TRANSPORT operator ComfortDelGro Corporation is looking at a smooth road ahead for its taxi segment, amid several positive developments.

 

A massive downsizing cut by ride-hailing operator Grab last month suggests it is much less likely to engage in destructive competition. Grab&rsquo s CEO Anthony Tan said the company needed fundamental changes to its operating model and cost structure to build a long-term competitive advantage.

 

Meanwhile, ComfortDelGro&rsquo s move to implement a new platform fee for its booking app CDG Zig should drive profits. Such a fee is already standard practice among ride-hailing platforms.

 

Last month, shares of ComfortDelGro fell to S$1.02 &ndash a low not seen since 2004. Bargain hunters poured in, and the stock has since rallied. Are all the positives priced in?

 

There are more growth opportunities ahead, but rising costs and persistently stiff competition could get in the way.

 

Taxis driving growth

The introduction of an additional S$0.70 platform fee for rides booked through CDG Zig is consistent with that of ComfortDelGro&rsquo s ride-hailing peers, Grab and Gojek.

 

This fee &ndash which will be used to improve the quality of its point-to-point transport services &ndash took effect from Jul 1 and also applies to limousine transfers made through its app. It excludes bookings via phone calls or text messages, and street hails.

 

While small, the fee would be an immediate boost to ComfortDelGro&rsquo s taxi and private-hire earnings.

 

The company said in its 2022 annual report that it has close to 9,000 taxis in its fleet, and more than 3,000 private-hire drivers on its CDG Zig platform.

 

Statistics from the Land Transport Authority indicated that the number of ride-hail trips in April (across the industry) averaged 535,000 a day. The number of street-hail trips averaged 90,000 a day.

 

In comparison, the number of ride-hail trips in April 2022 averaged 488,000 a day while the number of street-hail trips averaged 108,000 a day.

 

Overall ridership is also set to rise with the gradual return of tourists.

 

Taxis are the second-largest contributor to ComfortDelGro&rsquo s revenue, making up 11.4 per cent of revenue over the latest 12-month period for which data is available. But they constituted an outsized 25.8 per cent of operating profit excluding one-off items.

 

To fully capitalise on the changing dynamics of the ride-hailing environment, ComfortDelGro needs to retain its existing drivers and attract new ones.

 

But it has struggled significantly in this area. Over the last six years, ComfortDelGro&rsquo s taxi fleet has been shrinking &ndash it numbered 14,075 in April 2023, down from 26,476 in April 2017.

 

Public transport operations at risk

Meanwhile, earnings for ComfortDelGro&rsquo s public transport services segment, its largest business segment, are at risk. Two of its six bus packages in Singapore are set to expire in 2024. Both have been put up for competitive tendering.

 

The company&rsquo s bus segment saw improved ridership and fare increases in the first quarter of 2023. This was, however, offset by contract renewals in Australia at lower margins, as well as lower Singapore bus margins.

 

Public transport operations made up 78 per cent of revenue in the last 12 months, and 45 per cent of operating profit excluding exceptional items.

 

Furthermore, the company has seen its total operating cost rise in the past year on the back of higher staff, fuel and electricity costs. Total operating cost was S$3.5 billion in 2022, or 92.9 per cent of revenue. The comparable figure in 2021 was S$3.3 billion, or 94.3 per cent of revenue.

 

Valuations

Over the past five years, net income of the transport operator has been declining. In 2018, ComfortDelGro reported full-year net income of S$303 million. In 2022, this was down to S$173 million.

 

This has weighed on its share price, and the counter was dropped from the benchmark Straits Times Index in 2022, and was replaced by Philippines liquor giant Emperador.

 

At its closing price of S$1.20 on Thursday (Jul 6), ComfortDelGro is trading at a price-to-earnings ratio of 14.7 times. This is below the average of its Asia-Pacific peers of 30.6 times, which could suggest the counter is undervalued.

 

The counter has a higher 12-month dividend yield of 7.07 per cent &ndash above the industry average of 2.31 per cent.

 

The company has a dividend payout policy of at least 50 per cent, and its dividend payout ratio for 2022 was 70 per cent thanks to special dividends.

 

ComfortDelGro also has a strong balance sheet &ndash it had a net cash position of S$714.5 million as at Mar 31, 2023, up from S$$653.4 million as at Dec 31, 2022.

 

The company has been putting some of this cash to use in buybacks. Since May 2023, the company has bought back a total of 1.1 million shares at an average price of S$1.10 each.

 

Investors may be interested in ComfortDelGro as a profitable proxy to the ride-hailing and transport industry. But they should also consider the counter&rsquo s valuation and how the stiff competition will impact the company&rsquo s financials.