Like fellow analysts, Maybank Securities analyst Eric Ong has kept his target price on ComfortDelGro C52 (CDG) following news of the Mainboard-listed company’s GBP269.1 million ($461.2 million) acquisition of one of the largest fleets of premium private hire vehicles in London.
Announced on Oct 23, CDG intends to fund the purchase with external borrowings as it needs to pay off Addison Lee’s existing debt facilities in full upon completion. Management believes this acquisition will serve as a catalyst for CDG’s expansion into the “premium mobility market”, strengthening its overall point-to-point (P2P) proposition in the UK.
Upon completion, the 7,500 drivers and 5,000 vehicles of the Addison Lee network will join CityFleet Networks’ existing private hire and black taxi fleets elsewhere in the UK such as Liverpool, the Wirral, Chester and Aberdeen.
“While not exactly cheap, this latest move should expand CDG’s portfolio in the UK, enabling it to leverage Addison Lee’s expertise to deepen and scale its differentiated premium segment globally. It will also strengthen the group’s overall P2P proposition, creating strong synergies with its existing businesses that include pre-planned and on-demand ground transportation for businesses, as well as private and ride-share transfers to airports, bus/train stations and ports via its indirect subsidiary, CMAC, [whose] acquisition concluded in February,” writes Ong in an Oct 24 note.
Ong is keeping “buy” on CDG but with his $1.65 target price.
CDG’s business update for its 3QFY2024 ended Sept 30 is slated for mid-November. Ong expects CDG to record core patmi of about $55 million, up 4% q-o-q and 14% y-o-y.
See also: ComfortDelGro subsidiary to acquire London black taxi provider for GBP269.1 mil
Addison Lee’s profit ‘appears low’
Meanwhile, CGS International (CGSI) analyst Ong Khang Chuen is keeping “add” on CDG with an unchanged target price of $1.70.
Addison Lee’s FY2024 profit before tax “appears low” at GBP7.7 million, says CGSI’s Ong. “This was mainly dragged by high interest burden (up to 10% interest rate). We estimate its FY2024 adjusted ebitda at GBP35 million, which implies the acquisition was valued at 6.2 times trailing enterprise value/ebitda, as debts by Addison Lee will be discharged upon deal completion on Nov 7.”
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Assuming CDG funds the acquisition with new borrowings at 5% interest cost, CGSI’s Ong estimates the acquisition to be earnings accretive at GBP8 million [$13.71 million] per annum.
Separately, CGSI’s Ong forecasts CDG to post patmi of $58 million in 3QFY2024, higher than Maybank’s forecast. “Tender environment for London public bus remains favourable, and we expect further contract wins by CDG at current elevated margins to drive UK’s ebit margin towards mid-single-digits by end-FY2024 and to see further improvement in FY2025.”
Valuation ‘palatable’: DBS
DBS Group Research has the highest target price on CDG among the three research houses, with a “buy” call and $1.80 fair value.
“We believe investors will likely have questions around the strategic fit to CDG and its ability to grow the business going forward,” write DBS’s analysts in an Oct 24 note. “CDG has alluded to challenges in the UK P2P market with intense competition from ride-hail companies, which prompted it to sell its smaller London P2P business to Addison Lee for GBP3 million back in June 2021. However, it is now buying the total business of Addison Lee.”
While the reversal in stance is noteworthy, DBS believes there is “justified rationale” for the sale back then and the purchase now. CDG was “sub-scale” back then and Addison Lee’s valuation has since fallen to “more palatable levels”.
Carlyle was looking to sell the company for as high as GBP800 million in 2019 and eventually sold the company back to its founder’s son, Liam Griffin, with private equity backing at an undisclosed valuation, notes DBS.
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“We do see certain synergy with the recent CMAC acquisition; Addison Lee’s cabs could be utilised as means of transport to meet emergency/last minute travel needs. Moreover, since the takeover by Liam, the company has managed an impressive turnaround with return to profitability. [The] company was making losses pre-Covid-19, from FY2017 to FY2019,” says DBS.
With incentives in place to retain the management team, DBS believes Addison Lee could continue its “strong growth trajectory”, with an estimated 27% ebitda growth in FY2024.
Shares in ComfortDelGro closed flat at $1.45 on Oct 25.
