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Taxi operator ComfortDelGro upgraded to 'buy' even as ride-hailing market thrives amid ‘healthy competition’

Uma Devi
Uma Devi • 3 min read
Taxi operator ComfortDelGro upgraded to 'buy' even as ride-hailing market thrives amid ‘healthy competition’
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SINGAPORE (Oct 2): The entry of new players into the ride-hailing market, which broke a ‘monopoly’ following the Grab-Uber merger in 2018, has seen 55% of drivers report increased earnings even as average daily ride-hailing fares have fallen by 11% for commuters.

According to a study published Wednesday by the Centre for Governance, Institutions and Organisations (GCIO) at National University of Singapore (NUS) Business School, this underscores the importance of healthy competition in the ride-hailing market.

Commissioned by Gojek, the independent study polled 1,000 drivers and commuters who are users of multiple ride-hailing services, including Grab, Gojek, Ryde and Tada.

It comes close to a year after the Competition and Consumer Commission of Singapore (CCCS) issued an infringement decision on the Grab-Uber merger.

Overall market improvements

Some 80% of commuters surveyed believed the entry of new operators provided them with more options, while 52% of them noted improved availability of ride‐hailing services.

In fact, the new players have done more than improve the market statistics, according to Professor Lawrence Loh, director of CGIO. He opines that the new entrants might just have rescued consumers from suffering the brunt of the Grab-Uber merger.

“Since ride-hailing was introduced in Singapore in 2013, it has become an integral part of the country’s transport landscape. Our study supports Competition and Consumer Commission of Singapore (CCCS) findings that the Grab-Uber merger monopolised the ride-hailing market to the detriment of stakeholders,” says Loh.

“We are heartened to find that there is healthy competition in the market today as a result of the entry of new players and the responses from commuters and drivers support this,” he adds.

Taxi industry remains under pressure

While great for the ride-hailing market, the news does little to soothe the nerves of traditional taxi operators, such as land transportation behemoth ComfortDelGro Corporation (CDG).

According to Maybank Kim Eng Research analyst Luis Hilado, CDG’s monthly taxi fleet has been on the decline. He notes that CDG has continued to lose fleet share every month up to July 2019, resulting in a 9.4% drop in fleet size year-to-date.

In addition, the group’s management had recently indicated a potential sacrifice of 2H19 taxi margins in order to win back and retain drivers.

However, Hilado opines that CDG’s current share price, which has fallen 15% since July this year, is “not justified”.

“CDG has de-rated and underperformed the index over the past one and three months on no major unexpected news. The share price is implies a ‘no fare hike’ scenario for Singapore public transport which we think is not justified,” says Hilado.

Maybank is upgrading CDG to “buy” from “hold”, as the current share price implies a “healthy 15% upside” to its unchanged target price of $2.76.

Hilado also notes that the stock is currently trading only slightly above its 3-year and 10-year average P/E valuations – “far from the above +1SD levels the stock has traded at in recent times”.

“Although current competition from unlisted Grab and GoJek has continued to erode the taxi business the business restructuring has since taken place. Arguably this mitigates the risk of a similar de-rating as seen in 2017-2018,” he adds.

Meanwhile, the analyst believes the company’s strategic shift to a bus contracting model (BCM), which offers more regulated returns, as well as continued demand for public transport services, will continue to mitigate and outpace risks brought about by the rise of the ride-hailing market.

Shares in ComfortDelGro closed flat at $2.41 on Wednesday, implying an estimated price-to-earnings (PE) ratio of 17.1 times and a dividend yield of 4.4% for FY19E.

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