ComfortDelGro (CD SP) - Maybank Kim Eng 2018-03-09: Potential Positive Developments

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COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro (CD SP) - Potential Positive Developments

Potential Grab-Uber merger & positive regulations 

• Potential acquisition of Uber by Grab, reported by Bloomberg, could be positive for ComfortDelGro if it happens in Singapore, as the consolidation could reduce competition for the taxi industry. However, regulatory hurdles could block the deal. 
• Also, the Ministry of Transport raised two positive points in the budget debate on 7 Mar 2018:
  1. the rail fare could increase; and
  2. further regulation of private-hire car services. 
• Maintain BUY and DCF-based Target Price of SGD2.35 (WACC 9%).

Potential scenarios for Grab’s acquisition of Uber 

• In Singapore, it might be difficult for Grab to acquire Uber, as the regulators are very much against market dominance by a single player.
• However, we think of several scenarios for Comfort if the deal goes through:
  1. ComfortDelGro continues to acquire Uber’s car-rental fleet and partners with Grab instead of Uber. As ComfortDelGro and Uber have not closed the deal, which is pending regulatory approval, they might renegotiate the terms;
  2. ComfortDelGro calls off the deal and Grab acquires Uber’s car rental fleet along with Uber’s booking app. This is less likely as Grab’s current business model involves partnering with other vehicle-rental companies, instead of owning a large fleet of vehicles in-house; and
  3. UberFlash should continue, as Uber's ride-booking app is likely to stay.
• Following the acquisition of Uber by Didi Chuxing in China in 2016, Uber's app has been retained.

Fare hike and further regulation for Grab & Uber 

• Two potential positive points were raised by the Ministry of Transport in its budget debate yesterday. 
  • First, the rail fares could rise as commuters will be required to share the cost increase in improving the service standards. Operating costs have risen by around 60% over the past 5 years but fares have gone down by 2%. The key timeline is the conclusion of the fare formula review by PTC, targeted to be by 1Q18.
    ComfortDelGro should benefit if there is any hike in the rail fare, as it shares the fare revenue with the government. We estimate every 1% increase in rail fare will raise ComfortDelGro's FY19E EBIT by 0.05%. 
  • Second, further regulation in the private-hire car services, operated by Uber and Grab, could benefit Comfort’s taxi unit as it could further level the playing field.

Swing Factors

Upside

• Higher-than-expected bus profitability.
• Successful bids for new rail lines in Singapore.
• Value-enhancing acquisitions of overseas business.

Downside

• Decline in taxi utilisation or rental rates.
• Overpaying for acquisitions.
• Higher labour and energy costs.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-03-09

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 2.350 Same 2.350