$ComfortDelGro(C52.SI) Ties up with Uber – My Initial Thoughts

This article is first posted here at investmentmoats.com. Please visit me if you wish to learn more about building a wealth foundation, active stock investing, and financial independence.

This is an addendum to my first comprehensive article on ComfortDelgro written here.

ComfortDelgro announced that it is acquiring 51% stake in Lion City Rental (LCR), a private hire vehicle fleet owner of Uber for a total consideration of $295 mil.

This acquisition will be funded by internal resources.

How do I look at this deal and its effect on CDG?

LCR Fleet Operation Looks a Bad Deal On Paper

CDG will take part as the majority shareholder in this venture with Uber.

This total fleet is valued at SG$642 mil. This is the net asset value.

CDG will be purchasing their share of LCR at a 10% discount to the value of SG$642 mil.

CDG have no problems funding this deal consider they are net cash and their net cash position is closer to $188 mil.

The 642 mil valuation is determined from 12,450 vehicles versus Uber’s fleet of 14,000 vehicles.

Why this deal is bad is because I wonder what kind of ROA you can earn in leasing out vehicles in Singapore.

Some of the figures provided by analysts are damn bombastic. UOB is saying the per car rental is $70 on average. I took a look at LCR’s rental and they average $50/day. This is if you rent it for 1 year, if you rent it for 3 months the rate goes up to $65/day.

The table above shows the ROA you could get from an average vehicle. This is assuming what all the analysts are assuming, where the utilization rate is 95%.

The ROA is 6.15%.

If you refer to my previous report, CDG’s, car rental segments ROA is closer to 10%.

This is almost half of it.

CDG’s car rental division, majority is made up car leasing in Malaysia.

If we reduce the average utilization to 85%, the ROA fall even more to 4.35%.

Now note, while interest expense, depreciation were factored in, we have not factored in the corporate costs.

With that the overall ROA should be much lower.

Where it might work in CDG’s favor is that the depreciation is not in a straight line, but much of the depreciation has taken place in the first 5 years. In that case, the ROA would be much lower.

Let’s work on another angle. Let’s assume these LCR vehicles achieve the same EBIT Margin as the existing car leasing segment of 22%.

Based on the 95% utilization, the EBIT per vehicle with corporate costs factored in would be $3762. If you deduct the interest expense of $1350, the profit before tax is $2,412. ROA on a $100k vehicle is 2.4%.

Based on the 85% utilization, the EBIT per vehicle with corporate costs factored in would be $3366. f you deduct the interest expense of $1350, the profit before tax is $2,016. ROA on a $100k vehicle is 2%.

These figures on paper do not look like very good returns.

How much Debts in LCR?

So I was thinking that the total deal was valued at $642 mil NAV based on 12450 vehicles.

Assuming each vehicle with 10 year lifespan costs $100k. The asset value will be $1.24bil.

If we deduct the equity from 1.24 bil, the debt is approximately 600 mil.

This seems far from the $1 bil debt figure that was being circulated.

It makes sense that the debt to equity ratio is close to 100%.

How I look at the LCR Car Leasing Business

I honestly think this is a lukewarm deal.

It is a deal that CDG have to swallow as part of this helping the bigger picture.

This is probably a mainly cash financed acquisition.

So if the cash is earning an interest income of 1%, the hurdle is for LCR’s return on equity to be greater than 1%.

If it is more than that, this deal is of net benefit for CDG.

The nature of this business is such that:

  1. As long as the utilization is good, there is cash flow to pay off the debt. Thus the debt will eventually be paid off
  2. If 12,500 vehicles is too much, they can choose not to renew
  3. If they really do not like to do this rental, they could choose not to renew all

The key factor here is what kind of utilization rate LCR could garner going forward.

That affects the ROA and ROE and determines if this part of the deal is worth it.

Main Objective: To compete and stem the outflow of drivers

Honestly, I do not know how this deal will work out.

CDG is in the business of renting out vehicles at a rate higher than normal car rental.

If adding Uber’s network effect is of net benefit to the taxi drivers, this might stem the outflow and make them able to compete better.

From many sources, I hear the same narrative again and again that the CDG management is damn rigid and stubborn that they cannot out innovate Grab in this front.

Potential Boost to Automotive Engineering Services

With 12500 vehicles coming on board, CDG might see a big boost to their automotive engineering services, which is 11% of CDG’s EBIT.

The Automotive engineering services is tied to the growth of the taxi fleet.

In recent quarters, where the taxi fleet was cut, automotive engineering services see a drastic cut in revenue as well.

This deal might boost CDG’s automotive engineering services.

Previously, LCR’s car rental should engage some third party services. That cost is accounted in the EBIT and net profit.

In the future, this cost will still be around as expenses to the LCR car leasing operations.

However, now CDG can charge these additional business from LCR as revenue.

The potential boost might be more than the ROA they garnered from the actual car leasing operations.

Vicom May not Likely Get a Boost

My sensing is that these vehicles might already be inspected by Vicom, so Vicom’s inspection business might not get a boost.

This is from some internet search on chatters about who LCR use for their inspection.

This is not confirmed.

Remember the Basecase

A large part of the negative sentiments was the lost in business of the taxi segment and its failure to win TEL transit line.

The base case is that Singapore Taxi accounts for roughly 27% of CDG’s EBIT not 100% of its EBIT.

On a terminal basis, the landscape would require some forms of premium transportation, be it taxi or private car rental.

I don’t think its right to value Singapore Taxi as earning $0.

If you can identify a good price to purchase this piece of business conservatively, you might not do too badly.

