ComfortDelgro Corporation Ltd (SGX: C52), or Comfort, is a land transportation heavyweight with business interests in buses, taxis, and rail. The group operates in Singapore, Australia, China, the United Kingdom, Malaysia, Ireland, and Vietnam.
The group reported back in May 2018 that it had terminated its strategic partnership with Uber. Recall that Comfort announced in December 2017 that it was entering into a strategic agreement with Uber Technologies Inc (Uber) to form a joint venture, whereby Comfort will take a 51% stake in Uber’s car rental subsidiary in Singapore, Lion City Rental. Investors were hinging on the Uber tie-up as it would be seen as a way for Comfort to ease its taxi woes.
Despite the dissolution of the partnership (Uber agreed to sell its Asian operations to Grab), Comfort’s CEO, Lim Jit Poh, said Comfort would engage in acquisitions in order to grow the business, as it still wishes to reduce its reliance on its taxi segment.
A slew of acquisitions in 2018
I decided to make a chart of Comfort’s acquisitions in 2018 and 2019:
It seems that Comfort spent considerable sums of money in acquiring many different businesses in Australia, Singapore, and the United Kingdom. Most of the acquisitions centred on beefing up Comfort’s bus division, with acquisitions of private bus and coach operators in (mainly) Australia, as well as in Singapore and the UK. There were also acquisitions of a repair centre in Western Australia and a taxi circuit operator in London.
Comfort relying on debt for acquisitive growth
Most of the acquisitions were done in 2018, but there was one recently announced in April 2019 of a New South Wales (Australia) bus service operator for 28.3 million Australian dollars. This may signal that Comfort may continue its acquisition spree into 2019, as organic growth for the group has been lacklustre. Note that even though Uber has exited Asia, Comfort still faces competition from the likes of Grab, a ride-hailing giant, as well as new entrant GoJek, an Indonesian ride-hailing company.
As a result of the acquisitions in 2018, the group has seen its debt level rise significantly. As of the end of December 2017, gross debt was S$322.3 million, while net cash for the group stood at S$273.9 million. A year later (end of December 2018), gross debt stood at S$569.9 million while net cash was just S$16.2 million. The total amount spent on acquisitions in 2018 was S$418.8 million.
Risks relating to acquisitions
Investors need to be aware of the risks relating to these multiple acquisitions. First of all, there is integration risk — each company being acquired needs to be properly integrated and assimilated into the group, and this will take time and effort in order to align processes and staff practices. Another is the risk of an acquisition failing to deliver its expected performance, and this could drag down group performance in future periods. Finally, there is also the risk of incurring higher finance costs as a result of the higher debt load, which may not always be supported by higher levels of earnings and cash inflows.
The Foolish bottom line
Comfort has been much more aggressive on the acquisition front in the last 18 months. Whether these work out or not remains to be seen. Investors need to carefully assess the numbers and also raise questions to management on how these new acquisitions are performing. While it is admirable that management is bold enough to deploy the cash into meaningful acquisitions, investors need to be mindful of the risks that come with an acquisitive growth strategy.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in ComfortDelGro Corporation Ltd.