The New Criterion: hitching a ride on the taxi recovery theme

Tim Boreham

Independent Investment Research

 An ASX  newcomer is offering an exposure to both the taxi and ride share sectors at a time when listed stalwart Cabcharge is fighting back.  Which stock represents the ‘farest’ value?

P2P Transport (P2P) $1.34

Cabcharge’s former monopoly on non-cash fares might have been smashed some time ago, but when it comes to a listed taxi industry exposure local investors have only had the choice of Cabcharge or Cabcharge.

As for the burgeoning ride share sector, Uber is privately owned and there’s no way of hitching a ride on the ASX.

All this changed on Wednesday, with fleet manager P2P (as in point-to-point transport) listing at a modest premium after raising $30m in an oversubscribed IPO.

The “platform agnostic” P2P manages a fleet of 720 vehicles, mainly for taxi drivers but also for full-time ride-share drivers who don’t want to run their private vehicles into the ground.

Pitched as a roll-up play, P2P aims to grow by acquisition in a fragmented sector populated by family businesses owning a handful of taxis each.

P2P co-founder and CEO Tom Varga says P2P has the advantage of being vertically integrated: it not only acquires the vehicles but fits them out as taxis and services and maintains them.

It also sources drivers, but does not aspire to emulate Cabcharge (and many others) in the crowded payments game.

“We do everything required to keep the steel on the road,” says the former BlueScope and Macquarie Group exec.

“There’s no margin paid to someone else in the channel.”

Given its economies of scale, P2P claims to be able to source a car for 15-20 percent cheaper than the retail sticker price, with a 20 percent saving on insurance costs and 25 percent on insurance.

For ride-share drivers, leasing a popular Toyota Camry hybrid from P2P costs between $249 to $299 a week to rent, with only petrol and tolls to pay over and above that.

The economics preclude part time or weekend drivers, but are more attractive for the 25 percent or so who drive for 40 hours a week or more.

Interestingly cabbies will pay much more to rent a taxi -- $850 to $1500 – which reflects the still-superior earnings power of cabs because of rank privileges and their ability to accept passengers off the street.

Of course it’s hard to earn a decent living via either channel.

A diplomatic Varga says that with taxis still accounting for 93% of the passenger market, Uber’s 6% share has often been overstated.

Uber also gave the taxi industry a much needed kick up the bum (our words). “It’s easy to say Uber has been bad for the (taxi) industry but  ...  Uber has resulted in a lot of changes that have benefited everyone,” Varga says.

Well, almost everyone. At the stoke of a legislative pen, the value of a Victorian licence – which at the peak of the market changed hands for more than $500,000 -- to a mere $53 a year licensing fee.

But with the regulatory ground rules for both taxis and ride shares now becoming clearer – and with taxi industry innovation such as set fares in Queensland – Varga expects both sectors to burgeon.

As for the IPO, P2P forecasts $6.4m of earnings on $50.4m of revenue in 2017-18, based on its fleet growing to 1084 by June next year

This compares with earnings of a mere $92,000 and revenue of 2016-17 (based on a 514-strong fleet).

At $1.32 a share, the offer was pitched on a current year earnings multiple of 16 times and a yield of 2.5-3.7 percent.

Investors should be aware that the three key founders have used the listing as a chance to lighten up their holdings to the tune of $6m.

But the founders will still control 36.5% of the company with 27.8m shares (escrowed for two years).

 We guess they’re still more ‘in’ than ‘out’.

Strictly speaking, P2P’s nearest exemplars are Singapore’s Comfortdelgro (Cabcharge's erstwhile JV partner), Indonesia’s BlueBird (as in the ubiquitous Balinese cabs).

Cabcharge (CAB) $2

While P2P is priced for growth, Cabcharge’s valuation assumes a continuation of the decline that has seen its earnings erode by almost 25 percent over the last five years.

As Cabcharge shares trade close to record lows, there are signs of stabilisation as revamped management devotes more resources to a ‘back to basics’ approach to customer service and deploying technology such as booking apps.

At Cabcharge’s recent AGM, CEO Andrew Skelton highlighted measures such as new handheld terminals to counter the offerings of payment rivals such as Ingogo and GM Cabs.

Last year, Cabcharge pocketed $184m after disposing of its 49 per stake in a local bus operating J.V – a business that increasingly looked a distraction rather than a sensible diversification.

“We are encouraged by the early signs that our strategy is working and we are excited by the ... opportunity available in the expanding market for personal transport,” he said.

A more fundamental reason for optimism is that Cabcharge had been battling the headwinds of a Reserve Bank dictate that cut the allowable surcharge on credit card transactions from 10 per cent to 5 per cent.

But this has now worked its way through the numbers, which means the drag on 2017-18 earnings should not be so severe.

No-one would argue that Cabcharge is a growth stock, but the moot point is how much the trashed share price factors in further declines.

Cabcharge reported net earnings of $21.3m from continuing operations in 2016-17, with current expectations ranging from a slight decline to as low as $17m.

Cabcharge reported earnings per share of 17.7c in 2016-17, with current year expectations ranging from 16c to a healthy 24c. This means the company is trading on an earnings multiple of anywhere between 7.5 times and 11 times.

At the AGM, management made positive noises but did not proffer any earnings guidance, so it’s a guessing game as to how strongly the overdue reforms will trickle to the bottom line.

Our sense is that conditions have at least stabilised, but investors may have to wait for longer to enjoy the rewards.

With net cash of $25m, Cabcharge at least has the balance strength to last a journey which – like many of its cabbies – remains directionally challenged.

Tim Boreham edits The New Criterion

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.







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Tim Boreham
Tim Boreham
Editor of New Criterion
Independent Investment Research

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

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