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44 comments
Laksa

buying CDG nao!

CYK

Just wonder why the CDG management keep all this info from retail investors ....
Do the big funds have all the info while we are still fighting in the dark?

BearYamSeng

Reply to @CYK : Info is gold, just like lehman going bust still can attract so much daft investors

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limchris8

Wah, long story. Seems near term speculating within few days. Longer term seems not so clear.

jeremyowtaip

Thanks Kyith for the detailed sharing! It looks reasonably good on paper for CDG at the current estimated utilisation rate and average rental rate per car for LCR fleet CDG has acquired. The potential boosts to their automotive engineering services and Vicom sevices are possible synergies in this deal. Overall, it is still not a bad decision on paper if future pans out for CDG according to our estimates.

However, in doing businesses, there are too many factors and unknown future circumstances beyond our assumptions. Let's see how Grab and it's other alliances are responding to this new alliance between CDG and Uber. Are they going to continue with a price war campaign now that they have a recent fresh injection of capital on their side from investors? Or will they respond in other ways to maintain or compete for more market share going forward?

And also, we have to consider how the number of private hire drivers and taxi drivers are going to be like in future. Will the future number of drivers be healthy to support this segment of private hire car and taxi transport businesses. This is because the cars and taxis still need drivers to drive. They are not autonomous vehicles. If they are, then owning a larger fleet will take this concern of finding drivers out of the equation and give better advantage towards CDG versus Grab and their alliances which now operates a smaller fleet than CDG and Uber alliance. And also if the number of drivers do not grow according to taxi and private car hire demand, there will be also competition for drivers on both sides of the competition camps to factor in future. Recently, we have already seen some CDG drivers switching sides to join Grab. Will there be similar occurences like this in future? Of course, things could happen in the other direction as well with drivers coming back to CDG and Uber if they dish out certain terms and conditions which are attractive.

And lastly, how will the future demand (within next 10 years) for private car and taxi hire transport be like in Singapore? We are going through a lot of new developments to make Singapore more connected with public transport. Will the demand for private hire ride remain the same current growth in step with population growth or decline in demand in future?

Also, it has already been announced that the growth of car population will likely stall next year as no more new COEs will be issued. How will this impact the COE prices moving ahead? And coupled any potential increase in COE prices (due to tightening of car population growth) with the current fierce competition in this area of private hire ride transport, how will the increased COE prices in future years affect the margins of various private hire ride operators once their current fleet of cars reach the end of their 10 years lifespan and need to either scrap and buy new cars or renew existing cars?

I am sure there are far more considerations than my above points which there will always be blind spots that an investor cannot exhaustively cover. And many of these are beyond anyone's prediction due to many factors and unknown circumstances in future surrounding any businesses. And the various factors and future circumstances will affect both CDG and Uber alliance as much as Grab and it's other alliances.

It hinges on the utilisation rate and average car rental price going forward. This in turn is affected by the demand for the private hire cars on both sides of the competition by the end users. And demand is really the most difficult to predict for future. We simply cannot read the minds of the masses in future. There are many factors and unknown circumstances for the future which can affect demand. And taking a ride from a car is only a one-off cheap sales even though there maybe attempts to encourage repeat sales with discounts or other tactics. The private hire ride customers clearly have stronger bargaining power than the providers of this service.

Ideally, we hope for at least maintenence of current utilisation rate and average rental per car going forward. Any upside growth to this will be good for CDG. We shall see how things pan out for them in future. The short term boost to both their rental car division and automotive engineering services seem very evident. However, other areas of potential for synergies we shall have to stay tuned for future developments.

Hunter_

Reply to @Dead : Should be.. but they will be begging for drivers to use thier fleet..if they choose to do this way..
Oh by the way, I was chatting with a silvercab driver, using grab but used to drive for Uber. I asked if it was a good move by CDG.. he gave the same comment.. problem is getting deivers .. not fleet. Also, when he was with UBER, he said UBER delayed in paying its drivers.. seemed to have problems with payroll then.. sign that UBER already facing cash flow issues..

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MasterLeong

previously people keep talking nonsense say LCR is super high debt and loss making without doing any homework or research
now when we look at the numbers and logic it now makes sense why CDG rallied 7% yesterday

eveee99

Yeah... looking very gd today ... :) so can leave cdg a bit to focus on another blue chip ... :P

limchris8

Reply to @evelow : What I meant was near term all shares r in a way manipulated. The true value will eventually emerge much later. Cheers.

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Hachiko

Kyith is vested in CDG at 2.08
My confidence boosted up liao! :)

MasterLeong

Reply to @Hachiko : confidence up gao gao for sure

3ddy

kyith's articles always very comprehensive. well done!

MasterLeong

thanks, very good read for sure. I have shared.

BearYamSeng

Any plan to secure more drivers? Vehicles as an asset is devaluing overtime ; so will rental cost be adjusted to match or absorbed?

kyith

Reply to @TeddyBearMarketWoof : the rental cost has to be rationalize to market competition conditions and might not meet the costs. but in most cases it should be higher than the break even. that is my thinkig could be wrong.

if the assets generate positive ROA, it is good, because it accouts to the moey set aside for depreciation.

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Its been sometime since I did a school project so I did a dive on $ComfortDelGro(C52.SI) . I laid out the quantitative numbers of the SG Public Transport Business, SG Taxi Business and The return on assets, margins and revenue changes over the past 13 years.

Then I attempt to provide some intrinsic value based on price earnings and discounted cash flow.

http://investmentmoats.com/stock-market-co...

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