SINGAPORE (March 30): UOB Kay Hian is keeping its “hold” rating on land transport group ComfortDelGro (CDG) at a target price of S$2.47, due to the lack of strong catalysts as the local taxi industry continues to undergo structural shifts with the recent rollout of a dynamic pricing fare structure.

To recap, the Land Transport Association (LTA) recently passed approval for taxi operators to introduce dynamic pricing for trips booked through mobile applications, which will serve as an additional option for commuters on top of metered-fare taxi bookings.

In conjunction with this development, Grab this week rolled out a new dynamic fare pricing service, JustGrab, where commuters can be picked up either by a GrabCar or a taxi.

“While we remain confident of CDG’s execution capabilities, we believe the taxi segment’s operating outlook will remain challenging as competition intensifies,” says UOB in a report on Thursday.

The research house notes that ride-hailing app Grab now serves as the third-party booking platform for all local taxi companies, save for CDG, which has also chosen not to introduce dynamic pricing and will instead adopt a flat fare structure for its mobile bookings, said to be introduced on April 10.

While CDG’s customers may benefit from the transparency of a fixed fare prior to their journey, UOB suggests that the divergence in price structures between CDG and Grab could lead to even more intense competition between the companies for drivers.

“We note that fares for JustGrab are not necessarily always more expensive than CDG during peak hours. In the near-term, we reckon CDG may face increased competition for drivers, from taxi operators partnering JustGrab to private hire cars. This may put further pressure on fleet hire-out rate,” says UOB.

“Having said that, we are not ruling out the possibility that CDG may eventually introduce dynamic pricing. Furthermore, we believe CDG’s wait-and-see approach may also be part of its competitive differentiation strategy. As the only taxi operator not introducing dynamic pricing, CDG may get an edge in terms of attracting drivers who prefer stability in income stream,” they continue.

Meanwhile, UOB estimates CDG’s rail margins to remain depressed at 1-3% for 2017 on the back of start-up costs for Downtown Line 3, in addition to a 4.2% fare reduction from Dec 30 last year. It however expects margins to recover in 2018 as a result of increased network effect.

As at 12.36pm, shares of CDG are trading 1 Singapore cent lower at S$2.59.