ComfortDelGro Corporation - RHB Invest 2017-07-03: Short-Term Relief From PDVL Implementation

ComfortDelGro Corporation - RHB Invest 2017-07-03: Short-Term Relief From PDVL Implementation COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro Corporation - Short-Term Relief From PDVL Implementation

  • The LTA’s Private Hire Car Driver's Vocational Licence (PDVL) framework was implemented on 1 Jul. The framework requires PHC drivers to be licensed and for PHCs to be clearly identified through use of tamper-evident decals. Heavy fines have been proposed for PHC drivers who do not hold a valid PDVL or display the decals while providing services from 1 Jul. 
  • Our channel checks suggest that ~15-20% of the PHC fleet was taken off the road due to the PDVL implementation. 
  • We have long stated that the implementation of this license would limit the PHC driver supply and should shift some demand back to taxis. This is as PHC fares could increase through shrinking driver supply. 
  • We view the implementation of the PDVL as short-term positive for ComfortDelGro. We already forecast an annual fleet contraction of 0.5% for its Singapore taxi fleet. 
  • Maintain BUY and SGD3.00 Target Price (30% upside).



What’s New 


The Private Hire Car Driver’s Vocational Licence (PDVL) framework comes into force. 

  • The Land Transport Authority’s (LTA) PDVL framework was implemented on 1 Jul
  • The framework requires all chauffeured private hire cars (PHC services like Uber and Grab) to display a pair of serialised tamper-evident decals on the front and back windscreens of their vehicles. PHC drivers also need to secure the PDVLs and must display their licenses or LTA concession letter authorising them to provide chauffeured services. 
  • Heavy fines have been proposed for PHC drivers who do not hold a valid PDVL or display the decals while providing chauffeured services from 1 Jul.


Our View 


Expect some drop in driver supply for PHCs. 

  • Our conversation with PHC drivers over the weekend makes us believe that ~15-20% of the PHC fleet was taken off the road due to the implementation of the PDVL. Reasons cited by PHC drivers for the likely reduction in the fleet size include drivers unwilling to display decals on self-owned vehicles, and delays in part-time drivers acquiring the PDVL. A 24 Jun Straits Times report indicated that only 27,000 PHC cars, or ~63% of the total population, had decals affixed. 
  • We have long stated that the implementation of the PDVL would limit the PHC driver supply, especially due to its course requirements, employment terms related to the nationality of the driver, and PHC cars being registered and identified with a tamper-proof decal. 
  • We forecast an annual fleet contraction of 0.5% for ComfortDelGro Corp’s (ComfortDelGro) Singapore taxi fleet. While the current rate of decline in its fleet size has been much higher, we believe the PDVL implementation should restrict such a sharp decline.

Fare promotions from PHC companies have declined. 

  • We believe that the PDVL implementation should shift some demand back to taxis, as PHC fares could increase through shrinking driver supply. We have noticed a sharp decline in freebies being offered by Uber and Grab Singapore over the last few weeks. 
  • Uber’s promotions are now based on percentage reduction in final fares for a limited number of rides, with a limit on maximum fare reduction for each ride (eg 50% off for the next three rides for up to SGD5.00/ride). This compares with fixed price promotions (eg SGD3.00/SGD5.00 off each ride) offered earlier. This change limits the riders from enjoying free rides on the Uber network. 
  • Grab Singapore has moved to a prepaid credits system, whereby a rider needs to top up its payment system (GrabPay) before being able to enjoy any reductions in fare.

Some relief for taxi companies, but not for long. 

  • While the implementation of the PDVL framework should provide short-term relief for taxi companies, a delay in creating a level playing field between the PHCs and taxi companies does create a downside risk for the latter. 
  • As the PDVL limits the addition of new drivers by PHC companies, we believe Uber and Grab Singapore may choose to target the large pool of taxi driver vocational licence holders, thereby leading to an eventual shortage of taxi drivers.


Valuation and Risks 


Maintain BUY. 

  • We like ComfortDelGro for its ability to deliver 7.5% profit CAGR during 2016-2019, which is in line with its 10-year and 5-year profit CAGRs of 7.4% and 6.1% respectively. Its high FCF yield of +7% should support dividends. 
  • Management remains on the lookout for inorganic growth opportunities, given its strong net cash balance sheet. 
  • Key downside risks to earnings are lower-than- estimated margins for its Singapore bus business under the Government’s contracting model, further delays in the breakeven of the Downtown Line operations, a sharp appreciation in oil prices, and lower-than-estimated growth in the domestic taxi fleet.




Shekhar Jaiswal RHB Invest | http://www.rhbinvest.com.sg/ 2017-07-03
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 3.000 Same 3.000



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