Private hire service Grab’s recent announcement to acquire Uber’s operations in Southeast Asia has brought our attention to the local land transport operator ComfortDelGro Corporation (CDG) once again. Amidst disruptions and challenges posed by private ride-hailing apps, CDG’s share price has plunged more than 30.6 percent from its high of $3.24 within the last three years. Furthermore, the share price is expected to continue to be range bound until greater clarity is seen with respect to how the deal may turn out.
Meanwhile, SBS Transit (SBS), the only other transport operator listed on the Singapore Exchange saw its share price rally 41.9 percent over the same period from $1.825 in June 2015. While SBS clearly generated a much superior return for shareholders in the last few years as compared to CDG, SI Research shares the reasons for our preference to park our investment monies in the latter instead.
Diversified And A Global Outlook
SBS, being the market leader of Singapore public bus services with a market share of around 62 percent, currently operates eight bus packages under the Negotiated Contracts with the implementation of the Bus Contracting Model (BCM). In all, the group operates a total of 208 bus routes running a fleet size of around 3,246 buses. Meanwhile, the group also owns 36 percent of the market share of Singapore’s rail services managing the Downtown Line, North East Line as well as the Sengkang-Punggol Light Rail Transit with a total rail distance of 82 kilometers.
SBS operates solely in Singapore and its public transport services segment accounted for 95.3 percent of the group’s FY17 revenue. The remaining 4.7 percent came from the group’s other commercial services which comprises advertising revenue and income from the rental of its commercial shop spaces.
Apart from public transport services (bus and rail), CDG also has a wide variety of other business interests in Singapore including taxi, engineering, vehicle testing and non-vehicle testing services, car rental, driving education, advertising and insurance broking. Nevertheless, public transport services and taxi segments together remained a large part of the group’s top line contributing a combined 90.7 percent of its FY17 revenue.
While the Singapore market contributed 62.5 percent to the group’s revenue, CDG still has a presence in six other overseas countries namely the UK, Australia, China, Ireland, Vietnam and Malaysia in order of size. It is noteworthy that the group assumed the second place among large scheduled bus operators in London operating 97 routes under the trade name of Metroline, claimed the title of being the leading private bus operators in Sydney and Melbourne, as well as being one of the leading taxi operators in major cities of China owning 10,691 taxi licences in 2017.
Source: Company Annual Reports
Recently, CDG announced the acquisition of National Patient Transport, one of Australia’s largest private providers of non-emergency patient transport services, as well as Tullamarine Bus Lines which operates seven metropolitan bus routes in the north-west of Metropolitan Melbourne. We saw these as testaments to the group’s ambitious strategy to strengthen on its existing operations and core capabilities, while at the same time expanding into related markets for future growth.
Higher Dividend Yield
2017 marked the first full year that SBS operated under the BCM, under which all bus infrastructure and assets such as depots and buses would be owned by the Land Transport Authority (LTA) while the group acted as the operator receiving a fixed sum for their services. Likewise following the transition to the New Rail Financing Framework (NRFF) with effect from April 2018 when LTA will take ownership of all operating assets, leaving SBS as the operator which just needs to focus on providing reliable and well-maintained rail services to commuters. These would transform SBS’s business model into one that is asset-light, requiring lower capital expenditure (CAPEX) and hence stronger cash flows, as well as a more stable and consistent income.
In fact, SBS declared a total dividend of $0.076 per share in FY17 which jumped 50.5 percent from last year’s payout. The healthy dividend payout of 50.2 percent coupled with lower CAPEX requirements suggests that there could be room for further dividend growth. However based on its high closing price of $2.59 as at 27 April 2018, SBS’s current yield merely stood at around 2.9 percent.
Similarly as a beneficiary of BCM and NRFF, CDG also saw its FY17 CAPEX of $393.6 million dropping 15.6 percent from FY16’ figures, which itself was 30.3 percent lower than in FY15. Besides, the group’s balance sheet continued to be strong in a net cash position of $273.9 million.
CDG’s FY17 dividends inched up one percent to $0.104 per share which represented a healthy and sustainable payout ratio of 74.6 percent of its profitability. Over the last five years, dividends increased consistently every year and grew at a compounded annual growth rate of 10.4 percent from $0.07 in 2013. Barring any drastic deterioration of its bottom-line, we are confident that CDG will continue to sustain the payment reinforced by the fact that management had raised the payout last year despite a weaker set of financial results.
Against CDG’s last done price at $2.25 as at 27 April 2018, this translated to a yield of 4.6 percent which is significantly greater than SBS’s yield by over 58.6 percent. Although both SBS and CDG qualify as desirable income stocks with proven track records of growing dividends, we find their variance in yield too big of a difference to ignore and hence regard the latter as more attractive.
SBS is now trading in a region closer to its 52-week high of $2.77. On the other hand, precisely because of the pull-back brought about by the negative sentiments around CDG, the market is now offering investors a chance to accumulate it at an appealing price near its 52-week low of $1.90. In terms of valuation, CDG is comparable or beats SBS’s numbers including price-to-earnings ratio, price-to-book ratio and yield. Furthermore, CDG is also considered to be more efficient in generating profit with a higher return-of-equity ratio at 11.8 percent.
Source: Singapore Exchange, updated 27 April 2018
While we acknowledged that SBS made for a quality dividend stock with a number of desirable traits, its price is slightly too steep now for our liking. In comparison, we favour CDG in light of its diversified business and global outlook, higher yield as well as a more attractive price and valuations. Nonetheless, it is worthy to point out that CDG still owns 74.6 percent of SBS. Should SBS perform, CDG is likely going to do well too.