ComfortDelGro Analysis – An Overrated Recovery?

In my previous article, I wrote that I am continuously looking to buy defensive stocks such as Sheng Siong, ComfortDelGro, SBS Transit, Koufu and the telecommunication stocks such as Netlink Trust and Singtel. As of now, I have yet to initiate position in Netlink Trust (in my watchlist) as I felt the valuation is still on the high side despite STI Index falling about 8% from its peak in August 2019. Defensive stocks’ price tend to be more resilient than cyclical stock during market rout.

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A look at CDG’s share price, we could see that its share price dropped close to 12% in just one month. As CDG is one of our Singapore’s blue chip defensive stocks, it has definitely raised some of our eyebrows whether it is time to invest in this company. In this article, I will share about the businesses that CDG operate
in, financial performance, acquisitions, balance sheet and cash flow and lastly other alternatives besides investing in CDG.

ComfortDelGro

ComfortDelGro prides itself as one of the largest land transport companies in the world with a global fleet of 42,300 vehicles in seven countries such as Singapore, United Kingdom, Ireland, Australia, Vietnam, Malaysia and 11 cities in China. ComfortDelGro was formed on 29 March 2003 after the merger of Comfort Group and DelGro Corporation.

We all know ComfortDelGro as one of the largest taxi companies in Singapore which was beaten by the entry of private car hailing service few years ago for offering cheaper fares. However, ComfortDelGro is more than just a taxi hailing business or driving centres. ComfortDelGro’s businesses include bus, taxi, rail, car rental and leasing, automotive engineering services, inspection and testing services, driving centres, non-emergency patient transport services, insurance broking services and outdoor advertising.

Financial Performance

Before we look into the financial performance, it is to note that CDG has adopted the Singapore Financial Reporting Standards (International) (SFRS(I)) 15 Revenue from Contracts with Customers with effect from 1 January 2018. There might have slight difference in revenue figures after 2018 but overall trend still remains the same.

CDG 5 year Performance Revenue

From this image above you could see that, CDG’s revenue stopped growing after 2015 and dipped for two consecutive years in 2016 and 2017. The reason why revenue fell was because of the drop in taxi business due to the disruption by private hailing services such as Grab and Uber. Its revenue only started to grow after 2018 when it was aggressive with expansion inorganically. Although the acquisitions contributed positively to its topline, the acquisitions did not contribute significantly to the bottomline. This can be seen where profit attributable to shareholders for 2018 only grew $1.8 million year-on-year. This is still less than its peak profit of $317.1 million in 2016.

CDG 5 year Performance EPSCDG 5 year Performance Div

Similar to Profit Attributable to Shareholders, EPS grew from 13.29 cents to 14.72 from 2014 to 2016 which was its peak. However, its EPS fell in 2017 to 13.95 cents and only to increase slightly to 14.01 cents in 2018 due to the aggressive inorganic expansions. Despite the drop in EPS in 2017, dividend was $0.1 cents higher compared to a year ago. Dividend payout is still lower than the EPS for that year. I believe that the management did not want the share price to drop further therefore the slight raise in dividend for that year.Revenue and ProfitCDG clearly was a growth stock before the arrival of Grab and Uber in 2016. Ever since ComfortDelGro was merged in 2003, revenue has been growing every year except in 2009 and 2017. ComfortDelGro grew its revenue by $1.95 billion in 14 years from $2.019 billion in 2003 to $3.97 billion in 2017. Profit Attributable to Shareholders had also done well over the past 14 years. Profit grew $167.6 or more than double in 14 years from $133.9 million in 2003 to $301.5 million in 2017. EPS over the years had also done well too. It grew 7.35 cents or more than double from 6.6 cents in 2003 to 13.95 cents in 2017. Dividends also grew at a conservative pace ever since the sharp drop in payout from 2006 to 2008. Revenue 4

CDG’s growth over the years is mostly contributed by its two main business segments – Public Transport Services (Bus and Rail) and Taxi. Public Transport Services’ revenue grew $1.4 billion or more than double from $977 million in 2003 to $2.394 billion in 2017. Taxi’s revenue grew slightly less than Public Transport Services at $409.6 million or 50% from $799 million in 2003 to $1.208 billion in 2017.

Revenue 2

About 90% of CDG’s revenue come from Public Transport Services and Taxi. Public Transport Services is the largest contributor where it contributes 71% of the revenue in 2018 while Taxi contributes 19% of the revenue.

The third largest contributor to CDG’s revenue would be Automotive Engineering. CDG provides repair and maintenance services to taxi, buses and third parties vehicle. Revenue is mainly dependent on the number of vehicles serviced and you could see that revenue fell consecutively since 2012. This can be due to a fall in the number of taxi vehicles that CDG owns.

