Comfort Delgro

A quick scan over the update say there is no runaway cost. Why not, perhaps because of those fuel adjustment mechanism(s) in placed. Over time, cost need to past through and it will and I believe the best time to do so is when all the headline news are about inflation. If not now then when?

A side note, I have seen companies in traditional business like distribution/ industrial doing better because of pricing adjustment due to inflation and also lesser competition.

(16-05-2022, 09:23 AM)weijian Wrote: Many folks who are more in tuned with the local SGX market, look to CDG as a "no brainer" stock for covid-19 recovery. This is because as Spore opens up, everyone returns to their workplace and hence public and private transport demand will resume. With a fixed large cost base from its assets, its bottom line improvement will scale.

But in the last 3-6 months, it is starting to become evident than this is not the cause with accelerating inflation affecting input costs. And from the topline perspective, unless you are on the cost plus basis, you would have a big problem raising charges as it will be extremely politically sensitive (in view of all other costs that are increasing, politicians will be navigating a very tricky path in the near future)

COVID-19 update for 1Q2022

https://links.sgx.com/FileOpen/1Q2022%20...eID=717185

Isn't profit up if exclude one off and government grants? Thought it's at least decent especially when ridership is not yet up significantly in 1Q22 vs 1Q21 and input costs are higher.

hi dzwm87,
When referring to covid-19 recovery play, we would try to compare to pre covid, rather than during the depths of covid19 (ie. 2021).

EBITDA margins as below (currently, there is ~4% gap to pre covid)
1Q22: (896 - 732 - 4.7) / 896 = 17.9%
1Q21: (862 - 675 - 33.4) / 862 = 17.8%
FY19: (3905 - 3489 + 453) / 3905 = 22.2%
FY18: (3805 - 3366 + 393) / 3805 = 21.8%

FY19/18 results: https://www.comfortdelgro.com/documents/...eIndex=all

The ground expectation is as utilization continues to improve (and it is not reflected in 1Q22 as Spore fully opened in April) , its operating leverage will allow margins to continue to expand to close the ~4% EBITDA gap to pre covid. It is also not wrong to believe that CDG will rise their taxi fares (to incentivize people to rent more taxis) which they had already done so. In fact, the adjustment for public fares had also been carried out. But my proposition is - what if this belief is wrong? I would like to suspect that with rising costs of everything from wages to food (and yes, GST), there is a good chance that the flexibility to increase prices may not be there after all. It is after all something that the Spore Gov can easily control and there is going to be a power transition soon.

Of course, my suspect could be totally wrong but generally, I do not think too much on the operations of companies I look at (It is the job of the Mgt) and so I reckon my job is mainly to assess other possibilities (that the ground is not assigning a big probability to) because that is risk management for me.

^I see. I thought you were just referring to recent quarter results which if based on what management said (higher fuel/utility cost), core earnings should theoretically be down a lot since it's neg op leverage so there is definitely some cost pass through mechanism. The recovery story is also not fully done yet since SG alone probably fully reopen closer to end-1Q. Looking at historical may not be reliable too as taxi fleet has been permanently reduced.

One thing to note is that the business model for SBS's has changed dramatically

https://links.sgx.com/FileOpen/SBST%20-%...eID=690334

A summary of the point is that for the downtown line model, the losses and gains are now capped, where if their EBIT falls below 3.5%, the government will chip in and if they make too much profits or reap gains from operating leverage (EBIT above 5%), the government takes almost everything

Secondly, from 2024, SBS loses the high margin advertising for all its rail network (approximately 50% net margin)

It might be hard to return to its 21% margin. The only way is to grow revenue greatly to offset the difference in margins

Singapore is improving but the rest of its international segments aren't. China is understandable due to its zero covid-19 policy but how about Australia and UK?

The amendment of the bus service fees to be collected from LTA from 1st Sept also looks like a concern. But one thing for sure is that the taxis are getting better now.

1H22 presentation: https://links.sgx.com/FileOpen/CDG%20-%2...eID=728277

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.

(28-03-2023, 09:44 PM)Choon Wrote: 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.

public transportation service is definitely a sensitive-hot topic and very political... :O :O :O

PE ratio or those reliant on earnings is not a good metric for CDG due to the following:

(i) From 2H 2023, there is going to be downward earnings pressure on CDG because it is returning the lucrative 50+% margin advertising for downtown line in exchange for loss support/profit cap for downtown line. Overall SBS/CDG is expected to lose a few tens in million of Operating Profits

(ii) the trajectory for the taxi business is downwards, while Grab is reducing in compeitition, the overall landscape is that CDG taxi business is no longer the lucrative, high margin it once was