Comfort Delgro

[Choon]

Looking at CDG recently as its share price has fallen a lot.

The Group has a net cash position of S$653M as at Dec2022 which is significant relative to its market cap of S$2.5B. Deducting this net cash off market cap may yield a very reasonable PE ratio.

Question I have is - is this net cash really free for use (either distribution or for acquisitions)? 

My doubts are:
(i) impression-wise, CDG is an asset-heaving company. 
(ii) and it has a large current trade and other payables of S$832M. 

So am rather surprise that it has a large cash and net cash balance.

Appreciate thoughts and insights.

Hi Choon,

Looking at PE after deducting net cash is like looking at EV (enterprise value) and valuing a company based on EV/EBITDA multiples, which is a substitute for P/E. The former is frequently used by takeover specialists because once they take over successfully, they have control on the capital structure. It is obvious that OPMIs are not the former.

While the OPMI should often put on the same lenses as a takeover specialist when looking at companies, I do not think it is applicable for CDG who has a long labor history.

Back to CDG. There are a couple of red flags for me personally:

(1) The way "extra" support is been given to the taxi drivers (due to its labor roots?) during covid-19 and even now. We could argue that the taxi drivers are their customers since they earn from taxi rentals. But substituting your customer isn't a very profitable endeavor. Ironically, CDG's fortunes over the last 10 years, were nailed to the cross by new (shared) economy competitors who substituted their own customers.

(2) CDG's own subsidiary VICOM had revealed that any international expansion would be done at the parent level. This should encourage any OPMI to instead look at their subsidiaries who will be paying up their cash to their parent to do the international expansion.

(3) Some of CDG's international expansion are going towards asset light (eg. the management contracts of railways) but her biggest investments are all CAPEX intensive (buying the transport tools and leases). I think the greatest risk is that CDG is operating in a core sensitive sector, ie. transportation, especially for the masses. In the age of populism and now "non transient" inflation, the risks are really high for a foreign operator in those countries.

"Looking at PE after deducting net cash is like looking at EV (enterprise value) and valuing a company based on EV/EBITDA multiples, which is a substitute for P/E. The former is frequently used by takeover specialists because once they take over successfully, they have control on the capital structure. It is obvious that OPMIs are not the former.


While the OPMI should often put on the same lenses as a takeover specialist when looking at companies, I do not think it is applicable for CDG who has a long labor history."

I see your point. To me, it is a bet. If the $600M is really free, CDG could do a significant acquisition funding it entirely from cash, and as a result, add perhaps $30-$50M to its bottomline. But I see that the cash is not held at the Company level but at the Group level, so I have choose to err on caution and regard that net cash as not free (held at operating companies for working capital needs).

Another point that caught my eye is  that CDG seems to be securing more and more overseas projects where it does not have to invest capital but just bid and operate. Thus as long as CDG does not overbid, the profits earned from these projects would just flow into its bottomline without CDG having to invest much (similar to Mandarin Oriental's asset-light hotel management biz).

It is a tough industry and I am still unconvinced about CDG.

But what if CDG's share price drop to $0.80 or $0.60 from the current $1.20?

And what if its profit recovers to pre-COVID 2019 high?

[weijian]

Another point that caught my eye is  that CDG seems to be securing more and more overseas projects where it does not have to invest capital but just bid and operate. Thus as long as CDG does not overbid, the profits earned from these projects would just flow into its bottomline without CDG having to invest much (similar to Mandarin Oriental's asset-light hotel management biz).

It is a tough industry and I am still unconvinced about CDG.

But what if CDG's share price drop to $0.80 or $0.60 from the current $1.20?

And what if its profit recovers to pre-COVID 2019 high?

Hi Choon,

CDG is in the business of transportation and unfortunately, there are different modes of transportation - bus, taxi and train. All of them are very different and require different expertise. Hence I think there are more executional difficulties and hence it is not as scalable as Mandarin Oriental. For example, opening a new hotel means getting some experienced staff to temporarily move over, the same culture, using the same mgt systems, restocking the same bathing lotion and sharing the same promotional budget etc...

As to your hypothetical questions...it is obvious that there cannot be any purchase that is always bad irregardless of the price.

[weijian]

A fare increase earlier in the month, followed by a commission increase a couple of weeks later. Money from left hand to right hand and then straight to CDG's pocket?

CDG's share price seemed to have hit a bottom in mid 2023, and is rising with all the fare increases in taxi/public transport in the last quarter of 2023. Is the worst over?

ComfortDelGro to raise taxi commissions for booked rides to 7%

TRANSPORT operator ComfortDelGro will increase its commissions from cabbies to 7 per cent from 5 per cent from Jan 1, 2024. This will be applicable to app and phone-booked rides.

The 2 per cent increase in commissions would mean an additional S$0.40 on top of the S$1 paid to ComfortDelGro for a S$20 ride. A driver would have to pay S$28 to the company if he completes 20 such rides, S$8 more than what is payable now.

