ComfortDelgro Corporation Limited (SGX: C52) is a household name in Singapore. Its blue taxis and red buses operated by SBS Transit are common sights on roads. 

However, do you know that CDG runs a full range of land transport utilities including bus, taxi, rail, car leasing, automotive engineering, vehicle inspection and driving centres, across 61 cities in Asia, Australia and Europe?

CDG also holds a 36.3% market share of MRT network in terms of rail length, through its ownership in SBS Transit that operates the North East Line, Downtown Line, and Sengkang-Punggol LRT.

With the COVID-19 epidemic spreading rapidly, CDG’s business will undoubtedly be affected as employees start working from home, large events being postponed, and crowd-avoiding behaviour taking roots.

I studied its recently announced 2019 earnings to find out how it performed last year, and its near-term outlook.

Revenue and Earnings

Source: CDG FY2019 Financial Results Presentation

CDG’s revenue increased by $100.5 million in FY2019, contributed by new acquisitions ($154.2 million) and existing business ($20 million), offset by unfavourable foreign currency exchange in the British Pound and Australian Dollar.

In tandem with revenue growth, operating costs have risen by 3.7% mainly due to staff costs from acquisition, and depreciation & amortisation. As a result, operating profit dropped by 5.2% to $415 million, representing an operating margin of 10.6%.

Group profit after tax fell 11.3% to $318 million.

Overall, I feel that this set of results are not unexpected. While CDG made new acquisitions, inevitably it incurred higher expenses which eroded its earnings. Furthermore, its taxi business continues to face challenges from private hire vehicles.

Public Transport and Taxi Segments

Public transport and taxi business constitute about 90% of CDG total revenue hence it is important to examine closely the performance of both sectors.

In FY2019, public transport services raked in revenue of $2,880.4 million, a 6.2% growth. Management attributed the good performance to new acquisition in Australia, increased fees from higher mileage operated, improvement in bus services, and the 4.3% fare adjustment that commenced end-2018.

As for the taxi business, the picture is less rosy. Revenue dropped by 8% in FY2019 to $668.6 million due to smaller operating fleet caused by competition from ride-hailing operators.

Balance Sheet Strength

Source: CDG FY2019 Financial Results Presentation

Cash and short-term deposits increased by 1.4% to $594.2 million.

Liabilities in the form of borrowings and finance leases increased by 11.3% to $64.3 million. This is attributed to increased capital expenditure for UK operations and acquisitions activities in Australia.

As a result, CDG went into a net debt position of $40 million, from a net cash of $16.2 million in FY2018.

I am not too concerned about the increased borrowings because, in absolute amount, it does not seem excessive. In addition, CDG took on more debts due to productive business expansion, a legitimate reason. 

Cash Flow

CDG’s cash flow generation ability remains sound. In FY2019, its net cash from operating activities was $609.9 million. From FY2015 to FY2018, CDG’s same figure ranged from $581.9 million to $702.5 million, according to its past annual reports.  

Dividends

CDG announced a final dividend of 5.29 cents per share, a drop from 6.15 cents per share in FY2018. Taken together with the interim dividend of 4.50 cents, CDG will dish out 9.79 cents per share, giving it a yield of 4.5% based on the share price of $2.18.

Looking at CDG’s dividend track record, it has been a steady performer with an increasing dividend from 8.25 cents in 2014 to 10.50 cents in 2018. A trend reversal this year in dividend payment will not sit well with retail investors who have most came to know CDG as a stable dividend stock.

Source: CDG FY2018 Annual Report

Management could be preparing for increased capital expenditure in the next financial year that comes from taxi fleet renewal, replacement with hybrid vehicles, and possibly more acquisitions. One tell-tale sign is the increase in net CAPEX to $346.5 million from 226.1 million in FY2018, a 53% jump. 

Business Outlook

COVID-19 will impact CDG’s local business, and China’s taxi, driving centre and bus station operations. In response, the government has announced a support package to help taxi and private hire drivers stay employed during this difficult period. About 40,000 drivers will receive $20 per vehicle per day, funded equally by the government and operators.

While this means additional costs to CDG, I view this as a necessary measure to retain drivers. Imagine if drivers start quitting en masse while not being able to make ends meet, the repercussions will be disastrous for CDG when its fleet of taxis are left idle while costing the company licensing, maintenance and rental expenses. It is a case of short-term pain for long term gain.

Conclusion

I have been paying close attention to CDG since the outbreak of COVID-19 virus. Its share price fell from $2.43 in mid-December to $2.18 on 13 Feb, about a 10.3% drop.

One of my investing strategies is to collect shares of established enterprises with a track record of income and dividend growth, when they are hit by non-fundamentally crippling issues. However, judging from CDG’s FY2019 performance, its reduction in dividend, and pessimistic assessment of business prospect by its management, 2020 seems likely to be a challenging year.

While the COVID-19 outbreak would eventually be contained, its impact on the general economic conditions and market sentiment can take much longer to subside.  

Hence, at this moment, I would personally withhold from buying CDG shares. Instead, I will place it in my watch list, and monitor its next quarterly earnings to assess how the company performs in a difficult quarter affected by a full-blown epidemic outbreak, before making my next move.

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