We stuck our necks out a few months ago and highlighted ComfortDelGro (SGX.C52) as a sustainable dividend play for passive income, a view that generally went against the market consensus. While we were punished with a -7.5% decline (as of 13 November 2017) since putting up the article, our investment case for the transportation company remains intact, and we continue to retain ComfortDelGro on our Income focus list. Here's a quick update on ComfortDelGro's latest 3Q 2017 earnings results, and some of the reasons why we believe it is still an attractive dividend stock.
Chart 1: ComfortDelGro's Shares Have Sputtered
Weak Taxi Segment Weighs On 3Q 17 Earnings
ComfortDelGro's net profit slid -8.2% year-on-year to SGD 80.1 million in 3Q 2017, with the stellar performance of its public transport division negated by the continued deterioration in the taxi segment, whose operating profit plunged -20.7% from the corresponding period last year to SGD 37.5 million. ComfortDelGro's automotive engineering segment, which includes diesel sales and repair services for its taxi fleet, was also negatively affected, with operating profit almost halved to SGD 8.5 million, down from SGD 15.4 million in the same period last year.
The road ahead remains rough and bumpy for ComfortDelGro's taxi business, which continues to be affected by the increased competition from private-hire rivals Uber and Grab. Earlier this year, Grab launched an aggressive move to poach cabbies away from ComfortDelGro, dangling huge rental discounts to entice them to make the switch. The results are starting to show: ComfortDelGro's taxi fleet size continued its decline in September to 14,823 – the lowest in eight years – and its taxi idle rate has also creeped up during the quarter. Given the tough operating landscape, the weakness in ComfortDelGro's taxi business is likely to continue, with its margins also potentially impacted if it lowers its rental to retain drivers.
While we acknowledge that the negative impact on ComfortDelGro's taxi business has been worse-than-expected, our investment case for the transport giant remains intact, and we believe that the sell-off in its share price has been overdone. Here are our reasons why we have decided to keep ComfortDelGro on our Income focus list.
1. Public Transport Division Remains Growth Driver
ComfortDelGro's public transport division remains healthy and is a bright spot in its 3Q 2017 earnings. Its subsidiary SBS Transit (SGX.S61), in which ComfortDelGro has a 74.6% stake in, saw its net profit jump 42.1% in 3Q 2017, due mainly to the transition to the new bus contracting model and higher average daily ridership for rail services. The only blot on an otherwise encouraging set of results, was the fact that SBS Transit lost out on the Thomson-East Coast line operating tender to SMRT, a result that was rather unexpected given the SMRT's recent high-profile train breakdowns that have led to serious questions over its reliability.
Nonetheless, the outlook for the public transport segment remains positive, with the opening of Downtown Line 3 and the takeover of the Seletar bus package in 1Q 2018 both helping to boost the bottom line of ComfortDelGro over the next few years. The upcoming Bukit Merah bus package could also be a potential earnings driver and stock catalyst, if SBS Transit clinches the tender, which concluded in August this year and attracted six bidders in total (including SBS Transit).
2. Attractive Dividend Yield That Is Fairly Sustainable
At a forecasted yield of 5.10% for 2018 (as of 13 November 2017), ComfortDelGro's dividends are not only attractive, but they look fairly sustainable at this moment. Despite a shrinking bottom line, ComfortDelGro's cash flow situation has, in fact, improved. Its free cash flow to equity of SGD 214.3 million in the nine months through 30 September 2017 compares favourably to the SGD 46.2 million generated over the same period last year. Market participants are also expecting ComfortDelGro's increased dividends to be supported sufficiently by its cash flows (Chart 2), especially with the transition to the new asset-light bus contracting model that will provide a boost to operating cash flows over the next few years.
Chart 2: Dividends To Be Sufficiently Covered By Cash Flows Over Next Few Years
ComfortDelGro's robust balance sheet, with a net cash position since 3Q 2015 and strong short-term liquidity, should also allay any fears of a potential dividend reduction. Its total cash on hand as of end-September 2017 totalled SGD 538.1 million, an amount that is more than sufficient to cover its estimated capital expenditures of SGD 317.6 million next year, as well as SGD 73.4 million in short-term debt. Its current ratio of 1.16 (up from the previous quarter's 1.04) is also indicative of ComfortDelGro's ability to meet its short-term obligations with ease.
3. Potential Uber Tie-Up Could Revive Taxi Business
Over the quarter, ComfortDelGro announced that it has signed an exclusivity letter with Uber to discuss on a potential strategic alliance between the two companies. Based on the press release, the alliance may include "collaboration in relation to management of fleet vehicles and booking software solutions in Singapore". Both parties are currently mulling over the details of the partnership, and the management has guided that a decision will mostly be made by the end of November. While there is no guarantee that the discussions will result in any definitive agreement between ComfortDelGro and Uber, we believe that a partnership is highly possible given that their businesses are synergistic, and both parties stand to gain from a potential collaboration.
