Is ComfortDelgro Corporation Ltd A Good Buy Or A Goodbye?

By: Kong Soon Lee


ComfortDelGro Corporation Ltd (CDG) is one of the largest land transport companies in the world with a global workforce, a global shareholder base, and a global prospect.

The Group was formed on 29 March 2003 through the merger of two land transport companies – Comfort Group and DelGro Corporation. Both had started out in the 1970s and had, by the time of the merger, grown to become successful listed land transport companies.

In this article, I’ll list down 10 key things that you need to know about CDG before you invest.

#1: Stock Symbol

Ticker Symbol: (SGX: C52)

Market Capitalization: S$ 4.413 billion (30 March 2018)

Share Price: S$ 2.050 (30 March 2018)

Industry: Land transport, Automotive engineering, Vehicle inspection

#2: The Business

CDG derives income from the following properties:

Bus:

This segment offers public scheduled bus and private bus-charter. It also offers outdoor advertising solutions to buses.

Car Rental & Leasing:

This segment engages in the car rental and leasing activities.

Driving Centre:

This segment operates driving schools.

Inspection & Testing Services:

VICOM provides motor vehicle inspection services; and non-vehicle testing, inspection, and consultancy services.

Bus and Rail:

ComfortDelGro owns 75% of SBS Transit, which is listed separately on the Singapore Exchange. SBS Transit is a leading bus and rail operator in Singapore. Every day, it carries more than three million passengers on its extensive bus and rail network.

Car Dealership Operations:

This segment is engaged in car dealership activities.

Bus Station:

This segment offers bus station services.

Rail:

This segment provides rail services and ancillary advertisement services.

Diesel Sales:

This segment sells diesel to taxi hirers.

Taxi:

This segment engages in the renting out taxis; operating taxi bureau services, and providing ancillary advertisement services.

Others: This segment is engaged in property development.

Automotive Engineering Services:

This segment engages in the provision of vehicular maintenance and repair services; construction of specialized vehicles; assembly of bus bodies; provision of crash repair services and engineering services; and sale of diesel.

Public Transport Services:

This segment offers public bus and charter bus services; rail services; motor vehicle evaluation and other related services; public taxi services through the rental of taxis to hirers; car rental, car care, and leasing services; outdoor advertising services; and taxi booking management services.

#3: Financials

Revenue

CDG has achieved growth in gross revenues from S$4.05 billion in 2014 to S$4.11 billion in 2015 before dropping to S$4.059 billion in 2016 and S$3.97 billion in 2017. The dip in gross revenue is caused by lower revenue reported by Taxi and Automotive Engineering Services, due to increased competition in the taxi segment.

Distributable Income
CDG has delivered lower growth in earnings attributable to shareholders, from 317.1 million in 2016 to 301.5 million in 2017. Therefore, CDG has decreased its earnings per share from 14.72 cents in 2016 to 13.95 cents in 2017.

Source: Annual Report (SGD ‘000) Left Revenue (Blue), Right Income (Orange)

Source: Annual Report

#4: Major Acquisitions

There is no recent announcements or proposals on any acquisition of new investment properties made by CDG at the point of writing.

#5: Valuation

As I write, CDG is trading at S$ 2.05 a unit. Its payout ratio has increased from 62.9% in 2016 to 74.6% in 2017. PE average of CDG is 15.94x.

At current levels, we think that most of the negative impact from the disruption from private hire cars have already been factored in. Although there is lesser competition resulting from the merger between Grab and Uber, there are limited barriers to entry as seen by the entry of RydeX into Singapore.

There are still positives in valuation, including the potential upside to rail earnings with the expected breakeven of the Downtown Line (DTL) in early 2019, and with the government’s

plans to double rail network by 2030.

#6: Debt Profile

As at 31 December 2017, CDG has S$ 114.2 million in borrowings, down from S$ 169.3 million a year earlier. The Group’s gross gearing ratio was 10.6% as at 31 December 2017 compared to 10.8% as at 31 December 2016. Its cost of borrowing stands at 2.4%. (Based on Capital IQ)

Its gearing ratio is 29.4%. Its weighted average debt maturity stands at 2.7 years, Its cost of borrowing averages at 2.4%.

#7: Investor Relations

 

Mr Choo Peng Yen

Group Investor Relations & Special Projects Officer

Direct: (65) 6383 7007

Facsimile: (65) 6282 9526

Email: girspo@comfortdelgro.com

 #8: Major Shareholders

As of 6 March 2017, the Major Shareholders of ComfortDelgro Group is DBS Nominees Pte Ltd at 23.4% and Citibank Nominees at 22.94%.

#9: Share Price Catalyst

  1. Positive Catalyst
    1. With the increasing dividend payout in recent years as shown above, the expected dividend payout is expected to increase in the coming years.
    2. The announcements by Competition Commissions of Singapore regarding the Grab and Uber merger
    3. More aggressive overseas acquisitions
  2. Downside Risk
    1. Non-accretive Merger and Acquisition Deals
    2. Lower than expected earnings from existing core businesses.

#10: Exciting Times

With Uber agreeing to sell SEA business, CDG partnership with Uber remains on hold and it is highly likely that the proposed tie-up with Uber will be renegotiated. If this is the case, the acquisition of Lion City Rental (LCR) for S$642 million and the launching of Uber Flash might be renegotiated.

Therefore, there remain 2 possible scenarios that might happen

  1. CDG renegotiating its terms and conditions with Grab and continuing to partner LCR – This realigns CDG interest as it helps them to enter the private car segment and if the purchase price of LCR can be renegotiated.
  2. CDG does not partner with LCR and taxi segment remains unchanged – There is a slight negative in this as there is expected to be increasing competition for future clients and drivers against Grab after its merger with Uber in the private hire space.

However, it remains to be seen as the Competition Commissions of Singapore might not allow the merger of Grab and Uber as it may infringe Singapore’s Competition Act, namely Sections 54, 34 and 47, as this merger may bring about another dominant market leader, this time in ride-hailing applications.

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