(08-10-2017, 12:31 AM)CY09 Wrote: Hi TTTI,
I am probably haunted by my experience at Penguin Holdings. In 2014-15, I made the argument that Penguin's FCF numbers was strong and that Mr. Market was unjustified to sell the stock down. I failed to factor one key point - FCF is dependent on i) how much revenue is generated and ii) how quick revenue converts to cash. My horror in investing in Penguin manifested in point i) where the O&G industry slowdown caused a fall in revenue and in turn penguin FCF was affected and rightly proven so, with its recent FY 16 results.
Fast forward to CDG and using this tainted lens of mine. Right now, CDG's revenue from taxi is falling due to a) declining rental rates and b) a smaller fleet. This will affect revenue and in turn Cash flow generated from Ops. In this FY we are not seeing this fall in great effect because CDG had greatly cut down on CAPEX by not replacing its old taxis at a 1-1 ratio. This has helped maintain FCF numbers.
However in the future, it is not possible for CDG to continuously sting on CAPEX by not replacing its taxis at a 1-1 ratio [unless it intends to exit from the taxi business]. It is at this juncture, where cash for CAPEX has to be spit out but CDG's cash flow generated from operations is now at a much reduced level due to smaller fleet.
To summarize, current FCF number may be strong now due to past revenue and cut in CAPEX. But can this FCF number be still replicated when revenue is falling in the future?
*Mgmt can still support dividends with a weaker FCF, they just have to borrow money to maintain dividends (see M1 and Starhub case study)
CDG is deliberately not spending on their cab business. They have to scale down in the face of a competitor that has no regard for spending or profitability.
That would of course impact on their revenue and earnings, but even then, it's 1/3 of their revenue. CFs will be insulated, and even if we cut FCF by 30%, their current dividend would be well supported.
This is probably a different scenario from Penguin, although I am not privy to what happened with Penguin.
In this scenario, their other businesses are niche, protected businesses. Particularly so with the new bus contracting model.
So, if all the other segments and subsidiaries are doing alright, the negativity arises mostly from the cab challenges. In terms of FCF, cab would have a limited impact cos like you said, Capex is cut, although it affects profitability and CFs.
I don't think CDG will increase borrowings to support dividend payout.
I've already highlighted this scenario for M1, I don't like seeing a long term record of increasing debt with dropping holdings of cash and other equivalents
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