Potential JV could arise from ComfortDelGro-Uber alliance

Uber previously merged with a Russian taxi provider to keep both businesses intact.

ComfortDelGro Corporation's (CDG) alliance with Uber has three possible areas of collaboration, which includes a joint venture (JV), UOB Kay Hian said in an analysis.

A JV firm could arise following a merger with a Russian taxi provider, where CDG has the controlling stake.

"The strategic rationale is for CD to diversify and defend market share," said analyst Thai Wei Ying.

UOB Kay Hian said a JV firm could mitigate CDG's loss of taxi revenue by diverting drivers who want to leave to join other competitors to use its ride-hailing business instead.

However, the acquisition could cause a 3.4% earnings dilution in 2018.

"Our assumptions are premised on CD taking a 51% controlling stake in the JV, interest cost of 2.5%, and Lion City Rentals’ latest available financials (FY16 loss of S$7.2m)," the brokerage firm said.

Another area of collaboration is a fleet management partnership, which can help CDG's automotive engineering segment.

CDG’s automotive engineering services segment saw a 28% YoY decline in 9M2017 operating profits largely due to lower volumes of taxis serviced as a result of a reduced taxi fleet.

UOB Kay Hian forecasts this could translate into a 5.3% uplift in 2018 earnings, due to a potential to service 15,000 Uber cars.

The final possible area of collaboration is a shared booking platform for taxis.

CDG can benefit from Uber’s technological know-how such as ride-chains or ride-dispatching algorithms. For instance, in its latest push to retain drivers in Singapore, Uber has allowed drivers the flexibility to choose trips that suit their preferences.

"With higher bookings and passenger density, as well as better routing for drivers, this will translate to increased driver retention for CDG," Thai added.

With this, taxi rental is expected to converge closer to private hire car rental.

Overall, this could mean a 5% earnings dilution for the alliance in 2018.

"Nevertheless, we believe the alliance is necessary for the long run as CD will need to embrace the new reality of the shared economy," Thai said.

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