Cabcharge Ltd (CAB) is a diversified Australian technology, financial services, taxi payments and a land transport company. Its business is predominantly a taxi charge account system allowing customers to pay via credit card for their tax trips for a servicing fee.
CAB also has two affiliate businesses; UK-based account, booking and dispatch services provider, Cityfleet (49%-owned), and Australian-based commuter bus operator, ComfortDelGro (49%-owned).
Victoria tax reforms
In a major blow for the company, Victoria’s government announced in late May that it intended to limit the industry credit card servicing fee from 10% to 5%.
Victoria contributes around $22 million of CAB’s overall taxi service fee income, which came in at $89.6 million in FY12. Taxi service fee income represents around half of total revenue.
A 5% fee effectively reduces Victoria’s contribution by around $11 million, or 12% of overall taxi service fee income. On its own, this proposal will make a noticeable dent to CAB’s annual revenue stream, but not enough to cripple the company.
A bigger issue is whether other state governments choose to follow Victoria in any implementation of these changes. Already, NSW and Queensland have signalled they may too consider a 5% cap on servicing fees.
Whether Victoria ultimately implements the changes recommended by last year’s Alan Fels tax inquiry, and whether Queensland and NSW decide to follow Victoria will ultimately be negative for CAB.
The policy uncertainty alone is likely to cloud the company’s outlook, and if the servicing fee change is adopted by these three states, then we foresee a significant hit to its annual taxi service fee revenue.
CAB’s recent results have not been particularly impressive. 1H13 underlying profit was down 3.7% amid weak Cabcharge Card turnover, which was blamed on subdued economic conditions.
Moreover, Cityfleet net profit slumped 49% amid difficult trading conditions in the UK, detracting from the group’s overall earnings. CAB’s financial metrics highlight some worrying trends. EBIT margin has shrunk from 48.6% in 2H11 to 46% in 1H13.
Revenue growth has also stagnated during this period from 5.5% to just 1%. This has reflected a decline in payment system turnover growth from 3.5% in 1H11 to -2.2% in 1H13.
The fact margins have shrunk amid deteriorating revenue growth further suggests to us CAB is not doing a good enough job in cost control.
The uncertainty created by the proposed Victorian taxi reforms is an unwelcome problem facing CAB’s management. With NSW and Queensland indicating an interest in implementing their own reforms to credit card servicing fees, it appears a major driver of CAB’s revenue is coming under threat.
The reforms add to concerns of a weak operating environment in the UK (hurting the Cityfleet business) and will likely lead to further decline in the company’s margins. We think these concerns are enough to see CAB’s share price suffer over the medium term.