Trans-Cab Holdings Ltd.

Trans-cab Holdings Ltd (or the "Company") is offering 168m shares comprising 65m Cornerstone shares, 94.2m Placement Shares and 8.8m Public Shares at $0.68 each. Out of the 168m shares, 153m will be new shares with the balance vendor shares. There will be an over-allotment option of 20m shares. The IPO will close on 18 Nov 2014 at 12pm and starts trading on 20 Nov 2014.

According to the prospectus, the Company is the second largest taxi operator in Singapore by Fleet Size. In case you have never see a TransCab before, this is how it looks like. A striking red brighter than what you normally see in Hong Kong but with the same sense of familiarity.

This is a simple business so i will not have to explain much. The Company is a taxi operator and acquire and rent out taxis to licensed taxi drivers. According to the prospectus, there are 4 investment highlights, namely:

1. Favorable industry trends and outlook - 
2. Ability to retain and attract taxi drivers
3. Ability to capitalize on economies of scale from fleet renewal and expansion
4. Experienced and Committed Key Management Team

In case you don't know, Trans-cab was owned by a Union Energy and was granted a taxi operation license only in 2003. The founder, Mr. Teo Kiang Ang, is a secondary school dropout and made a living delivering gas cylinders. His company, Union Energy Corporation, controls more than 30% of the bottled gas market in Singapore and has annual revenue of $130m. A rags to riches story! If you want to read his inspiring story, it can be found here.

Financial Highlights

The Company has shown an increasing trend of revenue and profitability growth for the last 3 years. Probably it has reached an inflection point where it makes sense for the founders to get it listed since the growth will start to "stagnate".  

Having said that, the HY2014 numbers continue to show growth of around 20%. Given the stability of this business, I will hazard a guess that the EPS for FY2014 will be between Singapore 6 cents (doubling of 1H2014 adjusted EPS) to 6.48 cents (growth of 20% of adjusted EPS from FY2013). Given that there are some listing expenses and profit sharing to be accounted for and for simplicity, i will use Singapore 6 cents for FY2014 and 6.5 cents (FY2013 adjusted EPS of 5.4 cents x 20% growth) for FY2015.  

Based on the forecast adjusted EPS of Singapore 6 cents, the forward PER is around 11.3x for FY2014 and 10.5x for FY2015.

Dividend Policy

The Company intends to distribute not less than 15% of it profit after tax for FY2014 and dividends of not less than 60% of its PAT for FY2015.

Based on 6.5 cents for FY2015, the forward looking yield is actually very decent at around 5.7% (which explains why the insurance-linked asset management companies linked to Prudential and Great Eastern are buying into this stock as it more than matches the liabilities of the insurance policies they have on hand).

What i like about the Company

• While you may argue that the industry is competitive, it is actually a controlled and regulated industry. There are currently six operators in Singapore. The number of licenses to operate are likely to be limited to a few key players and unlikely to increase any more. As LTA is trying to raise the operating standard, I wouldn't be surprised to see some consolidation going on among the smaller taxi operators as you need economies of scale to operate a profitable business. 
• Strong take up rate by Cornerstone investors of about 9.4% of the Company. My initial read of the list of cornerstones are more of the long-only investors (Great Eastern, Prudential) and less of the "subscribe and throw" hedge funds. Please do note that they are not subject to any lock up. The IPO has also been priced at the top end of its range due to strong demand
• Well integrated verticals. The Company owns their own vehicle workshops, have lower diesel and CNG pump prices for its drivers and also invests in fuel efficient taxis. So far the trans cab taxis i took from the airport are the hybrid vehicles and they are usually very "green" vehicles that are fuel efficient.
• Stable business and high visibility of recurring income. While there are many taxis plying the roads of Singapore, the income is highly predictable and recurring in nature. People will still use the taxis in good weather or bad and in good times and bad. With Singapore rated as the top Lonely Planet destination for 2015, the tourism industry will likely to continue booming and this bodes well for the sector. 
• The existing owners' interest continue to be aligned with the new investors. They own about 72% of the Company and will likely continue to pay out high dividends.

Some of my concerns

• Disrupting technology. I have shared with you my prior experience with Uber in United States. In Singapore, the "car sharing" concept has not been accepted by the authorities. Otherwise, it will affect the livelihood of the taxi operators and companies.  Instead of Uber, Grabtaxi is the more established player here. Here is an old article on why Grabtaxi is giving Comfort Delgro a run for its money. Grabtaxi is partly owned by Temasek. Trans-cab should learn how to embrace such taxi apps (instead of creating its own) and worked in partnership with them. However, if the industry is liberalised here to the extent it is in United States, the taxi operators will be in deep trouble.
• Changing regulations. If LTA continues to come up with new and more difficult operating KPIs, the Company may have difficulty complying and this will impact its license. 
• Limited scalability. While the Company intends to increase its fleet to 5,234 by end of FY2015 and tender for bus routes in future, Singapore is a small island and the number of taxis are highly limited. It is difficult to scale up the business in a meaningful way. Venturing into bus routes is an unproven business. 
• Investors are paying a high 62.5% premium to NAV for depreciating car assets and taxi operating license in exchange for future earnings. I am actually fine with this but just included here in case you share the same concerns. 
• The two CEOs are very well remunerated and will receive between $1.25m to $2.25m per year before performance bonus. Probably this is not unusual given that they could have kept all the earnings of the Company of it continues to be privately held. 

Fair Value

Comfort Delgro and SMRT are trading at much higher valuations. Given they are "giants", I will not use the same metrics on Trans Cab. However, relative to them, Transcab is more attractively priced although I wouldn't call it a value buy at 11x PE. 

Assuming a fair value of between 12-14x PE for FY2015, the fair value trading range will be 78c to 90c. 

Conclusion

I will give it a 3 Chilli ratings given its relative better value against its peers, strong cornerstone investors, high recurring income predictability, strong cashflow and good dividend yield. It may be a good hedge against rising transport costs for the longer term too. 

Hoot Ah! Happy cabbing. 

Please note that Mr. IPO is vested with 14 lots from placement and intent to apply for more at the Public Tranche.