Is ComfortDelgro (SGX: C52.SI) Still a Buy in a Pre-Covid Economy?
Looking back at my past conversation with a group of friends in early 2019, I was quite convinced that Comfordelgro, one of the largest transport companies in the world, is rock solid and worth a second and third look in any economic situation should the share price falls below $2.
Then comes COVID-19.
I told myself to look at it again when it falls below $1.50 but decided against it when it really happened because some other companies suddenly look more attractive at that time. One of them being Singapore Airlines (SGX: C6L.SI), which I am still holding on to.
Now that the dust has more or less settled with new of successful vaccines being reported to calm the market down, it is time to look out for some (still) undervalued stocks. And Comfortdelgro comes to my mind.
Going Digital
With COVID-19, almost everything has changed; from consumer behaviour to the way businesses are being run. Even my favourite ExxonMobil (NYSE: XOM) is no longer the immortal giant it used to be.
Any traditional marketer who has recently signed up for a digital marketing course would tell you that businesses are transforming themselves and that if they don’t upgrade themselves, they will find them being out of a job soon. Many businesses who were doing well before the pandemic may become irrelevant with the digital transformation being sped up by the new normal brought by the virus, or rather restriction in movement.
So which companies will still survive, or even thrive, when things go back to (new) normal again?
I looked through my watchlist (of 12 years) and crossed out almost half of them. Some of them overvalued, many will face intense pressure from tech-based competition.
Why ComfortDelgro, Previously in early 2019?
After selling my bank stocks, which have made me quite a good amount with them (D05.SI & O39.SI) rebounding to around 80% of their pre-COVID price, I felt a need to park my monies somewhere else where the price is still depressed despite the recent surge.
ComfortDelgro (CDG) lights up from the watchlist that desperately some new perspective.
So I look back at my previous research on this transport giant and here are some reasons why I think it deserved a second look despite facing the obvious competition from the Temasek Holdings backed Grab.
1.Grab Has Peaked
I think one thing that all will agree is that those who will take Grab/Uber, would have already used the app before. Consumer behaviour has long shifted to accepting the booking of a taxi with the use of an app even before COVID-19 happens.
This will also mean that CDG’s fiercest competition in the taxi market will find it hard to achieve a double-digit percentage growth.
Interestingly, behavioural change, in this case, may not be a bad thing for CDG as it wasn’t on the mind of the consumer to book a taxi first before trying to flag for one on cost consideration. Booking comes with a booking fee that people were unwilling to pay for.
How things have changed, they didn’t even realise or care that the convenience comes with a price, literally.
Savvy consumers will soon have 2–3 apps on their phone to compare prices before making the booking like how they do it for airlines & hotel accommodation. CDG’s app will be one of them.
The peak in the cab business for Grab is quite evident in their various initiatives like grab food, grab pay, grab finance, etc., in an attempt to increase their download and usage by creating an eco-system for their users that they cannot get out of (with the popular adoption of Grab pay being the end-game I think).
So by saying Grab has peaked in this case will mean that this is the worst that CDG taxi business can go, right?
Since CDG taxi business cannot be more depressed than what they are now (bar the COVID) anymore lower than this, as those who wanted to switch has already switched during the past few years, I will take it that the numbers now are accurate for a long term projection.
And the numbers (pre-COVID) are not ugly with all negatives priced in.
Year on year revenue growth has been achieved despite a 40% drop in revenue from its taxi business from its high in 2015.
Even if a new player like GoJek comes in, it’s going to be the new player Vs Grab. CDG is CDG as they can’t do street hail.
2. Incentives Are Being Taken Away By Grab
So what if all the incentives to drivers have been taken away by Grab, gradually or suddenly? Will these Grab drivers still continue to drive for Grab, or to find another job e.g. a taxi driver?
Truth be told, although some of these drivers were previously from taxi drivers, many were non-taxi drivers.
But now that they have gotten used to driving a taxi for a living that, if grab can’t give them a decent wage anymore, I think they naturally switched to driving taxi instead. And that is good news for CDG.
In fact, many of those who were taxi drivers have regretted leaving CDG during this pandemic as CDG offered such attractive subsidy (free rental) to its drivers that made most of these Grab drivers fuming mad (on social media).
