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Cabcharge’s share price docked

Cabcharge Australia Limited (ASX: CAB) has seen its share price smashed, after the Victorian government announced that it was adopting most of the recommendations in a recent enquiry into the taxi industry. Cabcharge shares were changing hands at around $4.26, a 13% drop.

Among the recommended changes is the adoption of a maximum 5% service fee on card payments, from the current 10% level. Last year, Goldman Sachs had calculated that halving the fee could hit Cabcharge’s earnings by 10%. Other analysts have estimated that up to 40% of the company’s net profit could be at risk, although the company has ridiculed that suggestion.

Taxi related services represent 79% of Cabcharge’s earnings, with an estimated 97% of cabs running Cabcharge’s payment system.

Cabcharge also operates in New South Wales, in fact, it’s the company’s largest taxi market, and has smaller operations in South Australia and the UK. Cabcharge also operates a joint venture in the bus transport industry, which now represents 26% of the group’s underlying profit.

While Victoria has adopted a lower maximum fee for processing electronic taxi payments, it’s not yet known whether other states will follow suite. Cabcharge may also dispute the lowering of the fee, as the company views itself as taking on credit risk for some products used with the Cabcharge system.

The company may also face a hit with another one of the recommendations, which lowers metropolitan taxi licences, currently valued at around $350,000 to $22,000 a year. The lower price may allow more individual owners to become taxi drivers, with the option of excluding the Cabcharge payment system from their cabs.

Cabcharge chief executive, Reg Kermode, last year suggested that 5% was unsustainable, and that neither Cabcharge nor its competitors could afford to operate due to back-office costs.

The changes to the taxi industry have clearly weighed on Cabcharge’s share price in the past 12 months. Shares have fallen 28% over that period, compared to the S&P / ASX 200 Index (Index: ^AXJO) (ASX: XJO) rise of 16%.

Foolish takeaway

The share price plunge may have been overdone, with Cabcharge having other operations like its UK and bus businesses, as well as providing its services and systems to other states in Australia. At current prices, Cabcharge may represent an opportunity, and it’s one to add to your watchlist.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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