ComfortDelGro stock had been beaten down lately with the Covid-19 impact adversely impacting it’s bottom line. This was made worse during the Circuit Breaker period in Singapore which occurred mostly in Q2 2020.
As part of practising value investing, an important aspect is to identify companies that enjoy barriers to entry. This will give them the competitive advantage to ensure sustainable earnings in the long term.
Today, we will examine ComfortDelGro, to determine if it possess any competitive advantage in the industry. The company operates a variety of businesses beyond just taxi services that most Singaporeans are familiar with.
Given it’s various business operations in different countries, we will focus on the key segments of the business today. This will help us understand if indeed the company has any competitive advantage.
Countries of Operations Analysis Of ComfortDelGro Stock
As Singaporeans, you may be familiar with the ComfortDelgro stock and it’s brand. With their fleet of taxis on the road, it’s hard not to notice. However, the group does not only have operations in Singapore. They also have businesses in the United Kingdom, Ireland, Australia, China, Vietnam and Malaysia.
Below shows the breakdown of the revenue contribution by geographical region.
You can see that ComfortDelgro’s Singapore operation takes up more than half of the company’s business. Whereas UK and Australia take up the other substantial parts of the remaining pie.
Service Segment Analysis Of ComfortDelGro Stock
However, do you know that the company’s taxis operation is not the main driving business in Singapore? Their Public Transportation Services segment is the one that contributed to the bulk of the revenue. It actually takes up more than 70% of the pie. This is an important aspect to analyse ComfortDelGro stock and it’s related competitive advantages.
We see that Singapore’s business contribute more than half of the company’s revenue, with different lines of business. Therefore, we want to examine deeper on the public transportation services, mainly made up of bus and rail services.
Also we will need to take a look at taxi services as well. This will give us a clearer view of the values attributing to the ComfortDelGro stock competitive advantages.
In fact ComfortDelgro owns 75% of SBS Transit Ltd, which is listed in SGX separately. Understand that SBS Transit in turn operates Singapore’s public bus, with a dominant market share of 61.1%. This will give the company economies of scale. In turn it allows the company to bid more competitively for bus contracts in future tenders.
SBS Transit also operates some of the rail services in Singapore. They consist of the 17-year-old North East Line (NEL), 42-km long Downtown Line (DTL), and the 28-station Sengkang Punggol LRT (SPLRT) systems. These translate to 36.3% of the market share in the rail network.
There is an inherent barrier to entry as each of the rail lines can only be operated by one company. This will sustain at least until 2033 for NEL and SPLRT, until 2026 for DTL, when their licenses will expire. Understand that they will also have a possible 5-year extension.
The volume of commute for bus and rail services have definitely been impacted due to the Covid-19 situation. However, it is reasonable to believe that the volume of commute should revert close to pre-Covid19 period eventually.
ComfortDelgro has 10,700 fleet of taxi, representing 58% of the market share. While this represents a dominant share in the taxi market, the private hire cars market is disrupting the industry. We are seeing a growing number of private hire cars, hitting 77,000 in 2019. As such, there is no barrier to entry to compete with ComfortDelgro per se.
However, the taxi stands places like shopping malls will continue to be restricted from private hire cars. Thus, it gives taxis an edge in this aspect of the market.
Other Businesses In Singapore
Apart from the above key businesses, the company has businesses in the following:
- Automotive Engineering Services
- Inspection & Testing Services
- Driving Centre
- Car Rental & Leasing
- Insurance Broking Services
- Outdoor Advertising
Due to comparative smaller contributions to the topline, we will not go through the details in these segments
But we would like to highlight that the company operates it’s Inspection & Testing Services through its subsidiary Vicom Ltd, which ComfortDelgro owns two-thirds of it, has a dominant market share of 74% in 2019.
The inspection and testing service stems from a regulatory requirement that motorists have to adhere to. Therefore, we believe it represents a competitive advantage to ComfortDelgro in this segment of the business.
Businesses In Other Countries
Elsewhere in other parts of the world, the details of ComfortDelgro’s businesses are summarized below. Here we highlight the categories where the company possesses potential edge over the rest of the competitors. In particular, we will examine Australia and UK as they take up the bulk of the remaining pie. This will give us a more complete picture of ComfortDelGro stock competitive advantage analysis.
The company maintains a market share of 16% in the bus service category in Melbourne. This makes the company the third largest operator in Melbourne itself.
Buslink NT Pty Ltd is the largest bus operator in the Northern Territory of Darwin. The contract in Darwin consists of 46 urban buses, 77 school buses and 26 special needs buses. They represent 60% of the urban network and 100% of the school and special needs network.
The company operates taxi services in Perth, Western Australia, as well. They maintain a dominant two-thirds of the city’s 940 registered taxis.
Metroline Limited, a wholly owned subsidiary, is the third largest bus operator in London with close to 1,600 buses. The company operates about 17% of London’s scheduled bus mileage and plies routes in North, West and Central London.
It’s other wholly owned subsidiary, Computer Cab plc, is London’s largest black taxi operator with a fleet of 2,335 taxis.
Computer Cab (Aberdeen) Limited has the second largest fleet of taxis in Aberdeen.
In Beijing, Beijing Jin Jian Taxi Services Co., Ltd is the third largest taxi operator in the capital city. They have a fleet of 5,501 taxis, making up 8.3% of the market share.
Next in Jilin city, Jilin ComfortDelGro Taxi Co., Ltd is the largest taxi operator. They own 729 taxis, translating to 14.2% market share.
The city Chengdu, sees Chengdu ComfortDelGro Taxi Co., Ltd as the second largest taxi operator with 650 fleet of taxis.
In Nanjing, Nanjing ComfortDelGro Taxi Co., Ltd (70%-owned subsidiary) is the fourth largest taxi operator. They have 664 fleet of Compressed Natural Gas taxis.
Finally, in Nanning, Nanning Comfort Transportation Co., Ltd (80%-owned subsidiary) is the largest taxi operator. They have a fleet of 854 taxis.
Ireland / Vietnam / Malaysia
As Ireland, Vietnam and Malaysia contribute relatively lesser to the group’s topline, we will leave them out of analysis here.
So far we have examined ComfortDelGro stock competitive advantages, from the geographical standpoint and breakdown on the individual service segments.
I think that there’s some value to examine further the financials of the company. That’s because we found the company to enjoy barriers to entry in it’s bus and rail services especially in Singapore. These competitive advantages are going to help the company recover from the Covid19 impact.
There’s some scale in the taxi business, taking 25% of the operating profit of the company, per the diagram below. However, there’s more uncertainty in this segment given the rise in competition with private hire cars like Grab. However, with consolidation in the industry, taxi revenue may be reaching a new steady state. It’s worth examining a bit deeper into the value of this segment of the business as well.
Operating Profit By Segment | Based on 2019 Full Year Financials
It’s important to note that the operating profit margin of public transport services is the lowest among all the segments. It’s no wonder why the group continues to expand into other segments of better margins.
Operating Profit Margin By Segment | Based on 2019 Full Year Financials
A closer look at the value of public transport services and taxi lines of business will be the next step. We need to determine if the current market price of the company’s share is worth investing. This is especially crucial with the Covid-19 situation impacting the business substantially.
In summary, the analysis of ComfortDelgro stock competitive advantages shows strong barriers to entry in public transport services segment. They are contributing the bulk of the revenue for the company. While the company maintained its taxi market position well, we will need to examine the sustainability of its earnings.
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