DBS Group Research has maintained its “buy” call on ComfortDelgro, as it interprets the merger of two smaller rival taxi companies as a sign that the industry has bottomed out.
SMRT Corp’s taxi arm, Strides, will be merging with Premier, forming Strides Premier, which will have a combined fleet of 2,500 vehicles, still a fraction of CDG’s 8,740 taxis.
This merger effectively further consolidates the market with three main players, with TransCab, which has 2,170 vehicles, remaining as the third largest player.
At the peak 15 years ago, there were six operators in all. Since then, Smart Taxi and HDTT have exited.
“We see this consolidation as a sign that operators are finding it tough and scale is needed for operating efficiency,” says DBS in its April 14 note.
“This is particularly so with the Covid-19 restricted mobility in the past couple of years which made it particularly challenging for operators,” DBS adds.
“With improved mobility, eased restrictions and better clarity on outlook, there could be more willingness to seal a deal.”
Specifically, the deal is not seen to have “major implications” on CDG, given how its fleet size remains the largest by far.
Nonetheless, the consolidation can potentially reduce competition along with operators (including ride-hail apps) focused on profitability, this could mean a more sustainable environment for the industry, says DBS.
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In the meantime, DBS believes that CDG’s strategy of implementing a 5% commission on ride-hail fares is positive, and provides more levers for revenue uplift vis-à-vis the traditional method of fleet and rental revenue.
Citing statistics from LTA, the percentage of ride-hail vs street hail now stands at 15% of total point-to-point, down from 22% in Jan 2021.
DBS further notes that CDG’s share price, struggling to recover even with the easing of the pandemic, has bottomed out.
“With share price trading at below 1x P/B, with improving profitability, we believe confidence should return over time,” says DBS, whose target price remains at $1.66.
