ComfortDelGro Corporation (CD SP) - UOB Kay Hian 2017-03-30: JustGrab May Intensify Competition For Drivers

ComfortDelGro Corporation (CD SP) - UOB Kay Hian 2017-03-30: JustGrab May Intensify Competition For Drivers COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro Corporation (CD SP) - JustGrab May Intensify Competition For Drivers

  • The taxi industry continues to undergo structural shift, with the roll-out of a dynamic pricing fare structure. While we remain confident of ComfortDelGro’s (CD) execution capabilities, we believe the taxi segment’s operating outlook will remain challenging as competition intensifies. 
  • Meanwhile, given CD’s resilient cash position, we see potential M&A opportunities, which could provide upside on its outlook. 
  • Maintain HOLD on the lack of strong catalysts. Target price: S$2.47. Entry price: S$2.35.



ESSENTIALS


Dynamic pricing approved by LTA; JustGrab introduced. 

  • The authorities recently gave the green light for taxi operators to introduce dynamic pricing for trips booked through mobile applications. This will serve as an additional option for commuters on top of the current metered-fare taxi bookings. 
  • In conjunction with this development, Grab rolled out a new dynamic fare pricing service yesterday, JustGrab, where commuters can be picked up either by a GrabCar or a taxi. 
  • We understand that Grab is now the third-party booking platform for all taxi companies in Singapore, except ComfortDelGro (CD).

CD opted for flat fare structure instead. 

  • CD has chosen not to introduce dynamic pricing for now, and will instead adopt a flat fare structure for mobile bookings, which we understand will be introduced on 10th April. This is similar to taxi metered fares, except customers can have the transparency of a fixed fare before the journey starts.

Competition for taxi drivers may intensify. 

  • Compared with CD, taxi drivers partnering JustGrab are offered more options in income stream, which encompass both dynamic and metered fares. 
  • According to an article by The Straits Times, we note that fares for JustGrab are not necessarily always more expensive than CD during peak hours. 
  • In the near term, we reckon CD may face increased competition for drivers, from taxi operators partnering JustGrab to private hire cars. This may put further pressure on fleet hire-out rate. Having said that, we are not ruling out the possibility that CD may eventually introduce dynamic pricing. 
  • Furthermore, we believe CD’s wait-and-see approach may also be part of its competitive differentiation strategy. As the only taxi operator not introducing dynamic pricing, CD may get an edge in terms of attracting drivers who prefer stability in income stream. 
  • We maintain our hire out rate assumption at 97%, with 0% fleet growth in 2017-18.

Drag on rail margins to continue in 2017. 


  • Meanwhile, we estimate rail margins to remain depressed at 1-3% for 2017 on the back of start-up costs for DTL3 as well as impact of 4.2% fare reduction from 30 Dec 16. With DTL3 slated for opening in Sep 17, we expect margins to recover in 2018 due to increased network effect.



STOCK IMPACT


Seletar bus package expected to be awarded at end-March. 

  • With all bids submitted to the Land Transport Authority (LTA), the Seletar bus package is expected to be awarded by end-Mar 17 and revenue service will commence in 1H18. While we previously opined that the first two bus packages offered to foreign groups may be for price discovery mechanism, we are not ruling out the possibility of SBST being awarded the Seletar tender. 
  • We note that of the nine bids submitted, SBST had the lowest bid of S$480.3m. Based on our estimate, winning the Seletar tender may add 1-2% to CD’s 2018 underlying earnings.

Australia segment to lift earnings for 2017. 

  • Recall CD had recently completed the acquisition of 49% of ComfortDelgro Cabcharge (CDC), which will now become CD’s wholly-owned subsidiary. 
  • CDC operates contract scheduled bus, school bus, private contract and charter bus services in Australia, with a total of 1,712 buses. We have factored in the impact of the acquisition and expect CDC to add 4-5% to CD’s 2017 underlying net profit.

Strong cash position to build potential case for M&A… 

  • Following the upcoming leadership change in GCEO on 30 April, we are of the view that we may see a pick-up in potential M&A activities. Given CD’s resilient net cash pile of S$432m (2015: S$229m), we see a case for M&A opportunities, likely within the group’s operating geographies. 
  • We deemed Australia as a favourable candidate as the country is gradually shifting towards increased private-sector involvement in the delivery of bus services. A report by an Australian tourism and transport body highlighted a number of privatisation reform opportunities in areas such as Sydney, where government-owned operators still carry the majority of bus passengers.

…or dividend payout upside. 

  • Barring major M&A, we also see dividend payout upside on lower capex upon CD’s transition to an asset-light model. We note the group has been increasing dividend payout over the past five years (2012: 54% vs 2016: 70%).


EARNINGS REVISION/RISK

  • No change to our earnings estimates with a flat 3-year EPS CAGR of 1.1%.


VALUATION/RECOMMENDATION


Maintain HOLD and PE-based target price of S$2.47, pegged at mean PE of 16.5x.

  • While we like management’s execution capability and track record, we think the operating environment will remain challenging, particularly for the taxi segment with the advent of third-party car hires which brought about structural changes. 
  • While the taxi segment is undergoing a structural shift, CD’s move to adopt an asset-light model for its rail and bus operations would lead to lower capex. This could suggest potential M&A opportunities or further increases in dividend payout to mitigate the lack of growth due to a more challenging taxi outlook.


SHARE PRICE CATALYST

  • We see potential catalysts from: 
    1. more accretive overseas acquisitions, and 
    2. continued rise in dividends in 2017.




Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2017-03-30
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 2.470 Same 2.470



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