Following the 2003 merger of two land transport companies (Comfort Group and DelGro Corporation), one of the world’s largest land transport companies – ComfortDelGro Corporation Limited (C52.SI) was formed (No prizes for guessing how they came up with the new name). With over 46,303 vehicles over 7 countries, CDG stood as one of the largest land transport companies in the world. Just within the CDG umbrella, there were not one but two listed subsidiaries – VICOM Limited (V01.SI) and SBS Transit Ltd (S61.SI) with shareholdings of 67.07% and 75.11% respectively.

STOCK INFORMATION

1
TICKER SYMBOL: C52.SI
MARKET CAP: SGD 6.11 Billion (Updated 21 August 2015)
MARKET PRICE / SHARE: SGD 2.88 (Updated 21 August 2015)
INDUSTRY: Transportation

THE BUSINESS

Broadly speaking, what a transportation company does is simple. Sending people from Point A to Point B.

CDG Annual Report 2014
CDG Annual Report 2014

And here’s a brief rundown of CDG’s top 3 revenue contributors:

1. Bus (S$2.1 billion | 50.7% of FY2014 Rev)

Not only was CDG the market leader in Singapore’s public scheduled bus services with SBS Transit’s fleet of 3,448 buses (average daily ridership of 2.75 million – In 2014, SG population was ~5.5 million), they were also the largest private bus chartering company with another 350 buses.

Next up let’s look at their London bus operations. After CDG’s 2013 acquisition of West London (renamed under CDG’s Metroline brand) bus operations from First Group plc for S$111 million, CDG’s London operation totalled over 1,700 buses, moving up the ladder to become London’s second largest operator with a market share of over 18% (from 14%) of London’s bus market.

Lastly we move on to the land of Down Under. CDG’s Australia bus operations have also seen recent action, specifically investments in buses and coaches plying the famed Blue mountain touristy hotspot. And with a fleet of 1,697, buses are the name of the game in Australia with this segment contributing ~94% of Australia’s revenue.

2. Taxi (S$1.3 billion | 31.7% of FY2014 Rev)

With a much higher operating margin of 12% compared to Bus’s 8%, CDG has Taxi operations not only in SG but also in places like China (Top players in Beijing, Jilin City, Shenyang, Chengdu, etc) and Perth, Australia (With 2,025 taxis, CDG’s fully –owned subsidiary Swan Taxis has a whooping 93% market share of Perth’s market).

However with that being said, the bulk of revenue still came from Singapore. With a total fleet of 16,855 taxis (Comfort and Citycab), CDG (2014) made up a massive 58% of Singapore’s taxis out there on the road. CDG’s SG Taxi operations are particularly interesting as compared to the more regulated Bus and Rail operations (Fares set by the PTC) because the taxi industry appears to have relatively more freedom in terms of pricing.

Bus and Rail: Public bus and train services are provided on a commercial basis, within the maximum fares approved by PTC.  The Government does not provide direct subsidies for public transport operations.

Taxi: Taxi fares have been deregulated since 1998 to allow taxi companies to set their own fares.

Also unlike CDG’s Bus and Rail operations, their Taxi segment functions more like a rental type of business. How the money rolls in is by the fares CDG charges the drivers to rent their vehicles with prices varying from S$75-S$105 per day. In a context of a brick and mortar business, you could simply imagine the taxi as a store where drivers (like entrepreneurs) pay rent to use the space in order to attract customers to provide customers a service (getting from point A to point B) in exchange for $.

3. Automotive Engineering Service (S$0.3 billion | 7.5% of FY2014 Rev)

What does this segment really do? To put it simply, this SG based operation by CDG Engineering Pte Ltd is essentially a vehicle garage doing repairs and maintenance for not only in-house vehicles (i.e taxis), they also have a corporate contracts with a notable new customer – Singapore Airlines Engineering Company to maintain its fleet of airport vehicles!

Some of its other businesses include being the accident reporting centre for 18 insurance companies (2014) and CDG Engineering also does vehicle assembly (buses) for their subsidiary SBS Transit.

4. Others

Rail (5% of FY2014 Rev): Operator of the Northeast Line (NEL) and also the Downtown Line (DTL) in SG.

Inspection and Testing Services (3% of FY2014 Rev): VICOM Pte Ltd (The go-to place for vehicle inspection in SG).

Bus Station, Car Rental and Leasing and Driving Centres (~1% of FY2014 Rev respectively).

