SINGAPORE (Dec 11): Analysts are largely positive on the proposed tie-up between ComfortDelGro Corporation and Uber Technologies, even as they await more financial details to emerge pending the completion of the deal.
ComfortDelGro, Singapore’s largest taxi operator, on Friday announced a proposed joint venture with private hire car service start-up Uber.
The agreement will see CDG acquire a 51% stake in Uber-owned Lion City Holdings for an estimated $295 million. LCH operates Lion City Rentals, a car rental subsidiary with a fleet of some 14,000 vehicles.
The collaboration could see CDG’s fleet of more than 14,300 taxis being made available on Uber’s app, while the companies work together on the management of fleet vehicles and booking software solutions in Singapore.
The deal is subject to regulatory approval from the Public Transport Council (PTC) and the Competition Commission of Singapore (CCS).
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The move comes amid continued weakness from CDG’s taxi business, which has been dented by increased competition from private hire car service operators such as Uber and Grab.
“While financial details are scant, our initial estimates show that there could be up to 5% increment to ComfortDelGro’s 2018 earnings,” says UOB Kay Hian lead analyst Thai Wei Ying in a Monday report.
Thai adds that any impact will only be from FY18 onwards as the deal is not expected to be completed by the end of this year.
UOB is keeping its “buy” recommendation on CDG with an unchanged target price of $2.25.
Maybank Kim Eng Research analyst John Cheong notes that CDG could see a potential loss of interest income of around $3 million per year from the $295 million consideration, assuming a rate of 1% for interest income.
In addition, Cheong says interest costs for CDG could rise by $6.7 million as it should also be taking on additional debt in LCR.
In total, these work out to financing expenses of close to $10 million for CDG.
“The key financial measure that needs to be calculated is the level of profitability for LCR, which will be determined based on the daily rental rate, utilisation rate, and whether Uber will be subsidising the promotional rental,” Cheong says.
However, the analyst says the tie-up should be positive as both parties leverage on their respective strengths: CDG’s good fleet management and Uber’s technology-centric ride-booking app.
Maybank is keeping its “buy” call on CDG with an unchanged target price of $2.40.
On the other hand, Phillip Securities Research analyst Richard Leow opines that the tie-up is unlikely to directly address the decline in CDG’s taxi business.
“Comfort/CityCab drivers will now have access to Uber’s ride-booking app-based platform, but we do not see that as doing much for the Taxi business, in terms of maintaining driver stickiness, nor the resultant contraction to taxi fleet,” says Leow.
In addition, he says CDG could incur further capex from the asset-heavy car rental business. In its Friday announcement, CDG says it has “agreed to pay for more vehicles when utilisation increases.”
Phillip is keeping its “buy” recommendation on CDG with an unchanged target price of $2.69. “We have not made any changes to our forecasts, pending more details and conclusion of the deal,” Leow says.
While the proposed acquisition will leave a narrower cash position for dividends, CIMB Research lead analyst Cezzane See says dividends are likely to remain intact.
“CDG 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,” she says.
While See agrees that the move might not rejuvenate CDG’s taxi segment, she adds that potential benefits include a lower taxi idling rate, and uplift in earnings for its Automotive Engineering Services (AES) and car leasing & rental (CLR) divisions.
As the deal is still pending regulatory approval and details are scarce, CIMB is keeping its “hold” call on CDG with an unchanged target price of $2.15.
Meanwhile, DBS Group Research analyst Andy Sim remains neutral on the proposed acquisition, 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,” Sim says. “However, competition still exists from Grab which we believe would still be aggressive in its bid to gain market share.”
In addition, Sim believes that LCH is unlikely to be profitable, based on its advertised promotional rental rates.
DBS is keeping its “hold” call on CDG with an unchanged target price of $2.18.
“We are positive on the JV and deem this alliance necessary in the long run as it gives CDG inroads into the ride-hailing market where CDG could raise driver retention rate through diversification and defend market share,” says UOB’s Thai.
As at 12.52pm, shares of ComfortDelGro are trading 8 cents higher, or up 4.2%, at $1.99. According to UOB forecasts, this implies an estimated price-to-earnings ratio of 13.5 times and a dividend yield of 5.1% for FY18.
