ComfortDelgro Ltd

Since the video on Covid-19 was made in the week immediately after the Chinese New Year (CNY), signs are now beginning to surface of the near-term situations of transport companies. ComfortDelgro (CDG), which has been facing a dwindling operating taxi fleet from more than 16,000 in the beginning of 2017 to slightly more than 11,000 by end of FY 2019, is likely to be affected further as the effects of Wuhan Coronavirus start to bite.

 Operating model

Sans the onslaught of the Covid-19 epidemic, CDG’s business model has been under pressure in a few fronts. First, the operating taxi fleet has been dwindling for the past 3 years due to the competition from ride-sharing cars. Over the last three years, the operating taxi fleet has been shrinking in size from more than 16,000 in early 2017 to a little more than 11,000 in end 2019. For FY2016, the operating profit against revenue of taxis were $167.5m and $1340.8m, while for FY2019, the corresponding figures were $104.2m and $668.2m respectively.

Although the bus operations in United Kingdom (UK) and Australia remain relatively free from serious disruptions in the recent years, the exchange rate of the British Sterling and Aussie dollars have declined against Singapore dollars. In effect the reported profit from these two fairly large contributors have been affected as well. In Singapore, the Public Transport Services remains relatively shielded due to the need for yearly review on transport fares.

With the spread of Covid-19 gaining momentum by the 1st quarter of FY2020, it is highly likely that the taxi business gets deteriorate further, both in Singapore and China. Taxi operations, in China contributes about 4% of the revenue and 9% of the total profit in FY 2019. Together with the taxi operations in Singapore, they form a very significant contributor to the group’s profit and revenue. So, the 1st quarter and even the 2nd quarter, is likely to turn out to be worse that Q4 2019, especially with the rebates that CDG has to pay to retain drivers.

The drop in earnings of Q4 FY2019, in effect pushed up the historical PE to above 20. Unlike 3 years ago when CDG was in net cash position, it is now in net debt position with less leeway for growth via acquisition. The pressure on the share price is likely to continue in the months ahead based on the calculated PE. With the dividend payout at 80% even after the recent dividend cut, it may be imminent that a further cut in dividend be expected in mid-2020 for cash conservation. The share price to sub-$2 or even sub-$1.90 is all possible, hopefully temporarily and get pass quickly.

Disclaimer – The above points are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell the mentioned securities. Everyone should do his homework before he buys or sells any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

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