How I Decided To Take A Look At This Company

I already have my Indonesian Driving License from around 4 years back and I wanted to convert it to Singapore Driving License.

Little did I know that It is not that simple- One of the criteria for conversion is that I have to attain my permanent residency AFTER I received my Indonesian license. That disqualified me from conversion because I attained my Singapore permanent residency when I was back in primary school.

It turned out I have to go to the standard route to attain their Singapore driving license. Thank god I passed my Basic Theory Test (BTT) and with a bit of luck, I recently just passed my Final Theory Test (FTT).

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I was queuing to use the toilet at ComfortDelGro Driving center in Ubi when I realized that there are a lot of people here! Even the male toilet is crowded with students.

Two questions popped into my mind; “If they are always so crowded with students, does that mean that they are profitable? “What is their competitive advantage besides being one of the three places where people go to get their driving license ?”

I have never done any analysis on ComfortDelGro before- although I know that they are listed on Singapore Stock Exchange (SGX) – So I thought why not?

Comfort Delgro Logo www.christopherleesusanto.com

Comfort DelGro Logo

Picture source: Google

What I Think Of ComfortDelGro

What businesses come to your mind when you think of ComfortDelGro? In my mind, it has to be the blue color taxi which I always prefer to take and also the driving center at which I am taking my driving test at.

In reality, they own more businesses than that.

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What ComfortDelGro Really Is

ComfortDelGro Corporation Limited (SGX: C52.SI) was founded in 2003 and it is essentially an investment holding company that operates as a passenger land transportation company. They provide:

  • Public bus and charter bus services
  • Rail services
  • Motor vehicle evaluation
  • Public taxi services
  • Car rental
  • Car care
  • Outdoor advertising
  • Vehicle inspection services (They have a 67.07% stake in Vicom Ltd (SGX: V01))
  • Consultancy
  • Crash repair services
  • Driving schools
  • Workshops for repairing, servicing and maintenance of motor vehicles

As of February 11, 2015, the company operated a fleet of approximately 46,300 buses, taxis, and rental vehicles in Singapore, the United Kingdom, Ireland, Australia, China, Vietnam, and Malaysia.

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Focus Of My Initial Analysis

I would like to focus my initial analysis on the earnings power of this company and conclude it with my valuation (only if they passed my initial earnings test).

Earnings Power

Income Statement Past 5 Years Comfort DelGro www.christopherleesusanto.com

Income Statement For The Past 5 Years For Comfort DelGro

Picture source: SGX Website

The above chart shows three things and I am going to dissect it one by one:

Revenue

Revenue (gray bars) has been consistently increasing over the past 5 years but is it the company really profitable? We will have to take a look at their gross profit and net income.

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Gross Profit and Net Income

Gross profits (blue bars) are calculated by deducting the cost of goods sold from revenue.

Net income (yellow bars) is the net earnings of a company after deducting depreciation, interest, taxes and other expenses from the gross profit.

You can see that both the gross profit and net income has been rising consistently over the past 5 years (in line with the revenue).

Linkage Between The Three Metrics by Taking a Look at The 2015 Numbers

In 2015, ComfortDelGro earned a total revenue of $4,111.5 million (m) and has a cost of goods sold of approximately $2,919.3 m which resulted in gross profit of $1,192.2 m.

The depreciation, interest, taxes and other expenses of ComfortDelGro for 2015 is $891 m and after deducting from gross profit of $1,192.2 m, it resulted in net earnings/income of $301.9 m.

From taking a look at its revenue, gross profit, and net income, we can see that Comfort profitability seemed to be really good over the past 5 years- Then it leads me to ask two other follow up questions: 

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1. How Do the Earnings Translate Into Shareholder’s Profitability?

Comfort DelGro EPS www.christopherleesusanto.com

Comfort DelGro Earnings Per Share

Picture source: SGX website

To know if the company’s earnings really result in the shareholders (owners of ComfortDelGro shares) being profitable, we will have to take a look at their earnings per share– which is calculated by taking the net income divided by the total number of outstanding shares owned by shareholders.

As you can see from the above chart, their earnings per share have been consistently going up over the past 5 years and yes, this is a wonderful sign of profitability- from the point of view of being ComfortDelGro’s shareholders.

This is an important metric because a company may have increasing net income but if they consistently issue new shares to the public, the earnings per share will decrease (thus not in line with the increasing earnings).

2. Is Money Really Coming Into The Company?

Comfort Delgro Free Cash Flow www.christopherleesusanto.com

Comfort DelGro Net Cash Flows

Picture source: SGX website

There are many companies in the stock market that show a high amount of revenues and net income but in reality, they are not profitable. Why is that so?

