Comfort Delgro

[Nick]

This is the world second largest transport operator with a fleet of 44,800 vehicles spanning across South East Asia, China, Australia and Europe. It has reported consistent profit growth since listing and has a decent dividend yield exceeding 3%. It generates consistent FCF and has a very clean balance sheet with net gearing of 2.8%. At the moment, its forward PE ratio is around 14. The company aims to derive 70% of its revenues from its overseas operations in the next 3-5 years. It will be interesting to see how this pans out.

(Not Vested)

[Musicwhiz]

Net gearing means it has net debt? Then the Balance Sheet won't be so "clean" liao. But if it generates FCF then it's a very good sign.

Forward PER of 14 isn't exactly cheap, considering it's not exactly "blue chip" status. I understand that ComfortDelgro has many plans to expand their business overseas, but it remains to be seen how these will pan out, and the method of financing they will use.

It should be interesting, yes.

Not vested too.

[Nick]

Haha your definition of clean is a lot stringent than mine ! Generally, I have no qualms with debts provided there is a feasible plan to repay it and the company has a history of generating positive operating cash in-flow.

Ok...I am gg to post something highly controversial but it represents my p.o.v:

Lack of debt doesn't point to a well-managed company - instead it points to a cautious Management who can't find anything worth of acquiring. This isn't a bad thing; actually such companies which focuses on organic growth tend to fare better in the long run since the odds of them doing something stupid is much lesser. On the other hand, a sign of well-managed company is one which is willing to take on debt to make earnings accretive acquisition while not facing any sort of credit crunch during the worst of recessions. This is a very proactive Management which is always on the look out for excellent acquisitions and always keeping their lenders happy even in the worst of credit crunches. Such companies are rare to find. I believe a few of the blue chips were able to grow very quickly using such a method. Sadly, most heavily debt-laden companies fail to make an earning accretive acquisition - instead they further weaken the company's balance sheet with a series of poor acquisitions (and plenty of goodwill) hence leaving it at the mercy of its lenders during a credit crunch.

Hence, it is safer to avoid highly geared companies unless the Management has a 10 year track record to prove other-wise. I am never impressed by a slow growing company sitting on a pile of cash for a period of 3 years or more unless their dividend payouts are extremely attractive. Naturally, there are exceptions to both sides - a famous example is Thomson Med with its phenomenal growth rates and ever increasing cash pile. But, let's for a moment imagine it was actively seeking out new investment opportunities overseas (like owning and operating hospitals regionally), its growth rates could have be a lot higher.

In summary, I won't say having debt in the balance sheet makes it 'un-clean'. Debt is a powerful growth tool in the right hand (or a quick way to destruction in the wrong hands). Management quality is the key. Sadly, value investor will find this to be the hardest thing to measure accurately.

Please feel free to disagree. I am straying from Comfort...so I apologize

I wouldn't consider Comfort to be a value play at current prices. It certainly isn't a yield play either. Whoever buys now, is extremely confident in Comfort's ability to grow its earnings at 15% p.a. both organically and through strategic overseas acquisitions. I will adopt a wait and see approach first.

(Not Vested in any local land transport stock)

[Musicwhiz]

Hi Nick,

No worries, and I am glad you expressed your point of view.

I do agree on your point that debt is a "necessary evil" for some companies in order to grow, and that debt can help a company to grow faster than it normally would using just internally generated cash flows alone. That said, the level of debt which is considered "normal" or "necessary" will vary with the industry, business and company. As you rightly mentioned, there is no "right" level of debt.

Some companies are well-managed without debt, while some are well-managed with a lot of debt. But all things being equal, and debt being debt, I'd rather go for the well-managed one with minimal debt (note: not zero debt!). Even companies such as MTQ and Kingsmen have some level of loans on their Balance Sheet, and are not completely debt free. Only very few companies (e.g. SIAEC) are completely debt-free and can remain so for an extended period of time, all the while still generating very high ROE.

Whether or not Management deploys cash in the most efficient manner can only be observed on hindsight, by comparing the rates of return on equity and assets over a period of time. For Comfort's case, my point was that I hope it does not leverage up excessively in order to grow, as OSIM did with its LBO of Brookstone in USA a few years back. We've seen how wrong things can go for OSIM and it had to write off its entire investment after a few years.

