Comfortdelgro (SGD: C52) has been one of the companies that has been affected quite badly since the start of the Covid-19.
It joined the lists of other industries such as airlines, aviation, retail and hospitality industry that is severely impacted by this pandemic crisis.
Since the start of the year, the company has dropped by more than 40% as we saw its share price plunging from $2.37 to $1.40 as of writing today.
One of the most obvious reasons for the plunge is due to the government initiative of a circuit breaker, which lasted two months from April to Jun, before the gradual opening of phase 1 and 2 thereafter.
With the circuit breaker being implemented, the company decided to provide a full rental waiver to its drivers for the 2 months, which based on source is estimated to be around 10,282 fleet to date. After all, what is the use of driving around when most people are forced to lock yourself at home. The goal was to provide a waiver so the drivers do not have to pay rental for its cab. Not the best situation to be in, no revenue for the 2 months but at least they were aided with the waiver.
The full rental waiver could not for obvious reasons last on perpetual needs so the company took measures to cut the waiver by half when the economy gradually reopen following the guidance from the task force.
While there were now people streaming the streets and lining up queues, the crowd pales in comparison as it was before the Covid. Because of this, the company has to gradually lowered the waiver instead of doing it in an instant. Doing so will be catastrophic to both sides as most drivers would rather return the fleet in favor of other available work such as being a social distancing ambassador.
I have no data available on the latest fleet as well as how many fleets were returned during Covid.
Below is a timeline table appended which I will run through in detail on the numbers and impact to the company.
Round 1 and 2 signifies full rental waiver to the drivers, which coincides with the circuit breaker implemented by the government.
Each period runs from 7 April to 5 May, and 6 May to 1 Jun respectively.
The expected rental waiver from the company is expected to cost the company between $45 to $86 per fleet per day based on source from the company’s announcement. For the purpose of this computation, I have taken a weighted average of $65 per fleet per day, give or take.
The total cost to the company based on the above estimation is expected to be around $20m for round 1 and $15.4m for round 2.
This is excluding the Special Relief Fund (SRF) from the Government which is at $10 per fleet per day, so I’m being quite conservative here.
When the government announces the reopening of the phase 1 from the beginning of Jun, the company followed by tapering down its rental waiver to 50%, which is halved from the previous two months.
Even though the government subsequently advance the reopening of the phase 2 from 19 Jun onwards, the company was still extending the 50% waiver to its drivers on goodwill basis, up until 15 Jul (see Round 4).
Round 3 costs the company $10m while the extension of two weeks in Round 4 costs the company a further $5m.
Earlier last week, the company further announced a gradual reduction in its rental waiver to 40% from 16 Jul to 15 Aug. For each sensitivity downward adjustment of 10% in rental waiver, the company would be able to save a cost of about $2m per month. It is not known yet if the company will extend the waiver until the end of Sep but it looks like the case.
If we look closely at most of the government grants that were given to businesses and sectors, most would have lasted until either September or October. This includes the rental waiver from landlord as well as the Job Support Scheme payout. In other words, we could potentially see the company starting to charge a full rental for its fleet as early from Oct onwards.
Barring unforeseen circumstances, we should also look at the economy gradually opening up for more (already we saw cinemas and staycation gradually opening up) with international borders from certain countries being allowed to come in. This should bode well not just for the taxi division but also for its rail and buses, as well as inspection centers as more cars are required to go for servicing.
Operating revenue and profit for FY2019 for its taxi business were at $668.6m and $104.2m respectively which would translate on average of about $167m and $26m respectively per quarter basis.
The impact from the rental waiver is likely to push the company into a loss in the second and third quarter but is likely to rebound back very strongly in the fourth quarter onwards.
Furthermore, there is likely an impairment being done to its taxi fleet given that it’s not bringing in much revenue this year, so this is likely to hit the NAV of the company further.
The total impact from the rental waiver I computed came up to about $70m for its taxi division, while I noticed some analysts have estimated the impact to be above $100m. The difference I suspect is due to the earlier waiver being halved as early as Jun and further reduced to 40% as early as 16 Jul while the analysts’ earlier estimates were based on full waiver up until Sep.
There are various other factors which we did not talk about in this article including the structural growth of its business, the upcoming bus Sembawang tender and also the railway tender bid in France, all of which is likely to further enhance the diversified business growth nature of the company when the whole Covid situation is over.
I also believe that when international borders are reopen, we should see a flurry of ex-drivers going back to drive, as most have been doing so for a number of years. In this regard, I think the structural story of the taxi business will remain intact.
At the current valuation, I think most of the bad news has been baked in and we should start seeing earnings growth quarter on quarter from Q3 onwards. The only downside is if we are seeing a flurry of second wave coming in, leading to another round of closure, which I think seems unlikely at this point as we continue to see more activities reopening. In this regard, I believe we are awaiting for more positive news to drive the stock upwards as sentiments get better in the wake of this Covid crisis.
*Author is vested at an average price of $1.56
Thanks for reading.