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Friday, February 17, 2017

Recent Action - Comfortdelgro

I've been on a rather buying spree this month. I think I needed to review my cash balance all over again to see how much I have left.

I added Comfortdelgro this week by buying 11,000 shares at a share price of $2.43 (5,000 shares) and $2.41 (6,000 shares) on two different tranches.

This is a company which I had to do my thesis presentation for my MBA corporate finance class about 3 years ago, and I have to admit that the business has so many different divisions and in so many different parts of the country that it makes it difficult to prospect.




Financials

I don't think I have to run through the financials and their recent full year results as it is available easily on the sgx website.

I'd just quickly run through what I feel is important to take note.

For so many years, many investors have prospected Comfortdelgro as a single digit growth company with earnings coming from various division.

The public transport division (bus & railways) take up almost 45% of the pie, while the taxi division takes up the other 40%. The rest of the 15% can be divided amongst the driving center, car leasing, vehicle inspection and engineering service.

The company has operated at a steady net margin over the years of around 7.5% and they payout about 65% to 70% of the company's earnings as dividend. Dividend yield is at around 4%.

Balance sheet has strengthened over the years and the company has been a net cash company for a long time. Net cash per share is currently at 44 cents.

Company's Prospect

The bus segment, both overseas and local is the probably the only division worth hoping for as the company moves towards the contracting model framework which has benefitted the UK model so much and is already proven to be a success looking at how SBS has performed. SBS has also stated optimistic outlook in the bus division for FY17.

DTL3 will commence operations in the 2H17 and there is a big expectation on this to be successful. To me, I think costs will continue to start creeping in and margins are still relatively unknown so I'm more wary than hopeful on this.

The taxi division will almost definitely be lower as they face pressure from various competitions such as grab and uber and leasing also has stated to be lower.

Valuations

At this valuation, the company is not cheap. I repeat not cheap.

They seem cheap because many investors are anchoring their share price and valuation to what it is for the past 3 years, where valuation has gone to as high as 22x. This is similar to Keppel when folks used to anchor their share price when oil was at its peak. We need to remind ourselves when we invest in these decisions.

EV/EBITDA is also at around 6.5x. That is almost fair valuation.



If you look at the various analyst's report on CDG, I found Citibank and CIMB Research on CDG to be overly bullish. If I recall, they built in higher positive single digit growth and gave a higher valuation at around 19x. In addition, they were so bullish about the contribution of DTL3 contributing to the bottomline. It ends up with a target price of around $3. I think that's way overly optimistic at this moment and unlikely to happen within the next 12 months. So don't get your hopes up.

Final Thoughts

My plan on buying this is likely to hinge for a short term trade of 10% (4% dividend yield + 6% capital gain). If it reaches my desired target, I may let it go depending on any further news development and review thereafter.

My theses is based on the projection that the company will stalled their growth in FY17 but will have a higher dividend payout as they are freeing up more cashflow since they have less maintenance capex to deal with. So I think 4% yield is almost a certainty for me within the next year.

If you are an investor buying this thinking that it may go back to $3 fast, then I think it's almost quite impossible in the near term (next 1 year). You may want to rethink your decision.

If you are an investor buying this for the long term, I think it'd do just fine. You can sit back, relax, collect dividend and wait for the shares to retrace back to the higher range of the valuation. I think there is always a chance given the company often engage in M&A activities.

If you need further margin of safety, then I think you can wait till the selling dust has settled and it goes below their long term valuation.

Whether or not this is a suitable buy, I think it depends on what our objective is.



14 comments:

  1. Hi B,

    Margins for rail has been weak (negative at times) for the past few years. DTL, which is operating under NRFF, is supposed to give the operator an EBIT of about 5%. So, I would guess it's the NEL which revenue growth has not been able to keep up with the cost increase?

    Their taxi segment has been resilient up till now, showing stable margins despite all the gloomy news of PHV cannibalizing CDG's market share though I do agree with your thoughts that the taxi business is on a decline.

