Treasure Chest | Aug 14 2015
By Eva Brocklehurst
Investors in Cabcharge Australia ((CAB)) may be receiving the taxi payments business for free and the tax services at a discount of anywhere between 10-50%. Analysis by UBS suggests that even if the taxi payment business does not exist in five years – not the broker’s view admittedly — the business should still be worth the net value of the cash flows.
While recognising that a halving of taxi payment revenue would be a very bearish development, the broker considers this is more than reflected in the current share price. The broker contends the taxi payment business should not be valued at zero. UBS expects it is just a matter of time until a service fee cap is implemented Australia-wide and Cabcharge is not without opportunities despite the headwinds.
Moving to a 5.0% environment in terms of a service fee cap may be challenging but the broker believes other competing second terminal providers have found it near impossible to remain profitable or have materially reduced their competitive offering. In Victoria several competitors have left the market, which has resulted in Cabcharge’s turnover in that state increasing by 35% over the first 12 months of the new cap.
The broker’s Buy call is based more on valuation and longer-term opportunities rather than the upcoming FY15 results, which UBS suspects will be lacklustre. Having run the case for various scenarios the broker estimates risks to the business are more than priced in, while the stock offers a dividend yield of 5.7% on forecasts. Following a change of analyst, UBS upgrades to Buy from Neutral. Target is $4.70.
UBS envisages multiple opportunities to either protect market share, increase earnings or obtain value through a revamped mobile booking application. This could come from creation of a closed loop environment, whereby payment details are captured at the time of booking.
The broker suspects Cabcharge is suffering from large leakage in turnover by giving the driver the choice of where to process booking related fares. Upcoming competitors Uber and GoCatch both capture the credit card details within their application and process fares automatically that they book through their apps.
Cabcharge management has also recognised it is not paying enough attention to its radio network technology and has made recent improvements to mobile apps. Continued improvement should place the company in a stronger position to maintain market share. Also beneficial would be divestment of non-core operations and assets such as the associate businesses – CDC buses and CityFleet Network – as well as listed shares and the property portfolio, in UBS’ view.
FNArena’s database has two Buy ratings, the other being Morgans, with one Hold (Macquarie) and two Sell (Credit Suisse, Deutsche Bank). The consensus target is $4.59, suggesting 40.7% upside to the last share price. The dividend yield on consensus forecasts is 6.0% for FY15 and 5.9% for FY16.
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