The other smaller contributor worth talking about would be Vehicle Inspection and Testing. CDG owns 67% of VICOM which is Singapore’s leading provider in inspection and technical testing services. VICOM Group comprises of VICOM and JIC Inspection Centres. A look at LTA’s Authorised Vehicle Inspection Centres, VICOM Group is in a duopoly market where it’s only competitor is STA Vehicle Inspection operated by ST Engineering. In addition, it is mandatory for all motorists to have their vehicles regularly check and inspect thus explaining steady rising revenue since 2003.

Even though CDG is diversified with seven business segments, there is concentration risk on Public Transport Services and Taxi where 90% of its revenues are derived from. This poses a great risk to both the topline and bottomline because if any of the segments suffers a significant drop in revenue and profit, the overall group performance will be greatly affected. This can be illustrated by the drop in taxi revenue after 2016. In 2016, CDG reported a drop of $132.1 million or about 10% in revenue compared to a year ago. However, operating profit for taxi in 2016 fell $32.4 million or 20% compared to a year ago. This resulted in a drop of overall group revenue and operating profit where it was partially offsetted by growth in Public Transport Services segment. In addition to the above point, as seen from the line graph above, CDG was not able to grow its other small businesses such as Car Rental, Driving Centre and Bus Station to reduce the concentration risk from the two largest segment contributor. Over the years, revenue either declined or stayed stagnant.

Revenue 3

On a brighter spot, Singapore only contributes about 59% of the overall revenue of the company. However, one worry sign I would like to point out is that Singapore’s contribution to the overall revenue has inched up slightly over the decade.

Revenue 1

A look at the line chart above shows that growth in Singapore’s revenue outgrew other countries such as the United Kingdom and Ireland and China. It seems that management has not been expanding its businesses overseas and only rely on organic growth to grow overall group revenue which isn’t that successful at all. It is only until 2018 where CDG started to look into growing the group inorganically through acquisitions which I will cover in the next section.

Acquisitions

I would like to applaud the management for starting to make acquisitions as my perception for the management is that they are conservative and rigid. If they did not start acquiring existing companies in 2018, we would see the share price, revenue, profit and dividend fall further. CDG made close to $500 million in acquisitions in 2018. We will look briefly into what CDG has acquired recently.

Singapore

In Singapore, CDG spent $17 million to acquire AZ Bus and Ric-Tat Travel. With this acquisition, ComfortDelGro Bus Pte Ltd has 372 buses or 722 buses if inclusive of subcontractors’ buses and 374 staff thus strengthening its position as Singapore’s largest private bus charter operator.

Australia

In 2018, CDG started expanding into the non-emergency patient transport services for the first time by acquiring National Patient Transport for about $30 million. National Patient Transport offers a range of healthcare transport services to State Government ambulance utilities and directly to major metropolitan hospital networks including walker, hoist and stretcher transport services for high acuity and complex patients. It also operates a registered training organisation that is qualified to deliver and assess a range of non-emergency healthcare transport, first aid and resuscitation courses. CDG also acquired Tullamarine Bus Lines, which operates seven bus routes under contract with the government in Victoria and contracted school services and a small taxi fleet management business for about $32 million. With this acquisition, it strengthens CDG’s presence in Victoria. The rationale for the next acquisition is that the company sees opportunity where there is growing trend of Australian moving to the more affordable coastal region thus acquiring Coastal Liner Coaches which it operates route bus services in Outer Sydney Metropolitan Bus Service Region 11 for about $9.1 million. Besides that, Coastal Liner Coaches also specialises in luxury coach tour packages for theatre performances, concerts and day tours for individuals and small groups. CDG spent about $131 million, its second largest acquisition in Australia to acquire FCL Holdings, which runs Forest Coach Lines in Northern Sydney and regional NSW and two freehold depot sites for the operation of the bus services. In its largest acquisition in Australia, CDG spent $192.5 million to acquire Busline, one of Australia’s largest privately-owned bus businesses, comprising Buslink Pty Ltd, Buslink Southern Pty Ltd and their 11 corresponding depots. Buslink operates in eight locations across four Australian states and territories with a fleet of 401 buses and a staff strength of over 500. It operates majority of Darwin’s school services and about 70% of Darwin’s urban network. It also operates a sizeable business in Queensland and is based primarily in Sunshine Coast and Gladstone. Its service offerings comprise bus transportation for urban, school, special needs, employee transport, and charter services.

In total, CDG spent close to $400 million in Australia alone. With that, CDG now operates in six states and territories with a fleet of over 4,200 vehicles comprising buses, coaches, taxis and ambulances and an outdoor advertising services.

China

In February 2018, CDG spent $15 million to acquire The Group acquired 217 taxi licences and vehicles from Shenyang Tian Wen Taxi, bringing its fleet of taxis to 1503. It helped to further strengthen its position as the largest taxi operator in Shenyang.

United Kingdom

CDG expanded its bus and coach operations outside of London for the first time by acquiring New Adventure Travel Limited for $25 million in February 2018. CDG expanded its taxi business by acquiring Dial-a-Cab’s business and taxis. This acquisition increased its total black cab fleet by 36% to 3000.

