Research Report Cab Charge Australia

Research Analyst: Zeng Ooi Publication Date 17/04/11

Company Summary

Cabcharge Australia (CAB) is a

transport services company started
in 1976 to manage electronic
payments for taxi operators. It has
since diversified through
acquisitions into the taxi and
private bus sectors in Australia and
internationally.
Summary
The Cabcharge payment facility is Cabcharge is a fundamentally strong company that has
universally offered (>95%) in benefitted from diversification into the bus transportation
Australian taxis through
Cabcharge charge/prepaid cards
sector. Their core taxi business has slowed in the past 3 years
or standard credit/debit cards. due to the GFC but it has been balanced out by the strong
growth and expansion of CDC. Expansion of their taxi business
Cabcharge owns the largest fleet overseas with CityFleet UK has been disappointing and casts
of taxis in Australia under it’s
doubts over their EU expansion strategies.
various subsidiaries and is the
largest private bus operator in
Australia through their JV with In the short term CAB’s 2011 financials will be severely
ComfortDelGro. affected by the 15m ACCC settlement but it will be a one-off
expense. Expect solid growth in taxi services profits due to
ASX Code: CAB fare increases in NSW and QLD. Growth in CDC should also
IPO Date: 1999 be solid but it will be low relative to previous years due to the
Market Cap: $642M (AUD) lack of major acquisitions.
Last Price (15/04/11): $5.33
Ultimately CAB relies on the strength of the economy
52-Week Range: $4.25 - $6.38
(reliance on corporate clients), which has been slow to
Average Volume (30 Day): 371,174
recover with their taxi business accounting for 78% of profits. It
Dividend: $0.34 (2010) 0.27 (2011)
is important that CAB is focusing their efforts to expand their
NPAT: $57.6M (2010)
bus business as their taxi business is reaching a saturation
EPS: 47.8c (2010)
point. They have done well to corner the vertical market of
taxi services in AUS but there is little room for further growth in
Valuation
this sector.
Based Current Earnings: $6.67
Cabcharge Australia (CAB) – 1 year Chart
Based on forward EPS: $4.72

Target Price based on forward EPS

without one-off expenses: $7

Cabcharge Australia Limited

Founder and Chairman: Reginald

Kermode

Address
152-162 Riley Street
East Sydney NSW 2010

TEL: +61 2 9332 9222

www.cabcharge.com.au
 Major Subsidiaries Strategy and Operations
• Combined Communication Networks
(CCN)
• Taxi Electronic Payment Systems (Cabcharge)
• Taxi Combined Services (TCS)
• Black Cabs Combined • Taxi Logistics & Related Services (CCN & acquisitions)
• Silver Services
• EFT Solutions • Commuter Bus Services (CDC: Westbus)
• Europa Business
• Taxi Related Technologies: EFTPOS, security, taxi meters
Joint Ventures (49/51 split CDG)
• ComfortDelGro Cabcharge (CDC) Clients are diverse from corporate clients, government bus
• CityFleet UK contracts, taxi operators and individuals.

