ComfortDelGro - CIMB Research 2017-12-09: Uber Deal Emerges; Hoping For Safer Territory

ComfortDelGro - CIMB Research 2017-12-09: Uber Deal Emerges; Hoping For Safer Territory COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro - Uber Deal Emerges; Hoping For Safer Territory

  • We are unsurprised by ComfortDelGro's proposed acquisition of 51% of Lion City Rental (LCR), which has been anticipated for some time. The deal is subject to regulatory approval.
  • Cash consideration of S$295m is within ComfortDelGro's capacity given its cash pile of S$538.1m at end-Sep 17. We expect its dividend payout to be unaffected by this purchase.
  • Potential benefits include a lower taxi idling rate, and uplift in earnings for its Automotive Engineering Services (AES) and car leasing & rental (CLR) divisions.
  • Target Price upside has widened vs. the current share price of ComfortDelGro, but we maintain Hold. We await a successful completion of the deal and finer financial details to emerge.
  • Risk-reward may tilt towards the upside as valuations have slipped below its long-term average mean.

Consolidating 51% stake in Uber’s preferred rental car unit 

  • ComfortDelGro mentioned that the cash consideration of S$295m for the 51% stake in Uber’s preferred rental car subsidiary was arrived at based on a net asset value of c.S$642m for 12,450 cars vs. Lion City Rental's current fleet of 14,000. 
  • ComfortDelGro will likely consolidate Lion City Rental (LCR) financials given the majority stake. 
  • We understand that Lion City Rental (LCR) is in a debt position of c.S$1.0bn as at Dec 16, and we believe the proceeds could be utilised to pare down debt. 
  • ComfortDelGro has agreed to pay for more vehicles when Lion City Rental (LCR)'s utilisation increases.

Requisite cash pile to stomach acquisitions; Dividends likely intact 

  • The cash consideration of S$295m is within capacity, given its cash pile of S$538.1m as at end-Sep 17. This leaves a narrower cash position for dividends; however, we believe ComfortDelGro may prioritise dividends to incentivise investors and tap into more borrowings to alleviate working cap needs in the near-term. 
  • We assume a 75% payout rate for FY17F.

Stemming the taxi idling rate 

  • ComfortDelGro has guided that the tie-up with Lion City Rental would create a path for its taxi drivers to receive ride requests on Uber’s app, which could lower the idling rate (c.5% in 9M17), in our view. 
  • However, a return to growth for ComfortDelGro's taxi fleet (and earnings) may be unlikely as competition in the taxi/rental car segment has become more competitive, with the ratio of rental cars vs. taxis having risen significantly. 
  • As at Oct 17, rental cars outnumbered taxis by 2.8x.

Breathing new life into AES and CLR divisions 

  • For the Automotive Engineering Services (AES) division, we believe the additional Uber fleet of 14,000, on a slight discount to revenue/car could lift FY18F EBIT contribution to c.12% p.a. (vs. 10% previously). 
  • For the Car Leasing & Rental (CLR) division, assuming 12,450 Uber cars and similar EBIT margins of 24% seen for ComfortDelGro, this could double the division’s EBIT. 
  • Overall, we preliminarily believe that the deal could accrete 4-9% to our FY18-19F EPS.

Taxis/ride-hailing apps gravitate towards co-existing 

  • The tie-up may not rejuvenate ComfortDelGro's taxi segment, in our view; but it could moderate the competitive landscape as there would be fewer players in direct competition (two large consortiums: ComfortDelGro / Uber tie-up; and Grab / SMRT / Transcab / Prime Taxi / Premier Taxis / HDT Singapore Taxi). 
  • Also, the new earnings for the AES and CLR divisions could help stem the yoy declines in our current forecasts if they pan out as mentioned above.

Maintain Hold; await completion of the deal 

  • We maintain our estimates and DCF-based TP of S$2.15 (WACC: 7.4%) as the deal is still pending regulatory approval and details are scarce. However, near-term risk-rewards do tilt towards the upside as ComfortDelGro's share price has fallen 4% this week. 
  • FY17F valuations have slipped to 14.0x, below its average mean of 15.9x. 
  • Upside risks include better-than-expected financial benefits from the deal. 
  • Downside risks include the deal not going through.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-12-09
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 2.150 Same 2.150