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Has the Time Come to Invest in ComfortDelGro?

by: Tam Ging Wien


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The bad news surrounding ComfortDelGro (CDG) needs no introduction, instead of explaining it, here are links to the relevant publications:

The market fears surrounding CDG are related mainly to the effect ride hailing firms such as Grab and Uber have on their taxi business.

Therefore in order to understand the potential impact they would have on CDG, lets breakdown its revenue and operating profit trends based on their business segments.

ComfortDelGro's Financials

Source: ComfortDelGro Ltd H1-FY2017 Financial Report

We can see that CDG derives approximately 30.6% of its revenue from the Taxi business compared to 56.8% from the Public Transport Services. Owing to higher margins in the Taxi business, operating income from both the Taxi and Public Transport Services are 40.6% and 34.0% respectively.

Rising usage of ride hailing apps would no doubt encroach on CDG’s Taxi business and to a lesser extend reduce demand for its Public Transport Services.

Looking at the trends of Public Transport Services and Taxi business over the years, we can clearly see that the impact is most noticeable in the annualized figures based on the H1-FY2017 results. The data is simply multiplied by 2 to obtain the annualized figures.

Source: ComfortDelGro Ltd Annual Reports

Source: ComfortDelGro Ltd Annual Reports

Comparing the operating profit for the annualized figures for FY2017 against the FY2016, we found that the Public Transport Services and Taxi business fell correspondingly by 3.31% and 13.67%. We could extrapolate with an assumption that for every 10% fall in Taxi operating profits, the operating profits for Public Transport Services will fall by 2.5%. Using this modal and assuming that other operating profits stay the same and the trend continues to FY2019, we could project CDG’s profitability in the coming years.

Projecting CDG's Profitability In The Worse Case

Using the modal described above, we calculated that ComfortDelGro’s net profits could decline at a compounded rate of 8.92% for 2 years with its net profits declining to $263.1mil in FY2019. At the current price of $2.08 per share, the P/E Ratio will increase from the current 13.9x to 17.1x.

Source: ComfortDelGro Ltd Annual Reports with Projected Figures

Despite this decline, it is still above the $199.4mil dividends paid out in FY2016. This indicates to us that CDG’s dividend paying ability is likely to remain strong despite falling profits.

On the 22-Aug-2017, CDG announced it has signed an exclusivity letter with Uber relating to forming a potential exclusive strategic alliance. In alliance could see collaboration between the 2 with ComfortDelGro's vehicles being offered on Uber's app. ComfortDelGro was careful to state that there is no certainty or assurance that this exclusive alliance will lead to a definitive agreement. You may read the announcement here:


Source: Google and Yahoo! Finance

ComfortDelGro's share price leapt from $2.17 to a high of $2.37 on this news in Aug-2017. Should they announce a confirmation of this strategic alliance, we are likely to see the share price jump in a similar fashion.

Will CDG really perform as badly as projected in the modal above? We think that the model above is the worst case scenarios only if the ComfortDelGro-Uber Strategic Alliance fail to materialise.

Also this model assumes a fairly bad case of driver poaching from CDG to other companies. From July 2017 onwards, the government has instituted a “Private Hire Car Driver’s Vocational License” requirement. This will likely reduce the number of drivers leaving CDG for private hire vehicles the reduce the impact on CDG’s decline.

This announcement signals to us that ComfortDelGro's management is fully conscious of the potential disruptions in the ground travel industry and is actively seeking opportunities to counteract this trend. With other taxi operators such as Transcab and Silvercab already in alignment with Grab, we think CDG is likely to proceed with it’s the alliance to protect its future profitability. Here are the reasons why:

  • Singapore market is important to both Grab and Uber as it’s the most significant in SEA. Losing Singapore is as good as losing the SEA market and Uber is not likely to give up this market so quickly.
  • The change of CEO from Travis Kalanick to Dara Khosrowshahi will likely see Uber’s business strategy change and become more accommodative.
  • Uber lost its license in London and an appeal is unlikely to be successful. Uber is likely to take a softer approach in other markets to avoid risk of losing further licenses.
  • ComfortDelGro needs a strong partner who is able to assist to supply transport jobs for its drivers
  • Grab's recent announcement of exclusive tie-ups with SIA and SMRT will put pressure on Uber to seal the partnership with ComfortDelGro.