This would equate to an extra amount of around S$70,400 a day from ComfortDelGro’s fleet of about 8,800 taxis, or S$25.7 million more a year.

https://www.businesstimes.com.sg/compani...ed-rides-7

[RBM]

Good, thoughtful post Weijian. I suggest receding interest rates should also help propel CdG’s share price. It currently has more than half a billion in debt. The competitive challenges arising from Uber, Grab should be well understood (and contained?) by now. I believe the challenge CdG’s management faces is boosting its ROA, ROE - currently sitting at a mediocre 3%, 6%.

Vested

[weijian]

Good, thoughtful post Weijian. I suggest receding interest rates should also help propel CdG’s share price. It currently has more than half a billion in debt. The competitive challenges arising from Uber, Grab should be well understood (and contained?) by now. I believe the challenge CdG’s management faces is boosting its ROA, ROE - currently sitting at a mediocre 3%, 6%.

Vested

hi RBM,

I don't think there was an "thoughful-ness" in my earlier post. But I reckon you were generous with VB moderator.

Receding interest rates may reduce its interest costs, and this will flow to the bottom-line - As a result, the P/L will be probably be better. I am not sure how CDG's share price turns out. For all we know, Mr Market may decide to assign a lower valuation (eg. lower P/E) and hence share price may actually not move.

P.S. From 1 old VB to another: a healthy reminder to focus on the asset/business/structure. Everything else is a byproduct.

[dzwm87]

It's in a net cash position so lower interest rates will also reduce interest income.

[weijian]

The recently launched Corporate Monitor has came up with a high quality piece of analysis on CDG.

As an (ex)-VICOM shareholder, I can only say that CDG will continue to extract local rents from SBS Transit/VICOM and then continue their overseas expansion at parent level. So it is better to be positioned at child level, at all times.

And they are 100% spot-on as transportation is a very sensitive sector with foreign operators have zero leverage politically.

ComfortDelgro: Analysis of Performance, Strategy & Governance 2024

Return on Equity (ROE). CDG’s ROE has consistently fallen short of its cost of equity, eroding shareholder value. CDG has publicly stated that it has no target ROE. There is no indication that the group will be able to achieve returns that meet its cost of equity in the future.

Investments and Acquisitions. CDG has invested over S$1 billion since 2014, primarily in overseas expansions and acquisitions. These investments and acquisitions appear to be underperforming, as evidenced by the stagnant revenues and reduced profitability. FX and regulatory risk are considerable and can further reduce profits.

Executive Remuneration. There is a misalignment between executive remuneration and company performance. Despite low, falling shareholder returns, executive remuneration has increased.

Corporate Structure. CDG comprises 3 separately listed entities, with the smallest, VICOM, having annual revenues of just S$110m. The elaborate structure extends to the group’s directorships, with overlapping directors and more than 30 directorships in total. A comparison with SGX-listed peers shows the potential to simplify CDG’s corporate structure and board. This can result in cost savings and improve the efficiency of decision-making.

https://corporate-monitor.org/cdg-analys...ance-2024/

[dzwm87]

Too comfortable with nobody to answer for (i.e. fragmented shareholder) and sitting on their laurels. I put this in the same bucket as SPH and GE.

[weijian]

Too comfortable with nobody to answer for (i.e. fragmented shareholder) and sitting on their laurels. I put this in the same bucket as SPH and GE.

Hi dzwm87,

I understand why you would put SPH into the same bucket as CDG, ie. both have fragmented ownership and were unable to evolve their business model to meet the digital disruption. But I wouldn't necessarily think that the Mgt teams of CDG/SPH were "sitting on their laurels" during all that time. But whether they were equipped with the necessary skillsets or under the proper incentive structure to evolve successfully, is another question. Nonetheless, we have to admit that most companies fail to pivot than succeed to do so.

As for GE, I do not agree that it warrants to be "in the same CDG/SPH bucket" though. First, it doesn't have a fragmented shareholder since OCBC has owned >85% of its shares for the last 20years. Next, embedded value was 11bil in 2015 and 17.3bil in 2023, a ~7% CAGR growth in 8 years. Growth compared to other financial services firm (banks/brokerages and fellow insurers) may not have been impressive but it has been conservative so far and hasn't blown up like AIG once did. The money business is pretty resilient to any sort of digital disruption, so GE can ride on this luck as long as it doesn't blow up.

[dzwm87]

I was using a more simplified criteria of them not aligning interests for minority shareholders

CDG was long under a "rent seeking" mentality if we recalled how difficult it was to book/flag a taxi in the past. Supply was controlled and as long as they increase rental fee by a single digit per annum, they were happy. No improvements in services not even after Grab Taxi came into the picture and stole market share. (The irony is that Grab looks to become like the CDG of the past although it is another discussion by itself)

CDG patronized with some VC tech investments but never really went serious with it. Their Zig app is still terrible. They pitched about its variable commission-based model but it doesn't move the needle when you look at the unit economics. The fact is they permanently lost half of their taxi fleet. And they will just continue patronizing by paying another 4-5% dividend yield each year.

It is just another classic case of an incumbent being too comfortable in its cashflow profits and ceded market share.