Tuesday, June 6, 2017

ComfortDelgro Stock Analysis- Will It Survive the Uber & Grab competition?

Recently, a stock familiar to most of us caught my attention. I've been wanting to write on ComfortDelgro but did not do so until now as I had to read and dive in deeper on the company. ComfortDelgro is known to us as a taxi company where Comfort's taxi ply the roads of Singapore day in and day out. However, its business is more than the taxi business itself which makes it harder to analyse. Their annual report also didn't really break down the information I needed so I had to go to different sources just to find the info I wanted.


What got me interested in ComfortDelgro's business is that its stock price have fallen significantly after a bad financial result in Q1 FY2017. The stock price is at a 3 year low now and its quite fairly valued in my opinion.

Here's the share price of ComfortDelgro for the past 3 years:


Let's get deeper into ComfortDelgro's business to understand more about whether this would be a good investment?

Dissecting ComfortDelgro's business 

ComfortDelgro's business is not just in Singapore. They have businesses in 35 cities and 7 countries. The countries are Singapore, China, Australia, UK, Ireland, Vietnam and Malaysia. 64% of its revenue comes from Singapore and 36% from the overseas markets.

ComfortDelgro breaks its business into the following segments:

  1. Public Transport Service Business
  2. Taxi Business
  3. Bus Station Business
  4. Automotive Engineering Business
  5. Inspection and Testing services Business
  6. Driving Centre Business
  7. Car Rental and Leasing Business
As we can see, their business is all in the transport industry. Close to 90% of its revenue comes from the public transport service and taxi business so I will focus more on these areas in this article. 

For the public transport service business, it is further broken down into the bus (scheduled & unscheduled) and rail business. For bus, it is operated under the subsidiary of SBS transit which we are all familiar with. ComfortDelgro also have their own bus chartering service with a total fleet of 348 buses. For rail, it is also operated under SBS transit which runs the North East Line (NEL), Punggol and Sengkang LRT as well as the new Downtown line (DTL). 


Latest Q1 FY17 Financial result of ComfortDelgro


Public Transport service business



For FY2016, SBS transit's revenue was $1098 Million. Base on its latest Q1 FY17 results, SBS transit contributes about 50% to ComfortDelgro's public transport service segment with about 75% from bus and 25% from rail business. In Q1 FY17, revenue for the public transport business segment was up about +0.75%. This was mainly from the increase in SBS transit's bus revenue after the transition to the bus contracting model (BCM) effective 1 September 2016. It seems like under the BCM, it benefits the operator more. Another increase was due to higher rail revenue from higher ridership from the DTL and NEL/LRT. DTL ridership grew by 19.1% while NEL and LRT ridership is still growing as well. This was offset by the lower fares which was implemented in 2016. 


For Australia business, revenue increased due to favourable currency of a stronger AUD while for UK, revenue decreased due to unfavourable currency of a weaker pound. 


Taxi Business

For the taxi business, revenue decreased by about 5.7% due to lower rental income in Singapore. Elsewhere in UK, China, Australia and Vietnam, revenue from its taxi business decreased as well. For UK, the decrease is due to an unfavourable currency from a weaker pound while in other countries, it is due to lesser rental fees and also a smaller fleet. This reflects a challenging environment for the taxi business due to the rise of private hire cars such as Uber and Grab.

For its other business segments, the rest remain stable except for automotive engineering services which see a lower revenue due to lower volume of diesel sold to taxi drivers and a drop in the repairs and maintenance of taxi and bus assembly jobs.


Should We Invest In ComfortDelgro's Business? 

The situation doesn't look that good for Comfort's taxi business but for the public transport service business, I would think there is much optimism ahead. Furthermore, its share price has dropped significantly from about $2.70 to about $2.40 in less than a month. It is currently trading at a PE ratio of 16x with dividend yield of about 4.2% and with gearing of 12.8%. I think this is a fair valuation for a big company like ComfortDelgro. If we compare to other similar companies such as MTR in HK, they are trading at a PE ratio of 32x, not forgetting SMRT which was delisted at 22x PE ratio.

Moving forward, I believe ComfortDelgro's bus revenue will be higher as it reflects a full year of revenue under the BCM. We have already seen higher revenue due to BCM in the last 2 Quarters since the bus industry in Singapore transited into it. DTL 3, which is run by SBS transit will also start revenue service in October this year which we should see higher revenue for its rail business as well. The straits times has reported that ridership on the DTL will double to about 500K daily ridership compared to about 245K now. Adding on, fares in Singapore are expected to continue increasing as the government has already signalled to the public transport council that fares have to keep up with costs involved to continue to be sustainable. The fare review is ongoing now and expected to be completed early next year.

The competition in the taxi industry should also be more or less stabilised now with the impact already factored in. Once the currency for the Pound turns favourable, we should see positive results for them again. I've bought some shares of ComfortDelgro at $2.42 as of now. There are certainly some risks and many factors to consider but personally I've weighed them and invested an amount I'm comfortable with. Let's see how things evolve later on.

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4 comments:

  1. Hi,
    Recently Uber has increased its revenue but running at a loss so the model won't for long while the Grab is buying over the SMRT taxi business so private car rental model cannot last long. Comfortdelgro to me seems water runs deep, in the long run will survive.

    ReplyDelete
    Replies
    1. HI Meng Choon,

      Both grab and uber are loss making currently. How long they can last is anybody's guess. Comfort shares have fallen further and now have to relook again at its valuations.

      Delete
  2. Hi,

    CDG has hit a new low of 1.995. What's your take on this? Would you average down or cut loss?

    Thanks for your advice.

    ReplyDelete
    Replies
    1. Hi jalan jalan,

      I'm still holding this and monitoring the progress. Right now its still at a level I'm comfortable with. About 10% down from the time I bought so will be keeping a close watch on the developments

      Delete