The above chart shows the net cash position that is coming into the company by deducting investing and financing expenses from operating expenses.

A negative net cash basically means that cash is coming out of the company while a positive net cash means that cash is coming into the company.

While Comfort DelGro has a strong operating cash flow coming into the company, their expenses resulted from maintaining their consistently high capital expenditures do not equate to them being a profitable company. This is because after receiving operating cash flows, they are spending equally as much if not more for investing and financing activities. This is the case for three out of the past five years.

This is not a good sign because positive and high net cash flow is the fuel that allows companies to expand without relying too much on borrowings and issuing additional capital.

When we think about it from a layman point of view, it seemed logical enough- for a company like ComfortDelGro, they would need to regularly spend a lot of money to purchase new vehicles, premises, and equipment etc.

At the same time, they have increased the dividends paid consistently for the past years- even with the gross margins decreasing from 30% in 2011 to 28% in 2015, I still believe that they will be able to consistently pay up dividends- but truth be told, this is not your typical company that will generate a high amount of net cash flows. 

Conclusion

With them not passing my personal initial- albeit brief earnings power test, I shall not go on to doing the valuation of this company- because moving forward, this is not the kind of company I am looking to allocate my capital in.

I would prefer to allocate my capital in companies that have:

  1. A huge competitive advantage
  2. High and sustainable gross margins (of at least 40%)
  3. Be able to generate a positive amount of net cash flows consistently

To be fair, I do know that short-term negative net cash flow is not always a bad thing– for example, if Comfort DelGro needs to spend cash to build a new driving center, the investment will pay off as long as the new driving center will eventually generate more cash that it cost to build.

However, i would rather go with the advice by Warren Buffett that says, “Buy the stock of the company where even a fool can run it, because eventually one will.”

That means that I would prefer to allocate my capital into companies that have low capital expenditures and is able to generate consistently high cash return on invested capital.

On the other hand, a company called Vicom Ltd (SGX: V01), that is majority owned by ComfortDelgro, has positive net cash flows for the past five years- that might be a better company to look deeper into.

Vicom Net Cash Flows www.christopherleesusanto.com

If you are wondering why am I being so strict about a company in having a high amount of net cash flows, do take a look at my investment philosophy  which is as a result of me making mistakes buying some company stocks in the past).

Revision to this post (Dated 31 March 2016)

After looking through my initial analysis on this stock and hearing some feedback, I rethink-ed my analysis. I have to admit I overlooked certain key things.

First of all, Comfort could be a potential stock that I would buy in the future- contrary to my earlier analysis. Because from a shareholder point of view, they are of a stable and profitable nature of a company. This can be seen from their consistently rising earnings per share and stable operating cash flows for the past five years.

Second, my initial flaw was that I thought of negative net cash flows as a horrible thing. However, in supporting the stable nature of their business, huge capital expenditures are mandatory. They are also treating their shareholders well by not missing out paying out dividends.

Last but not least, they have synergy in their wide range of business. It starts from car rental to car servicing and providing daily public necessities in terms of public transport. All these are the business of a stable nature. A business that has stable cash flows with good debt management can be a good dividend stock.

Having said that, their competitive advantage is in jeopardy with the rise in Uber and Grab Car alike. It is evident in their decreasing gross margins.

This is not an easy business to run (might not be the best one to buy too). But when the price is right, I might consider this stock- for its dividends.


Bonus: If you want me to do a quick look at any company in Singapore or United States Stock Exchanges, feel free to contact me.

Read also: #FAQ What Is Value Investing?

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. I have no plans to initiate a position on this stock over the next 72 hours.

Important: Please read my disclaimer.

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. 

Disclaimer: The information provided is for general information purposes only and is not intended to be a personalised investment or financial advice.

Important: Please read my full disclaimer.

Further Reading:

Do You Know What Is Private Equity?

GameStop Corp (NYSE: GME)– A Cigar Butt Investing Play

CHRIS LEE SUSANTO

CHRIS LEE SUSANTO

Founder

Hi, my name is Chris and I am the founder of Re-ThinkWealth. A blog that focuses on personal finance self-improvement, investments, and investor psychology.

Since early 2015, I manage money for my family and invests it in Singapore and United States equities and options achieving above market return.

I use Value Investing and Options Selling strategies used by Warren Buffett (World’s richest investor) coupled with the core theory of inversion. Inversion meaning that in every investing idea, we have to scrutinise on why it would fail.

This will result in us being more conservative, and being conservative is the key to protecting and growing wealth in the long run.

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