ComfortDelGro Corporation (CD SP) - UOB Kay Hian 2017-08-24: Potential Uber Alliance May Improve Taxi Utilisation Rate

ComfortDelGro Corporation (CD SP) - UOB Kay Hian 2017-08-24: Potential Uber Alliance May Improve Taxi Utilisation Rate COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro Corporation (CD SP) - Potential Uber Alliance May Improve Taxi Utilisation Rate

  • ComfortDelGro Corporation (CD) is in talks with Uber to form a strategic alliance, which may include collaboration in fleet management, booking software solutions and taxis made available on Uber’s booking app. 
  • While no further details were given, we believe this could lift CD’s taxi utilisation and other segments. We keep our earnings forecasts pending more details. 
  • Maintain HOLD and PE-based target price of S$2.37. Entry price: S$2.25.



WHAT’S NEW


Potential Uber alliance to strengthen CD’s position as mobility service provider.

  • ComfortDelGro Corporation (CD) has signed an exclusivity letter with Uber to discuss forming a potential strategic alliance. This may include collaboration in fleet management, booking software solutions and taxis being made available on Uber’s app. However, there is no assurance that the discussions will result in a definitive agreement.


ESSENTIALS


CD’s taxi fleet is facing operational decline. 

  • CD’s taxi idle rate has edged up to 5% in 2Q17, from 3.5% in 1Q17. Meanwhile, based on the latest LTA data in June, we note that the group’s taxi fleet had declined 9% yoy to 15,556.

Uber alliance may be different from the current Taxi/Grab partnership. 

  • We believe CD’s potential alliance with Uber may be different from Grab/Taxis tie-up. Recall in March, Grab became the third-party booking platform for all other taxi operators (Trans, SMRT, Premier, Prime), except CD. 
  • Besides making taxis available on Uber’s booking app, CD’s alliance with Uber may also focus on mobility services such as fleet management and booking software solutions. We believe this could even extend to other parts of CD’s operating segments, such as automotive engineering services or inspection/testing services. 
  • We note CD’s inspection/testing arm, VICOM, currently does inspection for private hire cars, such as decal inspection as well as decal installation and registration.

Overall positive; key is utilisation uplift for taxi... 

  • While no further details of the alliance were disclosed, we view this potential alliance positively as we see synergistic benefits to both parties. We believe CD could see a rise in utilisation rate from increased bookings though Uber’s platform. 
  • Currently, we estimate every 1% increase in utilisation to improve group earnings by 2-2.5%. However, even if the alliance is confirmed, we believe CD will probably have to share the economics with Uber, possibly in profit share of revenue or lower taxi rental.

…Uber may also benefit. 

  • With Grab currently raising US$2.5b funding, we reckon the operating environment will remain competitive. 
  • We believe a potential alliance with CD may allow Uber to benefit from CD’s taxi fleet, which is the largest in Singapore with a market share of about 60%.

Other taxi operators still struggling despite Grab partnership. 

  • Separately, we tracked the fleet size of the other operators (Trans, SMRT, Premier, Prime) which tied up with Grab. On average, the total fleet size still declines around 9% ytd. 
  • While we do not have details on utilisation rates of these operators, we believe the decline in fleet size indicates operators are still struggling to rein in their idle rates to optimal level.


EARNINGS REVISION/RISK

  • No change to our earnings estimates pending further details of the potential alliance with Uber.


VALUATION/RECOMMENDATION

  • Maintain HOLD and PE-based target price of S$2.37, based on long-term average PE of 16.6x. While management’s execution capability and track record is good, we think the operating environment will remain challenging and fluid, particularly in the taxi segment, due to disruption from third-party car hire. 
  • However, CD’s move to an asset-light rail and bus business model would lead to lower capex. This could suggest further potentially higher dividend payout to mitigate the lack of growth from the tougher taxi outlook. 
  • Entry price is S$2.25.


SHARE PRICE CATALYST

  • Completion of strategic alliance with Uber.
  • More accretive and aggressive overseas acquisitions.
  • Rising dividend payout.




Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2017-08-24
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 2.370 Same 2.370



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