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Will stiff taxi competition continue to hinder ComfortDelGro despite Uber alliance?

Michelle Zhu
Michelle Zhu • 5 min read
Will stiff taxi competition continue to hinder ComfortDelGro despite Uber alliance?
SINGAPORE (Feb 14): OCBC is upgrading its call on ComfortDelGro (CDG) while increasing its fair value to $2.25 from $2.12 previously after rolling forward its valuations, on the belief that CDG’s alliance with Uber, if approved, will help to stabilise t
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SINGAPORE (Feb 14): OCBC is upgrading its call on ComfortDelGro (CDG) while increasing its fair value to $2.25 from $2.12 previously after rolling forward its valuations, on the belief that CDG’s alliance with Uber, if approved, will help to stabilise the group’s earnings outlook going forward.

See: ComfortDelGro and Uber finally join forces

This is because the alliance would stabilise CDG’s taxi idle rate as well as open up potential opportunities from enlarged fleet to sell petrol and provide vehicle maintenance services, says OCBC lead analyst Eugene Chua in a Wednesday report.

The upgrade comes after CDG on Tuesday posted FY17 earnings of $301.5 million, down 4.9% from a year ago on the back of lower revenue, particularly in the taxi business segment.

See: ComfortDelGro posts 4.9% drop in FY17 earnings to $301.5 mil as competition in taxi business heats up

“In our view, while the taxi business remains highly competitive, we expect the rate of decline in CDG’s taxi business to slow down going forward, but possibly at the expense of lower operating margin in order to incentivise existing hirers to continue renting the taxis,” says Chua.

The analyst expects gradual and steady growth from CDG’s bus business, which he thinks will help to offset the current weakness in the group’s taxi segment.

“According to management, while taxi fleet size has been shrinking over FY17, idle rate has remained in the low single-digit level. Looking into FY18, management guided that they will not grow its taxi fleet size but may look to replace taxis that are slated to be scrapped during the year, if there is demand, and certainly not at the expense of higher idle rate,” he adds.

Meanwhile, CIMB and RHB are maintaining their “hold” and “neutral” ratings at the respective target prices of $2.16 and $2.01 as both research houses await re-rating catalysts, especially the group’s proposed acquisition of a majority 51% stake in Uber’s wholly-owned car rental subsidiary, Lion City Rental (LCR).

See: ComfortDelGro on 'hold' as it kick starts collaboration with Uber

“The 51%-stake purchase of LCR is still pending regulatory approval at this juncture, but we note that management expects the move to not only spearhead CD’s entry into the private-car business and generate more business for its automotive engineering divisions from the maintenance of Uber’s cars and sale of petrol. It also guided that it is open to gear up for suitable M&As in the future,” comments CIMB lead analyst Cezzanne See in a separate report.

In See’s view, the stock remains “unexciting” pending the final details of its LCR acquisition, with downside risks including further deterioration in the taxi and public transport profits.

CIMB has revised its FY18-19 net profit slightly by +1.9% and -0.9%, respectively, after refining its forecasts and introducing FY20F net profit estimates of $290.7 million.

On the other hand, RHB has increased its 2018-19F earnings estimates by 1.6-2.3% to account for contribution from recently-announced acquisitions.

“CDG highlighted that it is too early to assess the impact of UberFlash on its taxi hire out rate. However, the trend seems positive, as bookings made through UberFlash seems to partially offset the decline in bookings via CD’s taxi booking app,” notes RHB analyst Shekhar Jaiswal in a report on Wednesday.

Going forward, Jaiswal expects the public transport services segment to sustain CDG’s revenue growth ahead, especially as contributions from the Seletar bus package are expected to progressively kick in from March.

“The increase in daily ridership for Downtown Line (DTL) should moderate losses at its rail business. While the current daily DTL ridership of 450,000 is close to the estimated breakeven of 510,000, lower average fares in 2018 would mean DTL may only breakeven in 2019. CDG expects revenue from its Australian bus businesses to increase as well,” he adds.

DBS is also maintaining its "hold" recommendation on the stock while lowering its price target to $2.12 from $2.18 previously after reducing earnings forecasts by 2-3%, based on the assumption of a smaller taxi fleet in Singapore, offset by higher contributions from the public transport segment.

While DBS is at the lower end of consensus in terms of its earnings forecasts on the back of a contraction in taxi fleet, its analyst Andy Sim believes distribution per share (DPS) will remain stable on the back of a higher payout ratio, providing yields of about 5% and thus supporting the group's share price.

"We expect DPS to be at least maintained, given its lower capex requirements and net cash position," says Sim.

"A stabilisation of the contraction of [CDG's] taxi fleet, or approval of its LCR acquisition with better-than-expected earnings accretion and improvemen tin operations could be catalysts for the stock."

Given that CDG's 4Q results were in line with expectations, UOB Kay Hian has reiterated its "buy" call on the stock with an unchanged target price of $2.25, although the research house's lead analyst Andrew Chow also sees potential earnings and target upside upon the approval of its alliance with Uber.

"The alliance may include collaboration in management of fleet vehicles and booking software solutions in Singapore. we have not factored this into our estimates pending approvals, but we see a possible 5% upside in our 2018 estimates from the Uber alliance and LCR acquisition. In our view, the alliance is necessary as it gives CDG an inroad to the ride-hailing business, where CDG could raise driver retention rate through diversification and defend its market share," notes Chow.

As at 11:53am, shares in CDG are trading 1 cent higher at $2.02, or 15.1 times FY18F PER based on OCBC estimates.

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