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An incomplete analysis of ComfortDelgro (Updated).

Friday, September 22, 2017

UPDATED (5 Oct 17).
-----------------
Retail investors have limited resources at their disposal and very rarely are able to do a thorough analysis of any business.

Time is one of those limited resources.

OK, I admit. I am lazy and I want to spend more time watching anime, K-drama and playing MMORPGs.

Bad AK! Bad AK!






Anyway, like what I have done in so many other instances in the past, I just zoom in on what I feel is the crux of the matter and try to make a decision based on what gives me peace of mind.

The biggest problem facing ComfortDelgro now is its taxi business.

Taxi business accounts for a third or so of its revenue. 


The revenue might be lower compared to its public transport arm but because it is a higher margin business than its public transport business, a loss in revenue will dis-proportionally lead to a higher loss in earnings. 

When we remember that it will also impact another segment of its business and that is the sale of diesel to its taxi fleet, the picture becomes gloomier.






However, all investments are good investments at the right price and to find the right price, we need to look at valuation.

During the Global Financial Crisis, in October 2008, ComfortDelgro traded at $1.19 a share and with full year EPS at 9.59c then, the PE ratio was 12.4x.

ComfortDelgro's 1H 2017 EPS was 7.5c. 

Annualising this gives us 15c.




So, if we should assume that things don't get worse from here, paying for a stake in ComfortDelgro at a PE ratio of 12.4x would give us a target buy price of $1.86 a share.

Of course, we are not in another Global Financial Crisis, so, paying a PE ratio of 13x could be considered a peace time bargain. 

This would give us a share price of $1.95 per share.






This line of thought makes sense to me but the assumption is that things don't get worse for ComfortDelgro from here.

For sure, I do not know if things would get worse from here but, just from my observation, I have an inkling that things probably would get worse before they get better. 

Grab is very aggressive and ComfortDelgro's taxi fleet size could shrink further.




How much worse would it get?

If we think that its taxi business could shrink another 20% from here (which is pretty grim) and since it is likely that ComfortDelgro would roll out some remedial measures to retain taxi drivers, we should expect profit to decline somewhat.


Given these assumptions, since its taxi business accounts for about a third of its profit we could see ComfortDelgro's EPS declining by another cent or so.






Assuming EPS declines to 14c, a crisis valuation would dictate that we are buyers only at $1.74 a share. 

If we are more sanguine about the macro environment, then, a 13x PE ratio would give us a target buy price of $1.82 a share.


When would things get better? 

Surely, I don't know.






I do know that ComfortDelgro pays out more than 50% of its earnings as dividends to shareholders. So, if EPS falls to 14c a share, a DPS of 7c is not excessive.

At $1.82 a share, that is a dividend yield of 3.85%.

At $1.74 a share, that is a dividend yield of 4.02%.

Nibbling earlier today at $1.96 a share could have been premature but it gave me an incentive to take a more detailed look at the numbers.
--------------------------




UPDATE (5 Oct 17):






Read another incomplete analysis: HERE.

43 comments:

patrol said...

Dear AK,

Thanks for making the incomplete analysis so easy to understand. I went through step by step to finally realise how PE is used and how you assumed with a 20% shrink of taxi business will result in EPS dropping to 14 cents! For a more complete picture, do you intend to use other ratios? Would be very keen to learn how and why you use certain ratio!

Just another question, why is PE ration 12.4 times considered peace time bargain? Where and how did you derive that information and come to that conclusion? Is there any website that we can find PE ratio of a company from x to y years for easy comparison?

Thanks!
Pat

Cory said...

I love to see you do this numbers. Estimation on estimates. Investment becomes more fun and easier to manage !

AK71 said...

Hi patrol,

I am too lazy to look into all the different ratios. Although incomplete, I stick to PE ratio because it is basic and does the job well enough for me.

I didn't say that 12.4x is a peace time bargain. You might want to read the blog again. ;)

The answers to all the questions you asked can be found in the blog too. Oh, except for getting the PE ratios for x to y years. I calculated the PE ratios myself.

You just need to know the share price and the earnings at the time to get the ratios. The info isn't hard to find. Think Yahoo!Finance and company reports. ;)

AK71 said...

Hi Cory,

Math was one of my weakest subjects in school. ;p

patrol said...

Hi AK,

Oh i read carefully and got what you meant in the blog! Thanks!

