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By Leo Sek – Clime Asset Management

Cabcharge Australia Limited (ASX: CAB) was established in 1976 to service taxi operators and drivers to manage non-cash fares. Today CAB covers 96% of Australian taxis, limousines and water taxis, and is also available in some fleets around the world.  

Taxis Combined Services, the largest taxi company in Australia, is a wholly owned subsidiary of CAB. CAB also owns Combined Communications Network, an Australian transport logistics company that operates the country’s largest fleet of taxis and provides associated specialist services to support owners, operators and drivers.  

Business model

CAB derives most of its revenue from two main sources: Cabcharge taxi charge system and taxi related services.

Cabcharge taxi charge system accounted for 54% of FY 2009 revenue and is the core business of CAB. CAB provides electronic transaction services for the use of debit, credit and Cabcharge cards in taxis in return for a fee of 10% of the total fare including tolls. Cabcharge cards predominately caters to corporate and government accounts.

Taxi related services generated 46% of FY 2009 revenue. The main revenue contributors are subscription fees paid by taxi operators for radio dispatch services and leasing of plates on behalf of taxi owners. Other services include insurance broking, vehicle financing, smash repair and taxi fit outs.

CAB also participates in two joint ventures with ComfortDelGro Corporation Ltd (Singapore). These are ComfortDelGro Cabcharge Pty Ltd (“CDC”) and CityFleet UK Pte Ltd (“CityFleet UK”). CDC operates Westbus, Hillsbus and Hunter Valley Buses and acquired a bus building business in July 2008. CityFleet UK provides taxi and hire care services in London, Aberdeen, Birmingham and Edinburgh.

The CDC joint venture had a fleet of 1,255 buses at the end of FY 2009. Another 124 buses will be added by the end of calendar 2009.

Key issues

CAB is highly leveraged to the economic cycle as reflected in the 2% fall in taxi fares processed during FY 2009. The extent of the fall was significant; the second half of FY 2009 experienced a fall of 8.7% on the prior corresponding period, compared to a 4.7% increase in the first half. The fall was predominantly due to reductions in corporate expenditure partly offset by a 10% increase in the volume of bank issued card fares processed.

CAB has a near monopoly in the taxi payment system industry having terminals in 96% of taxis in Australia. However, in recent years several competitors have surfaced, the largest being GM Cabs and Live Payments/Taxi Epay.

The attractiveness of competitors’ terminals lies in the payment of commissions of 1-3% of fares direct to tax drivers. This contrasts with CAB who pays a 2.5% commission to the taxi network. Hence, taxi drivers are encouraged to use an alternative EFTPOS machine to the CAB machine. Although CAB does not provide market share data, external research suggests that CAB may be losing market share.

The threat from competitors may be mitigated by CAB’s incumbency in almost all taxis in Australia, national acceptance and CAB’s large share of corporate accounts. Also, to some extent a taxi driver may find it inconvenient to have two credit card machines in their cab.

The taxi industry is regulated as fare increases are controlled by the Independent Pricing and Regulatory Tribunal (“IPART”). In June 2009, IPART recommended a 4.2% taxi fare increase for urban taxis in New South Wales. This is positive for CAB as it increases the fare revenue base.

However, of some concern, is that in June 2009, the ACCC brought legal action against CAB alleging anti competitive conduct.

ACCC action

The ACCC has alleged CAB of three breaches of the Trade Practices Act:

1. CAB’s refusal to allow Cabcharge cards to be processed through non Cabcharge terminals

2. CAB supplied a significant number of taxi meters and fare schedule updates either free of charge or below cost to eliminate or prevent competition

3. CAB acquired the charge account business of Townsville Taxis and replaced them with Cabcharge terminals to eliminate competition

The first allegation has the most impact on CAB’s core business. If the ACCC is successful in its claim, CAB would be required to allow other EFTPOS terminals to process Cabcharge cards. This may lead to a decline in margins as Cabcharge may have to pay the terminal owner a processing fee.

Of more importance though is the potential loss of market share as taxi drivers will be less motivated to have a Cabcharge terminal in their taxis. If Cabcharge cards can be processed on competitor terminals, why would taxi drivers use a Cabcharge terminal where they receive no commission versus competitor terminals paying 1-3% commissions directly to the driver?

Valuation

The performance of CAB has been strong, with profit more than doubling from $27 million in FY 2005 to $61.3 million in FY 2009.  Profitability, as measured by ROE, increased slightly from 27.6% to 29.9%.  

The slower pace of ROE growth is due to CAB’s has been due to a decline in returns on incremental equity as is shown by the following observations:

•    profit rose by $34.3 million from FY 2005 to FY 2009

•    $88.3 million of profit was retained and $72.2 million of new equity was raised

•    this produced a return on incremental equity of 21%

This declining return appears to be due to CAB’s diversification into bus construction and operation as well as UK taxi services.  Between FY 2006 and FY 2009, CAB invested $163.6 million into these joint ventures. CAB’s share of profit was $31.4 million and $4.5 million of dividends was received. This equates to a ROE of 21.9%, lower than the ROE achieved prior to the establishment of the joint ventures in FY 2006.

As the economic recovery gathers momentum and corporations and consumers increase their spending, the volume of taxi fares processed and profit should recover.  In the longer term, further acquisitions of Australian bus and UK taxi operators may be undertaken but based on history these will further erode the ROE.

We have adopted a required return of 13.6% which is appropriate given the risk of losing market share to rival EFTPOS terminals and the uncertainty posed by the ACCC case. We note that the market average market required return used by StockVal is 12% and so we have placed a margin for the risks identified with CAB.

The adopted profitability forecast of 28% is conservative given the resilience of the Australian economy and strong employment numbers. The current market price requires CAB to generate 26.9% profitability or ROE and thus suggests that investors should consider an investment in CAB at present.

However at present our fund managers would prefer to wait until there is greater certainty around the ACCC case before allocating our client’s capital to the stock.

Clime Asset Management uses StockVal.

 

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