3 Wise Investing Views on Comfortdelgro Corporation Ltd

Three wise men were blindfolded and led one at a time into a room where an elephant stood. Each was asked to discern what was in the room without removing his blindfold.

The first, upon touching the elephant’s trunk, concluded a “snake” was in the room. The second, upon contacting a leg, concluded a “tree” was in the room. The third, upon grasping the tail, concluded a “rope” was in the room. All were surprised to discover the elephant once their blindfolds were removed.

— old Indian fable

You may have heard this old fable before. The three blindfolded wise men were not able to make a good guess of the complete picture (in this case, an elephant). It can be the same with investing.

For any potential investment, our own view may be limited, and we may miss some major points. We could always do with more intelligent and Foolish perspectives.

To demonstrate, let’s use land transport provider Comfortdelgro Corporation Ltd (SGX: S08) as an example.

As a quick introduction, Comfortdelgro is a global land transport giant with operations mainly in Singapore, Australia, the United Kingdom, and China. The company has a total fleet size of more than 46,300 buses, taxis, and rental vehicles. It is also the majority owner of other Singapore-listed companies like test and inspection outfit, Vicom Limited (SGX: V01), and bus and rail operator, SBS Transit Ltd.  (SGX: S61).

You can learn more about ComfortDelGro’s business in here and here.

With ComfortDelGro, I would like to share three possible views, from three differing investor personalities no less. They are the value investor, the income investor, and the growth investor.

The value investor’s view

At its closing price of $3.02 last Thursday, Comfortdelgro sported a hefty trailing price to earnings (PE) ratio of around 22.4.

Meanwhile, the SPDR STI ETF  (SGX: ES3) has a trailing PE ratio of 12.8. Given that the SPDR STI ETF closely mimics the fundamentals of Singapore’s market barometer, the Straits Times Index (SGX: ^STI), we can say that stocks in Singapore are also selling for 12.8 times their trailing earnings on average.

As a bargain hunter, the value investor would prefer stocks with valuations that are lower than the market average. As such, Comfortdelgro’s PE ratio may be too high for the value investor to stomach at the moment.

But, there may still be a couple of reasons why the value investor may be excited about the company. As of 31 March 2015, ComfortDelGro has a strong balance sheet with a net-cash position of around S$153 million. On top of that, Comfortdelgro also generates a fair amount of free cash flow (more on this soon).

With all said and done however, the value investor may still not be able to get pass ComfortDelGro’s high valuation.

The income investor’s view

All things equal, the income investor would prefer a high dividend yield over a low one. At ComfortDelGro’s closing price last Thursday, it has a nondescript yield of just 2.7% thanks to its annual dividend of $0.0825 per share in 2014; this may not attract the income investor.

But, there are other aspects to ComfortDelGro which may cause the income investor to sit up and take notice.

The first is the company’s track record with paying a dividend; as you can see in the table below, ComfortDelGro’s annual dividend has been growing nicely over the past five years.

Financial year ended 31 December Dividend per share (Singapore cents)
2010 5.50
2011 6.00
2012 6.40
2013 7.00
2014 8.25

Source: S&P Capital IQ

Second, the land transport firm has also managed to generate steady free cash flow (operating cash flow minus capital expenditures) as the same period above. This trait might provide financial viability for ComfortDelGro’s dividends.

comfortdelgro FCF OCF capex

Source: Comfortdelgro’s earnings report

As mentioned earlier, the low dividend yield may not excite the dividend investor at first glance. However, the growth in ComfortDelGro’s dividends, backed by ample free cash flow, may be enough to interest the income investor to investigate further.

The growth investor’s view

Revenue growth is something important for the growth investor and that’s an aspect in which ComfortDelGro has fared decently.

Development of Business Segments Revenue (in S$ millions)

Source: Comfortdelgro’s earnings report

From the graph above (click for larger image), we can see that the company’s bus and taxi divisions are leading the charge in steady revenue growth over the past six years. Barring the rail division, the revenue growth has led to stronger pre-tax operating profits for Comfortdelgro over the same period – this is displayed in the graph below (click for larger image).

Development of Segment Pre-tax Operating Profit (in S$ millions)

Source: Comfortdelgro’s earnings report

ComfortDelGro’s steady growth in revenue and pre-tax operating profit may warm the heart of the growth investor. But at a PE ratio of more than 20 and with annual revenue growth of only around 5% over the past six years, ComfortDelGro’s valuation might be too spicy even for the optimistic growth investor.

Foolish summary

So, there you have it. Three quick perspectives from three different investor personalities looking at the same company. Thinking as different investor personalities and coming up with different views can be a useful exercise for us.

Collectively, the differing views may be worth much more than the sum of their parts.

Which investing style sings to you? Come meet David Kuo and the rest of the Fool Singapore team on August 15 to discuss about it! 

Please join us at Invest FAIR Singapore on 15 August. (Suntec Centre, Booth B-16). Come chat with us at our booth, and see our MAS-licensed Director, David Kuo, give his official SGX investor presentation.

You won't want to miss this! Add Invest FAIR Singapore to your calendar today.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in Vicom Ltd.