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ComfortDelgro's 51% stake in LCR good or bad?

Saturday, December 9, 2017

I was wondering whether to blog about this but still feeling rather lazy, I just made a few comments in my blog's comments section and on my Facebook wall.

OK, if you don't know about the proposed acquisition, read the article: HERE.

"Taxi giant ComfortDelGro announced on Friday (Dec 8) its intention to acquire a 51 per cent stake in the Uber-owned rental fleet business, Lion City Rentals."

As things turned out, I received an email from a reader on the matter and I decided to do a little bit of "work" to share it in my blog.

Bad AK! Bad AK!

Reader's email:

I like your reply to your reader Lee Jiahui that CDG's deal with Uber will "stem the loss of drivers" and this is already helping CDG.

I also like your reply to your reader Kevin that "car rental business is actually a good business and CDG is an old hand at fleet management and they should be able to do a better job of managing LCR's fleet and reap some benefits." 

I am also glad that CDG did not invest in Uber and I also believe that the CDG's proposed majority stake in LCR is not a bad idea.

I would like to share the following:

1. CDG is paying S$295 million for a 51% stake in LCR.

2. It involves only 12,450 cars out of LCR's fleet of about 14,000 cars.

3. The NAV of the 12,450 cars is about S$642 million.

4. If utilisation rate of the fleet goes up in future, CDG would pay for more cars in the fleet.

So, although it is true that CDG is paying for depreciating assets, they are only paying for productive depreciating assets.

This is nothing new. 

Taxis are depreciating assets too but if they are put to work, they are productive assets.

Hack, 99 years, 60 years, 30 years leasehold properties are all depreciating assets.

Should investors avoid them?

Like you always say,

"All investments are good investments at the right price."

If we understand this, understand that this deal with Uber would lead to an increase in earnings for CDG in their car leasing department.

Also, we should expect CDG's engineering department's earnings to benefit.

So, is this really a bad deal?


From the comments here in my blog and on my FB wall, it is clear that not everyone is convinced that this is a good deal for ComfortDelgro.

However, to expect a fantastic offer from Uber to give away something precious to ComfortDelgro on a silver platter would be unrealistic.

As an investor, I try not to be overly optimistic or overly pessimistic. 

I try to be pragmatic.

Realistically, we cannot predict what Mr. Market is going to do next week.

However, as investors for income, all we need to do is to determine what is a fair price to pay and wait for offers from Mr. Market.

We can do it for fun but we are not in the business of predicting price movements.

We are in the business of preparing to buy from Mr. Market when he is feeling depressed.

If you just popped by, this is one of those rare days with more than one blog published in ASSI.

Read the blog published earlier today: HERE.


Kevin said...

Hi AK and reader

In my opinion, the future on transportation is more about big data to match the demands and needs of commuters via technology and less about vehicle fleet management. ;)

In fact, ComfortDelgro currently has high non-utilisation rate for their own taxis and I do not understand why did they become a major shareholder of LCR when it is loss-making and grappling with debts. It is also unclear how are they going to fund this large $642 million deal, with a cash consideration of $295 million.

At the end of the day, drivers need to be entice to rent the taxis/cars to make them utilised and ComfortDelgro has done a poor job in doing so for their own fleet of taxis and I don't see how they can lead the way by becoming the new bigger shareholder of LCR. Having said that, if they wish to entice hirers to rent their vehicles, they have got to splash the cash by offering highly discounted rents and this will hurt the balance sheet and in return hurt existing shareholders and that is why they are reluctant to do so. ;)

Uber has just found a partner to help them lessen their load and hopefully Uber doesn't exit the Singapore market, if not ComfortDelgro will be so screwed. :P

AK71 said...

Hi Kevin,

I read something similar in TODAY online earlier as well.

Transport economist Walter Theseira from the Singapore University of Social Sciences said the future of mobility platforms lies in algorithms, data and technology that match travel supply with demand — and “not in the business of owning large fleets”.

People who are not IT savvy probably do not understand big data and its role in the future of transportation.

Alamak. That sounds like me... :(

laurence said...

Alamak, with AK sitting on the fence, readers here will be wringing their hands in anxiety and helplessness. Lol.

AK71 said...

Hi Laurence,

I am learning to be more cautious in answering certain questions.

Many expect me to take ownership of their decisions.

When they make money, I don't hear from them.

When they lose money, I get inundated with emails and messages. -.-"

Kevin said...