However, should this alliance fail to materialise, we predict the stock price will likely trend towards $1.68 (+/- 10c) reflecting our projections of net profits in the modal above using the current P/E Ratio of 13.9x. However, if it should fail to materialise, a stock price plunge could be another buying opportunity simply because we think that CDG’s management is will pursue other projects to ensure its profitability and prices will recover in the future. Perhaps initiate a potential ComfortDelGro-Grab Strategic Alliance?

Strong Balance Sheet and Cash Flow

Source: ComfortDelGro Ltd Annual Reports

CDG is still producing a healthy cash flow and free cash flow. The dividends paid out is also consistently below the free cash flow which indicates that CDG’s management has been very prudent with their cash flow management and has not artificially boosted yields on the stock.

From a balance sheet perspective, CDG is cash rich with $606.6mil in cash and $377.1mil debts. Therefore, CDG is in a net cash position of $229.5mil. Its total liabilities currently stands at $1,874.8mil while its current assets alone are worth $1,136.5mil. CDG in our view has a strong balance sheet.

We are positively hopeful that ComfortDelGro-Uber Strategic Alliance will materialise and bring comfort (pun intended) and relieve to shareholders. Should this happen, we predict that the share price will trend towards the post-announcement in August at around $2.37 (+/- 10c).

We at ProButterflyTM are keeping a close watch on this counter.

We are now in the reporting season for Q3-2017. We will be excited to see what ComforDelGro has to share with its shareholders.

 


Disclosure Statement

The views and opinions expressed herein are those of Tam Ging Wien (“the author”) and do not necessarily reflect the official policy, position or view of the author’s employer, organization, committee, or other group(s) or individual(s).

The author at time of writing owns shares in ComfortDelGro Ltd.


 

Positioning to Ride the Recovery

Opportunities and Risk Post-COVID-19 Pandemic in the various S-REIT Sectors

The COVID-19 crisis has brought about an unprecedented economic shock to many sectors, and yet it has also generated opportunities in others.

The tech sector has been a major beneficiary and along with that, S-REITs exposed to the Data Centre sector such as Keppel DC REIT and Mapletree Industrial Trust gained phenomenally.

But are the investment opportunities in REITs now gone? Personally, we do not think so. There are still many REITs below their pre-COVID-19 levels poise to recover strongly in the coming quarters – and now it is the best time to prepare to capture the post-COVID recovery.

Join us as we discuss the opportunities and risk in the S-REIT space sector-by-sector as we try to uncover recovery opportunities for FY2021 and beyond. Real estate sectors that we will be covering include the Retail, Hospitality, Offices, Healthcare, Industrial and Data Centres.

Our speaker Tam Ging Wien will be sharing his knowledge and experience including:

  • Part 1: A Survey of the REITs Landscape Around The World
  • Part 2: Key Metrics in Identifying Strong REITs
  • Part 3: Real Estate Sector Review Amidst the COVID Crisis
  • Part 4: Screening for Opportunities
  • Part 5: Q&A

Some key highlights that will be covered includes:

  • Real estate sector-by-sector review on COVID-19 impact and recovery opportunities. Sectors covered include the Retail, Hospitality, Offices, Healthcare, Industrial and Data Centres.
  • Opinion on which sector will continue to stay resilient and which are poised to recover quickly post-pandemic
  • The right metric to use when screening for high quality REITs
  • Case studies of REITs which are considered high quality
  • Step-by-step demo of how to screen for high quality REITs on your own

During the sharing session, various Singapore-listed REIT examples will be used.

There will also be a Q&A so that members of the investing community may engage in open dialog and discussions in order to deepen their understanding of REITs. Do prepare your writing materials for note taking.

Please note that the duration of the on-site seminar is 7pm to 9:45pm Singapore Time (GMT +8).

The details of the event are as follows:

  • Seminar: Positioning To Ride The Recovery
  • Date: 5th May 2021 (Wed)
  • Time: 7:00pm to 9:45pm
  • Venue: RNN Conference Centre - Kyoto Training Room (Level 4), 137 Cecil Street, Cecil Building #04-01, Singapore 069537
  • Fees: S$10.00
  • Sign-up Link: http://reitessentials.eventbrite.com/

To learn more about REITs, we recommend the article: What are REITs?

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