ComfortDelGro Corporation (CD SP) - UOB Kay Hian 2018-03-29: More Questions Than Answers

ComfortDelGro Corporation (CD SP) - UOB Kay Hian 2018-03-29: More Questions Than Answers COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro Corporation (CD SP) - More Questions Than Answers

  • The acquisition of Uber’s SEA operations by Grab could drastically alter the competitive dynamics in Singapore’s private car hire and taxi industry. Also, regulatory uncertainties would mean limited visibility for the sector. 
  • Maintain BUY but the shares could range trade till there is more clarity. 
  • Target price: S$2.25.



WHAT’S NEW


Grab rules in SEA. 

  • Grab announced that it had acquired Uber’s Southeast Asia (SEA) operations and Uber will take a 27.5% stake in Grab. The financial details were not disclosed but this development should not be too surprising given the common shareholding in these two companies by Softbank
  • With the acquisition, Grab will take over Uber’s operations and assets in eight countries, including Singapore, Malaysia, Indonesia, Thailand, the Philippines, Vietnam and Myanmar. However, what was surprising is the speed of the merger implementation, including the announcement that Uber services in SEA will be transitioned to Grab with effect from 8 April.

Regulatory uncertainties. 

  • Interestingly, it was reported by Channel NewsAsia (CNA) that The Competition Commission of Singapore (CCS) has written to the companies to clarify the details of the deal. In response to this, Grab replied that it has informed the CCS and will be making a merger notification filing. 
  • Given the potential that the merger between UBER and Grab could reduce competition, there is the potential risk that CCS could impose conditions for its operations in Singapore. In addition, the alliance between ComfortDelGro (CD) with Uber is clearly in doubt with the latest development.

New competitor pops up. 

  • Even before the dust has settled on the Uber and Grab merger, homegrown carpooling app, Ryde announced on 28 March that it will be launching RydeX, its new private-hire car service. It currently has a combined fleet of more than 55,000 drivers, including both private cars and taxis that serve 300,000 passengers a day in Singapore and Hong Kong.


ESSENTIALS


Possible scenarios. 

  • As the current situation remains fluid, we highlight several potential scenarios, though we would emphasise that the scenarios presented are clearly not exhaustive.
    1. ComfortDelGro terminates deal to acquire Lion City Rental (LCR). This would ease the financial pressure on ComfortDelGro as it would have to assume the debts of over S$1.0b. However, competition will remain intense, and if ComfortDelGro does not tie up with Grab, the former will not have access to the private car hire booking platform.
    2. ComfortDelGro continues with the acquisition of LCR and ties up with Grab. Whilst this is a theoretical possibility, we think this is unlikely as CCS may not approve the transaction. Even though the entry of RydeX into Singapore could boost competition, a tie-up between ComfortDelGro and Grab may not secure regulatory approvals, in our view due to the dominance of ComfortDelGro and Grab.
    3. ComfortDelGro continues with the acquisition of LCR but does not tie up with Grab, after its merger of Uber. In our view, this is unlikely as ComfortDelGro will be saddled with private cars (of circa 14,000 from LCR) without a private car hire booking platform, which would be clearly negative.


EARNINGS REVISION/RISK


Maintain earnings forecasts. 

  • We are keeping our earnings forecasts for now as the situation remains fluid and we had not factored in the potential upside from the proposed ComfortDelGro and Uber alliance, which had not received regulatory approvals.


VALUATION/RECOMMENDATION

  • Sticking to BUY but ComfortDelGro share price could be range bound due to uncertainties. Our target price is based on a long-term 10-year PE average of 16.6x. At current levels, we think most of the negatives have been priced in from the disruption from private hire cars.
  • Whilst the merger between Grab and Uber could temporarily ease competition, there remains limited entry barriers, as indicated by the entry of RydeX into Singapore.
  • Nevertheless, there are positives, including potential upside to its rail earnings with the expected breakeven of the Downtown Line (DTL) in early-19, and with the government’s plans to double rail network by 2030.


SHARE PRICE CATALYST

  • Rising dividend payout.
  • More accretive and aggressive overseas acquisitions.
  • Announcements by CCS regarding Grab and Uber merger.




Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2018-03-29
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.250 Same 2.250



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