Rosesyrup Research

CDG, a drying cash cow

Reccomendation: Short Sell                                                                                                           Target price: $1.62

                                                                                                                                                            Downside: 59%

ComfortDelGro Group (CDG)

The land transport company is involved in an array of businesses ranging from maintance of vehicles to taxi rental, with operation in different parts of the world. To make analysing this well diversified company more bearable, in this report we will only look at CDG' s operations which have significant impact on the group financial figures. As of the end of 2015, around 80% of the firm profit came from its taxi and bus operation. Its operations in Singapore and UK derived 75% of the group profit, while operation in Austrialia only accounted for 14% of its profit.

 

New and stronger competitors on the horizon

For decades, the two Singapore bus operators had enjoyed a long period of stability and little competition. However all these are starting to change under the new Bus Contracting Model intiated by the government to improve local transportation efficiency. Under the new model, all buses routes are divided into 12 packages with only 3 of them opened to foregin competitors' bids- CDG lost all 3 packages to foregin operators. As the governement continues to push for efficinecy and open up more packages for foregin bids, we expect the inefficient and uncompetitive CDG to lose out even more.

 

On the taxi scene, we see the entrance of new players, such as Uber and Grab. With their new business model they are able to offer arguably better services than CDG, without owning a single fleet. The fast rising of these new players throughout the world is another testimony of how deadly a threat the new business model is to the traditional operators like CDG. In fact the company revenue growth rate slowed from its long term average of 4.5% to only 1.5% in 2015.

 

Despite the obvious danger, we noticed that alot brokerage houses (RHB, UOB, OCBC, DBS, CIMB etc) continued to make buy call on CDG in late 2016 and the common reason they gave was the financial figures released by CDG was little affected after the entrance of Uber. While it is good to consider other analyst opinions, we would like to introduce a new concept for readers to ponder about when making their investment decision. When it comes to analysing new technology such as Uber or even Iphone, one important factor to consider is the penetration rate- percentage of the market which has adopted the new technology. Uber has a 20% penetration rate in US where one the largest cab operator in San Francisco has filed for bankruptcy. As of 2016, penetration rate in Singapore stands at only 4%. Do note that we are not saying CDG might face the desinity as its counter part in San Francisco. We are simply pointing out that it is too early to say Cab hiring apps post negligible threat to CDG, as the the financial figures released by CDG has yet to reflect the full brunt of the disruptive technology.

 

 

Rising Oil Price

The oil price slump started off in 2014 was mainly caused by the price war among OPEC members fighting for market shares. Energy reliant transportation companies like CGD are among the greatest beneficiaries from the depressed oil price. As a result CGD share price spiked sharply from $2 at the beginning of 2014 to a peak of $3.21 in June 2015, representing 60% gain.

 

However all these cost saving are about to end with agreement signed by OPEC in Dec 2016 to cut supply glut and end the price war. While many brokerages reports stated the rise in oil price as a potential risk to investing in CDG, we believe the $3 target prices have yet to take into account of this risk factor which has become reality in Dec 2016.

 

Full acquisition of ComfortDelgro CabCharge (CDC)

In Dec 2016, CDG announced the acquisition of 49% stake it did not already owned in a joint venture with Cabcharge Austrialia. We see this as a welcoming strategy to further diversify the group source of income to minimize the impact of economy downturn in UK and Singapore on the company performance.

 

However as the acquisition represents significant cash outlay by CGD, this together with more uncomfortable ride ahead, lead us to believe that the company will stick to the lower end of their pledged (min 50%) dividend payout policy in the coming years.

 

Valuation

In this sector, we attempt to value CDG share price based on the following assumptions:

 

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  DDM model: CDG has been issuing pretty stable dividend
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  50% payout rate
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  New technology penetration rate to hit 20% by 2019: Though we honestly doubt it would need that long as Singapore is a much smaller market compared to US.
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  Oil price stay at $90- this was the average before 2014 slump.