|On 11 Jan, ComfortDelgro (CD) closed at $1.21, the lowest close since 31 Oct 2008. The next day, to the horror of CD’s shareholders, it broke $1.21 with volume expansion and closed at $1.18. At the time of this write-up, CD closed today at $1.14, the lowest close last seen on 29 Oct 2008.
Will CD fall more? Is CD’s current situation worse than that of pandemic where gloom and uncertainty were prevalent at that time?
Or will this be a comfortable trade at current level?
|Possible reasons to be bullish|
A) Still a recovery play
CD with its operations in Australia, China, Singapore, UK etc. should gradually benefit as economies re-open.
China’s abrupt easing of its Covid measures will likely facilitate more commuting and travelling in China and outside China.
Based on Bloomberg, the consensus from analysts is for CD to post a year-on year (“y-o-y”) net profit growth of 30% in FY22F; 16% in FY23F; 7% in FY24F. Thus, suffice to say that CD is still a recovery play and is likely to post year on year profit growth.
The same cannot be said for some companies as they may report a y-o-y drop in net profit in FY23F especially if their FY22F is an exceptional year.
B) Valuations are incredibly low; 2.0x standard deviations below its average 10Y P/BV
Based on Bloomberg, CD trades at 2.0x standard deviations below its average 10Y P/BV of 1.9x.
With net profit expected to rise in FY22F, FY23F and FY24F (see point A above), it does not seem justifiable to trade at such depressed valuations.
C) Net cash $647m; easily can finance M&A & 5-6% dividend yields
Based on some of the analyst reports which I have read, CD's balance sheet has emerged stronger after the pandemic. CD has net cash amounting to $647m in 3QFY22 vs $520m in 4QFY21. In other words, 26% of market cap is backed by net cash.
Such a strong balance sheet should be able to support its dividends and any acquisitions. Furthermore, generally speaking, in a rising interest rate environment, having net cash is better than being in debt.
D) 14-year low price since 29 Oct 2008
During the height of the pandemic, CD traded to a low of around $1.30 – 1.31. At that time, the economy and human traffic come to an almost standstill and plagued with uncertainties on how the pandemic will pan out.
It is difficult to see how its operations can be worse now compared to the pandemic. Granted that analysts have cut their profit estimates for CD, the consensus net profit still expects CD to post a 30% rise in FY22F; 16% in FY23F; 8% in FY24F.
E) Total potential upside is around 43% if the consensus is right
Based on Bloomberg, average analyst target price is $1.56; FY23F estimated div yield is at 6.0%. If the consensus is right, CD presents a total potential return of around 43%.
|Risks to be cautious of|
A) Overseas operations may face headwinds from competition, narrowing margins + forex risks
Based on Maybank 15 Nov 2022 report, overseas operations were below expectations due to forex effects; inflationary cost pressures; driver shortage and the timing mismatch to pass on the higher costs (public bus services fees see indexation from wage and CPI on an annual basis).
B) Risk of catching a falling knife
Notwithstanding CD’s attractive valuations, stocks can always go lower. This is why some market watchers advise against catching a stock which is falling. Catching a stock which is free-falling is especially dangerous for small mid cap stocks.
Personally, for large cap stocks, this risk is slightly less as it is usually widely covered by analysts and there should theoretically be less blind spots. Nevertheless, I hasten to add that this depends on one’s strategy and risk profile.
Based on my observation of price action and chart, there seems to be buying interest around $1.14.
|There is a possibility that the constant strikes in UK may have an effect on CD’s UK operations. Based on Sky News, 70,000 members of the University and College Union (UCU) will join civil servants, teachers and train drivers etc. on 1 Feb 2023 for strikes.|
C) Risk of economy closure should there be another pandemic
If there are lockdowns again, CD’s business operations will be adversely affected.
D) UK operations – constant strikes may affect CD’s UK operations
There is a possibility that the constant strikes in UK may have an effect on CD’s UK operations (click HERE ). Based on Sky News, 70,000 members of the University and College Union (UCU) will join civil servants, teachers and train drivers etc. on 1 Feb 2023 for strikes.
I do not know whether such strikes will have any material effect on CD’s UK operations. However, at the very least, it does not aid investor sentiment in CD.
E) AirAsia plans to expand the ride-hailing service to Singapore by June this year
Based on an article in CNA (click HERE ), AirAsia through Capital A plans to launch its ride-hailing service to Singapore by June this year. Investors may be worried on the potential competition which is a valid concern. I personally feel with the experience of dealing with competition from Grab, CD is likely to be better positioned this time.
F) Large volume sell offs may be a result of a change in positioning by the institutions
Since 11 Jan, CD has traded in excess of 8m of shares per day. Such large volume transactions may be a result of a change in positioning by the institutions. If this is really the case, we do not know how many shares they are prepared to sell at current 14 year low prices.
G) May have other reasons which caused this fall
There may be reasons known to some people in the market but unknown to me which cause CD’s share price to decline on large volumes.
It is noteworthy that there are risks involved such as the aforementioned risks (e.g. potential competition from AirAsia, headwinds facing its overseas operations etc.).
Nevertheless, CD at 14-year low price; valuations trading at 2 standard deviations below its 10Y average P/BV; net cash and 6.0% FY23F estimated dividend yield, I am comfortable to take some risks in accumulating CD for a trading play.
For a more complete picture, it is advisable to refer to CD’s analyst reports (Click HERE ); SGX website (Click HERE ) and CD’s corporate website (Click HERE ).
Readers have to assess their own % invested, risk profile, investment horizon and make your own informed decisions. Everybody is different hence you need to understand and assess yourself. The above is for general information only. For specific advice catering to your specific situation, do consult your financial advisor or
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P.S: With reference to my earlier write-up (click HERE ), I have previously taken profit when CD traded $1.34- 1.38 just before it released 3QFY22 results. I have bought back CD for the past few days for a potential trading play.
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