ComfortDelGro - CIMB Research 2017-12-09: Uber Deal Emerges; Hoping For Safer Territory

COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro - Uber Deal Emerges; Hoping For Safer Territory

We are unsurprised by ComfortDelGro's proposed acquisition of 51% of Lion City Rental (LCR), which has been anticipated for some time. The deal is subject to regulatory approval.
Cash consideration of S$295m is within ComfortDelGro's capacity given its cash pile of S$538.1m at end-Sep 17. We expect its dividend payout to be unaffected by this purchase.
Potential benefits include a lower taxi idling rate, and uplift in earnings for its Automotive Engineering Services (AES) and car leasing & rental (CLR) divisions.
Target Price upside has widened vs. the current share price of ComfortDelGro, but we maintain Hold. We await a successful completion of the deal and finer financial details to emerge.
Risk-reward may tilt towards the upside as valuations have slipped below its long-term average mean.

ComfortDelGro mentioned that the cash consideration of S$295m for the 51% stake in Uber’s preferred rental car subsidiary was arrived at based on a net asset value of c.S$642m for 12,450 cars vs. Lion City Rental's current fleet of 14,000.
ComfortDelGro will likely consolidate Lion City Rental (LCR) financials given the majority stake.
We understand that Lion City Rental (LCR) is in a debt position of c.S$1.0bn as at Dec 16, and we believe the proceeds could be utilised to pare down debt.
ComfortDelGro has agreed to pay for more vehicles when Lion City Rental (LCR)'s utilisation increases.

The cash consideration of S$295m is within capacity, given its cash pile of S$538.1m as at end-Sep 17. This leaves a narrower cash position for dividends; however, we believe ComfortDelGro may prioritise dividends to incentivise investors and tap into more borrowings to alleviate working cap needs in the near-term.
We assume a 75% payout rate for FY17F.

ComfortDelGro has guided that the tie-up with Lion City Rental would create a path for its taxi drivers to receive ride requests on Uber’s app, which could lower the idling rate (c.5% in 9M17), in our view.
However, a return to growth for ComfortDelGro's taxi fleet (and earnings) may be unlikely as competition in the taxi/rental car segment has become more competitive, with the ratio of rental cars vs. taxis having risen significantly.
As at Oct 17, rental cars outnumbered taxis by 2.8x.

For the Automotive Engineering Services (AES) division, we believe the additional Uber fleet of 14,000, on a slight discount to revenue/car could lift FY18F EBIT contribution to c.12% p.a. (vs. 10% previously).
For the Car Leasing & Rental (CLR) division, assuming 12,450 Uber cars and similar EBIT margins of 24% seen for ComfortDelGro, this could double the division’s EBIT.
Overall, we preliminarily believe that the deal could accrete 4-9% to our FY18-19F EPS.

The tie-up may not rejuvenate ComfortDelGro's taxi segment, in our view; but it could moderate the competitive landscape as there would be fewer players in direct competition (two large consortiums: ComfortDelGro / Uber tie-up; and Grab / SMRT / Transcab / Prime Taxi / Premier Taxis / HDT Singapore Taxi).
Also, the new earnings for the AES and CLR divisions could help stem the yoy declines in our current forecasts if they pan out as mentioned above.

We maintain our estimates and DCF-based TP of S$2.15 (WACC: 7.4%) as the deal is still pending regulatory approval and details are scarce. However, near-term risk-rewards do tilt towards the upside as ComfortDelGro's share price has fallen 4% this week.
FY17F valuations have slipped to 14.0x, below its average mean of 15.9x.
Upside risks include better-than-expected financial benefits from the deal.
Downside risks include the deal not going through.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-12-09

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