Let me clarify that in accounting parlance, a "clean" Balance Sheet simply means one with little clutter and is easy to read. More often than not, a Balance Sheet without much liabilities and debt is labelled as "clean" and so it is not really my definition or a strict interpretation; but more of an industry practice to term such Balance Sheets as "clean". Not that "un-clean" Balance Sheets are not good, but it's just a purely technical description.

And oh yes, we must also look at the cost of debt. Even if a Company has a history of healthy operating cash flows, if the interest rates are too high, this raises the probability of the Company not being able to service its interest commitments should business suddenly turn bad or a slowdown occurs.

[pianist]

how to look for cost debt in the financial statement over a few quarters?

[SLC81]

ComfortDelgro's debt level is considered managable, cash inflow of 77.5 Mils and with load of cash 485 mils, it should not be difficult for them to service the current level of debts, If things turn out bad for them for instance, oil price goes up to 200$/ barrel and it takes them 2year to negotiagte for fare hike, they just need to stop the regular dividend for 2 years

I think it is good to have some debt to leverage as long as they borrow to spend wisely as debt is "cheap' now :-).

Comfort also need to maintance some level of debts as they need to spend on CAPEX (200-300mils/year) .i.e, to procure vehicles (bus +taxi) on yearly basis and it is best to tap on bank loan then to repay/refiance later through cash inflow from operation.

Comparing to SMRT, Confortdeglro is always "favored" when things slown down in Singapore as Comfortdelgro has in the past expended out globally, They have Bus and taxi businesses in UK,Australia, China...and all these oversea operation now contribute i think 40% of FY09 Profit.

I would consider Comfort more of a utility business model as Bus fare are regulated and oil price is a big factor that affects their profitability.

Overally, i think Confort is a good company to invesy but not the best. There is a report on Comfort by KimEng.

http://www.remisiers.org/cms_images/Comf...2010ke.pdf

[chang]

i always want to buy this company but one thinking hold me off. as train network expands, bus becomes a complement operation to train. while bus is always needed esp. in rural area, the overall growth will be limited.
i hope i can correct my thinking sometime, and then can buy some of it.

[mikh]

i think you got to look at Comfort a bit differently. While its "public" bus business is decreasing and clearly under threat in Singapore, it is unlikely to go away for a while. In parallel, it also has business in taxis (major player), NEL and VICOM etc. If it gets to run the Downtown line, i think it will be a good boost, making its rail business a lot more meaningful. If not, it risks being marginalized in this sector.

Meanwhile its overseas life with the targeted 70% revenue means that part of its business warrants substantial consideration.

Strategically longer term, I prefer their "transport" play better than SMRT which wants to dabble in property. Too bad, that has not (yet?) been as successful as SMRT measured in dollars. There also seems some consensus that Comfort is old fashioned and too conservative.

(vested)

[Nick]

CIMB raised its target price for Comfort Delgro to $1.90 with expectation of further grow locally and strategic acquisitions in the overseas market.

http://www.remisiers.org/cms_images/Comf...401111.pdf

There aren't many land transport stocks listed here (Comfort Delgro, SMRT, SBS, Vicom, CM Pacific) but they all do seem to generate good cash-flow with decent dividend history. A yield investor may choose to study them now and purchase them when their yields are a little more exciting.

Dividend Yield
Comfort Delgro: 3.2%
CM Pacific: 5.4%
SBS: 4.2%
SMRT: 4.1%
Vicom: 4.2%

It is clear that these stocks are trading at an average yield of 4%. Comfort trades at 3% yield due to its perceived ability to grow as opposed to the rest. CM Pacific is a SOE-linked toll road owner with consistent dividend payouts but due to its foreign assets, its yield is slightly higher. Unless I am mistaken, I don't think any of them are geared massively. This may change for CM Pacific which needs to finance its latest RMB 2.3 billion tollroad acquisition and Comfort Delgro may turn to debt to grow faster in the future.

(Not Vested in any land transport stock)

[Poowawa]

Comfort Delgro has a potential catalyst if the Downtown Line contract is awarded to them. My prediction is they will get it over SMRT. SMRT looks quite stretched with the East-West and Circle Line and I got a good feeling they will get it.

Downside is their exposure to the pound from their UK operations.