Currently, incentives are being cut year by year mainly because Grab desperately needs to be profitable by a certain year.
Why so? Because of the impending IPO by March 2023.
In around 3 years’ time, Grab will need to have an IPO under the agreement signed with Uber during the merger or that a penalty of $2bln will need to be paid out. This is a deadline that the money-losing company cannot afford to miss and the clock is ticking.
It’s either the reduction in costs, which they have done so in a very much traditional way of firing employees during this pandemic, or an increase in revenue.
Wide use of safe autonomous vehicle can save the day but that can be said the same for CDG.
3. ComfortDelgro Is Not Just a Taxi Company
Most people will look at the shiny new tech ride-hailing companies and judge CDG based on this part of the competition. But they are not calling themselves one of the largest transport company in the world for being just a taxi operator.
In fact, the taxi business only takes up around 17% of its revenue now according to their latest 2019 annual report, when private hire peaked.
Their main source of revenue and profit is in fact public transport.
CDG is among the leaders for public transport in not only Singapore but also United Kingdom/Ireland, and Australia, with good presence in China and Malaysia.
Buses form an important part of the public transportation system and I don’t foresee them dying anytime soon since there is also no way for a country to build train tracks that can link to almost everywhere, except in Singapore.
4. Strong Balance Sheet with Dominance in Its Largest Market
Since the closest competition in public transport in Singapore, SMRT, has been privatised by the government, profit is not a focus anymore. I don’t expect them to be going all out to get projects and definitely not lowballing the industry to do it.
In fact, SMRT may want to pace themselves to not get too many projects since they would rather go for the “work done properly” approach than to focus on increasing revenue.
CDG is not only in public transport and is into private buses too. Since this sector is not governed by the government, the sky is the limit if they are willing to. This is because the smaller operators in this segment most probably do not have their strength in terms of financial, assets and manpower.
Even with the onslaught of the COVID-19 pandemic, there is not much cash burn for CDG, with a strong cash position of $619m and borrowing of $546m, setting them in a strong position of the positive cash flow territory.
ComfortDelgro, Post-COVID
According to its latest half-year assessment as of Jun 2020, CDG has experienced a drop in business across different business segments ranging from 12%-47%, with the exception of their Car Rental & Leasing business which rose 4.7% due to a bigger fleet size.
Taxi segment is understandably one of the hardest hit with heavy subsidy in the form of free rental being provided to taxi drivers, but that has since ended. This was partially subsidized by the Singapore government where $82.3m of relief fund was dispersed to CDG.
This relief fund has also helped CDG turned an operating loss of $75.7m to a small $6.6m (operating) profit.
Although overall revenue has dropped by around $400m, or 20%, due to the unprecedented pandemic, CDG has managed to reduce operating costs by a good $100m. This is even after a conservative provision for impairment on vehicle & goodwill of $30m, something that wasn’t included in the previous financial year (at the halfway mark). This impairment was most probably done to prepare themselves for any worst-case scenario of the damage caused by COVID-19, before we all now know that a vaccine (by many companies) has been successfully invented.
I like this conservative approach of the management and the fact that they are proactively looking at ways to cut costs instead of spending as normal.
Public transportation like buses and trains, although lesser-used now due to the restriction in human movement to curb the spread of the virus, are unlikely to be disrupted by the digital economy, unlike retail. Fundamentals of the business have not changed much and the future still looks promising with economies gradually opening up due to the availability of a vaccine.
CDG’s main market in Singapore has already tamed the COVID-19 situation with community spread being a rare occasion than the norm (in fact, the people you see in the malls here makes you feel like the pandemic is over). Their English market is on track to be the first to approve & getting their hands on the vaccine from Pfizer, China has successfully developed their own vaccine and exporting to Indonesia, and the outbreak in NSW Australia being brought under control. It seems like their business may be back as usual in a year or so.
The only downside is the fact that they may not be able to move as fast as competitors like Grab that can integrate all their offerings into one loyalty app that builds stickiness with their users since these infrastructures of the pubic transportation are still being controlled by the government. But imagine you can earn loyalty points with CDG when you take any of their public transportation, from bus to train to taxi, will you choose to stay with them or go out of the eco-system to break the loyalty program they have for you?
