Rail cost hike could hit ComfortDelGro's earnings

Maintenance costs could rise following the mid-life revamp at North-East Line.

ComfortDelGro’s (CDG) earnings may take a hit from higher maintenance costs in its rail operations, as well as the continuous competitive pressure in the taxi business, according to an analyst report by RHB.

The expected improvement in profitability brought by the 7% fare hikes may be countered by higher maintenance costs, related to mid-life refurbishments to be undertaken at the North-East Line.

The Land Transport Authority (LTA) and SBS Transit had jointly announced in late 2018 that the North-East Line will undergo major refurbishments starting this year.

Also read: Growing taxi competition trims ComfortDelGro's long-term growth prospects

During the first seven months of 2019, CDG’s taxi fleet dipped 9.4% during to 11,200, no thanks to the loss of drivers to ride-hailing companies. Because of this, the firm is now expected to have a smaller taxi fleet by the end of the year. RHB noted that CDG may result in forgoing some earnings margin in its taxi business by offering higher incentives to retain drivers. Taxi operations accounted for 35% of the company's operating profit in 2018.

Also read: ComfortDelGro profits up 0.6% to $303.3m in 2018 

However, the firm’s acquisitions worth $479m in 2018 is seen as an upside. “New acquisitions, which have been earnings accretive, offer EBIT margins that are higher than that of its existing businesses. At a net gearing of 30%, CD should have access to c.$800m of funding to support further acquisitions of earnings-accretive businesses,”  Shekhar Jaiswal, analyst at RHB Group said in a report.