KEY OPPORTUNITIES

1. Easy To Understand, Always in Demand Type of Business

How a transportation company works is not rocket science.

Although there can be no guarantees of how regulations might pan out in future, for a transportation company that has consistently profitable in their operations over the past decade, odds are that they would be too far off in terms of operations going forward (well at least the next decade). Especially given the dynamics of Singapore (with the land scarcity stuff), public transport would more likely than not still be an important part of the infrastructure. Let’s face it, with an average daily ridership (2014) for MRT and Buses at 2.6 million and 3.6 million respectively, we definitely do need public transport in Singapore. And this doesn’t seem to be a trend that’s going away anytime soon. Imagine if every family gets a private car – things would get slow. Very slow indeed.

Just considering CDG’s Singapore operations (Because it makes up ~60% of FY2014 Rev):
Rail: SBS Transit’s rail license condition (For NEL) dated January 2003 issued by the LTA was for an initial period of 30Y. For the Downtown Line (DTL), SBS Transit’s 19Y license started in 2013. So there’s some assurance there for ~20Y.

Bus: Although CDG’s Bus Service Operating License expires in August 2016, they should be likely to be able to continue operating those routes under the contracting model for the next 5Y (implied in their Annual Report 2014).

Operational-wise, the next 5Y seem to be rather visible for CDG in terms of still having licenses to operate their core businesses. Side-note: They are one of the industries where population growth might be a decent yardstick to gauge their growth.

2. Asset Light Bus Operations

CDG’s SG bus operations through their 75% ownership of SBS Transit was not their strong suit, at least not in the past 2Y (SBS’s bus segments had margins of between 1-2%).

Over the past few years, the public bus and rail operators in SG (CDG and SMRT) appear to be caught in a sticky situation. On one hand they had rising costs (Maintenance and new improvements) while on the other hand did not have a free reign to raise revenues (Fare prices). On the bright side, public buses in Singapore are exempted from COE (Certificate of Entitlement), so at least they have that going for them.

Even so, revenue (bus and rail fares) that could not be freely raised coupled with rising costs = not very good business dynamics.

However, this was blown wide open after a major change in policy announced by the Land Transport Authority (LTA) in 2014 for Singapore’s scheduled bus business. Under the new “Government Contracting Model”, LTA will pay operators to operate bus services through competitive tenders based on gross cost. The Government will take on the revenue risk while successful tenderers will focus on delivering services subject to various standards. What this means is that bus operators like CDG and SMRT need not have to worry about new bus assets and infrastructure (provided by the Government) and are essentially operating on sort of a cost plus basis. They would essentially be pure operators and if things go as planned, profitability should not be an issue.

It’s also notable to mention that the DTL was already functioning on sort of this new model for the rails segment with LTA, instead of the operator (CDG) owning the rail operating assets. This places LTA and not CDG in the position to make the decisions on replacing existing trains and operating assets as well as investing in new trains and operating assets.

3. Slow and Steady Track record (Not Exciting But Gets Things Done). Did We Also Mention A Solid Balance Sheet?

CDG Annual Report 2014
CDG Annual Report 2014

Let’s just let the stats speak for themselves:
Rev Growth (2010-2014): 6.0%
Profit to Shareholders (2010-2014): 5.5%
Return of Shareholders Equity (2010-2014) averaged: 12.8% in the last 5Y

It’s not what we term as a growth company with sexy double digit growths year on year but CDG definitely gets things done year after year. Another highlight was CDG’s impressive cash generative ability. In 2014, Net Cash from Operating Activities stood at S$0.73 billion, twice Net Income of S$0.34 billion and this was definitely helped by their business dynamics where their receivable days are lower than other businesses because most of their transactions are done in cash!

And CDG is one company that definitely has no issues with regards to insolvency with Cash (Short term deposits and bank balances) at S$0.83 billion more than able to cover all their S$0.74 billion worth of borrowings.

Did we also mention that CDG has a policy of paying out at least 50% of their profits!

KEY RISKS

1. Lower Barriers Of Entry

After the policy change to an asset light framework was announced by the Land Transport Authority (LTA) barriers to entry for new entrants of the industry have been lifted with bus assets and infrastructure provided by the Government (lesser capital required to get into this business) and arrangements being put in place to transfer staff on present routes to successful tenderers.