Hi AK,

All is not lost. A wiser investment would be owning Vicom's stock instead as all the vehicles from Lion City Rentals are guaranteed to be the clients of Vicom. ;)

Unknown said...

Hi AK,
I just want to say that the deal is 295m in cash and not 642m, if some pple may think so.

AK71 said...

Hi Kevin,

Oh, I am very sure that all is not lost.

I am still of the opinion that ComfortDelgro is a good investment for income with its share price at current levels. ;)

As for Vicom, yes, I am a shareholder too. :)

AK71 said...

Hi Unknown,

That is my understanding too and this blog says as much. :)

Siew Mun said...

The asset acquisition of the cars masked the value of the Uber platform. The keys to the kingdom is the IT platform and the developers. CD historical data together with LCR will amass massive data of travel patterns which the experienced Uber developers will enhance their platform to include AI. The unique competitive advantage will be IT platform together with the enlarged fleet. Such a platform can be replicated to CD's global footprint. Finally, with the effects car growth at 0% is yet to be seen.

laurence said...

I am still of the opinion that ComfortDelgro is a good investment for income with its share price at current levels. ;)

With AK's chop, stamp and seal of approval, there's only one action to take next week.

Dividend Warrior said...

Hi AK,

Whether CDG can create enough synergy between its taxi business & this new acquisition remains to be seen.

But one thing is for sure. Uber got the better end of the deal IMO. They get a decent sum of cash for a car rental business which they have been desperate to get rid of.

AK71 said...

Hi Siew Mun, Laurence and DW,

In business, there has to be give and take.

Although I am quite sanguine about the latest development, the jury is still out on this one.

Time will tell. :)

AK71 said...

This is a strategic agreement to form a joint venture that brings together one of the
world’s largest land transportation companies with the world’s leading ride sharing service to leverage their operational and technological excellence.

The total consideration of S$295 mln for the 51% stake in LCR is based on the net asset value of S$642 mln, determined from the value of 12,450 vehicles.

This works out to be approximately 10% discount to net asset value though CD has agreed to pay more as and when the utilization rate improves.

CD should have no issue funding the deal given its cash balance of S$538 mln and net cash position of S$188 mln as of 3Q17.

It will also create a path for ComfortDelGro’s taxi drivers to receive ride requests on the Uber driver app, thereby increasing their potential earnings while providing users of the Uber app an opportunity to directly book a ComfortDelGro taxi.

The two companies are finalising additional partnership opportunities and will make further announcements in the upcoming months.

Lim & Tan

AK71 said...

UOB Kay Hian maintained a "buy" outlook with a target price of S$2.25, citing a 5 per cent increment to ComfortDelGro's earnings in the 2018 financial year.

"We are positive on the JV (joint venture) and deem this alliance necessary in the long run as it gives CD (ComfortDelGro) inroads into the ride-hailing market where CD could raise driver retention rate through diversification and defend market share."

AK71 said...

Phillip Securities maintained "buy" recommendation at a S$2.69 target price, saying access to the burgeoning PHV (private hire vehicle) business would offset some of the decline in ComfortDelGro's taxi segment.

Phillip Securities also added the combined fleet of a possible 28,300 vehicles with the ComfortDelGro/LCR tie-up would be far larger than the alliance fellow PHV company Grab has with the other four taxi companies - Trans-Cab, SMRT, Premier and Prime, which numbers 9,555 taxis.

AK71 said...

CIMB 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..."

Potential benefits include a lower taxi idling rate and uplift in earnings for its Automotive Engineering Services and car leasing & rental divisions.

AK71 said...

CDG could see a loss of interest income of around $3 m a year from the $295 million consideration.

Interest costs for CDG could also rise $6.7 m as it takes on LCR's debt.

However, the tie-up should be positive as both parties leverage on their strengths: CDG's fleet management and Uber's ride booking app.

Maybank Kim Eng's BUY call unchanged with target price of $2.40.

AK71 said...

Despite its delayed alliance with Uber which has led to its share price taking a hit, outlook for ComfortDelGro remains positive.

This is due to the higher free cashflow arising from lower capital expenditure in its taxi operations.

In addition, ComfortDelGro is also the operator of Downtown Line (DTL) and the complete opening of the DTL will further contribute the Comfort’s overall performance.

Analysts from Phillip Securities Research gave ComfortDelGro a “Buy” call with a target price of $2.69. The target price implies a 40.8 percent potential return from the current trading price of $1.91.


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