ComfortDelGro (CD SP) - DBS Research 2017-12-11: Buying Into Private-hire Vehicles Through Lion City

ComfortDelGro (CD SP) - DBS Vickers 2017-12-11: Buying Into Private-hire Vehicles Through Lion City COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro (CD SP) - Buying Into Private-hire Vehicles Through Lion City

  • ComfortDelGro to acquire 51% stake in Lion City Holdings.
  • Deal size at S$642m, cash consideration of S$295m.
  • Combined fleet accounts for 30% market share.
  • Initial take: Neutral, some EPS accretion though developments from competition and synergies bear watching.

What’s New 

Strategic agreement with Uber to take 51% stake in Lion City Holdings. 

  • ComfortDelGro announced on Friday evening that it has entered into a strategic agreement to form a joint venture with Uber Technologies, Inc. through the acquisition of a 51% stake in Lion City Holdings Pte Ltd (LCH). LCH in turn operates Lion City Rentals (LCR) which has a fleet of about 14,000 vehicles.

Acquisition size of S$642m; cash consideration of S$295m. 

  • The aggregate cash consideration for the acquisition is estimated at S$295m, which is based on the net asset value of about S$642m (based on 51% share). This, in turn, is based on the value of about 12,450 vehicles, and implies a value of about S$101k per vehicle. We understand that the cash component will be funded internally, but ComfortDelGro will also assume the debt currently undertaken by Lion City Holdings/Lion City Rentals.
  • In our view, this seems reasonable for ComfortDelGro from an asset-value perspective, though we believe Lion City Holdings is unlikely to be profitable. In the announcement, it was indicated that ComfortDelGro has agreed to pay more for vehicles when utilisation increases. We believe this pertains to the remaining 1,500 vehicles, which is the difference between the total fleet of about 14,000 and 12,450 vehicles ComfortDelGro is acquiring in Lion City Rentals.

Synergies from fleet management, automotive engineering. 

  • From the announcement, it was indicated that Lion City Rentals will benefit from CD’s expertise in fleet management and operations, while CD’s taxi drivers will be able to receive bookings through the Uber driver’s app. This does not come as a surprise, given our earlier expectations when news of a potential alliance was first announced in August.

Our views: 

Neutral stance, but bears watching and further analysis… 

  • At this stage, we are neutral on the transaction with positive and uncertainties weighing relatively equally. On the positive side, we believe the tie-up and collaboration outweigh the competition, coupled with our view that the price seems fair - at net asset value. 
  • In addition, there could be potential synergies from a larger fleet and for taxis to leverage on the Uber app.

…but competition still looms from Grab. 

  • However, competition still exists from Grab which we believe would still be aggressive in its bid to gain market share. Following ComfortDelGro’s initial announcement on a potential strategic alliance with Uber in August, Grab promptly announced promotional plans to attract drivers. 
  • On the operational side, the collaboration between ComfortDelGro and Lion City Rentals/ Uber could require some lead time post regulatory approval, in our view.

Asset acquisition to gain majority share. 

  • The acquisition of a 51% stake in Lion City Holdings came as little surprise to us, though we believe this could signal ComfortDelGro’s desire to leverage its fleet management expertise and maintain majority share. Assuming the transaction is approved by regulatory authorities, the combined entity of ComfortDelGro/ Lion City Holdings will have a total fleet of about 27k taxis/ private hire vehicles (PHV). This implies about 30% market share of all taxis and PHVs in Singapore (c.90k – taxis 24k, rental cars 66k).
  • The deal itself may lead to some EPS accretion (est. 1-4%) but there are other factors to consider as well. Based on our estimates, we believe Lion City Holdings is not profitable, given the advertised promotional rental rates ranging from S$38 to $58/day. 
  • Going forward, assuming there is harmonisation in rental rates and the promotional rates are subsidised by Uber, our initial rough calculation suggests Lion City Holdings may be able to add between 1-4% in profits, based on assumptions on rental rates, utilisation, operating margins. However, this does not take into account significant cuts in rental rates for taxis.
  • While we understand that ComfortDelGro has introduced various schemes in a bid to be more competitive against PHV rental companies, the rental gap between taxis and PHV remains. At this stage, it is unclear if rental rates would move closer, with a narrower gap between the two categories.
  • In our current financial model, we have factored in ComfortDelGro’s 14k taxis in FY18F, leading to a 12% fall in its taxi revenue in Singapore, following a similar 12% decline in FY17F. We are retaining our forecasts for now and will update after the finalisation of the deal and/or with further details.

Andy SIM CFA DBS Vickers | 2017-12-11
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 2.180 Same 2.180