Friday, 8 December 2017

Comfort Delgro - The crucial next step after Uber

Things are starting to get interesting for Singapore stocks and it seems like there are 2 spectrums of blue chips at the moment. 

Spectrum 1: Stocks that are constantly breaking new 52 weeks high. Examples are the local banks, DBS, OCBC, UOB as well as property stocks, City Development, UOL, etc.

Spectrum 2: At the same time, there are a few stocks that are languishing near their 52 weeks low and i’ll list them under spectrum 2. Examples are ST Engineering, SPH and, star of the day, Comfort Delgro

Naturally being a value investor, I’m more interested in those companies in spectrum 2 because I have the intention to plough some or all of my SRS funds earmarked for 2018 in them. 

This evening, the long awaited news about UBER and Comfort Delgro joint venture is released. Visiting Investing Note just made things more complicated as there is no common consensus. There is one section who feels extremely bullish about this whereas the other section feels that this joint venture is disappointing. 

Even though the news is released after market hours, those who managed to sniff some information prior to release didn’t seem to like the idea much as Comfort Delgro share price declined 3 cents to close at $1.91. During the trading session, they went lowest at $1.90, which is their 52 weeks low at the time of writing. 

The news essentially said that Comfort Delgro will acquire a 51% stake Lion City Rental. The article brought up 12,450 vehicles, cash consideration of $295 million etc. so that’s about $47,389 per vehicle. 

Sounds like quite a steal considering that cars in Singapore cost upwards of $100,000. A couple of other positives are increase in car servicing related business as well as inspection services due to an increased number of users. So far so good? If that’s the case, why is Uber doing the deal? 

Let’s put aside the dollars and cents for now. Why not throw away the argument for car inspection and repairs too and focus just on the taxi business. 

Ultimately, the bottom line is determined by how many taxis can Comfort Delgro rent out. How many cars can Lion City Rental loan out to Uber drivers. More importantly, among their entire fleet, how many vehicles are stagnant and not bringing in income? Cars have a fixed lifespan in Singapore and are also a depreciating asset. If it remains under utilized, it will be more of a liability rather than an asset. 

One major problem that Uber and Comfort Delgro are facing now is aggressive competition behavior from Grab. By dangling huge discounts, Grab are poaching drivers over to their platform, filling their cars and leaving Comfort Delgro and Uber with stagnant vehicles. 

This joint venture between Comfort Delgro and Uber will at least provide a fair playing field now that drivers for Comfort Delgro also have access to a solid ride hailing app. However, the root of the problem, which is the huge discount offered by Grab to poach drivers, still exists. 

If the poaching is allowed to continue, it will leave Comfort Delgro with an even larger under utilized fleet and that’s going to eat into their bottom line. Then again, if Comfort Delgro and Uber matches what Grab is offering to their drivers in order to keep their existing drivers, they will lower their profit margins which does not look good on their bottom lines as well. If Comfort Delgro and Uber be even more aggressive and offer better deals than Grab to entice their drivers over.. you get the idea right? 

Now that the news of the joint venture is established, the retaliation strategies that Comfort Delgro and Uber adopts against their competitors now are key to their long term profitability. 

The once stable business has been interrupted by technological advances that the largest incumbent now loses their first mover advantage. As such, I’ll prefer being a spectator and watch the episode unfold from the sidelines. 


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