Recent Acquisitions Growth has been fueled by acquisitions expanding markets from
• Kefford Group NSW to the rest of Australia, NZ, Singapore and the UK.
• City Fleet UK
• Europa Division of Ingenicio of France Cabcharge Australia’s core FY2011 profits will be boosted by a
business of providing electronic 3% taxi fare increase in NSW and
taxi fare payments is a monopoly 4.2% in QLD. There will also be a
Institutional Shareholders as of 10/09/10
• RBC Dexia: 10.23% position with over 95% market share one off increase in FY2013 profits
• JP Morgan: 8.74%
in taxis in Australia. In 2010 the from their currently dissapointing,
• National: 8.65%
• HSBC: 7.51% service fee margin for their UK taxi operations (CityFleet UK)
• Nefco: 7.46%
Cabcharge branded cards was due to the London Olympics.
• Citycorp: 5.56%
• UBS: 5.55% 9.2%. They also offer EFTPOS
CityFleet UK is crucial to their
payments through the same
Recent Change in Positions
• Credit Suisse: 5.02%, in/out ST position. international expansion plans.
systems but collect a lower fee. The
• Lazard: 5.97%, decrease from 10.88% However the J.V. was during the
company regards their main
since Sept 2010.
• Commonwealth Bank: 5.06% peak of the GFC. European
competition as cash and aims to
expansion plans have since been
convert these customers to cards
2010 Financials on hold due to the poor economic
to target growth.
environment with profits also
Revenue: 174.3m
Profit: 57.6m In the past 3 years since the GFC affected by the strong AUD. In
EPS: 47.8c CAB’s growth has considerably addition to the UK they have
Dividend: 34c
ROE: 19.5% slowed from the double-digit pre operations in Singapore and NZ.
Payout Ratio: 71% GFC years. Because of the GFC
Net Profit Margin: 33.1% The reason for CAB’s rapid growth
LT Debt: 76.5m companies have cut down travel
before the GFC was acquisitions.
expenses and as a growth has
Key Personnel Their last acquisition, Kefford
slowed as coporate clients make
Reginald Kermode (CEO, Chairman) Group, was at the start of 2009 and
• up a large percentage of . Growth
• Ian Armstrong (Non Exec Director) before that there was a flurry of
in this business unit is highly tied to
• Neill Ford (Non Exec Director)
Phillip Franet (Non Exec Director) deals as they expanded into the
• the current AUS and global
• Peter Hyer (Non Exec Director) UK. Future growth prospects for
economic situation. With
• Kua Hong Pak (Director)
Donnald McMichael (Non Exec) CAB as whole depend on a steady
• economic growth slowly
• Neville Wran (Non Exec Director) flow of deals. This is especially
recovering in the past 3 years,
• Chip Beng Yeoh (CFO)
Sharon Doyle (Company Secretary) important for CAB and whether
• growth has also slowed for CAB
they will return to the double-digit
having reported a first ever-
growth that fueled their rapid stock
negative profit growth year in
price increase from 1999-2007.
FY2010 of - 6%.

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 Issues with the ACCC
In June 2009 the ACCC informed
Cabcharge that they have instituted
proceedings against them for
breaches in the Trade Practices Act.
CAB was accused of abusing their
monopoly position by refusing deals
with competitors to process
Cabcharge branded cards and
signing taxi drivers to exclusively use
Cabcharge systems. In addition to
this they were accused of anti-
competitive behaviour by offering
free or below cost meters or fare
schedule updates.
CAB settled with the ACCC out of
court for $15m admitting to 3 of the
11 breaches involving the abuse of
their monopoly position.
Competitors
Two competitors that benefited
directly from the ACCC settlement
were MPOS Australia and Travel tab
Australia.
MPOS is a provider of EFT systems and
have supplied Australian Taxis since
1993. Now that they may be able to
process Cabcharge cards they pose
a bigger threat to CAB as they can
compete with lower fees and
terminal costs.
The Live Group is the most recent
competitor in the taxi e-payment
space offering similar services with
EFTPOS as well as charge card
solutions. It was started by Macquarie
Bank and went through a
management buyout in 2008.
But with CAB’s vertical approach to
the taxi industry, by operating the
largest fleet of taxi’s in Australia and
the services relating to it, it makes it
very hard for competitors to gain
market share.
Profit Growth
2008
CDC (millions) 7.1
CDC Growth 29.09%
CityFleet UK (Millions) 2.9
CityFleet UK Growth 31.82%
All Associated Companies 9.98
AC Growth 30.51%
Share of total profits 16.90%
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BUS OPERATIONS
CAB started diversifying from taxi
services into the bus sector in 2005
when they partnered with
ComfortDelGro in a joint venture
named ComfortDelGro
Cabcharge (CDC). CAB own 49%
while CDG own 51%. Their first
piece of business was the
acquisition of the Westbus Group
for 106.7m, which was having
funding problems at the time and
had entered into voluntary
administration.
Since then CDC have turned the
business around growing through
acquisitions. In Feb 2009 CDC
acquired the Kefford Group for
149.2m to expand into the
Victorian bus market.
There is still plenty of room for
growth and more acquisitions in
the private bus sector as CDC
expands their operations into other
states. They have a good grasp of
business model, which involves
maintaining and winning new
government contracts by serving
areas that state bus companies
don’t operate. CAB expects CDC
to be their main driver of growth as
they continued to add buses and
improve cost management.
Growth Sector by Sector
2009 2010 Revenue Growth
7.8 10.9 Taxi Services
9.86% 39.74% Growth
3.3 1.8 Taxi Related Services
13.79% -45.45% Growth
11.17 12.78
11.88% 14.39%
18.20% 22.20%
Technology Operations
Cabcharge develop their own
electronic payment systems to
support Cabcharge cards and
EFTPOS. They make a point to
keep up to date with the latest
mobile payment technologies,
having recently replaced their
terminals to now support the
more secure contactless cards.
With their EFT Solutions business
unit they aim to be the leading
independent Australian EFTPOS
development company. This unit
focuses on the software so that
they aren’t tied into hardware
and allows them to keep up with
the industry cost effectively.
With their Europa business unit
CAB design their own taxi
optimized security cameras and
taximeters to best suit their needs.
From taximeters to payments
systems and the taxis themselves
they control almost every aspect
of the taxi business. Subsidiary
CCN offers taxi training, smash
repairs, insurance and dispatch
services. However they are
moving to a third party dispatch
system from MTData, which is
becoming the new standard.
2008 2009 2010
88.08 87.46 84.59
11.78% -0.70% -3.28%
71.70 73.63 77.08
22.30% 2.69% 4.69%
 CAB (AUD)
Jun-06 Jun-07 Jun-08 Jun-09 Jun-10
NPAT 38,023,000 51,820,000 59,019,000 61,382,000 57,604,000
NPAT Growth 37% 36% 14% 4% -6%
EPS 0.34 0.45 0.50 0.51 0.48
EPS Growth 37.10% 32.35% 11.11% 2.00% -5.88%

