Australia | Nov 23 2012
– RBA intends to vary surcharge standards
– Decision seen as impacting on Cabcharge's business
– Potential earnings impact difficult to quantify
– JP Morgan and Macquarie rate the stock as Underweight
By Chris Shaw
The Reserve Bank of Australia's (RBA) Payments System Board has released a final Guidance Note in relation to its decision to vary surcharging standards from March of next year and brokers see potential implications for Cabcharge Australia ((CAB)) from the update.
The update from the RBA contains specific references to the taxi industry as a payment services provider while also referencing a Victorian Taxi Inquiry report suggesting service fees should be regulated so they don't exceed the resource cost of providing such electronic payment services.
What makes the taxi industry unique in the view of JP Morgan is specific payment systems such as that offered by Cabcharge have emerged as business models in themselves. This reflects the fact taxi drivers don't have specific merchant relationships with financial institutions and so don't own the surcharge, as is the case with a normal retailer.
This has seen Cabcharge argue its business will be impacted by the RBA's Variation to Surcharging report, as the company view is its business is applying fees on financial services rather than a surcharge on an underlying transaction.
For Macquarie, the RBA update is a clear indication taxis fall under the Payments Systems Regulation Act, which offers incentive for the likes of Mastercard and Visa to commence arbitration with the taxi industry.
Assuming the end result is a reduction in surcharge for third part card processing occurs, Macquarie estimates the potential earnings impact on Cabcharge could amount to as much as 30% of earnings per share (EPS).
While not making any specific estimate of the potential impact on earnings for Cabcharge, JP Morgan notes any change in the balance of power in the taxi industry's transaction value chain will pressure returns.
At present, JP Morgan estimates Cabcharge generates a return on invested capital of around 30% from its payments systems business, which is significantly higher than the rest of the company's operations. Any change in the earnings profile of the taxi payments business would therefore have a compounding impact on Cabcharge's valuation.
As with Macquarie, the JP Morgan view is it is simply impossible to predict what earnings impact is likely from any changes in the taxi payments business. As a result, the broker has left earnings forecasts unchanged but factored in a 25% discount to valuation when calculating its price target.
This sees JP Morgan's price target cut to $4.20 from $5.49. Macquarie has reacted similarly in cutting its target to $3.00 from $4.50. The consensus price target according to the FNArena database now stands at $4.80, down from $5.27 previously.
The uncertainty for Cabcharge's earnings outlook created by the RBA Guidance Note is enough for JP Morgan to downgrade its rating on the stock to Underweight from Neutral. While the Cabcharge share price has weakened significantly of late, having fallen around 20% over the past month, the broker suggests the uncertainty surrounding the business model means share price outperformance is unlikely in the near-term.
Macquarie had already rated Cabcharge as Underweight but like JP Morgan sees scope for further share price weakness given the uncertain outlook. Overall the FNArena database shows Cabcharge is rated as Buy once, Hold three times and Sell twice. Not all database brokers have responded to the RBA news as yet.
Goldman Sachs also rates Cabcharge as Sell, with a price target of $3.59, down 25% from previous levels. The broker assumed the new surcharging standards being proposed by the RBA will see Cabcharge's current 10% surcharge on bank-issued cards cut to 5% from mid FY14.
To reflect this Goldman Sachs has cut its EPS forecasts for Cabcharge by 13% in FY14 and by 21% in FY15. The broker also sees further uncertainty with respect to Cabcharge's earnings outlook, which is enough for a Sell rating to be maintained.
Shares in Cabcharge today are weaker in a lower overall market and as at 11.15am the stock was down 27c or nearly 7% at $3.65. Over the past year Cabcharge has traded in a range of $3.57 to $6.57, the current share price implying upside of more than 30% to the consensus price target in the FNArena database.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
