cases up to 40 to 50 bp, across Q1 2019 towards higher effective Singapore interbank offered rate (Sibor)-linked rates.

That said, contributions to NIM from banks' mortgage books may be a touch lower in 2H 2019 as we note some competitive pricing to maintain market share.

Beyond peaking Sibor/swap offer rate rates and the revision of mortgage rates, the key downside risk of a Fed rate cut in 2H will weigh on NIMs over FY20 to FY21.

Regional growth may be slower amid the US-China trade tension but the asset quality of the banks' Hong Kong/China operations have remained intact. Looking into DBS Bank's and OCBC Bank's Hong Kong books, we believe that some of the slowdown in growth could be due to an overstocking of inventory in months prior to the recorded contraction.

In keeping with the pace of system growth, a revision in loan growth targets (especially mortgages) may be on the cards. We prefer United Overseas Bank for yield visibility and smaller Greater China book.

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