Fundamental Valuation Process and Share Price

Method of valuation is via the fundamental P/E ratio.

Observations

• Company is no longer in high growth phase (at least until CAB decide to start acquiring again).
• Payout ratio promised to shareholders is around 65-70% and stable.
• ACCC settlement will affect FY2011 earnings by 15m, which would account for around 25% of net
profits.
• Current ROE of CAB is 19.5% and we can expect it to fall to a stable level of 15% (in five years), which is
the ROE of similar established companies such as Comfortdelgro Corporation.

Based on these observations we will calculate the fundamental P/E ratio with two stages, a moderate
growth phase for the next five years and a stable growth phase thereafter. We will assume the payout
ratio to be constant at 70%, ROE to be 20% in growth phase and 15% in stable phase.

The cost of equity will be calculated from the CAPM equation with 10 year AUS Treasury bond as the risk
free rate, company beta of 1.02 and 4.5% as the risk premium (5.44%+(1.02*4.5%)=10.03%).

Growth rate will be the fundamental EPS growth rate calculated as ROE*(1-Payout Ratio). This is 5.64%.
CAB (AUD)
Jun-06 Jun-07 Jun-08 Jun-09 Jun-10
NPAT 38,023,000 51,820,000 59,019,000 61,382,000 57,604,000
Weighted Avg. Shares 112,233,057 115,438,000 117,381,000 120,431,000 120,431,000
EPS 0.34 0.45 0.50 0.51 0.48
DPS 0.23 0.3 0.34 0.34 0.34
Payout Ratio 67.89% 66.83% 67.62% 66.71% 71.08%
ROE 24.30% 23.80% 22.40% 22.00% 19.50%
Fundamental EPS Growth 7.80% 7.89% 7.25% 7.32% 5.64%

Taking into account all the above information the fundamental P/E ratio equals 13.89.

Using current EPS the fundamental share price is valued at 13.89*0.48 = $6.67

Using forward EPS (assuming 5.64% growth minus 15m ACCC settlement = estimated EPS 34c) share price
valued at 13.89*0.34 = $4.72

Using forward EPS without one-off expense of ACCC settlement CAB would be valued at 13.89*0.51 = $7.09

⇒ LT share price target for CAB at $7 however investors should be cautious around the 2011 full year earnings
announcement around August as profits will expectedly be hit by the ACCC settlement.

Disclosure

The author of this report is not a stakeholder in Cabcharge Australia or their related entities. The views
contained in this report is by no means a recommendation to buy or sell shares in CAB. All information
contained in this report is from publically available sources such as company reports and announcements,
financial information services and news services.

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