This is an addendum to my first comprehensive article on ComfortDelgro written here.
ComfortDelgro announced that it is acquiring 51% stake in Lion City Rental (LCR), a private hire vehicle fleet owner of Uber for a total consideration of $295 mil.
This acquisition will be funded by internal resources.
How do I look at this deal and its effect on CDG?
LCR Fleet Operation Looks a Bad Deal On Paper
CDG will take part as the majority shareholder in this venture with Uber.
This total fleet is valued at SG$642 mil. This is the net asset value.
CDG will be purchasing their share of LCR at a 10% discount to the value of SG$642 mil.
CDG have no problems funding this deal consider they are net cash and their net cash position is closer to $188 mil.
The 642 mil valuation is determined from 12,450 vehicles versus Uber’s fleet of 14,000 vehicles.
Why this deal is bad is because I wonder what kind of ROA you can earn in leasing out vehicles in Singapore.
Some of the figures provided by analysts are damn bombastic. UOB is saying the per car rental is $70 on average. I took a look at LCR’s rental and they average $50/day. This is if you rent it for 1 year, if you rent it for 3 months the rate goes up to $65/day.
The table above shows the ROA you could get from an average vehicle. This is assuming what all the analysts are assuming, where the utilization rate is 95%.
The ROA is 6.15%.
If you refer to my previous report, CDG’s, car rental segments ROA is closer to 10%.
This is almost half of it.
CDG’s car rental division, majority is made up car leasing in Malaysia.
If we reduce the average utilization to 85%, the ROA fall even more to 4.35%.
Now note, while interest expense, depreciation were factored in, we have not factored in the corporate costs.
With that the overall ROA should be much lower.
Where it might work in CDG’s favor is that the depreciation is not in a straight line, but much of the depreciation has taken place in the first 5 years. In that case, the ROA would be much lower.
Let’s work on another angle. Let’s assume these LCR vehicles achieve the same EBIT Margin as the existing car leasing segment of 22%.
Based on the 95% utilization, the EBIT per vehicle with corporate costs factored in would be $3762. If you deduct the interest expense of $1350, the profit before tax is $2,412. ROA on a $100k vehicle is 2.4%.
Based on the 85% utilization, the EBIT per vehicle with corporate costs factored in would be $3366. f you deduct the interest expense of $1350, the profit before tax is $2,016. ROA on a $100k vehicle is 2%.
These figures on paper do not look like very good returns.
How much Debts in LCR?
So I was thinking that the total deal was valued at $642 mil NAV based on 12450 vehicles.
Assuming each vehicle with 10 year lifespan costs $100k. The asset value will be $1.24bil.
If we deduct the equity from 1.24 bil, the debt is approximately 600 mil.
This seems far from the $1 bil debt figure that was being circulated.
It makes sense that the debt to equity ratio is close to 100%.
How I look at the LCR Car Leasing Business
I honestly think this is a lukewarm deal.
It is a deal that CDG have to swallow as part of this helping the bigger picture.
This is probably a mainly cash financed acquisition.
So if the cash is earning an interest income of 1%, the hurdle is for LCR’s return on equity to be greater than 1%.
If it is more than that, this deal is of net benefit for CDG.
The nature of this business is such that:
- As long as the utilization is good, there is cash flow to pay off the debt. Thus the debt will eventually be paid off
- If 12,500 vehicles is too much, they can choose not to renew
- If they really do not like to do this rental, they could choose not to renew all
The key factor here is what kind of utilization rate LCR could garner going forward.
That affects the ROA and ROE and determines if this part of the deal is worth it.
Main Objective: To compete and stem the outflow of drivers
Honestly, I do not know how this deal will work out.
CDG is in the business of renting out vehicles at a rate higher than normal car rental.
If adding Uber’s network effect is of net benefit to the taxi drivers, this might stem the outflow and make them able to compete better.
From many sources, I hear the same narrative again and again that the CDG management is damn rigid and stubborn that they cannot out innovate Grab in this front.
Potential Boost to Automotive Engineering Services
With 12500 vehicles coming on board, CDG might see a big boost to their automotive engineering services, which is 11% of CDG’s EBIT.
The Automotive engineering services is tied to the growth of the taxi fleet.
In recent quarters, where the taxi fleet was cut, automotive engineering services see a drastic cut in revenue as well.
This deal might boost CDG’s automotive engineering services.
Previously, LCR’s car rental should engage some third party services. That cost is accounted in the EBIT and net profit.
In the future, this cost will still be around as expenses to the LCR car leasing operations.
However, now CDG can charge these additional business from LCR as revenue.
The potential boost might be more than the ROA they garnered from the actual car leasing operations.
Vicom May not Likely Get a Boost
My sensing is that these vehicles might already be inspected by Vicom, so Vicom’s inspection business might not get a boost.
This is from some internet search on chatters about who LCR use for their inspection.
This is not confirmed.
Remember the Basecase
A large part of the negative sentiments was the lost in business of the taxi segment and its failure to win TEL transit line.
The base case is that Singapore Taxi accounts for roughly 27% of CDG’s EBIT not 100% of its EBIT.
On a terminal basis, the landscape would require some forms of premium transportation, be it taxi or private car rental.
I don’t think its right to value Singapore Taxi as earning $0.
If you can identify a good price to purchase this piece of business conservatively, you might not do too badly.
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