SI RESEARCH: 4 REASONS WHY COMFORTDELGRO CORPORATION MIGHT BE WORTH A LOOK NOW
Tan Jiahui June 6, 2016 Stock Market
Singapore is well known to be one of the most expensive countries in the world to own a car. Given the high costs of car ownership, most people living in Singapore turn to public transport for their daily commute. Thus, ComfortDelGro Corporation (CDG) – Singapore’s largest public transport provider – should be a name that is familiar to most living in the city-state.
Well-diversified Business With Sustained Earnings Growth
Zooming in first on CDG’s financial performance, we are happy to note that the group has recorded top- and bottom-line growth in the past five financial years. Revenue grew at a compounded annual growth rate (CAGR) of 4.8 percent from $3,411.1 million in FY11 to $4,111.5 million in FY15 while earnings registered a decent 6.4 percent CAGR in the period to reach a record $301.9 million.
On the back of the sustained improvement in performance, the firm has rewarded shareholders with increasing dividend per share (DPS) in each of the past five years. Between FY11 and FY15, DPS has gained 50 percent to $0.09, which translates to a modest 3.3 percent yield based on the close price of $2.74 per share as of 31 May.
Apart from the good financial track record, the group’s well-diversified business is something we like. While CDG is the clear leader in the Singapore’s public transport sector, many might not know that it is actually also the second-largest land transport company in the world. As of FY15, CDG has operations in 7 countries and 36 cities; the firm derives more than 40 percent of turnover and operating profit from overseas operations.
The geographical diversification is certainly a plus point as weakness in a particular market can be mitigated by performances of its other markets and this stands out in comparison to competitor SMRT Corporation, whose operations are only based in Singapore.
Strong Balance Sheet Opens Up Opportunities For Acquisitions
Besides sporting strong operational results, CDG also boasts a strong balance sheet that has net cash of approximately $392.6 million as of 31 March. Total debt to equity is low at 0.16 times and the low gearing opens the firm to possibility of more acquisitions. In particular, the group’s management has expressed interest to further expand overseas given the saturated market in Singapore.
CDG’s business is also one that generates strong operating cash flows, which translates to positive free cash flow in most of the past years. The ability to generate positive cash flows and a strong balance sheet has enabled the company to increase dividend payouts as mentioned in the section above.
Share Price Has Fallen 9% Year To Date
As of 31 May, CDG’s shares closed at $2.74, down 8.7 percent from the close price of $3.00 on 4 January. The decline is in contrast to a year-to-date 1.6 percent fall in the benchmark Straits Times Index.
While global uncertainties could have affected the group’s share price performance, the share price movement could also be attributable to other factors including perceived threats from private-hire services and lower expectations of a cash windfall from its bus assets sale.
Firstly, the increased availability and popularity of private-hire services like Uber and GrabCar is seen as a threat to CDG’s taxi business, which is one of its largest profit contributors. However, we opine that the firm’s local taxi business remains robust as taxi hire rates remain at 100 percent as at end-1Q16.
While management noted the queue for hirers has shrunk significantly, investors should not be overly alarmed. Although the new private-hire services have initially enticed drivers to join by giving out better benefits and thus reducing new demand for taxi rentals, we note that these are slowly being cut back.
Next, despite news that the transition to a government-contracting model (GCM) for public bus services will happen by September 2016, not much details has been shared about what would happen to the current bus assets of the incumbents including CDG.
Initially, analysts and investors had expected a windfall from the sale of bus assets to the government in 2016. However, based on the Singapore Budget 2016 announced in March, it appears unlikely that the government will take possession of the bus assets from the existing operators and do a one-off payout. The situation has led to disappointment for those who expected a special dividend from the group pursuant to a sale of the bus assets.
Even though there are no details on the possible asset sale, the transition to a GCM model by September is expected to improve margins in CDG’s local bus segment. Under the new model, capital expenditure will likely decrease, which helps boost free cash flow and increases possibility of a higher dividend payout (something investors would be happy to hear).
Rail Business Expected To Pick Up
The Downtown Line (DTL), which is operated by CDG’s unit SBS Transit, opened its first six stations in December 2013. Subsequently, the second stage of DTL opened in December last year and now there are 18 stations in operation that connects Bukit Panjang to Chinatown. Most would likely agree that travelling time and connectivity for residents staying along the DTL has vastly improved.
Ridership on the DTL has been steadily increasing especially after the commencement of Phase 2, though lower than what management had initially forecasted. That said, CDG’s rail performance should see a steady improvement as ridership on the DTL continues to grow. The Land Transport Authority forecasts that DTL’s daily ridership would more than double to 500,000 when Stage 3 opens in 2H17.
Conclusion
Overall, we see the provision of public transport services as a fairly resilient business given that public transport is a necessity to those who do not own cars. Given that share price has experienced some correction, investors might be interested to add CDG to their watchlist as looking ahead, a transition to an asset-light model for the bus business in September and the current low fuel costs environment should support margin improvement.
Further catalyst could come from the finalisation of the sale of bus assets and new acquisitions. Notable downside risks include a sudden sharp recovery in crude prices and stronger than expected competition from private-hire services.
Taken from: http://aspire.sharesinv.com/26937/si-research-4-reasons-why-comfortdelgro-corporation-might-be-worth-a-look-now/
