Wolf Money(ComfortDelGro Ltd results)sold
The below article is for educational purpose only. Kindly refrain from taking any action. It shouldn’t constitute as an investment advice. Please read the disclaimer.
ComfortDelGro revenue went up by 14.4% to $2.427b. Net profit went up 11.2%. Net gearing went up to 16.6%. Did it meet market expectations? Yes. Did it meet my expectations? Nope.
Let’s talk about the positive first.
1.) The dividend went up from 3.52c to 3.91c.
2.) There are likely more contracts up for grabs in Europe and Australia as governments try to farm out public transport services to manage cost in providing essential services to the public. The headaches of dealing with transport workers’ unions can be a political risk to any government. For dealing with unions, ComfortDelGro earns a fee for the service.
The negatives.
1.) I don’t like the increase in gearing and it is heading towards the low 20% soon. The increase in gearing was due to fleet purchases/renewal in Manchester and London. In just slightly over a year, CDG has incurred an acquisition cost of $750m and a capex requirement of $400m spent on buying buses, deports and charging stations for Manchester and London contracts. The cash outflow is too great, given the company was in a healthy net cash position just over a year ago.
2.) The drop in margin from 4.5% to 4.4%. I suspect the biggest drag was their Australian business due to a shortage of drivers and a weak AUD.
3.) Personally, I don’t like how the contracts were structured In Manchester and London where the company needs to fork out a ton of money to buy buses on behalf of the cities, which will then be payback throughout the lifespan of the contract. In my opinion, this is a form of cheap infrastructure financing provided by CDG to the UK government. As the UK government continues to suffer from weak public finances, will all the upcoming tenders be assets-heavy, requiring CDG to put up their balance sheet in order to win more contracts?
4.) The item of PPA(amortisation) based on a straight line of around $3.9m per quarter. On a per-annual basis, the amount is around $15.6m. If I put a conservative number of 20% goodwill paid on last year purchases of $750m. Will it take 9.5 years to amortise the goodwill paid?
I have decided to sell my CDG. In the process, making a small kopi from my wager. LWF holds no share in CDG. Cash will be kept liquid for future deployment.
In the future, what will change my mind about buying back the shares? If the company listed any of their UK or Australia arms or the divestment of non-core assets to bring down their gearing. An improvement in CDG’s net margin closer to the 5% will represents better execution excellence. I am adopting a short-term view of the market with ppi number in the US out tonight. It is very difficult to see beyond the current month. More detail at the end of month update. God Bless. 🙏
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