Monday, September 25, 2017

What Happened To Comfortdelgro? - The Taxi In Distress

Comfortdelgro has been on the hot seat for the past few weeks with share price dropping to a low of $1.98 now. Grab and Uber seems to have an upper edge in this taxi business competition. It is crucial to review Comfortdelgro's business at this junction to see what it is really worth. Separately, it didn't manage to get the new Thomson East Coast line which could have boost its operating profit by about $12-$18 Million a year. Let's take a look at its different business segment and break it up to see what it is really worth.

Public Transport Services Business

This is essentially its core bus and rail business segment with revenue at $1147.8 million and operating profit at $86.2 million for 1H 2017. If we annualised the revenue, assuming this segment continues to grow at the same rate, we should see revenue at $2294.2 million. For this segment, there will also be contribution from DTL-3 which will be opening in October 21 this year. If we assume their ridership to double which adds about 200,000 ridership daily, the revenue contributed for this FY will be around $8 Million. 

We should see operating profit for the full year at $177.3 million. 

FY2017 Operating profit: $177.3 Million

Taxi Business

This is the tricky part to analyse but I will try my best to make sense of the numbers. Revenue stands at $618.5 million and operating profit at $72.3 million for 1H 2017. The fleet size of comfortdelgro is about 15,472 as at July 17. This is down from the fleet size of 16,821 in 2016. I estimated the rental of each taxi to be $120/taxi per day. At this junction, the taxi business is estimated to shed $59 million in revenue for the whole FY2017. 

The estimated revenue drop for Singapore's taxi business alone will be around $59 million. There are still other countries' taxi segment which may also face headwinds. If we assume a $70 million drop in revenue, full year FY2017 revenue should come in at $1270.8 million. 

Assuming total cost stays the same as FY2016, operating profit should come in at $97.5 million.

FY2017 Operating profit: $97.5 Million

Bus Station

The bus station business should remain stable. 2Q 2017 profit came in at $3 million. Annualised this, we should see a profit of $12 Million for FY2017

FY2017 Operating profit: $12 Million

Automotive and Engineering

This segment will see a decrease as lesser taxi fleet size means lesser servicing revenue also. 2Q 2017 profit came in at $11.4 million. Annualised this, we should see a profit of $45.6 million. A further reduction of taxi fleet will put pressures on this segment moving forward. So a conservative profit of $45 Million can be expected. 

FY2017 Operating profit: $45 Million

Inspection and Testing Service

This segment should remain stable too. Profit for this segment should come in at around $30 Million for FY 2017. Q2 2017 came in at $7.6 Million. 

FY2017 Operating profit: $30 Million

Car rental and leasing

Car rental has been facing a lower leasing fleet in Singapore and China. The profit should be about $6.4 Million for FY2017.

FY2017 Operating profit: $6.4 Million

Driving Centre Business

This segment should remain stable. Profit for FY 2017 should come in at $11.2 Million.

FY2017 Operating profit: $11.2 Million

Total Value of CDG's business

Now, we can add up the different segments and get the FY2017 estimated profit to derive the actual value of the company. Total operating profit for FY2017 should come in at $379.4 Million. This is 17.9% lower than in FY2016. With this, profit attributable to shareholders should come in at $246.6 Million. 

With outstanding shares at 2162.8 Million, EPS will be estimated 11.40 cents for FY2017. With this EPS, PE ratio will be 17.37 at current share price of $1.98. 

To put things into perspective, if the taxi fleet decreases by another 2000 for the next few months, EPS will be about 10.4 cents. This means the PE will then be 19.04 at current price of $1.98. Looks like at current price of $1.98, it will only seem fair if taxi fleet does not drop too much again. If taxi fleet continues to drop drastically, the situation can get much worser. 

Business times had a very good article on Comfort Delgro valuing its business at $1.70 if we exclude the taxi business. This is using a simplistic 20 times multiple of net profit. Of course, this will only happen if all Comfort taxis disappear from the streets once and for all which I don't think will happen at least for now.

It is also interesting to note that despite all the competition, the average daily number of taxi trips only slightly decreased by about 1 trip per day as compared to 2016. Comparing to 2015, the average daily number of taxi trips decreased by about 2 trips per day. Average daily number of taxi trips stands at 17.8 for one shift taxi and 27.5 for two shift taxi as at July 2017. This means that taxi drivers can still earn quite a decent income even with the fierce competition from private hire cars. 

There are many factors to consider in this investment and it is definitely not for the faint hearted. From my perspective, Comfortdelgro's taxi business should still continue to exist in Singapore but probably at a smaller market share in the future. It would be quite hard for it to go back to its $3 stock price value as the market adjusts itself to consider the future value of the company. For grab and uber, it is still an unknown how long they can keep offering discounts and burning cash month after month. How the taxi industry will evolve in the future will be for all to see.

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  1. CDG management requires a mindset shift to evolve and compete in a new environment. Grab and Uber are just tools for drivers (not your competitors), they are companies CDG should collaborate with.

    The ones eating into CDG revenues are the car rental companies that offer drivers lower rentals. CDG should also start rental of these cheaper non-taxi vehicles. Of course, it will cannibalize CDG’s taxi cash cow. The question is whether you let your competitors or yourself to cannibalize the cash cow.

    Kodak is a superb example. Kodak was sitting on a huge cash pile and had the muscles to compete in a digital world. As a matter of fact, it came up with an early digital camera prototype. The management held back the digital camera as it feared digital camera will cannibalize its film business. The rest is history.

    1. Hi XM,

      Good info! Yes companies always need to reinvent themselves and not think they are always the best. Thanks for sharing.