ComfortDelGro Corp - Singapore taxi operations remain resilient

■ ComfortDelGro’s taxi fleet utilisation looks set to remain high

■ We see a low risk of its drivers defecting to Uber/GrabCar

Reaffirm Buy (1) rating and target price of SGD3.46

What's new:
A recent article in the Straits Times (10 October) raised the concern of idle taxis amongst licensed operators and the rise in competition from car hire apps in Singapore. We expect CDG’s taxi business to remain resilient to these concerns, and hence reaffirm our Buy (1) rating.

What's the impact:
According to the article, operator TransCab has a number of idle taxis in its yard.

Based on our channel checks, there could be 2 reasons for this:
1) some of the vehicles’ registrations may have expired following TransCab’s acquisition of Smart Taxis in August 2013, and

2) a good portion are older compressed natural gas (CNG)-equipped vehicles, which have since seen a decline in popularity after the imposition of a tariff by the government, as well as a lack of CNG refuelling stations.

Meanwhile, based on our discussions with CDG, the utilisation rate of its existing taxi fleet in Singapore remains close to 100%. Despite concerns about increasing competition from car hire apps like Uber, CDG’s Singapore taxi business should remain resilient, in our view, as:

1) it remains one of the few operators fulfilling the government’s strict quality of service (QoS) standards, which must be met in order for operators to be allowed to expand their fleets,

2) CDG’s YTD fleet growth continues to be positive at around 1%,

3) demand for its own booking app is still strong (it recorded 35.6m booked jobs in 2014, up 10% YoY), and

4) recent comments by the Transport Minister suggest that the government is likely to implement regulations to ‘level the playing field’ in the near term.

Further, our conversations with several licensed full-time taxi drivers indicated that the risk of CDG’s existing driver base defecting to companies such as Uber remains low.

This is mainly as:
1) most taxi services in Singapore are rendered through street hails (around 80%), whereas private car hire services are not allowed to pick up passengers from the street,

2) CDG sells diesel to its drivers at subsidised rates at 16 refuelling locations island-wide, making it more attractive for full-time drivers, and

3) CDG offers greater stability and structure (in terms of vehicle/health insurance, company benefits, etc.) and is more appealing to the older driver base.

Technical Analysis
Daily Chart
What we recommend:
We reaffirm our Buy (1) rating and DCF-based 12- month TP of SGD3.46. We continue to like CDG for its quality exposure to the defensive transport services sector, and potential 2015 dividend yield of 3%. Unfavourable regulatory policies represent the biggest risk to our view.

How we differ:
We believe the attractiveness of a new contracting model for CDG’s Singapore bus segment could be under-appreciated by some in the market. (Read Report)

Source : Daiwa Capital Markets

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