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ComfortDelgro Stock Review: Should I Invest? (Q1 2020 Updated)

Updated: Jun 6, 2020

This post was originally published on 4 March 2020 but some revisions have been made to include updates from ComfortDelgro's annual report FY19 and their recent Q1 result. From time to time, I may edit this post should I find any significant changes to the company. To make it simpler for readers, I have denoted the changes with an asterisk '*'.

ComfortDelgro (CDG, SGX: C52), the largest taxi company in Singapore formed in 2003 with a fleet size of 46,000 in multiple countries.

Personal experience

I used to have a pretty bad impression of ComfortDelgro 5 to 10 years ago because of some of their drivers' attitude. There were couple of times where taxi drivers intentionally took the longer route to earn more money from its passengers. Other times, they would choose which passengers to pick up based on their destinations. On the road, CDG taxi drivers were also infamous for being reckless drivers. Especially when they suddenly cut 1 or 2 lanes just to pick up a passenger by the road side, I wonder how many accidents did that caused?

I guess it is natural when number of passengers exceeds the amount of cabs available or perhaps these minority have their own circumstances. I'm not trying to judge taxi drivers as all bad just because of some bad apples. The important point here is to point out that commuters were on the losing end back then.

With technology advancing over the years, who would have thought that their biggest competitors now do not own a single taxi? Times are definitely hard now for taxi drivers to deal with the intense competition from the likes of Grab, Gojek and Ryde. Here are some articles written about the situation in the taxi industry:

Such is the reality of life :<

Well, competition is always good for us commuters!

Besides being commonly known for their taxi, CDG also provide bus, train and car inspection services through their subsidiaries, SBS Transit and VICOM.

At the point of writing, ComfortDelgro is trading at $1.44 per share with a P/E of 11.8 and a dividend yield of 7.35%.* As a bargain hunter myself, ComfortDelgro does seemed attractively priced but is it worth investing? Let me quickly go through.

Price history*

ComfortDelgro Chart from Yahoo Finance

Over the past 5 years, the share price of CDG has fallen more than -50% off its peak in 2015 and -40% YTD. Its current price point is on a similar level as 10 years ago. Usually, such negative market reaction doesn't occur without good reasons.

Net income and free cash flow YOY

Data from MorningStar

The biggest concern with ComfortDelgro is that its net income has been declining YOY since 2016. Clearly, competition from ride-hailing services gave ComfortDelgro a good run for its money. 4 years has passed and it seems ComfortDelgro still don't have a strong answer.*

As for FY2020 Q1 performance..

Like I previously mentioned, financial impact caused by COVID-19 is inevitable so a bad Q1 was definitely within expectations. Though, to be honest, 50% drop in net profit seems rather drastic considering Circuit Breaker was only implemented in April. I believe Q2 results will be much worse.

Revenue breakdown

Data from ComfortDelgro annual reports

The decrease in net profit was mainly attributed by the decline in revenue from all business segments except Public Transport Services and Inspection and Testing Services. As to why these segments follow a similar downtrend, there could perhaps be some kinda reliance on the main taxi business.*

Data from ComfortDelgro Q4 2019 financial result

Majority of its revenue is concentrated around public transport services and taxi.

Debt levels

Current ratio is currently at 1.18 which means CDG would just nice be able to pay off its short term liabilities. Considering the impact from the COVID-19 crisis and a possible recession in the near future, a current ratio of >2 would be more preferable as a margin of safety. Perhaps the low current ratio has something to do with the industry itself since I can't find any comparisons. Contrary to their short term obligations, long term debt is low with D/E ratio below 0.5.

Yearly taxi ridership*

Yet another chart that illustrates the relationship between taxi ridership and ComfortDelgro's declining net profit. TNP had reported that taxi ridership has fallen again in 2019 with increasing commuters choosing Private Hire Cars (PHC) over taxi.

Hence, my negativity on ComfortDelgro due to the death spiral they found themselves in. Where less taxi riders = lower revenue = less justification to maintain a huge taxi fleet = less cabs to go around = even lesser taxi riders and it goes on.

Point-to-Point Passenger Transport Industry Act*

LTA introduced this bill to better manage Taxi and PHC service providers through a set of regulations such as safety, fare and other related items.

Regulations are vague so one can only speculate whether it is good or bad for ComfortDelgro for now. Though, experts had claimed that it will level the playing field for operators in this article so generally it should benefit the weaker players.

For instance, Grab drivers have to comply to exclusivity clause where they are not allowed to operate for a competitor network. With the bill, it should free up more options for cabbies to switch between different networks anytime. It would grant ComfortDelgro access to a bigger pool of drivers thus resolving manpower shortages.

Additionally, it would reduce the need to increase fleet size = reduce CAPEX = possibly transform ComfortDelgro into semi-Grab. Sounds interesting doesn't it? The idea is certainly game changing for ComfortDelgro! However, we still need to observe how the bill gets implemented and whether ComfortDelgro is able to capitalize on it.

ComfortDelgro Capital Partners

This is their answer to tackle challenges that arose from disruptive technologies such as Grab by setting up a corporate venture capital fund. Its primary focus would be investing in innovative technology that 1. synergizes with their business, 2. help bridge gaps in transportation and 3. open up new business opportunities.

So far, CDG had invested a million USD dollars into three transport related technology startups: Swat, Haulio and Fortellix. These startups are still at its infancy so I think it will take years to see any positive impact.

Nonetheless, it will be interesting to see what other investments they would commit.

Closing thoughts

Presently, I still feel that investing in ComfortDelgro has much higher risks than rewards due to a number of reasons below:

  1. Revenue is limited to fleet size which is capital intensive to expand.

  2. Difficulty increasing taxi ridership due to the network effects of Grab.* CDG's loyalty program is also not as elaborate and flexible as Grab rewards.

  3. Shortage of manpower as taxi drivers are quitting because of the low ridership and poor driver support package.

  4. Limited fare hikes or face backlash from local communities. As a fellow commuter, I wouldn't like this without substantial reasons. Occasionally, taking Grab is also more affordable than taking CDG taxi.

  5. Cab is an essential mode of transportation only to a special category of commuters during special occasions as fees are too high for daily commuting.*

However, some of the above reasons may change when the new regulation gets implemented. It would probably happen some time in September 2020 according to ComfortDelgro's annual report 2019.*

So is it a bargain? I believe there could be opportunity for some short term gains. As for the long term, ComfortDelgro's taxi business is still looking kinda uncertain as it is taking a toll on the group's performance. So for investors who remains interested, investing in ComfortDelgro's subsidiaries might be a better alternative as opposed to investing in the group.*

Hopefully with the new regulations, the situation might improve for ComfortDelgro. It is unclear how much it would help but keep in mind that approximately 60% of the revenue is derived from Singapore. Nevertheless, it is worth KIV to see what developments unfold.*

My 2 cents

Disclaimer: The information listed here are strictly my personal opinion. It does not constitute as investment advice. Please do your own due diligence.

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