In November 2021, a research analyst released a note saying that ComfortDelGro (CDG), the only transport operator in the Straits Times Index (STI), could drop out of the 30 stock index, which acts as a bellwether for Singapore stocks when the next quarterly review is due. It was also speculated that Olam International, a food and agri-business, was likely to take CDG’s place in the index. The index is reviewed quarterly to facilitate both the inclusion of eligible initial public offering stocks and the removal of stocks that don’t meaningfully represent the index.
When the note was released on 22nd November 2021, CDG was ranked 42nd by market capitalisation but its rank subsequently fell to 50th at S$2,969 million on 30th November 2021.
On 1st December 2021, FTSE announced that there will be no change to the STI constituents following the December quarterly review and that the next review will take place on March 2022.
Why is it important to be part of the Straits Times Index?
The STI is the largest index focused on Singapore stocks and it tracks the performance of what is regarded as the top 30 companies listed on the Singapore Exchange. These companies include the biggest and most well-known names such as DBS Group, Singtel, Singapore Airlines and Capitaland Investment.
There are many exchange traded funds (ETF) that track the movement of the index such as the STI ETF, which has an AUM of S$1.6 billion, and the Nikko AM STI ETF, with an AUM of S$600 million. In total, this represents billions of value being invested and CDG, which has a constituent weight of 1.0%, would have approximately 1.0% of this value under the ETFs.
If CDG is removed from the STI, the ETFs tracking the STI would have to rebalance and sell all holdings in CDG to continue to meaningfully represent the index. Conversely, if CDG’s constituent weight increases, the ETFs would have to increase their positions in CDG.
This will likely have a bigger immediate impact to CDG’s share price as compared to when CDG was removed from the MSCI ETF, which has an AUM of only S$600 million.
What happened to companies that were involuntarily removed from the STI?
Companies are removed from the STI either because they are taken private or were involuntarily removed due to underperformance of the business.
While companies which are taken private exit on a high, companies that were involuntarily removed, such as Singapore Press Holdings, Hutchinson Port Holdings Trust, Noble Group, Golden Agri-Resources and Starhub, have not recovered to its heyday and have fallen off into the great unknown.
What is ComfortDelGro currently doing to try and stay in the index?
CDG had weathered plenty of bad news recently, such as the new Covid-19 strain, Omicron, extending or increasing restrictions and the halting of its IPO plans for its wholly-owned Australian subsidiary on the Australian Stock Exchange. This occurred as the market conditions became more challenging since it first announced its IPO plans in August 2021.
When CDG first announced its IPO plans in August, it was targeting a listing by the end of the year. The company also noted that this move would unlock the value of its land-transport business assets in Australia as the country was also CDG’s single largest overseas investment destination, with a total investment of S$1.17 billion.
ComfortDelGro also added that it will continue to focus on growing its business through mergers, acquisitions, contract renewals and new contracts.
Should you still hold on to ComfortDelGro?
In May 2020, MSCI Singapore announced the removal of CDG together with SATS, Sembcorp Industries and SPH from the MSCI Singapore Index and this led to a combined market capitalisation decline of S$863 million on the next trading day.
While there is no doubt that there will be an immediate impact on its share price, there could be some glimmer of hope in the long run as CDG has been included in the prestigious Dow Jones Sustainability Index for the second year in a row. Although its weight in the index is small, with sustainability being one of the major themes of the next decade, CDG may still be able to attract some institutional attention.
The company is also trading at attractive valuations and it does have strong financials and room for growth through both organic means and opportunistic acquisitions. It is also the largest transport operator in Singapore and is a strong player in this competitive industry. We previously analysed ComfortDelGro in detail here.
Conclusion
While CDG has not yet been removed in the index, as long as its market capitalisation continues to be low, it will be a candidate for removal. With the review carried out quarterly, the management of CDG will have to quickly find ways to increase its market capitalisation and outperform other companies wanting to take its place. If not, there is a risk that its share price will fall further until it is removed.
Although the company has its strengths, such as attractive valuations and a strong fundamental business, investors do have to take into consideration the potential risk of index removal as this may hold sway over its share price performance.