Is that usually how you conclude if the PE ratio is considered high/low? by comparing the ratio during financial crisis vs peace time? How would you conclude a ratio for an industry?

Thanks!
Pat

AK71 said...

Hi patrol,

Alamak. Don't ask me cheem questions. I am a simple minded person. -.-"

If you have picked something useful from the blog, I am happy. ;)

Kevin said...

Hi AK and patrol,

The links below are the important data you are looking for. They are available at www.shareinvestor.com. ;)

Quite an impressive record huh? ;P

https://i.imgur.com/dA376hJ.png

https://i.imgur.com/SIlc0vb.png

AK71 said...

Hi Kevin,

As a long time shareholder of SPH, I strongly encourage subscription to www.shareinvestor.com

Yes, I know. AK is so sly. ;p

Eric said...

Dear AK,

If we calculate it is worth $1.76, should we buy when it is below that price? why buy at that price that it is worth? When the house selling is worth $1m on the market, why not wait until $900k then buy to have margin of safety because $1m worth and we buy $1m then we make what

AK71 said...

Hi Eric,

Valuation is mostly a subjective exercise. It isn't a hard science.

This is why so many research houses and so many bloggers attach different values to the same stock.

Having said that, this blog isn't about how much ComfortDelgro is worth.

I know some readers think this blog is about ComfortDelgro's intrinsic value but it really isn't. ;)

Kevin said...

Hi AK,

Can request you to have a collaboration with Shareinvestor to fight for special sign up price for your readers? :P

My guess is that the stock price should be facing more downward pressure when 3Q17 results comes out next month. That is because Grab launched massive rental discounts to woo ComfortDelGro taxi drivers in September this month and what i heard from ComfortDelGro taxi drivers is that many cabbies jumped over to Grab because of the attractive discounts.

http://www.todayonline.com/singapore/grab-makes-play-cabbies-comfortdelgro-amid-talk-uber-tie

The only catalyst would be the official announcement on the confirmed details of the partnership with uber before the release of 3Q17 results.

AK71 said...

Hi Kevin,

I doubt they would be bothered with a hobbyist blogger like me. -.-"

As for ComfortDelgro, I won't be surprised if the selling pressure persists. :)

sleepydevil said...

Hi AK,

Welcome on board CDG :)

AK71 said...

Hi SD,

Buckle up. I suspect the ride is going to be rough.

Good luck to us all. ;)

Laurence said...

Now that AK has bought and readers following suit, there's only one way for Comfort stock price to go --- Up Up and Away.

Vani said...

Hi Ak,

I am a beginner and have just started in investing. I am vested in CDG at about $2.30 previously. I did not expect the price to have sharply fallen with the influx of bad news surrounding it. I am freaking out a little on the drop in share price and am unsure if I should hold it? or average down..

Could you give some advice on this?

AK71 said...

Hi Laurence,

I rather doubt that.

Everyone should do their own due diligence, know what they are after and decide for themselves.

AK71 said...

Hi Vani,

Volatility is to be expected in the stock market. If one is to be an investor, one has to develop a stomach for it.

You have to decide for yourself if you have the temperament for this.

Kevin said...

Hi AK,

Off topic abit but I feel it is somehow correlated since ComfortDelGro belongs to the dividend stock category.

http://www.businesstimes.com.sg/companies-markets/singapore-dividends-to-drop-study

just in case the website restrict access: https://i.imgur.com/h2Ztq7S.jpg

AK71 said...

Hi Kevin,

It could happen, of course. Crossing fingers.

Kevin said...

Hi Vani,

World investor week 2017 is happening next week. :)))))))

Strongly encourage you to attend it to enhance your investing knowledge especially the sessions on 2nd and 4th October. It is totally free of charge with no caveats. ;)

https://www.sgxacademy.com/index.php?option=com_content&view=article&id=107&Itemid=1

Laurence said...

Wow, is AK invested in Singtel?
News from Singapore Business Review that bumper special bonus on the way:

Singtel receives $1.1b in cash for Netlink Trust IPO
Total proceeds from the sale of its stake in NetLink hit $2.2b.

Singtel pops the champagne after it received $1.1b in cash after it sold its 75.01% stake in NetLink Trust.

According to UOB Kay Hian, the shareholder loan of $1.1b has also been repaid.

Singtel's book cost for 100% of NetLink is only S$265m.

