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An incomplete analysis of ComfortDelgro.

Friday, September 22, 2017

Retail investors have limited resources at their disposal and very rarely are able to do a thorough analysis of any business.

Time is one of those limited resources.

OK, I admit. I am lazy and I want to spend more time watching anime, K-drama and playing MMORPGs.

Bad AK! Bad AK!






Anyway, like what I have done in so many other instances in the past, I just zoom in on what I feel is the crux of the matter and try to make a decision based on what gives me peace of mind.

The biggest problem facing ComfortDelgro now is its taxi business.

Taxi business accounts for a third or so of its revenue. 


The revenue might be lower compared to its public transport arm but because it is a higher margin business than its public transport business, a loss in revenue will dis-proportionally lead to a higher loss in earnings. 

When we remember that it will also impact another segment of its business and that is the sale of diesel to its taxi fleet, the picture becomes gloomier.






However, all investments are good investments at the right price and to find the right price, we need to look at valuation.

During the Global Financial Crisis, in October 2008, ComfortDelgro traded at $1.19 a share and with full year EPS at 9.59c then, the PE ratio was 12.4x.

ComfortDelgro's 1H 2017 EPS was 7.5c. 

Annualising this gives us 15c.

So, if we should assume that things don't get worse from here, paying for a stake in ComfortDelgro at a PE ratio of 12.4x would give us a target buy price of $1.86 a share.

Of course, we are not in another Global Financial Crisis, so, paying a PE ratio of 13x could be considered a peace time bargain. This would give us a share price of $1.95 per share.






This line of thought makes sense to me but the assumption is that things don't get worse for ComfortDelgro from here.

For sure, I do not know if things would get worse from here but, just from my observation, I have an inkling that things probably would get worse before they get better. 

Grab is very aggressive and ComfortDelgro's taxi fleet size could shrink further.

How much worse would it get?

If we think that its taxi business could shrink another 20% from here (which is pretty grim) and since it is likely that ComfortDelgro would roll out some remedial measures to retain taxi drivers, we should expect profit to decline somewhat.


Given these assumptions, since its taxi business accounts for about a third of its profit we could see ComfortDelgro's EPS declining by another cent or so.






Assuming EPS declines to 14c, a crisis valuation would dictate that we are buyers only at $1.74 a share. 

If we are more sanguine about the macro environment, then, a 13x PE ratio would give us a target buy price of $1.82 a share.


When would things get better? 

Surely, I don't know.






I do know that ComfortDelgro pays out more than 50% of its earnings as dividends to shareholders. So, if EPS falls to 14c a share, a DPS of 7c is not excessive.

At $1.82 a share, that is a dividend yield of 3.85%.

At $1.74 a share, that is a dividend yield of 4.02%.

Nibbling earlier today at $1.96 a share could have been premature but it gave me an incentive to take a more detailed look at the numbers.

Read another incomplete analysis: HERE.

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