Last week, I wrote about the inclusion of Emperador Inc (SGX: EMI) stock into Singapore’s Straits Times Index (STI).
The giant brandy and spirits company in the Philippines will be replacing transport giant ComfortDelGro Corporation Ltd (SGX: C52) on the STI.
The change in the composition of the STI will take effect on 19 September (next Monday).
As I’ve mentioned, near-term interest in Emperador is expected and the removal of ComfortDelGro from the STI will naturally lead to some selling pressure in the company.
In fact, the company’s share price was already down by 6.8% in less than a month by Friday (9 September).
Should investors – and ComfortDelGro shareholders – be worried about these changes?
I don’t think so since the changes are not due to a deteriorating business. Here are three reasons why the local transport player will be just fine.
1. Strong candidate for a “reopening play” in Singapore market
ComfortDelGro’s latest earnings in H1 2022 saw revenue and profit after tax and minority interests (PATAMI) continue to grow.
Revenue was up 6.7% year-on-year (yoy) to S$1.86 billion during H1 2022 while PATAMI increased 27.7% yoy to S$118.7 million.
This was despite the increase in its operating costs (by 9.2%) on the back of higher fuel and electricity costs for its public transport segment.
The reopening of the economy has benefitted ComfortDelGro. Furthermore, as economic activity in countries that ComfortDelGro operates in – such as the UK, Ireland, Australia, New Zealand and Malaysia – continues to pick up, this will boost the company’s earnings.
2. High dividend payout for investors
ComfortDelGro’s management has maintained its commitment to its dividend policy that aims to pay out at least 50% of its PATAMI.
At its current share price of S$1.38, the company has a trailing dividend yield of 3.6%.
Given the expected recovery in earnings, I believe that this bodes well for investors as the company’s dividend should rise going forward.
For income investors, a growing dividend is something we should look for. ComfortDelGro currently looks like a company that can provide this over the short term.
3. New earnings growth drivers
It is also exciting to see how ComfortDelGro is trying to create new earnings growth drivers.
The four new areas of growth are: rail, electrification, logistics and non-emergency medical transportation.
Here are just a few of the recent developments that we have seen at the company:
- ComfortDelGro entered into the New Zealand market to operate the Auckland Rail Network
- The company was also shortlisted for the Western Sydney Airport rail project with its Australian partners
- At the beginning of this year, ComfortDelGro acquired a 90% stake in Ming Chuan Transportation Pte Ltd in order to strengthen its medical transport business segment
Focus on company’s business fundamentals
I think that investors need to look beyond short-term uncertainties in the market.
It’s true the removal from the STI will result in some fund outflows from passive investors, such as the Exchange-Traded Funds (ETFs) that track indices.
However, I think the near-term price pressure on ComfortDelGro offers buying opportunities for investors as the firm’s business fundamentals remain solid.
In fact, ComfortDelGro’s earnings recovery is expected to continue in the coming quarters. This will be supported by improved monetisation of its Singapore taxi business, higher rail ridership, and increased charter activities as tourism rebounds.
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
