• 1Q23 revenue was within expectations but PATMI disappointed. 1Q23 revenue/PATMI was 22% and 18% of our FY23e forecast.
• The cost recovery from higher indexation of bus fees is underway in UK but the full benefit will be more evident in 2H23. Taxi earnings were hampered by incentives in China to attract taxi drivers, especially in Beijing. Balance sheet continues to strengthen with net cash of S$718mn
• The recovery in Singapore disappointed. Improvement in rail passenger volumes and prices could not offset the higher electricity and lower bus contracting fee. We are lowering our FY23e PATMI by 8% to S$164.7mn. Recovery in FY23e will stem from increased passenger volumes for both taxis and trains, a reduction in taxi rental rebates in Singapore by 5% points, indexation of UK bus contracts and lower taxi rebates in China. We maintain BUY with a reduced DCF target price of S$1.57 (prev. S$1.63).

The Positives

+ Taxi revenue improvement is still underway. Recovery of taxi revenue was due to booking commissions introduced last year (May 22: 4%, Oct 22: 5%) and a more stable taxi fleet. The improvement in taxi revenue would have been stronger but for incentives in China to attract drivers. Utilisation rate of taxis remains sluggish, especially in Beijing. Operating profit in China declined 46% to S$3.4mn.

+ With stable capex, cash piles up. Comfort generated free cash flow of around S$76.8mn in 1Q23 (1Q22: S$92.5mn). Net cash continues to pile up on the balance sheet. 1Q23 net cash is S$718mn, similar to last years S$754mn. Net cash is at record levels. Annualised capex is now S$200mn p.a., compared to the S$350mn-400mn p.a. pre-pandemic. We expect the large cash hoard will also boost earnings through higher interest income.

The Negative

– Poor margins in public transport. Public transport operating margins are a paltry 3% vs pre-pandemic 8%. Margin pressure comes from low bus contracting fees in Singapore, higher electricity and increased bus driver fees in Australia and UK. Despite the jump in rail fees (via subsidies) and volumes in Singapore, margins were under pressure. UK suffered an operating loss of S$3.5mn in 1Q23, compared to S$1.6mn profit a year ago.