    Valuation wise, given that SMRT was bought over at 22x P/E and CDG's subsidiary SBS is trading at 23x P/E, is 17x PER really too high for CDG, a diversified transport company with overseas business and a robust balance sheet with large cash pile for potential earnings accretive M&A?

    Would like to hear your thoughts. Thanks.

    WK

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    Replies
    1. Hi WK

      Thanks for your insightful comment and input.

      Ive missed the valuation of smrt when it was taken over and you are right it appears in the upper range of the 22x valuation. Similarly if I compare across regional BTS of Thailand and MTR of HK also trades in the 25x range. It seems that it made cdg valuation looks cheaper as compared to the rest and thats right. Thanks for pointing that out.

      Delete
  2. I think the technical outlook has a bit more downside with short term equilibrium at around 2.33. The momentum indicators remained in the negative bottom half on selling pressure.

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    Replies
    1. Thanks, I noticed there were still quite heavy selling pressure as well and its pretty baffling given their decent results and not so negative outlook.

      Delete
  3. Thanks for sharing again..

    Regarding the bus contracting model and it being a catalyst,cant really pinpoint why it is a catalyst actually after reading some research reports.

    Disadvantage :more competition as lower barrier, more controlled revenue as customer is the government.

    Advantage : less capex.

    Whether its good or bad depends on how much revenue the government is paying versus the savings from capex vs the increase in competition so its quite unclear.

    The manpower situation and the resulting increase in wages as such is also a concern. SBS has stated that they are working with the SAF in regards to attracting their drivers and technicians after their NS.

    I think the only winners are the customers as the KPI for the bus companies are based on performance metrics such as interarrivials and number of breakdowns.

    For bus companies, not very clear

    ReplyDelete
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    1. Hi sgdividends

      Thanks for your valuable input.

      I recall having studied the bus contracting model which cdg applied to their bus in UK and AU and it has been an immense success. I think they want to replicate the same model they have experience it over here, but i agree they are not without disadvantages.

      Delete
  4. Despite the influx of private hire cars, Comfortdelgro's results has nearly always exceed my expectations. Their dividends is always increasingly too.

    vested in this too.
    having said that there were trading at 1.7-1.9 (just before the news that govt will take over the infrastructure) and reached a high of 3.2 then. I wonder how it will fare in the coming years. I have absolutely no idea.

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    1. Hi MIM

      Good point there. Cdg has been trading rather cheap valuation before the announcement for the model 3 years ago and suddenly they have been re rates to go a lot more expensive. I think if the model proves to be successful they dont deserve to go back to the past valuations even as we are seeing different problems posed to their other divisions.

      Delete
  5. ComfortDelGro has been pretty resilient despite threats from Grab and Uber.

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    1. Hi SR

      Indeed, i dont think they are that badly affected as the news mainstream media makes it out to be. There will be more regulations coming out to uber and grab which will not make them easy to roll over.

      Delete
  6. Hi, I will wait for CDG price to drop further. As you posted, CDG is not cheap now.

    If not wrong, HK MTR owns land tt it can sell. Hence, MTR cannot be used to compare against CDG

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    Replies
    1. Hi Thinknotleft

      Thanks for your comment.

      And why do you think MTR deserves their high valuation in that case? The last time I compare across HK developers, they are all trading at steep discount, shouldnt it be the same case too for MTR? Could you elaborate your thoughts and if possible provide with some numbers please, thanks.

      Delete
    2. Hi B, I am not saying that MTR deserve to trade at high valuation. I am saying that its land holdings may contribute to its high PER of 18.4 (using aastock). Hence, MTR cannot be used to compare directly with CDG which does not own much land.

      Delete
    3. Hi Thinknotleft

      Thanks for clarifying.

      Understand your point now about not comparing them totally head to head. Actually its quite hard because each business is uniquely different but I think we'll take the closest we can get regionally.

      Delete

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