Company: Cabcharge Australia Limited
ASX Code: CAB
Share Price: $5.19
Market cap: $625m
Cabcharge enjoys a virtual monopoly in the taxi fare processing industry. Other blue chips with similar advantages include the likes of the ASX and Brambles. However, just as the ASX and BXB have encountered their share of competitive threats in recent times, Cabcharge too looks set to be challenged…
The company has enjoyed double digit growth every year since listing in 1999 but Cabcharge could not escape the economic downturn and the streak is set to end. Of more concern though is the emergence an ACCC lawsuit which could hamper Cabcharge’s near to mid term outlook. The infamous ‘competition watchdogs’ are taking the company to task for alleged breaches of the Trade Practices Act (anti-competitive behaviour). Cabcharge’s apparent focus on trying to defend its monopolistic turf has landed the company in hot water and may have left management wishing they could do the ol’ ‘runner’.
Despite its current headaches, Cabcharge boasts a distinguished background. Established in 1976, the company was founded by current Chairman and CEO, Reginald Kermode, as a partnership between Taxi Combined Services and Yellow Cab Group. Since formation the company branched into electronic payment systems which are now found in over 96% of Australian taxis, limousines and water taxis. The payment system is also available in some fleets overseas. On top of Taxi Combined Services – the largest taxi company in Australia – Cabcharge also has a 49% stake in the Westbus Group – the dominant bus operator in Western Sydney.
Nonetheless, the company’s run of nine consecutive years of double digit growth has ended. The economic slowdown has played its part, however the company’s less than healthy focus on defending its ‘royal stomping ground’ rather than expansion has allegedly been exposed. With the prospect of a lengthy court battle ahead – we don’t see the company changing its unhealthy defensive focus in the near term. Cabcharge has a solid record for warding off competitive threats, but now faces an entirely different beast. The company could face record fines in excess of the $36m recently dished out to Visy Industries (for an involvement in a local cardboard cartel with Amcor) which could potentially wipe out an entire year’s earnings. In our view, the ACCC has effectively declared war on Carbcharge’s virtual monopoly in the non cash taxi payments industry. With a dominant market share, Cabcharge has everything to lose.
In the absence of these (alleged) unscrupulous business practices and pressures from the ACCC, Cabcharge operates a very attractive business. Barriers to entry are significant, creating high margins and returns on equity. Gearing is also modest, with debts ($75m) repayable with one year’s earnings. In light of these positive qualities we are closely watching the stock for a deep value opportunity. Trading on a PE of 10 and dividend yield of 6.6%, the stock doesn’t appear priced for growth, which we believe is a fair scenario. The company’s strong historic growth record stems from its iron fist grip on the non cash taxi payments industry – which processes over $1bn annually. 96% of these transactions are processed via Cabcharge, which takes a 10% fee for the service. Although the company owns the largest taxi network in Australia, and 49% of Westbus – the payments processing business is the jewel in its crown.
Being largely a fixed cost operation, small increases in revenue can deliver handsome boosts to earnings. However this ‘operating leverage’ also applies to the downside. Although we believe the taxi payments industry will continue enjoying solid growth as a whole, the overarching threat of increased competition could become a far greater cost for Cabcharge. Overplayed competitive threats normally offer great opportunities to buy into market leaders (such as we recently saw with Brambles and its CHEP pallets), and having fought off past threats from Visa and Macquarie Bank – we could see one emerge with Cabcharge.
Nevertheless with management now focused on ‘defense’ more than ever, we believe the earnings risks favour the downside. Now testing its long term upward trend, the technicals are painting a similar picture and we recommend long term investors ‘avoid’ the stock for the time being. In the absence of legal and competitive threats, Cabcharge operates a very attractive business backed by a strong balance sheet. In light of the recent sell off a short term trading opportunity may emerge, however over the next 12 months at least, we expect further bad news from the court case to outweigh the good.
Joshua Terlich is an analyst at wise-owl.com. Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.
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Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.