Balance Sheet and Cash Flow

cdg net cashNet Cash has been sliding since Mar 18 quarter from $297.6 million to -$84.2 million in the latest quarter as Total Borrowings jumped 77% to $569.9 million from 2017. In view of expansion inorganically in the coming years, CDG expects the gearing ratio to rise though the board has set a limit to the gearing ratio.

CDG Cash FlowCDG FCF

Operating Cash Flow for has been very strong despite the disruption in its taxi business which is good.

According to FSMOne’s website, Free Cash Flow for ComfortDelGro stands at $300.60 million. This is more than the dividends paid out of $225.1 million in 2018. Therefore, dividend payout is sustainable as it is less than Free Cash Flow and less than the EPS.

Alternatives

There are other alternatives than to invest in ComfortDelGro. I recommend looking into SBS Transit and VICOM which CDG owns 75% and 67% of the shares respectively.

SBS Transit is the largest scheduled public bus operator in Singapore with a fleet of over 4000 buses and runs 200 routes. SBS Transit also owns two of the train lines in Singapore – North East Line and Downtown Line and two Light Rapid Transit Systems namely Sengkang and Punggol.

In 2016, The Government announced changes to the bus industry. The bus industry has been transitioned into Bus Contracting Model from 1 September 2016. Under the bus contracting model, operators will be paid a service fee to operate the services. LTA will own all operating assets including buses and lease them to the operators. This allows LTA to have more power in determining the bus services provided, responding to changes in ridership and set service service standards. Currently, LTA is leasing buses owned by SBS Transit and SMRT at net book value since there has not yet been a handover of bus assets. Due to the sudden transition of model, SBS Transit and SMRT continues to operate packages that have yet to be tendered out for the next two to 10 years. As of time of writing, SBS Transit has won two of the four packages out for tender – Seletar and Bukit Merah. The next package that will expire under the negotiated package will be Hougang – Sengkang due in 2 years time. For more information, you could look at this video .

On 1 April 2018, the NEL and the Sengkang-Punggol Light Rail Transit systems transited to the New Rail Financing Framework where SBS Transit was granted a 15-year licence to operate the lines until 31 March 2033. Under this Framework, the LTA owns the rail assets and would pay for replacements and upgrades. SBS Transit is responsible for operations and maintenance. For more information, you could refer to this website where it explains what this new framework is all about.

VICOM Group operates a total of seven vehicle inspection centres in Singapore. Its inspection centres also provide ancillary services, including motor insurance, road tax renewal, in-vehicle unit maintenance, car evaluation, accident vehicle assessment and vehicle emission certification. As mentioned earlier in the article, VICOM Group, which consists of VICOM and JIC Inspection Centre, is in a duopoly market where it’s only competitor is STA Vehicle Inspection operated by ST Engineering. ViCOM continued to command close to 75% of the market share in this industry.

What I like about the two companies are that they are both recession proof. First of all, when Singapore is hit by a recession, Public Transport will be a better solution to travel around Singapore compared to taking private hired car or taxi as fares are affordable for the former. With the new Government policy for Public Transport such as Bus Contracting Model and New Rail Financing Framework, it benefits SBS Transit as it reduces financial burden in maintaining the assets and better focus on investors’ wants which is to produce better financial results. The only concern I have for SBS Transit with this new bidding model is the inability of SBS Transit to successfully bid for new package as with this model, it will attract different transport companies to bid reducing the chance for SBS Transit to win the package.

Next, is mandatory for owners of vehicles to have their vehicles inspected on a regular basis. The first inspection for a private car is when the vehicle reaches three. The frequency of inspection increases as the vehicle gets older. For example, The vehicle must be inspected once every two years from the third year to tenth year. Cars above 10 years must be inspected once a year. With that, the number of cars going for general inspection will be consistent over the years. The Government’s policy for inspection also plays a part in VICOM’s business outlook. For example, “zero-growth” policy for passenger cars and motorcycles and encouraging early scrapping of older and more pollutive vehicles resulted in inspection to hit a three year low of 625,940 compared to 629,106 in 2017. However, the drop in inspection was offsetted by introduction of the new High/Low Idle test in April 2018.

Closing Thoughts

I believe that the recovery in share price in 2019 is overrated. Despite the fact that CDG spent $500 million to expand inorganically, resulting in its gearing ratio to rise significantly, recovery in net profit only inched up by a little. In my opinion, expanding inorganically does not arrest the problem of ever declining group net profit. The problem lies in the fall in revenue and operating profit from its taxi business since private car hire services still exist in the industry. Sure, CDG can still continue to expand inorganically but how sustainable can this go in the long run when net borrowings is already more than its cash and short term deposits? PE Ratio for CDG stands at 17.78 whiles PE Ratio for SBS Transit stands at 14.37. I feel like the current price of about $2.50 is a little bit too expensive and would only consider if it drops further.

One Comment Add yours

  1. Lino Purtell says:

    Great delivery. Sound arguments. Keep up the good spirit.

    Like

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