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Broker's take: CIMB unsurprised by ComfortDelGro's Lion City Rental deal, maintains 'hold'

THE long-awaited deal between land transport giant ComfortDelGro and Uber comes as no surprise to CIMB Research, which in a research note kept a "hold" rating on ComfortDelGro's stock with a S$2.15 target price.

However, despite potential benefits to the deal which include a lower taxi idling rate, and uplift in earnings for ComfortDelGro's Automotive Engineering Services (AES) and car leasing & rental (CLR) divisions, the broker said that growth and earnings for the land transport giant's taxi fleet may be "unlikely".

"(The) competition in the taxi/rental car segment has become more competitive, with the ratio of rental cars versus taxis having risen significantly. As at October 2017, rental cars outnumbered taxis by 2.8 times," the broker said.

ComfortDelGro announced earlier in December it was taking a majority 51 per cent stake in Uber's car rental business Lion City Holdings, ending months of speculation on how the two partners will team up in the disrupted sector.

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ComfortDelgro and Uber said that the deal, valued at about S$642 million with a S$295 million cash consideration, ranks as ComfortDelGro's "single largest deal to-date".

The move will put ComfortDelGro's taxis and Lion City Rental's (LCR) private-hire cars - totalling 14,000 units - under a centralised fleet management system, which will handle the despatching of vehicles to customers.

CIMB said that the the tie-up with LCR would enable ComfortDelGro's taxi drivers to receive ride requests on Uber's app, lowering the taxi idling rate, which CIMB estimated stood at around 5 per cent for the first nine months of 2017.

CIMB said that the deal's S$295 million cash consideration was within ComfortDelGro's cash reserves of S$538.1 million as at end-September 2017.

Dividends will likely remain intact, said CIMB, despite ComfortDelGro's narrower cash position after the deal, and CIMB assumes a 75 per cent payout rate for the full 2017 financial year.

The broker also said that the deal would moderate the competitive landscape as there would be fewer players in direct competition, referring to the ComfortDelGro/Uber deal, as well as Grab's deal with SMRT and the other smaller players in the local taxi industry.

As at 9.26am on Dec 11, ComfortDelGro's shares were trading at S$1.97, up S$0.06 or 3.14 per cent.