Singtel would also recognise a divestment gain of $1.9b, including the release of unamortised deferred gain in 2018.

The total proceeds of $2.2b will go to investing in its core businesses, new business opportunities, debt payment and capital management initiatives.

UOB said the special dividend related to NetLink NBN Trust’s IPO could be up to a maximum of 13.8 cents.

"The board would deliberate on the potential special dividend together with the interim dividend when Singtel releases its 2QFY18 results in mid-November," UOB added.

AK71 said...

Hi Laurence,

I have been a SingTel shareholder for many years and I increased my exposure again in recent weeks.

You might be interested in this blog:
SingTel and Netlink NBN Trust.

csky said...

Hi AK,

Do you not think that there is a risk that CDG might lose 50% or even more of their taxi business? With Grab being so aggressive and basically just throwing investors' money to take over as much market share as possible. With $2.5B fresh funding, they can afford to give the 15,000 comfort taxi free rentals (~$50/day) for at least a couple of years.

AK71 said...

Hi csky,

I do not know what is going to happen for sure.

However, I do know that Grab is burning cash rapidly to gain market share.

How long can this self destructive behavior continue? It depends on how long Grab can last doing what they are doing now. You say 2 years? Maybe.

Even if Comfort were to shut down their Singapore taxi business, they could still muster some 11c in EPS whereas Grab is money losing.

As an investor for income, it is probably more comfortable to be putting money in Comfort (pun unintended) than in Grab. ;)

csky said...

Thanks AK for sharing your thoughts.

Have been catching too many falling knives until I scared le. Hahaha.

AK71 said...

Hi csky,

I can imagine. Ouch. :(

Position sizing is important especially for more speculative positions so that it is not too painful if things should go bad.

AK71 said...

More than 3,000 ComfortDelGro taxi drivers have signed up with Grab over the last month, the ride-hailing firm revealed on Friday (Oct 6), with the majority choosing to switch to become private-hire car drivers.

Last month, Grab began offering ComfortDelGro cabbies aggressive rental discounts - $50 a day, or about $1,500 a month, to join one of its partner taxi firms, or up to $1,688 a month to sign up as a driver with its private-hire car service GrabCar.

Grab's announcement came even as the latest figures from the Land Transport Authority (LTA) show that the taxi population here has continued its downward trend, dropping to a seven-year low of 24,863 as of August.

ComfortDelGro's combined cab numbers - under its Comfort and CityCab brands - also dropped to 15,127, from a high of 17,143 in April last year.

In comparison, the number of chauffeur-driven private-hire cars stands at 42,000 as of July.

In July, The Straits Times reported that the number of idle taxis hit 9.1 per cent in the first five months of this year, almost double the amount during the same period last year.

Meanwhile, as of Monday, the LTA has approved 53,000 private hire car driver's vocational licence applications, since it began accepting applications in March.

This is more than half of the number of taxi driver's vocational licence holders, which currently stands at 97,467, down from 100,271 in January this year.

Dr Park, however, believes that the number of applications will slow down in the near future.

"This won't go on for too long more," he said. "The private-hire car market is already very saturated."

Source:
http://www.straitstimes.com/singapore/transport/grab-claims-it-has-managed-to-sign-up-over-3000-comfortdelgro-cabbies-with-most

Kevin said...

Over 1,000 ComfortDelGro cabbies express interest in Grab’s latest offer

http://www.todayonline.com/singapore/over-1000-comfortdelgro-cabbies-express-interest-grabs-latest-offer

AK71 said...

Hi Kevin,

I wonder if Mr. Market has grown immune to such news? ;p

Kevin said...

Hi AK,

We shall see how Mr. Market react to its latest third-quarter earnings report on Monday? ;p

ComfortDelGro’s net profit takes a hit from private-hire rivals

http://www.channelnewsasia.com/news/business/comfortdelgro-s-net-profit-takes-a-hit-from-private-hire-rivals-9395708

jalan Jalan said...

hi AK,

Q3 results are out.http://infopub.sgx.com/FileOpen/CDG_3Q17.ashx?App=Announcement&FileID=477772

BTW, U mentioned in on of your earlier comments that if you were to strip of the SG taxi business, the EPS would be: 11 cents. Would you kindly share how you derived 11 cents? Thanks!

AK71 said...

Hi Kevin,

Expectation is for Mr. Market to go deeper into depression but Mr. Market can be quite perverse.

