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Tug-Of-Fools: ComfortDelGro Corporation Limited – The Bear Argument

My name is Stanley Lim, and this is my bear case for ComfortDelGro Corporation Limited (SGX: C52).

ComfortDelGro is a transportation company with operations in seven countries, operating different modes of transport including bus, taxi, rail, car rental and leasing, and automotive engineering and testing services.

The company has been a steady performer, with stable growth and a relatively high dividend payout. However, there are risks in the company that many investors may not be aware of. Let us take a closer look at these risks.

Uber threat

The company is facing the beginning of a structural change in the taxi industry’s business model. Uber is taking over taxi business, city by city. The Google-backed company made a mobile app that connects passengers with available taxis or private vehicles.

Today, the company has a presence in more than 128 cities in 37 countries, including Singapore. Uber threatens the taxi industry by increasing the number of for-hire vehicles on the road, and makes it more convenient for customers. And most people living in Singapore know the pains of trying to get a taxi during peak hours.

Even if ComfortDelGro creates a similar app for its customers, what this means is that traditional taxi operators such as ComfortDelGro would no longer work in a controlled industry with a high barrier to entry. The market structure is undergoing a structural change and it might very well move towards a free market where not one operator has an advantage over its competitors.

This is particularly damaging to ComfortDelGro’s business in Europe where it does not own the taxis but only operates the radio circuit services for taxi drivers. With apps like Uber (and Uber isn’t the only one), taxi drivers would now have a wide range of services to choose from and does not need to be rely solely on ComfortDelGro’s radio circuit.

To put it into perspective, the taxi business currently contributes more than 30% to the group’s revenue and operating profits. Any decline in this segment of business would have a huge impact on the group’s overall performance.

Uncertainty in Singapore

That is not even the worst part. Through its subsidiary, SBS Transit Ltd. (SGX: S61), the company operates public bus and rail services. The public transportation sector is undergoing a transformation.

With the government taking over all bus infrastructure and assets, there is a lower barrier to entry for new players to enter (due to the lower capital expenditure needed). Furthermore, ComfortDelGro will lose its precious advertising and rental business that the bus assets provide.

The government might also be altering the business model of the rail business. Singapore is the group’s largest market, contributing about 60% of revenue and 51.1% of the entire group’s operating profit. It seems that there is still too much uncertainty in its Singapore business and given the large contribution from its Singapore business, investors should be aware of the risks involved.

Problems Down Under

Revenue from ComfortDelGro’s bus business in Australia fell by a whopping 16.2% for the most recent quarter as they lost routes in Regions 1 and 3. Moreover, management is expecting the bus revenue to be even lower in the coming few quarters. The bus business in Australia is definitely facing a huge problem and investors should be cautious about that since Australia contributes about 22% of the operating profit for the group.

Price

Lastly, although the company is facing several risks in many of its sectors, the market is still generally optimistic for the company. For one, the company is trading at more than 19 times its price to earnings ratio. That is for a company that is merely growing at around 4.2% annually since 2009. That appears to be a rather rich valuation for a slow growing company facing huge risk in its major sectors and markets.

Foolish Summary

ComfortDelGro has been able to produce stable growth for its shareholders. It has also been able to provide reasonable return for its shareholders over the past few years. However, we should all take note of this important phrase in investing; “Past performance is not necessarily indicative of future results.”

You can read the bull case here.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim owns shares in SBS Transit.