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How is ComfortDelGro Corporation Ltd Positioning Itself for the Future?

Land transport giant, ComfortDelGro Corporation Ltd (SGX: C52), has seen its business getting disrupted by the proliferation of ride-hailing apps. There is also the advent of new vehicle technologies such as hybrid, electric, and autonomous cars.

In fact, in ComfortDelGro’s 2017 annual report, its chairman, Lim Jit Poh, alluded to the fact that it is not business as usual for the group. He said:

“2017 was a difficult year on many fronts. The key word to describe the challenges we, as a Group, faced is ‘DISRUPTION’.”

So, amid the challenging times, how is ComfortDelGro positioning itself to fend off the D-word and emerge victorious in the years ahead? I dug through the latest annual report to find out more.

Through mergers and acquisitions with lower margins

In the 2016 annual report, Lim said that a new strategy might be needed, considering the swift changes and difficult challenges faced by the company. As highlighted in the 2017 annual report, one of the strategies that ComfortDelGro will be undertaking is to not limit the scope of mergers and acquisitions, and to also consider projects with “lower margins, so long as the investments are profit accretive, low risk and are acceptably priced.”

Just this week, ComfortDelGro announced two acquisitions. On 9 April, it announced that it is purchasing National Patient Transport Pty Ltd (NPT), one of Australia’s largest private providers of non-emergency patient transport services, for A$30 million (around S$30.2 million). The purchase price is 5.6 times NPT’s EBITDA (earnings before interest, taxes, depreciation and amortisation).

The next day, ComfortDelGro revealed that it is acquiring the private bus chartering assets of AZ Bus Pte Ltd for S$10.25 million. AZ Bus operates private charter, school bus, and tour bus services. Its customers range from multinational corporations to local companies.

By taking on more debt

To grow in the years ahead, ComfortDelGro has also decided that it “should take a less conservative capital structure and move into a net debt position in order to fund growth.” Simply put, a net debt position means having more debt than cash on its balance sheet.

As of 31 December 2017, ComfortDelGro had S$596.2 million in short-term deposits and bank balances, and total debt of S$322.3 million. This gives a net cash position of around S$274 million. In comparison, at the end of 2016, it had close to S$434 million in net cash. This quick look at its balance sheet should give context as to how much more debt ComfortDelGro can borrow.

Through investments, strategic alliances, and investigation of emerging technologies

ComfortDelGro is also prepared to take “minority stakes in larger or new investments that can break into new markets for future growth.” Lim added that the company “should also explore strategic alliances with start-ups to collaboratively work on commercial application of emerging technologies.”

Furthermore, a special team to look into new technologies and business models might also be set up. This team will report directly to the Investment Committee, which Lim chairs, for effectiveness.

The Foolish takeaway

ComfortDelGro’s 2017 revenue fell by 2.2% to $3.97 billion mainly on the back of an increasingly competitive environment, especially in its taxi business. Likewise, net profit declined by 4.9% to S$301.5 million. No one will know for sure if the land transport giant’s efforts to future-proof its business will pay off, but it is better to do something than nothing at all.

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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 Sudhan P doesn’t own shares in any companies mentioned.