ComfortDelGro Corporation (CD SP) - UOB Kay Hian 2017-12-11: Positive On Uber JV, Maintain BUY

ComfortDelGro Corporation (CD SP) - UOB Kay Hian 2017-12-11: Positive On Uber JV, Maintain BUY COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro Corporation (CD SP) - Positive On Uber JV, Maintain BUY

  • ComfortDelGro Corporation has announced a strategic agreement to form a JV with Uber, but the deal is still subject to regulatory approval. 
  • While financial details are scant, our initial estimates show that there could be up to 5% increment to ComfortDelGro's 2018 earnings. We are positive on the JV and deem this alliance necessary in the long run as it gives ComfortDelGro inroads into the ride-hailing market where ComfortDelGro could raise driver retention rate through diversification and defend market share. 
  • Maintain BUY and PE-based target price of S$2.25.



WHAT’S NEW


CD enters into strategic agreement to form JV with Uber. 

  • Under the agreement, ComfortDelGro will acquire 51% stake in Uber’s wholly-owned car rental subsidiary in Singapore, Lion City Holdings (LCR). Uber Technologies will retain the remaining 49%. However, the transaction is still subject to regulatory approval from Public Transport Council (PTC) as well as Competition Commission of Singapore (CCS). 
  • No details on completion schedule were provided and we do not expect the deal to be completed by the end of this year. Any impact will only be from FY18 onwards.

Details of transaction. 

  • The aggregate consideration for the above acquisition is estimated at S$295m, which will be fully funded by cash. This amount was structured based on the book value of approximately S$642m, which is based on the value of about 12,450 vehicles (out of a total of 14,000 of LCR’s fleet). 
  • This will translate to an acquisition P/B of around 0.9x. This is reasonable since Uber currently has an idle rate of 10%, which will translate to a fleet of about 12,450 cars.

Other areas of collaboration include fleet management and shared platform. 

  • Upon completion of the transaction, LCR will be able to benefit from ComfortDelGro's fleet management and ComfortDelGro drivers will be able to receive ride requests on Uber’s driver app. The two companies are still finalising additional partnership opportunities and more announcements will be made in the coming months.


ESSENTIALS


JV to have an overall 5% upside to FY18 earnings. 

  • As of now, no financial details have been disclosed. However, based on our FY18 projections of LCR historical numbers (latest available FY16), we estimate the JV to register 5% earnings accretion to FY18 earnings. We derive our FY18 estimates based on ComfortDelGro's 51% controlling stake in JV and fleet utilisation of 95%. 
  • ComfortDelGro is in a net cash position of S$188m as of 9MFY17.
  • Post transaction, we estimate ComfortDelGro to revert to a net gearing position of up to 30%.


STOCK IMPACT


FY18 taxi rental decline to remain at 10% yoy for our base-case assumption. 

  • Our current estimates are premised on FY18 taxi rental decline remains at our current basecase assumption of 10% to S$99/day, and that no further decline in taxi rental is needed after the JV. 
  • While we note that S$99/day is still higher than the average private hire car rental of S$70/day, we reckon this is a fair assumption as taxis are typically ascribed a “street hail premium” (street hail currently constitutes 70% of taxi rides).

Overall, we are positive on this transaction. 

  • The deal with Uber is consistent with our initial analysis (see report: ComfortDelGro Corporation (CD SP) - All Eyes On Upcoming CD-Uber Alliance, dated 24 November), where we rightly highlighted the 51% JV with Uber, shared booking platform as well as fleet management partnership. However, our initial estimates were based on historical LCR FY16 numbers.
  • With further clarity from this announcement of the acquisition of 12,450 cars and higher expected car utilisation, our reworked FY18 estimates show that this JV could be 5% earnings accretive to FY18F earnings.
  • Overall, we view the tie-up positively and see it as a necessity, as it gives ComfortDelGro an inroad to the ride-hailing business, where ComfortDelGro could raise driver retention rate through diversification and defend market share. 
  • While taxi rental may continue to come under pressure given competitive industry dynamics and potential reactions from Grab, we believe the shortfall may be mitigated by ramp-up of the ride-hailing segment.


EARNINGS REVISION/RISK


No change to our earnings forecast pending completion and financial details. 

  • We are keeping our earnings forecasts for now as this deal is still subject to regulatory approvals by Public Transport Council (PTC) as well as Competition Commission of Singapore (CCS). 
  • Although details on the financials are still very limited, we estimate a 5% uplift to FY18 earnings based on our initial forecast.


VALUATION/RECOMMENDATION


Maintain BUY with a PE-based target price of S$2.25. 

  • Our target price is based on a long-term average PE of 16.6x. At the current price, we believe ComfortDelGro shares have mostly reflected the disruption from private hire cars. 
  • We see limited downside risk to current share price as taxi earnings will unlikely be zero in the next 2-3 years, and the long-term outlook for public infrastructure (bus and MRT) in Singapore will still be very resilient. 
  • We see potential upside to rail earnings, given the government’s plans to double rail network by 2030, with the next upcoming line being the Jurong Region Line (expected completion: 2025).


SHARE PRICE CATALYST

  • More accretive and aggressive overseas acquisitions.
  • Rising dividend payout.




Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-12-11
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.250 Same 2.250



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