Stock Review: ComfortDelGro

Kevin Smith, of Delft Partners and portfolio manager of the TAMIM Asia Small Companies Fund, highlights one of the stocks in the Asia Small Companies portfolio. ​​ComfortDelGro Corporation Ltd is one of the largest land transport companies in the world, the Group was formed on 29 March 2003 through the merger of two land transport companies - Comfort Group and DelGro Corporation.

Following the merger, ComfortDelGro has expanded significantly and now operates in seven countries and has a global fleet of about 42,300 vehicles.  ComfortDelGro’s businesses include bus, taxi, rail, car rental and leasing, automotive engineering services, inspection and testing services, driving centres, non-emergency patient transport services, insurance broking services and outdoor advertising.  Apart from being the market leader in Singapore, ComfortDelGro has a significant overseas presence. The Group’s operations currently extend from the United Kingdom and Ireland to Australia, Vietnam, Malaysia, as well as across 11 cities in China, including Beijing, Shanghai, Guangzhou, Shenyang and Chengdu. 

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Accounting, Strategy and Governance Comments

​Accounting
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1. ComfortDelGro is audited by Deloitte Touche LLP. The Audit and Risk Committee have verified the independence of Deloitte Touche LLP in their role as auditor.  The Deloitte Touché LLP partner in charge of the auditing function is changed every five years as an additional safeguard of their independence.
2. ComfortDelGro has an internal audit staff of six suitably qualified and experienced staff
3. Full compliance with accounting rules is maintained in each jurisdiction in which ComfortDelGro operates. 

Source: Company filings

Strategy
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1. ComfortDelGro has the ideal model of businesses in which we like to invest, they have a strong domestic business (in Singapore) and then have gradually built the business into other international locations. The businesses in UK and Australia are now substantial and the exciting long-term growth will be generated by the strong presence in China and Vietnam.  The company now has 11,510 taxi licences in China with the largest fleets operating in the cities of Shengyang, Nanning and Jilin.  The size of the taxi fleet in China will soon overtake that of the home market in Singapore.
2. There are high barriers to entry in ComfortDelGro’s key businesses, buses and taxi fleets. It is noticeable that Uber failed to gain traction in Singapore and local competitor Grab allows the traditional taxi fleet to access their platform.
3. ComfortDelGro’s growth through acquisition strategy has been conducted in a sensible manner  whilst maintaining a very strong balance sheet. Until recently the company has maintained net cash balances in excess of debt, that will change to allow modest levels of net debt which are supported by the businesses being funded.
4. The Company has achieved an impressive level of value added per employee rising from $108,000 in 2014 to $111,900 in 2018 as the various international operations have been acquired and expanded.

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Governance
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1. Full governance with the Singapore governance codes which are in the process of moving from “comply or explain” to mandatory compliance.  A new rule requiring the terms of independent directors to cease after nine year is being introduced and ComfortDelGro is confident of full compliance with that rule.  The company sits in the top quartile of our universe for ESG ranking.
2. The Board of eleven people comprises ten fully independent directors with suitable qualifications and experience.
3. The company has achieved a 75% payout ratio in recent years and intends to maintain the dividend at an attractive level for investors going forward. 

Value, Momentum and Quality Comments

​ComfortDelGro sits in the top quintile of our VMQ ratings universe, with excellent quality and good value and momentum scores.  The quality score is helped by a strong balance sheet and return on equity of 11.5%.  The share price has shown strong price momentum against a weak market backdrop in the current year and earnings forecasts have been resilient in the past twelve months. There are 15 brokers providing regular coverage, 14 analysts have buy, overperform or hold recommendations on the stock with target prices in the range 15 to 30% above the current level.