- Strengthened UK Presence: ComfortDelGro’s acquisition of Addison Lee solidifies its position in the premium mobility market in London.
- Earnings Boost Potential: The deal is expected to add around £8 million annually to ComfortDelGro’s earnings, enhancing profitability in FY2025.
- Dividend Appeal: With a projected 5.3% dividend yield, ComfortDelGro remains attractive for income-focused investors.
ComfortDelGro Corporation Ltd (SGX: C52) (CMDG.SI) has just taken a major step to expand its global footprint by acquiring Addison Lee, a premium private hire and courier service company based in London, for a hefty £269.1 million (approximately S$461.2 million). This acquisition adds 7,500 drivers and 5,000 vehicles to ComfortDelGro’s global fleet, boosting its total to 34,000 vehicles. By bringing Addison Lee into its portfolio, ComfortDelGro is aiming to grow beyond its traditional public transportation services and into premium mobility solutions, positioning itself as a global player in the mobility space.
But why did ComfortDelGro make this move? Addison Lee is a well-known name in London, serving both private hire needs and offering courier services. With this deal, ComfortDelGro is solidifying its presence in the highly competitive UK market while expanding into the premium segment—a smart play as the demand for higher-end mobility solutions grows worldwide.
How Will It Affect ComfortDelGro?
This acquisition could be a turning point for ComfortDelGro, offering several advantages:
1. Increased Market Presence in the UK
The UK is one of ComfortDelGro’s key international markets, and the acquisition of Addison Lee strengthens its position. By integrating Addison Lee’s business, ComfortDelGro is not only expanding its vehicle fleet but also tapping into a premium segment that could provide long-term revenue growth.
2. Earnings Boost in the Long Run
Although Addison Lee’s profits have been hampered by high interest rates (as high as 10%), ComfortDelGro plans to clear these debts once the deal is finalized in November 2024. With the debt burden gone, Addison Lee’s adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) is estimated at £35 million, which makes this acquisition a bargain at 6.2x trailing EV/EBITDA. ComfortDelGro expects this move to add about £8 million annually to its earnings by 2025, translating to a 6% boost in its earnings per share.
3. Strengthening Global Mobility Solution
This acquisition aligns with ComfortDelGro’s strategic vision of becoming a global leader in mobility. The company is expanding its service offerings from basic public transportation to more premium services, which can attract higher-margin customers. The growth of private hire services, especially in cities like London, makes this a promising investment.
What’s Next?
ComfortDelGro is not stopping with this acquisition. The company is aiming to grow its UK operations further, especially in the public bus sector. In fact, ComfortDelGro is set to post a healthy profit of S$58 million in Q3 2024, driven by higher-margin renewals of its London public bus contracts. These renewals and additional contracts could push the UK’s contribution to CD’s earnings to new heights.
Overall, ComfortDelGro’s UK operations are forecasted to see significant improvements in profitability, with EBIT margins expected to rise toward mid-single digits by the end of FY24 and continue improving into FY25.
Should Investors Consider Buying ComfortDelGro?
So, is now the time to invest in ComfortDelGro? The numbers are promising. Here’s why:
1. Attractive Dividend Yield
ComfortDelGro offers a dividend yield of around 5.3% (FY24F), which makes it appealing for income-focused investors. For investors looking for steady returns, ComfortDelGro’s dividend policy is likely to continue providing reliable income.
2. Positive Earnings Outlook
With the integration of Addison Lee and favorable contract renewals in the UK, ComfortDelGro’s earnings growth looks solid for FY24 and FY25. The company’s earnings per share (EPS) is expected to grow by 15.2% in 2024 and another 8.6% in 2025, making it a strong performer in its sector.
Key Risks to Watch
No investment is without risk, and ComfortDelGro is no exception. Here are a few risks to keep in mind:
1. Execution Risk with Addison Lee Integration
While the acquisition is promising, integrating Addison Lee into ComfortDelGro’s existing operations may pose challenges. ComfortDelGro will need to ensure a smooth transition to avoid any disruptions in service quality, which could affect earnings.
2. Interest Rate Pressures
ComfortDelGro plans to fund the acquisition with new borrowings at an interest rate of around 5%. While this is lower than Addison Lee’s current interest burden, any future rise in interest rates could increase ComfortDelGro’s financing costs, potentially putting pressure on its profits.
3. UK Economic and Regulatory Risks
ComfortDelGro’s earnings growth is increasingly tied to its UK operations, making it vulnerable to any economic downturns or unfavorable regulatory changes in the UK. Delays or changes in the rollout of the bus franchising scheme in the UK could impact its ability to secure new contracts or maintain profitability.
Call-to-Action: Is ComfortDelGro a Buy?
ComfortDelGro’s bold expansion into the UK premium mobility space through the acquisition of Addison Lee could be a game-changer for the company. With its earnings growth projections and solid dividend yield, ComfortDelGro presents a compelling investment opportunity for those seeking both income and capital appreciation. However, investors should keep an eye on the successful integration of Addison Lee and any macroeconomic risks that could affect its UK business.
If you are looking to add a stock with growth potential and a solid dividend to your portfolio, ComfortDelGro is worth considering. Keep an eye on the upcoming quarterly earnings report and the progress of the Addison Lee integration to gauge whether its global expansion strategy is on the right track.
Disclaimer: ProsperUs Head of Content & Investment Lead Billy Toh doesn’t own shares of any companies mentioned.