From ComfortDelGro's perspective, the strategic alliance allows the company to leverage on Uber's booking software and expand its reach beyond its own mobile app and booking hotline. Moreover, there could also be spill-over benefits to its automotive engineering business, which contributed about 9.2% of operating profit in the nine months through 30 September 2017, if Uber chooses ComfortDelGro as its preferred firm for vehicle repair and maintenance. Uber owns a fleet of 15,000 private-hire vehicles under its majority-owned car rental company Lion City Rentals. From Uber's standpoint, the partnership provides them with access to ComfortDelGro's fleet management expertise and their 14,823-strong taxi fleet, which dwarfs that of the combined 9,645 taxis owned by the other operators, giving Uber a leg-up against its bitter rival Grab. There is currently a dearth of details on the partnership, but we believe any agreement is likely to be a share price catalyst for ComfortDelGro.
4. Negatives Largely Priced In
Based on its last traded price of SGD 2.10, ComfortDelGro trades at a PE ratio of 15.2X based on its estimated earnings for 2018. By way of comparison, its long-time rival SMRT Corporation was taken private last year by Temasek Holdings at an offer price of SGD 1.68 per share, which was 24 times its trailing 12-month earnings prior to the privatisation, while Hong Kong's mass transit railway operator MTR Corporation (HKEX.66) is currently trading at an estimated PE ratio of 27.2X based on its 2018 estimated earnings. ComfortDelGro's global peer group (based on the GICS Road and Rail classification) is also trading at a much higher valuation of 18.6X on average, a sign that ComfortDelGro's shares are undervalued at its current price.
As ComfortDelGro pays regular dividends to its shareholders, the dividend discount model can also be used to estimate its intrinsic value. Assuming a discount rate of 6.17% (calculated using the capital asset pricing model) and a constant dividend growth rate of 2.16% (assuming dividends grow in line with long-run inflation expectations), the simplified model yields an estimated target price of SGD 2.67 (Chart 3). We believe that its current share price has likely factored in the negatives stemming from its ailing taxi business, and represents a compelling investment as a dividend stock.
Chart 3: Using The Dividend Discount Model To Estimate Intrinsic Value
While the inclusion of ComfortDelGro on our Income focus list largely goes against the market consensus, we like the company for its high level of dividends, which we believe are sustainable at this stage. Moreover, there are stock catalysts on the horizon – a strategic partnership with Uber and the Bukit Merah bus package tender. In the longer-term, we see ComfortDelGro strengthening its position as a major mobility service provider in Singapore. In line with the nation's shift towards a car-light society, the existing bus and rail networks will be expanded in the future – and ComfortDelGro certainly has a big role to play in this. Meanwhile, it is a bed of roses for Grab, but it needs to start making money, before its deep-pocketed investors decide to turn off their funding taps.
Declaration:
For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities. The analyst who produced this report has a position in ComfortDelGro.
All materials and contents found in this site are strictly for general circulation and informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the funds or products found/identified in this site. While iFAST Financial Pte Ltd ("IFPL") has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies and typographical errors. Any opinion or estimate contained in this report is made on a general basis and neither IFPL nor any of its servants or agents have given any consideration to nor have they or any of them made any investigation of the investment objective, financial situation or particular need of any user or reader, any specific person or group of persons. You should consider carefully if the products you are going to purchase are suitable for your investment objective, investment experience, risk tolerance and other personal circumstances. If you are uncertain about the suitability of the investment product, please seek advice from a financial adviser, before making a decision to purchase the investment product. Past performance is not indicative of future performance. The value of the investment products and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. In respect of any matters arising from, or in connection with the said research analyses or research reports, recipients of the report are to contact IFPL at 10 Collyer Quay, #26-01 Ocean Financial Centre Building, Singapore 049315, or by telephone at +65 6557 2853. Where the report contains research analyses or research reports from a foreign research house and if the recipient of such research analyses or research reports is not an accredited investor, expert investor, institutional investor or an ex-accredited investor, IFPL accepts legal responsibility for the contents of such analyses or reports to such persons only to the extent as required by law. Please note that only certain security(ies) herein are available to all investors, while the rest are only available for certain persons to invest in, such as Accredited Investors (as defined in the Securities and Futures Act) or one who invests at least S$200,000 (or its equivalent currency) per transaction. To qualify as an Accredited Investor, one needs to submit a declaration form and certain relevant supporting documents, according to iFAST’s prevailing policies and procedures.
Please read our full disclaimers on the website at ( https://secure.fundsupermart.com/fsmone/policies/328125/investment-account-terms-&-conditions).
iFAST Financial Pte Ltd (IFPL) (registered address: 10 Collyer Quay #26-01 Ocean Financial Centre Singapore 049315, Telephone: 6557 2000) holds the Financial Advisers Licence issued by the Monetary Authority of Singapore ('MAS') to conduct regulated activities of advising on securities, marketing of collective investment schemes and arranging of any contract of insurance in respect of life policies, other than a contract of reinsurance and the Capital Markets Services Licence issued by the MAS to conduct regulated activities of dealing in securities and providing custodial services for securities. While IFPL has made every effort to ensure the independence of the report's contents, IFPL's nature of business is such that IFPL and its connected and associated entities together with their respective directors, officers and staff may be involved in providing dealing or investment-related services in the abovementioned securities, and have taken or may take positions in the securities mentioned in this report, and may also act as the principal for any buy or sell trades.