Saturday 16 September 2017

How Much is ComfortDelgro Worth?

Challenged by Grab/Uber in the taxi segment, ComforDelgro (CDG) taxi's segment has been hit hard and its taxi division has been suffering with declining profits. While others will focus heavily on CDG's Taxi business, it is worth noting CDG is quite diversified across many sectors.

So lets analysis CDG's sector by sector and try to find the valuation of the group on a whole based on its projected profits.

Public Transport Segment

Almost everyone is familiar with this segment which involves SBS Transit running bus and train operations. Due to the industry overhaul by LTA, SBS transit is moving towards an asset light structure, becoming an operator with no ownership of the assets. The profit segment is relatively stable and one can reasonably expect this segment to generate s$170 million per year.

Profit: s$170 million

Taxi Segment

This is the most contentious segment right now. While the taxi segment has been generating close to s$150 million yearly, the increasing competition from Private Hire Vehicles is pushing the fleet utilization and rental rates of CDG taxis down. To make matters worse, CDG had paid high prices for the COEs of its taxis in the recent few years. This makes its fixed cost high and it does not help that fleet's utilization rates are falling as well as rentals.

Hiring private rental cars cost about s$70/day and drivers enjoy rental rebates when driving for Grab/Uber, while renting from CDG starts from $90/day. If CDG is to reduce its rental rates by 20% to match competition, it is likely to lose all its profits. Hence, I do not expect CDG to slash its rental rates by 20% but instead 10+% to retain its profitability.

In its recent past two quarters report, CDG reporting results has shown a slow decline in taxi profits (1H: $72.3mil). In my opinion, on a long term basis, it is likely its Singapore taxi division will show the true extent of competition from Grab and Uber during its next financial year's results. I estimate CDG local taxis will make 40-45 million in profits annually, while 5-10 Million will come from its oversea taxi businesses.

Profit: s$50 million

Bus Station

A segment which I do not understand why LTA has left the assets to SBS Transit even though other assets of the public transport network has been bought. It could be a political decision to leave this cash cow in CDG's balance sheet to buffer it from competition because the segment is highly profitable (40% NPM).

Profit: s$12 million

Automotive Engineering

This segment supports vehicle maintenance and engineering for vehicles (including Comfort Cabs and SBS buses). Given that Comfort Taxis are piling the roads less often, expect a slight fall in this segment profit moving forward.

Profit: s$45 million 

Inspection & Testing

This segment relates mainly to analysis on Vicom's profitability. Given that Cars in the 8 to 10 years age range is now declining on Singapore's Road, this reduces the number of vehicle inspections overall and thus it is unlikely for Vicom to replicate its profit highs; a slight decline is expected.

Profit: s$30 million

Other Segments

Its Car rental is facing some competition and expect profits to decline, however given the monopoly CDG has in driving schools in Singapore and better reputation in China, CDG is able to command a premium (and force Singapore Driving Students to pay a sky high fee)

Profit: s$20 million

Total Profits before Taxes and Non Controlling Interest (Financial income is netted off Finance Expense)

Based on the above, CDG's new profits should be s$327 million. If we were to adjust for estimated Tax Expense of s$62 mil and non controlling interest of s$61 mil, the overall net profit attributable to CDG's shareholders is s$204 million annually over the next 5 to 7 years. This is because of the high fixed cost structure of its taxi business due to the high bidding for COE prices.

Are Current Valuations justified?

Based on its current market capitalization of s$5 billion, the expected P/E is 25 times. In my opinion, the current valuation is too optimistic and CDG should be valued lower. Based on its past price earnings ratio in the region of 16 times, we should expect CDG to be valued at s$1.36 share price or s$3.3 billion market capitalization. 

It is possible that Mr. Market is predicting the government may step in to protect Comfort Taxi and the rest, which means CDG's taxi business may not decline from s$150 million to s$50 million, but instead to s$100 mil profit level. This will make current valuations of CDG justifiable.

Assuming CDG's Taxi Business is not Profitable

In fact, my above analysis assumes that CDG's taxi business in Singapore remains profitable despite competition from Uber, Grab and Private Hire companies. If one had been utterly pessimistic and think that CDG's taxi business will break even (not even assuming loss making like Grab), the fair valuation of CDG has to be reduced by a further 20% to a price of s$1.10.

This is because Grab and Uber have been making losses and burning cash in their business. Furthermore, Grab has recently raised another round of funding from international investors, thus being able to up the ante against CDG.

As an investor seeking a margin of Safety, I may peg myself to the more pessimistic scenario before considering buying a stake in CDG.

<The author has no vested nor shorted interest in CDG> 

Thursday 7 September 2017

Portfolio Update- Divestments and Seeking New Gems in a "Fairly Valued" Market

It has been a while since the last update of my stock portfolio. Th main reason is because I have made a few transactions over the months.

