ComfortDelGro Corporation (CD SP) - UOB Kay Hian 2017-11-24: All Eyes On Upcoming CD-Uber Alliance


ComfortDelGro Corporation (CD SP) - UOB Kay Hian 2017-11-24: All Eyes On Upcoming CD-Uber Alliance COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro Corporation (CD SP) - All Eyes On Upcoming CD-Uber Alliance

  • We assess the upcoming ComfortDelGro-Uber alliance on areas of collaboration and potential earnings impact. 
  • Overall, we reckon the collaboration may result in intial rental pressure and earnings dilution. However, we deem the alliance necessary in the long run as it allows ComfortDelGro an inroad into the ride-hailing market and earnings uplift from the automotive engineering segment. 
  • We are keeping our earnings forecasts pending further announcements. Maintain BUY and PE-based target price of S$2.25.



ESSENTIALS


From competitors to partners. 

  • As the market scale required for profitability and network effect is typically very high, partnerships or alliances between ride-hailing and taxi operators globally are fast becoming a new competitive strategy rather than intense competition. 
  • The most common type of collaboration is that of shared platforms, where taxis could be made available on the booking apps of private hire car operators. However, more recently, market players are moving on to deeper forms of collaboration, which could extend to aspects of fleet management, shared payment system, fleet consolidation or even co-investment.

Three areas of potential collaboration for CD-Uber alliance. 

  • We see three possible areas of collaboration in the alliance between ComfortDelGro (CD) and Uber:
    1. JV with Uber, allowing ComfortDelGro to gain an inroad into the ride-hailing segment;
    2. collaboration in the automotive engineering segment, where the potential to service an additional 15,000 Uber cars will provide a lift to ComfortDelGro's automotive engineering segment; and
    3. shared platform, where ComfortDelGro may integrate driver applications onto Uber’s booking app, allowing ComfortDelGro drivers to benefit from Uber’s technological know-how such as ride-dispatching algorithms.

Overall, we estimate a possible 5% dilution to 2018 earnings...

  • Our base case scenario is a combination of all three areas of collaboration. Factoring earnings downside from a JV formation with Uber (-3.4% impact to 2018 earnings), rental pressure as taxi rental converges towards private hire cars’ (-7%), offset by uplifts in automotive engineering earnings (+5.3%), we expect the Uber strategic alliance to dilute ComfortDelGro's 2018 earnings by 5.1%.


STOCK IMPACT


…but necessary in the long run. 

  • Nevertheless, we believe the alliance is necessary in the long run as ComfortDelGro will need to embrace the new reality of the shared economy. The alliance gives ComfortDelGro an inroad to the ride-hailing business, where ComfortDelGro could raise driver retention rate through diversification and defend market share. 
  • While we expect taxi rental to come under pressure given competitive industry dynamics, we believe the shortfall may be partly mitigated by higher contributions from the automotive engineering segment as well as gradual ramp-up of the ride-hailing segment.


EARNINGS REVISION/RISK

  • No change to our earnings forecast. We are keeping our earnings forecasts for now, pending further announcements.



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's 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.




Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2017-11-24
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.250 Same 2.250



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