The stated purpose of this exercise was to “to make it easier for the further liberalisation of the industry.” That’s good for new entrants. However for the existing duopoly of CDG and SMRT, this was a risk to their operations after their licenses are up. After the first of such tenders won by Tower Transit in their bid to operate Bulim Bus Depot in Jurong West, there would still be another two tenders in the near future. As for the other nine bus packages making up 80% of the public bus fleet in Singapore, they will continue to be operated by incumbent bus operators (i.e. CDG and SMRT).

“This means that when SBS Transit’s Bus Service Operating Licence expires on 31 August next year, it will negotiate with the Land Transport Authority (LTA) to continue to operate these routes under the contracting model for about five years. Thereafter, when these negotiated contracts expire, these routes will gradually be tendered out.” – CDG Annual Report 2014

Looks like the days of duopoly might not be the same going forward.

2. Labour Crunch And Issues Beyond Pure Economics

Until the day that vehicles drive themselves, labour would likely continue to be an issue faced by CDG (or any transportation company for that matter). And this was further amplified by discontent voiced (by certain groups of people) in the home nation of CDG – Singapore, where transportation became a ‘hot’ topic in the 2011 General Elections.

With transportation issues close to most people (average daily ridership (2014) for MRT and Buses at 2.6 million and 3.6 million respectively), it is hard or almost close to impossible to please everyone (The officeholder of Singapore’s Minister of Transport in the past few terms was literally in the ‘hot’ seat). One of the key issue raised was the influx of foreign workers in Singapore. And with the Singaporean transportation industry greatly benefiting from the help of foreign workers, any restrictions in foreign workers would undoubtedly affect the operators (CDG and SMRT)

This have inevitably led to concerns on finding sufficient bus captains (maybe that was one of the reasons that fueled the driverless MRTs in the NEL) and the lack of supply would likely lead to increases of wages required to hire more employees. This does not look like a fun cycle to be in but for a company are operating in relatively regulated industries (i.e. transportation), some things may be beyond one’s control.

3. Overseas Growth Is Not Easy To Execute

Even before 2010, with Singapore making up ~57% of Group’s Revenue, management highlighted that they were looking towards diversifying their revenue stream. However 4Y later in 2014, Revenue from their Singapore operations instead went up to 59%!

But to CDG’s credit, operating profit painted a different picture with Operating profit from their Singapore actually decreasing from 58% all the way to 51%. But if we go deeper into the breakdown, these increases were the result of certain acquisitions, which is definitely the quicker (lower risk than starting from scratch) option when one is looking to expand in a foreign land. Acquisitions are tough, especially more so if you are a foreign operator as certain countries might treat transportation as an issue of national security. CDG stated in their Annual Report that the acquisition was, “This was a very rare opportunity given how infrequent bus operations in Central London come up for sale.”. This implied the difficulty faced by operators looking to expand in this industry.

But to CDG’s credit they have definitely been trying and are currently one of four short listed players to run a portion of London’s Underground (rail). And if successful, this would really be a significant contributor towards diversifying their revenue base. In this article by Barrons, it was indicated that this new operation could potentially add at least 5% to annual earnings!

LISTED PEERS

1. SMRT Corporation Limited
2. MTR Corporation Limited

TOP SHAREHOLDERS (As at 4 March 2015)

1. Citibank Nominees Singapore Pte Ltd: 23.67%
2. DBS Nominees Pte Ltd: 20.25%
3. DBSN Services Pte Ltd: 12.15%

Single largest Direct Shareholder: Capital World Growth and Income Fund with 6.35%.

FINANCIALS
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We will only provide you with information relevant to value investing. You can unsubscribe at any time. Your contact details will be safeguarded The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Mun Hong’s personal capacity and do not in any way represent those of his employer and other related entities. Mun Hong does not own any companies mentioned.

2 COMMENTS

  1. Excellent review on Comfort Delgro!

    The rail framework discussion between SMRT and LTA has been slow and no updates since last year. However, I still look towards the possibility of the rail framework taking off as SMRT current model of operation is not substainable.

    • Thank you 🙂

      Yup the rail framework / contracting model looks like the direction going forward. And from what I have read (please correct me if I am mistaken), one issue concerned the valuation of the assets in play. But this is definitely an interesting topic.

      I had the chance of reading your post on Sheng Siong and I was wondering given the drop in Dairy Farm’s market cap (Just among these 2 companies), what are some advantages that you think makes Sheng Siong more interesting than Dairy Farm?

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