COMFORTDELGRO PART 2: VALUING ITS TAXI BUSINESS

This post is a continuation from my article on ComfortDelGro's valuation yesterday.

Previous article: ComfortDelGro: A safe entry price?

In my previous article, I had arrived at a valuation for CDG's taxi business segment, using its net asset value. As some users on InvestingNote have pointed out, using CDG's net asset value may not be the most appropriate valuation method, as the vehicles may not be liquidated at book value.


Based on the feedback, I've revised my calculations, to take into account the projected fall in taxi fleet numbers, revenue, profit margins and earnings.


Valuation of Taxi Segment



Here's how I arrived at my updated valuation for CDG's taxi business, along with some key assumptions:


Source: LTA website

As per LTA statistics, the CDG's taxi fleet numbers have been steadily declining month-on-month for the past year. In July 2016, CDG had 17,044 taxis, and one year later, this figure dropped to 15,472 as of July 2017 - a 9.22% fall. This statistic corresponds with the fall in taxi revenue for CDG, which fell 8.3% year-on-year from $673.9 million in 1H 2016 to $618.5 million for 1H 2017.

For FY 2016, the total revenue for the taxi segment was $1,340.8 million. Since we expect the taxi revenue to fall by 8.3%, our pro forma revenue for FY 2017 would be $1,340.8 x 91.7% = $1,229.5 million.


Figures obtained from CDG's Q2 financial report

I calculated the net profit margins for both 1H 2016 and 1H 2017 using net profit excluding investment income, as the investment income had artificially boosted 1H 2017's earnings. For example, operating profit fell but net profit rose due to one-off gains from investment income. I also assumed that the effect of finance costs and taxes were proportionately split among the various business segments, therefore the taxi segment contributed the same percentage for both revenue and net profit.

Using this projected revenue for FY 2017, I came up with a range of scenarios, with varying severity for the decline in revenue and net profit margins. 


Net profit from taxi segment, based on FY 2017 pro forma revenue of $1229.5 million

Taking the median value from the table above, I arrive at a projected net profit of $73.16 million for FY 2018. This gives us an earnings per share of 73.16 / 2,162.8 = $0.03383. Applying a minimum P/E ratio of 10x, which was CDG's lowest P/E ratio during the Global Financial Crisis in 2009, and a maximum P/E ratio of 14, the current P/E for CDG's shares, we get a valuation of between $0.338 and $0.474 per share for CDG's taxi business. For some perspective, the net asset value for the taxi business is $0.468 per share.

In my previous article, I valued CDG's remaining business segments at $1.339, using a P/E ratio of 14. Therefore, based on my calculations, the fair value for CDG's shares should be between $1.68 and $1.81.


Factors that may affect my Valuation


CDG is still in talks regarding a partnership with Uber, and a mutually beneficial deal could potentially reverse the fall in revenue for the taxi segment.

Another possible catalyst would be if the regulators decide to impose more restrictions on the private hire companies, to level the playing field. However, an outcome similar to London suspending Uber's license may be a double-edged sword, at that would mean no partnership, and CDG would have to face Grab alone, the stronger of the two private hire companies. 


My opinion of the competitors


I've seen comments about how Grab's current practice of burning cash would be unsustainable, but we should note that they have just raised $2.7 billion from SoftBank and Didi Chuxing in July this year. 

(http://www.channelnewsasia.com/news/technology/grab-attracts-s-2-7b-in-investments-from-didi-chuxing-softbank-9057314)

By some estimates, Grab is burning between $500k and $1 million daily, but even if this goes on, it could be sustained for years. I don't expect this price war to end anytime soon.

Fundamentally, there is no difference in the service quality provided by CDG and Grab - we've all experienced our fair share of rude or reckless cabbies and private hire drivers. The only difference is in price, and CDG has to revise its pricing to attract customers. This would definitely impact earnings in the near term.

Note: As of writing, I do not have a long or short position in ComfortDelGro.


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2 comments:

  1. Hi while Revenue for this FY will not be adversely affected. One has to think about future profits.

    In the past CDG was charging cabbies $120/day rental (in FY 16), CDG only started reducing rates in Q2FY17 to $100+/day (FY 17). However, this is still far away from how much PHV are charging ($60/day). IMO, there is a high chance Comfort will further reduce its rental rates, we are looking at a high probability of a 30% fall in revenue.

    The effect of a full financial year of lower revenue and declining fleet will take its profits far down. I did a coverage of this in my blog previously and my expectation is only a 50mil full year profits(unless govt moves in to protect cabbies)

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    Replies
    1. Hi Choon Yuan,

      Thank you for visiting my blog!

      In my calculations, I have projected a 8.3% fall in revenue for FY 2017. I believe your estimation of $50 million in profits form the taxi segment in FY 2018 would be closer to my projection of a more bearish scenario.

      From my second table in this post, assuming a decline in profit margins to 6%, and a 20% fall in revenue, I estimated that the net profit would be around $59 million.

      Cheers!

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