Honestly, it’s not that bad.
That’s what I thought after seeing the news of transport giant ComfortDelgro Corporation Limited (SGX: C52), or CDG, being replaced on the Straits Times Index (SGX: ^STI), by Emperador Inc (SGX: EMI).
The switch will take effect on September 19th.
Unsurprisingly, many friends who are shareholders of CDG texted me in confusion as they assumed the worst.
First of all, this replacement on the bellwether index is not a direct result of deteriorating business fundamentals.
Secondly, some of you may be wondering, what is this Emperador and what does the company do? You can find out more about the liquor giant here.
As the Straits Times Index, or STI, tracks the performance of the 30 largest and most liquid companies, it is not surprising for CDG to be rotated out during this quarterly review.
From the chart below, CDG is the company with the smallest market capitalisation among the other constituent companies.
Source: Compiled market cap from sginvestors.io as at 6 September 2022
That said, it’s still business as usual for CDG.
The following are four reasons why this blue-chip remains a darling.
1. CDG is still a blue-chip
A blue-chip is a company that has a large market capitalisation (in the billions), a strong reputation or brand, and is backed by consistent earnings and cash flows from its operation.
CDG is a land transport giant that commands a fleet size of about 35,000 buses, taxis and rental vehicles.
It is also Singapore’s largest taxi operator with a 60% market share.
CDG, through its wholly owned subsidiary VICOM (SGX: WJP), is also Singapore’s largest vehicle inspection company with 35 inspection lanes across seven centres.
As you can see from the revenue and profit charts below, CDG looks like it is slowly recovering from the pandemic-driven dent in fiscal year 2020 (FY2020).
Source: compiled from Moomoo data broker, CDG financial statements
In its fiscal 2022’s first half (1H2022) earnings, revenue was up 6.7% year on year to S$1.9 billion, while net profit rose 30.4% year on year to S$118.7 million.
It is noteworthy that 1H2022 revenue is already more than 50% of the full year revenue seen in FY2020 and FY2021.
With more countries adopting the “living with covid” theme and relaxing their policies (e.g. Singapore’s indoor mask removal policy), CDG’s business units are expected to benefit from more ridership-related contributions.
2. CDG’s high dividend payout ratio
In FY2021, CDG nearly tripled its dividend to S$0.042 from FY2020’s S$0.0143.
For 1H2022, CDG declared an interim dividend of S$0.0285, a 35.7% year on year increase from that of S$0.021 in 1H2021.
Apart from that, a special dividend of S$0.0141 was also declared, bringing the total dividend announced in 1H2022 to S$0.0426.
The special dividend was a direct result of the exceptional gain on the disposal of its Alperton property in London.
CDG has a consistent dividend payout policy to pay out at least 50% of its profits. The interim dividend declared this time round for 1H2022 represents a 70% payout ratio.
Combining the dividends of 1H2022, and coupling it with last year’s final dividend of S$0.021, the trailing 12-month dividend stood at S$0.0636.
At a unit price of S$1.38, CDG shares have a trailing dividend yield of 4.6%.
3. Strong and diverse businesses
Taxi services aside, CDG’s other businesses range from public transportation and inspection and testing services to automotive engineering services and car rental and leasing.
Source: CDG’s 1H2022 earnings release, segmental revenue
These businesses are sizable and important enough to contribute to CDG’s top line.
Geographically, although Singapore contributes to the bulk of its revenue, CDG also has a healthy spread of revenue contribution from overseas.
In 1H2022, 42.6% of its total revenue came from the UK/Ireland, Australia, China, Vietnam and Malaysia.
4. New business drivers
Lastly, CDG has been putting resources and effort into creating new drivers for its business.
CDG plans to drive growth in four business segments; namely rail, electrification, logistics, and non-emergency medical transportation.
CDG has been active in the acquisitions space from the later part of 2021 to the first quarter of 2022.
These moves are strategically in line with how CDG builds strong business moats.
A great example is where CDG acquired a 90% stake in Ming Chuan Transportation Pte Ltd to strengthen its medical transport segment.
This deal would cement CDG as the largest wheelchair transport service provider in Singapore, a smart bet that would pay off as Singapore’s population ages.
Get Smart: Focus on the business
Being replaced on the STI is not all doom and gloom, especially when your business has multiple competitive moats and can perform consistently well even during bad times.
I can sleep soundly at night knowing that CDG is a consistent performer and can deliver the growth that I expect as a shareholder in the future.
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Disclaimer: Kent Lee owns shares of CDG.