AK71 said...

Hi jalan jalan,

Most of ComfortDelgro's taxi business is in Singapore but not all of it.

If I remember correctly, maybe, 3/4 of it is in Singapore.

The answer to your question is in the blog above.

You can deduce from my self talk. ;)

AK71 said...

We trimmed our forecasts by 3-4% on the back of lower average taxi fleet assumption. While headwinds persist for its taxi business, this should be partially mitigated by improvements in its public transport business.

CD’s current yield at ~5% could provide support for its share price. We expect DPS to be at least maintained, if not nudged up, given its lower capex requirements.

We are at the lower end of consensus in terms of our earnings forecasts on the back of contraction in taxi fleet. However, we believe DPS will tick up marginally on the back of higher payout ratio, providing yields of c.5%, thus supporting the share price.

Key risk is a prolonged irrational competition from private-hire car apps/ disruptive technologies.

Source:
DBS Bank, 2017-11-13.

AK71 said...

Reader says...
I read your analysis and I have been waiting.
Finally, I got in at $1.99 today!
You gave me some confidence.
Did you buy more? haha.

AK says...
Congratulations!
Welcome to the club. ;)
It shouldn't matter to you if I bought more but, I admit, I have been buying. ;p

AK71 said...

Taxi giant ComfortDelGro announced on Friday (Dec 8) its intention to acquire a 51 per cent stake in the Uber-owned rental fleet business, Lion City Rentals.

ComfortDelGro said the deal, which is subject to regulatory approval, is valued at about $642 million, with a cash consideration of $295 million.

Uber will retain the remaining 49 per cent of the Lion City Rentals, which has a fleet of 14,000 vehicles.

"Upon completion of the transaction, Lion City Rentals will be able to benefit from ComfortDelGro's world-class fleet management and operations, which will be in the interest of drivers and consumers alike," said ComfortDelGro.

ComfortDelGro added that taxi drivers will also be able to receive ride requests on the Uber driver app, thereby increasing their potential earnings and allowing customers the option of booking a ComfortDelGro taxi through the Uber app.

Source:
http://www.straitstimes.com/singapore/transport/comfortdelgro-to-acquire-51-per-cent-stake-in-uber-owned-lion-city-rentals

desmondsph said...

your take on this acquisition?

AK71 said...

Hi Desmond,

Skimpy on details, I rather not speculate although I like to think that ComfortDelgro has done the necessary due diligence to make sure it is a win-win arrangement. They did take quite long to hammer out a deal, after all. :)

AK71 said...

ComfortDelgro is likely to benefit from this partnership with Uber if past experience in Taipei is anything to go by and this is probably only one of the benefits of the partnership which might make their drivers think twice about jumping ship.

Driver supply constraints and tight regulations have led to Uber taxi services sprouting up in Korea, Taiwan, Myanmar, Indonesia among other places.

Previously, Uber rivaled traditional taxis by being cheaper and easier to hail. Now, doing deals with the former foe is now “a big focus.”

Uber’s Chief Business Officer for Asia Pacific said, “We are actively looking to partner with taxi companies. In Taipei [where Uber recently began working with taxi partners], taxis are at 30 percent utilization, we can drive that [figure] up.”

Source:
https://techcrunch.com/2017/11/11/uber-takes-a-different-approach-to-asia/

AK71 said...

Lee Jiahui:
i dont see how LCR will help CDG. number of riders and drivers constant, number of cars increased, to me, it's an over supply problem.

AK:
If this deal is able to stem the loss of drivers, it is already helping CDG. :)

Kevin said...

Hi AK,

Good deal for Uber to be able to encash a big stake of their car rental subsidiary to ComfortDelgro so as to adhere to their asset light model strategy. Take note that ComfortDelgro did not invest directly in Uber unlike Softbank but paid a hefty S$642m. ;)

AK71 said...

Hi Kevin,

Yes, I am aware that ComfortDelgro bought into Uber's car rental business (i.e. LCR) and not Uber.

I would not invest in Uber or Grab myself. I am not smart enough to understand why anyone would want to invest in such massive money losing models. So, it is good for me that ComfortDelgro did not invest in Uber.

I know that car rental business is actually a good business and ComfortDelgro is an old hand at fleet management. Realistically, they should be able to do a better job of managing LCR's fleet and reap some benefits.

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