SINGAPORE: Shares of taxi giant ComfortDelGro rose on Monday (Dec 11), following the announcement that it will acquire a majority stake in Uber's rental car business for about S$642 million.
The counter was last seen at S$1.99, up 4.19 per cent or S$0.08, in early afternoon trade. It outperformed the broader Straits Times Index (STI), which notched up 0.62 per cent, or 21.25 points, to 3,445.89.
Singapore's biggest taxi operator said on Friday after markets closed that it would buy over 51 per cent of Uber-owned Lion City Holdings, which runs a fleet of about 14,000 vehicles.
The S$642 million deal, which is subject to regulatory approval, will allow ComfortDelGro's taxi drivers to receive ride requests on the Uber driver app and let Uber riders book its taxis directly.
San Francisco-based Uber will retain the remaining stake in Lion City.
The long-awaited announcement comes more than three months after a possible tie-up between the two companies first broke in August.
Then, shares of ComfortDelGro similarly got a fillip as markets saw the deal as possibly helping the transport giant, as well as Uber, to compete against Grab, which had joined hands with the other five taxi operators in Singapore.
But since then, the stock has fallen more than 10 per cent as little details emerged about the possible alliance.
"Investors thought the deal probably got cancelled so the stock got sold off," Maybank Kim Eng analyst John Cheong told Channel NewsAsia. "Now, it's going back to that level likely due to short covering or investors repositioning after cutting losses."
TIE-UP WITH UBER NO SURPRISE, BUT HAS PROS AND CONS: ANALYSTS
But even as investors welcomed the news, stock analysts saw the collaboration with Uber as a mixed bag for ComfortDelGro.
Low-hanging fruits from the deal include a leg-up in the taxi operator's ability to keep up with a disrupted taxi industry, as well as an uplift in earnings for its automotive engineering services and car leasing & rental divisions.
But while the long-awaited deal allows the local taxi operator to collaborate with a competitor, it exposes the company to the "asset-heavy aspect of vehicle rental" which incurs capital expenditure, according to Phillip Capital Research investment analyst Richard Leow.
It also does not directly address the decline in ComfortDelGro's taxi business.
"Comfort (and) City Cab drivers will now have access to Uber’s ride-booking app-based platform, but we do not see that as doing much for the taxi business, in terms of maintaining driver stickiness, nor the resultant contraction to taxi fleet," said Mr Leow.
Analysts from CIMB Research echoed that sentiment, noting that the team-up between the two companies come as no surprise.
However, while the deal would moderate the competitive landscape by reducing the players in direct competition, it will do little to rejuvenate ComfortDelGro's taxi business.
"A return to growth for ComfortDelGro's taxi fleet and earnings may be unlikely as competition in the taxi/rental car segment has become more competitive, with the ratio of rental cars versus taxis having risen significantly," the analysts wrote in a note, while adding that the number of rental cars outnumbered taxis by 2.8 times as of October 17.
For Mr Cheong, Uber's ability to fend off competition from its key rival Grab remains an unknown too.
Over the past months, Grab has been aggressively wooing taxi drivers with guaranteed fare earnings and rental rebates.
"Grab has been pretty aggressive in attracting drivers with low rentals and better benefits. If Uber loses out eventually, will Comfort be affected as well?"
Thus far, analysts have maintained their ratings on the stock, with target prices signalling further upside following an underperforming year. ComfortDelGro shares declined about 20 per cent year to date as lingering and intensifying competition from ride-sharing firms continue to weigh on the company's bottom line.
Mr Leow from Phillip Capital Research and Maybank Kim Eng's Mr Cheong have held on to their "buy" ratings, with target prices of S$2.69 and S$2.40, respectively.
CIMB Research has a "hold" rating on ComfortDelGro with a target price of S$2.15 target price.
The broker added that the deal's S$295 million cash consideration was within ComfortDelGro's capacity given its cash reserves of S$538.1 million as at end-September 2017. Dividends will likely remain intact, said CIMB.