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ComfortDelGro Plummets to New Low: What Is Happening?

SG, Stocks

Written by:

Zhi Rong Tan

Comfortdelgro is a land transport company based in Singapore that operates buses, trains, and taxis. The company presently boasts a diverse portfolio of businesses and operates in a number of countries, including Singapore, China, the United Kingdom, and Australia.

In Singapore, which is its primary market, ComfortDelGro operates one of the largest fleets of buses and taxis while also providing a variety of transportation-related services such as vehicle maintenance, engineering, driving centers, and inspection services. Through its subsidiary, SBS Transit, the business also operates Singapore’s Light Rail Transit (LRT) system.

ComfortDelGro, like many other transport companies, was severely impacted by Covid 19. The pandemic has resulted in widespread travel restrictions and a decline in customer demand for transportation services, both of which have negatively impacted the company’s financial performance.

With the economy improving, notably in Singapore, it would have made sense for its share price to recover. However, why is the company setting a new low two years after reopening?

Lack of faith in the company’s direction

The most recent 5% decline in its share price came on 11 January, when ComfortDelGro announced a S$5.4 million investment in Ottopia, an Israeli software firm located in Tel Aviv that develops teleoperation software for autonomous vehicles.

This technology is said to be one-of-a-kind in its capacity to remotely assist, steer, and control fleets of self-driving cars. Its software, which has been tested and implemented in a number of situations, may be incorporated into the Group’s future AV Operations Centre, making it a critical instrument for AV technology adoption in smart urban mobility.

While investors may have been disappointed by the announcement, this newest investment is actually part of ComfortDelgro’s strategic plan to future-proof the firm by focusing on smart urban transportation, fleet electrification, and automotive engineering technology.

This is largely accomplished through the use of a US$100 million venture capital fund established by the company in 2018 to invest in technology businesses that complement its land transportation business.

Other investments made with this fund include:

  • A S$30 million Autonomous Vehicle Centre of Excellence facility to focus on AV-related research and development.
  • Foretellix, which is another Israel-based business specializing in autonomous car safety testing and compliance technologies.
  • Haulio, a container trucking technology company incubated by PSA International’s corporate venture capital arm, PSA unboXed.
  • SWAT, a shared mobility technology company in Singapore that routes vehicles optimally to offer the highest utilisation rates and service levels.

As indicated by the management, this fund is handled independently from ComfortDelGro’s core business, with its own decision-making, approval, and funding processes.

If it is the case, any investment is unlikely to influence core operating decisions and dividend policy, which some may be concerned about.

Whatever it is though, ComfortDelgro would ultimately bear the consequences of a bad investment since they are vested in the fund, which is perhaps why the share price has reacted to the investment.

Of course, this is not the only event that caused ComfortDelgro’s stock price to drop. In truth, structural changes and the broader environment may be the bigger concern.

Poor performance

This problem could be seen if we go back to 14 November, which coincided with a 10% dip in ComfortDelGro’s share price. On this date, the company announced its 3Q2022 business report, and well, shareholders were not pleased.

Revenue for the comparable quarter and year to date increased by 10.1% and 7.9%, respectively, according to its latest results.

This growth came as a result of the border’s reopening, which benefitted all of its categories (public transportation, taxi, automotive engineering service, car rental & leasing, and driving center).

After accounting for operating costs as well as a reduction in government aid, the company actually had quite a decent improvement on a same quarter basis and year to date, with its profit increasing by 45.9% and 34%, respectively.

So far, the numbers look fine, right? I was wondering what was wrong with the company after the first few presentation slides. It wasn’t until I got to the last few slides that I realized there was a problem.

For starters, the company’s income and earnings have not recovered to pre-pandemic levels even after two years of operation.

Public Transportation division is struggling.

Then there’s the deteriorating operational performance of its public transportation services.

The public transportation sector accounts for the majority of the company’s revenue. Almost 80%.

While most public bus schedules in all cities across the world have returned to full service, revenues in this sector have been dropping.

Looking at the highlighted row, which shows the company’s operating profit excluding any government relief or net gain, the public transportation segment has experienced a significant reduction. Almost half of the preceding quarter.

This was less obvious previously because the improvement in the taxi sector had masked the losses in this category.

This drop comes as the company faces an increase in operational costs due to inflationary pressures that have increased energy prices, gasoline and power expenses, and wage, as well as a shortage of drivers.

On the revenue front, while things are looking positive for the time being, this may not last. This comes as new contracts are being signed with lower margins, probably due to increased competition. Furthermore, looking ahead, the company claimed that the margin decline is expected to extend through early 2023.

Slower than expected recovery in the taxi business

Another issue would be the taxi business. While this sector had recovered pretty nicely by 2022, growing competitions have and will continue to pose a threat to ComfortDelGro’s second largest contributor.

ComfortDelgro’s taxi fleet has steadily declined over the years, and this trend is likely to continue as commuters become more accustomed to ride-hailing services like Grab and Gojek (Or maybe Air Asia Ride soon which is planning to launch in Singapore by June). Aside from that, work-from-home rules are likely to persist, with more employers giving partial work-from-home days, reducing anchor weekday transportation demand.

In the short run, ComfortDelGro’s extension of the 15% daily rental waiver for Singapore taxi drivers until 31 March has dampened investors’ hopes that it will be phased out by the end of 2022. While this is a noble cause to help drivers cope with increased living costs, it is perceived as a burden by investors who bear the brunt of the cost.

Will things get better?

With diminishing profits in its public transportation segment and a slower-than-expected recovery in its taxi segment, we can see why ComfortDelGro is underperforming.

Nonetheless, there is some good news to share. The first would be China’s reopening, which not only meant better operating results out of China, but with more travelers, ComfortDelGro’s business worldwide may benefit as Chinese tourists begin to travel.

Should the stock market improves in 2023, the previously planned Australia IPO of its Australian firm may also be back on the table, allowing the company to unlock the value of its assets.

Aside from that, we do see the company actively pursuing opportunities outside of Singapore. One such example is a tender win to operate the Auckland Rail Network in New Zealand, marking the company’s first debut in the country.

Of course, these are massive capital investments, but with the company’s strong balance sheet, such ongoing investment, if executed correctly, might drive the company to new heights. It will not be simple, but if it does not take some risk, it will not survive; therefore, investors in these companies must have faith that such investments will pay off; otherwise, it is best to avoid investing in it.

Conclusion

Overall, ComfortDelGro, which was once hailed as a blue chip stock and was previously a component of the Strait Times Index, had taken a beating in recent years due to the emergence of new players as well as structural changes caused by the pandemic.

As a result, its share price has been severely hammered, and on a price-to-book and price-to-sales multiple basis, ComfortDelGro seems undervalued compared to its pre-pandemic level.

Nevertheless, given the changing climate and ever-increasing competition, can we continue to use historical multiples as a gauge? Will the year 2023 be better for ComfortDelGro?

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