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SI Research: ComfortDelGro Corporation – In Anticipation Of A Smoother Ride?
In 2013 when US ride-hailing giant Uber and once-was-a-tiny-start-up Grab were launched in Singapore, the long-standing taxi industry in the country has been severely disrupted and continues to shrink.
According to Land Transport Authority (LTA) statistics, the taxi fleet stood at 23,140 as at 31 December 2017, a 19.5 percent down from its 2014 heyday of 28,736. In contrast, the private-hire car population of 46,903 is more than double the number of taxis. Meanwhile, the market leader ComfortDelGro Corporation (CDG)’s fleet tumbled 22.1 percent to 13,244, from its 2015 peak of 16,997.
Now, pressures from private-hire car services have eased significantly following the exit of Uber from Singapore in 2018 . Shares of CDG have risen to $2.57 from 2 January 2019 to register a year-to-date return of 22.9 percent as at 6 May 2019. On top of that, CDG delivered a positive earnings performance in the latest full year results. Is it a sign of bottoming out and a great buying opportunity?
Financial Performance
(Source: Shares Investment)
For FY18, the group’s revenue and operating profit increased 6.4 percent and 7.2 percent to $3.8 billion and $438.8 million. The better top-line performance was led by a $225.3 million increase in revenue from Public Transport Services segment (Bus and Rail) as well as $124.2 million from new acquisitions in late FY17 and FY18.
The revenue from Public Transport Services segment jumped 12.9 percent to $2.4 billion mainly due to higher fees earned with higher operated mileage following the commencement of the Seletar and Bukit Merah Bus Packages as well as higher ridership from rail services with full year operation of Downton Line Three. However, this was partially offset by a $106.6 million decrease in the Taxi segment and $21.7 million decrease in the Automotive Engineering Services segment as a result of a smaller operating taxi fleet.
Overall, net profit inched up 0.6 percent to $303.3 million. Excluding the one-off special dividend of $10 million from A2B Australia (formerly known as Cabcharge Australia) in FY17 and the net gain of $5.1 million on the surrender of lease of the property at Teban Gardens Crescent from VICOM in FY18, the net profit grew 2.9 percent to $298.2 million.
Balance Sheet
CDG remained a strong cash generative business with net cash flow from operating activities in FY18 amounting to $668.8 million, an increase of 14.9 percent as compared to FY17. In addition, the group’s balance sheet also stood healthy with $16.2 million of net cash which can be used to execute future expansionary plans.
To share the fruits of a good year with its shareholders, management declared a final dividend of $0.0615 per share for FY18. Including the interim dividend of $0.0435 per share paid in August 2018, the total dividend payout for FY18 will be $0.105.
CDG’s FY18 total dividends inched up one percent from $0.104 to $0.105 per share which represented a healthy sustainable payout ratio of 74.9 percent of its profitability. Over the last five years, dividend increased consistently every year and grew at a compounded annual growth rate (CAGR) of 8.4 percent from $0.07 in FY13.
At the closing price of $2.57, this translates to a decent dividend yield of 4.1 percent. Judging by the consistent dividend record and strong cash position, we could expect FY19 dividends to be likely the same or higher.
Positive Outlook
At the recent Annual General Meeting, management indicated to launch a Fare Share Scheme which will slash taxi rental (down to $68 to $78 per day from around $105) in exchange for 15 percent of fare takings. This will be initially made available to single hirers of Hyundai i40 cabs which are less than four years old. This will help CDG to reduce the competition from ride-hailing platform as it may attract drivers that are looking for a shorter or more flexible hours on the road.
Meanwhile, at the start of 2019, Land Transport Authority (LTA) proposed to licence all street-hail and ride-hail operators such as Grab and GoJek as they provide the same fundamental service of transporting commuters from point to point. Note that currently there is no uniform regulation to govern taxis and private-hire players as the authority viewed private-hire players as “tech companies” and not a transport provider. The new regulation may bode well for CDG who have experienced heightened concerns following the rise of private-hire players and the entrance of GoJek.
Valuation
At its closing price of $2.57, the stock is trading at a price-to-earnings (P/E) ratio of about 18.3 times, higher than 15.1 times a year ago. Comparatively, we observe that the current valuation appears to be demanding whether in terms of P/E ratio or price-to-book value (P/B).
While it can be said that the worst is over for CDG, it remains to be seen how the group can execute its growth strategies going forward. That said, there will be brighter days ahead as the proposed regulations could reduce the appeal for the private hire drivers. Meanwhile, the group had recently acquired B&E Blanch Pty Ltd, a bus service operator in New South Wales for A$28.3 million to further deepen its footprint in Australia due to Australia’s stable economy and good margins.
Despite its rich valuation, we believe CDG remains a viable long-term growth stock with its taxi business on a more solid footing and its earnings growth driven by its public transport services as well as mergers and acquisitions.
