Stock of the Day – Cabcharge Australia (CAB)

Cabcharge has traditionally held a quasi-monopoly position in t5he taxi fare processing industry thanks to first mover advantage, 30 years of experience and scale efficiencies that are difficulty for potential competitors to replicate. Cabcharge market share has deteriorated in recent years largely because of the 2.5 to 4% rebate offered for drivers by the third party operators. The current 10% surcharge is under heavy scrutiny with pressure coming from RBA Payments Systems Board – Victoria moved to 5% in February 2014.


CAB PROFIT (Source – Company Reports)

Contract wins will assist the bus joint venture but the recent re tendered losses are concerning. Despite its strong position, structural changes within the industry have increased competition and seen new entrants take market share from Cabcharge. Given the increased competitive threats and greater regulatory scrutiny we do not see Cabcharge as being suitable for conservative investors.


CAB ten year share performance (Source – Company Reports)

The New South Wales government announced an intention to legislate changes to the taxi service fee. The 10% surcharge cap on credit and debit card payments will be reduced to 5% which follows similar policy from the Victorian government. Cabcharge has disclosed that it processes AUD 310 million of taxi fares in NSW each year resulting in AUD 28 million of taxi fee income. The company will look at ways to mitigate the notional loss of AUD 14  million including reassessment of merchant fess arrangements with taxi networks and incentive payment to drivers. 
  

CAB Daily Chart (Source – Thomson Reuters)
Scrutiny by the Australian Competition and Consumer Commission and RBA will limit Cabcharge’s ability to defend its quasi monopoly. Potential regulation changes that impact the payments industry are a real threat. Margins will drop if Cabcharge is forced into offering drivers part of the surcharge to defend against aggressive new competitors. Rapidly changing technology is always a threat but Cabcharge aims to counter this by continued investment in technology. We believe the stock is expensive at its current price and would review the stock at a later date.

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