ComfortDelGro Corporation (CD SP) - UOB Kay Hian 2018-01-18: Negatives Mostly Priced In

  • ComfortDelGro Corporation (CD SP) - UOB Kay Hian 2018-01-18: Negatives Mostly Priced In COMFORTDELGRO CORPORATION LTD C52.SI
  • Uber UberFlash

ComfortDelGro Corporation (CD SP) - Negatives Mostly Priced In

  • While Singapore taxi conditions remain challenging, we believe the sector is gradually moving towards a more stable market. 
  • ComfortDelGro’s proposed alliance with Uber is also expected to be accretive. 
  • Maintain BUY and PE based-target price of S$2.25.



WHAT’S NEW


Continued concerns on Singapore taxi outlook. 

  • Investors remain concerned over the competitive pressures in the Singapore taxi segment. While we think that conditions remain challenging, we believe the sector has been consolidating and can hopefully see some stability in the next 6-12 months. This is indicated by slower growth of private car hire fleets. 
  • As of the latest LTA data, growth of rental cars has tapered to 34% y-o-y in Nov 17, vs Jan 17 where growth tracked 76% y-o-y. Total industry taxi fleet has also shrunk to 23,439 taxis (-18%) as at Nov 17 from the peak of 28,736 in Dec 14. 
  • In our view, the proposed alliance of ComfortDelGro Corporation (CD) and Uber could also help bring market stability.

Potential accretion from JV with Uber. 

  • Under the agreement, ComfortDelGro will acquire a 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 the Competition Commission of Singapore (CCS). Any impact will only be from 2018 onwards. 
  • On our estimates, the alliance could enhance ComfortDelGro’s 2018 net profit by up to 5%. However, we have not changed our estimates, pending the approvals from the regulatory authorities. 
  • 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.


Anti-competitive concerns overdone. 

  • Completion of the JV with Uber is subject to approval by CCS. There have been some concerns about the potential anti-competitive impact that may arise as a result of the deal and that approvals may not be secured. 
  • In our view, we believe that such concerns are not warranted, given that ComfortDelGro will still keep its booking platform which continues to allow consumers/passengers to opt for metered as well as a flat fare structure for taxis. Additionally, following the alliance, drivers will have more options to hire either rental cars or taxis. 
  • We also understand the taxis in ComfortDelGro’s fleet can opt to be on the Grab platform.


ESSENTIALS


Launch of dynamic pricing system this Friday (19 Jan 18). 

  • We understand that ComfortDelGro will launch a dynamic pricing system for its cabs, which will commence this Friday. This service will be similar to what the other five taxi operators had offered in Mar 17, where fares will fluctuate according to demand. This option will be offered through the Uber app, under the new UberFlash function.

UK bus tendering may get competitive but would be manageable. 

  • According to the most recent 2016/17 annual report by Transport For London, passenger numbers have been falling, particularly in central London where other forms of transport such as the Tube, walking or cycling are viable options. The London mayor has since announced plans to more effectively match services to demand. 
  • We acknowledge that contract bidding environment for UK bus operators may become more competitive in the longer term. Nevertheless, ComfortDelGro still holds one of the largest bus market shares in London (est. 18%) and we believe that margins could be sustained through cost efficiency. The UK contributes about 15% to the group operating profit.

Overseas opportunity. 

  • Meanwhile, in terms of overseas opportunity, we remain bullish on the Australia bus market, as the country is gradually shifting towards increased private-sector involvement in the delivery of bus services. 
  • We estimate government-owned operators would still operate more than 50% of the bus routes in Australia.


EARNINGS REVISION/RISK

  • Maintain earnings forecasts pending completion and financial details. We are keeping our earnings forecasts for now as this deal is still subject to regulatory approvals by PTC and CCS.


VALUATION/RECOMMENDATION

  • Maintain BUY and PE-based target price of S$2.25. Our target price is based on longterm 10-year PE average of 16.6x. At the current price, we believe ComfortDelGro’s shares price 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

  • Regulatory approvals for its proposed alliance with Uber.
  • Rising dividend payout.
  • More accretive and aggressive overseas acquisitions.




Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2018-01-18
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.250 Same 2.250



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