• ComfortDelGro’s recent share price plunge on fears of Go-Jek’s entry and Grab’s latest driver incentives is overdone. Go-Jek is likely to adopt an asset-light strategy and develop itself as a lifestyle app rather than engage in a price war. Even in the event ComfortDelGro’s taxi fleet declines by 30%, earnings contribution from recent acquisitions will easily offset it.
• Maintain BUY, with unchanged target price of S$2.59.

What’s New

Go-Jek is likely to come in asset-light.

• ComfortDelGro’s (CD) share price has fallen 7% on worries of Go-Jek’s entry in November.
• We have strong grounds to believe that Go-Jek intends to maintain an asset-light strategy in Singapore, as evidenced by their partnership with six car rental companies in Oct 18.
• Furthermore, their focus will likely be positioning themselves as a lifestyle app, with transport services a mean to provide those services.

Drivers are not likely to rush to switch for Grab’s new driver incentives.

• Grab announced an Income Guarantee Program that started on 29 Oct and runs till end-Dec 18. This sees Grab promise drivers S$2,400-11,888 per month in guaranteed fares, contingent on completing 8-26 trips per day.
• Realistically, the actual income guarantee is closer to S$4,800-5,720 after factoring in commissions and realistic trips per day. Meeting those minimum trips per day (and hence achieving the desired income level) will be a struggle, as ridership is likely lower since passenger incentives have stopped for several months now.
• Channel checks with Grab drivers indicate that they are already working longer than before just to maintain income levels. Additionally, our calculations indicate that without incentives, Grab drivers are largely worse off.

Earnings from M&As in 2018 easily offset potential fleet declines.

• Market has not fully factored the potential earnings upside from ComfortDelGro’s acquisitions this year. Ytd acquisitions total ~S$400m in value. Even assuming a high 15x acquisition PE for the businesses, the implied net profit of S$26m-27m completely offsets the potential earnings decline of S$25m assuming ComfortDelGro’s fleet falls by 30% in 2019 (already an unlikely case).
• ComfortDelGro’s acquisition multiple is likely closer to 10x.

Car ownership has stagnated, vehicle growth primarily from private hires.

• Private car ownership peaked in 2013 at 607,292 vehicles, and has since been on the decline. Based on the latest statistics from Singapore’s Land Transport Authority (LTA), the current figure stands at 550,423 (-9% from the peak). The growth in the car population over the last few years has stemmed from private hire cars, which rose from 16,396 in 2013 to 66,410 presently.

LTA promoting a “car-lite” society.

• Since Feb 18, LTA has set the vehicle population growth rate at 0%, as it tries to promote a “car-lite” society. With Singapore becoming increasingly accessible via public transport, be it trains, buses, taxis or private hire cars, this will discourage car ownership over the longer run.

FCF yield to improve as buses/train business improve.

• With buses now under the asset-light Bus Contracting Model, cashflow will improve. Furthermore, losses from the Downtown Line are expected to narrow further going into 2019 on the back of the fare hike of 4.3% coming in effect end-18. All these will lead to free cashflow improving to ~S$370m, which at current share price implies a 7.7% FCF yield.

Stock Impact

Share price correction overdone.

• Share price has over-reacted to the downside of Go-Jek’s entry, which is unlikely to engage in renewed price war. Unless Go-Jek introduces highly compelling driver incentives, it is unlikely that ComfortDelGro is at risk of losing its drivers in a repeat of 2016-17.
• In the worst-case scenario, we see ComfortDelGro’s taxi fleet stagnate, with earnings growth driven by ComfortDelGro’s recent acquisitions in 2018.

Earnings Revision / Risk

No change to earnings estimates.

• Pending the results release later today, we have made no changes to our earnings estimate.

Valuation / Recommendation

Maintain BUY, with target price unchanged at S$2.59.

• Our target price is pegged to ComfortDelGro’s long-term mean PE of 16.9x 1-year forward PE, on 2019 earnings.
• We think concerns are overblown and current level presents value.
• Current valuations imply 14x 2019F PE, 17% below its long-term mean, and dividend yield of 4.8%.

Source: UOB Kay Hian Research - 09 Nov 2018