Penguin Holdings – Sold all remaining 25,000 shares. This brought to the end of my infatuation with Penguin believing it was then riding on the oil boom in 2014 and being a low leverage company
Ezion - Sold 24,000 shares at 0.26 however my CPF portion was not sold and now I have to await the debt talks before deciding. The irony is that I had sold off my Ezion shares via CPF at 0.26 and bought it back at 0.22 as I sensed a trading opportunity (should have sold off and not bought back)
Silverlake Axis- Sold off at 0.620 before ex-dividends. This is because I believe the company is now fully valued and cash flow ability seems not to be as strong as before.
BBR holdings- Did a short term buy because BBR has been continuously doing share buybacks. Bought at 0.22, sold at 0.23
Ellipsiz- Sold it off today at 0.75

Over the past months, I had added on to FSL because of my belief that the fleet’s liquidation value, nett of debt, is above its market price of 7 cents plus. This were at various price points ranging from 7.5 cents to 8.2 cents. I do think there is value in the trust and I await the verdict to see if they have successfully rolled over their debts or otherwise.

Still Seeking Gems
With the various divestment, my cash holding is now at a 37% level. Paring down of my FSL stake is expected especially if share prices move above 10 cents. This is because the concentration risk is getting too high; becoming a binary bet.
I have tried looking for value in other companies. However, none of their free cash flow yield relative to current share price are at attractive levels. The two in my monitoring now are CSE Global and Sarine Tech. Other than that, I am currently finding little value in Singapore’s market.

Monday 4 September 2017

Saving $100,000 by 31

“How do I start to reach my financial goals?”

“What must I invest in?”

These are questions often asked as newcomers to the workforce embark on their goal to start saving for retirement. And the first steps to it is saving with a certain figure in mind. So how can one achieve this first financial milestone of saving, say their first $100,000? While many would think the ability to invest smartly is required to achieve this goal, the truth could not be any further.

Its more about Saving Habits than Smart Investing
In my view, if you have the goal of saving $100,000 before the age of 35 (or preferably 31), achieving your milestone depends more on how much you save than the ability to invest for wonderful returns.

Let’s use the example of “Ben” to illustrate. Following the path of most university graduates, Ben graduates and enters the workforce at the age of 25. There he attains a job with a monthly salary of $3,000 (After CPF: $2,400). Ben expects an annual 5% increment during the early stages of his career and intends to save a full 1 month of his bonus annually. In addition, being a new investor, Ben expects to invest in “safer” stocks which will yield him an annual investment returns of 4%.

Under $1,000 Monthly Expenses
As mentioned, Ben intends to keep his personal monthly expenditure to under $1,000 or about 40% of his take home pay. This is how his monthly expenditure will look like. Do note that while the insurance expense is low at $45, this is because term coverage of $200,000 and hospitalization insurance is utilized.

All in all, Table 2 shows how much Ben will save monthly. At the start of his working life, he is saving only about 30% of his monthly take home pay.
Table 2: Saving Table at age 26 & 30

Based on the calculations, Ben will save
$100,000 when he is 31 years old.

Analysis of how Ben achieved his $100,000
Based on Table 3, a significant portion of the $100,000 was due to Ben’s savings. In fact, only $8,910 was a result of his investment returns. To summarise, 91% of Ben’s financial milestone was due to his efforts of keeping monthly expenses low (below $1,000); enabling him to save 30-40% of his take home pay.

What if Ben had been Given Wrong Financial Advice or Spent More?
Let’s put additional thoughts to the above example. How would Ben’s milestone of $100,000 be affected if instead of spending $990 monthly, Ben spends $1,340 monthly. The reasons can vary such as instead of being advised to take Term insurance, Ben was offered Whole Life insurance (which will cost him $350 more monthly for the same coverage) or Ben simply decides to spend $350 more to pamper himself.

From a spending ratio of 30-40% of his take home pay, Ben’s spending ratio has now increased to the 43-55% range. Correspondingly, this will affect his savings ratio (a decline from an average of 39% to 26%).
Table 4: Saving Amount at reduced Saving Ratio

At age 31, Ben will only be able to save $73,991. Hence, just a decision to 'spend more' or 'an advice to choose Whole Life instead of Term' sets him back a difference of $26,000. Ben has been delayed by approximately 2 years in achieving his financial milestone of $100,000.

To summarise, the financial milestone of $100,000 depends greatly on what you spend and the amount you save. From Table 3, it shows just how little investment returns contributes. It is only if we take a longer term horizon, will the compounding of investment returns be substantial to contribute to our wealth building. However, for our investment returns to be significant, we need to build a large capital base and this boils down to an individual’s spending and savings habit.

Lastly, some individuals (particularly insurance agents) will dispute the later part of this post where I have “expense” the differential where Whole Life insurance is involved. It is worth noting for individuals who purchase such policy, they will never get to see their maturity sum, hence such a sum/differential should never count towards their retirement fund. Suggestions such as surrendering the policy when they are older (i.e. age 65) may then be offered; however, such a surrender comes at a penalty, and it reduces the returns of whole life insurance to the region of 2-3% per annum. If that is the case, investing the differential on your own is a much better option.