Payments provider Emerchants is strongly expanding its global reach – but not reaping the share price benefits – while the 40 year old Cabcharge is seeking to restore its rightful place in the disrupted taxi industry.

Emerchants (EML) $1.21

The provider of both reloadable and non-reloadable payments cards exemplifies the life cycle of a tech start-up, with unabashed investor enthusiasm in the blue-sky stage giving way to caution even as the enterprise grows it revenues and turns profitable.

Having reverse listed in 2012, Emerchants came from nowhere with its approach of filling the gaps in the payments chain vacated (or never filled in the first place) by the banks.

Contrary to common perception the banks aren’t entirely monolithic, despite their dominance of traditional lending and transactions. They choose not to play in some payments activities that require a bespoke approach or are not big enough.

Examples of Ecommerce’s offerings are gift cards, loyalty schemes, supplier payment cards and online bookies so that punters can download winnings directly on to a stored value card (or, more likely, upload them when they stop winning).

Emerchants manages 1100 card programs in 19 countries – a mix of direct white-labelled consumer programs or business-to-business products.

About three-quarters of volumes derive from the US, where the old fashioned cheque book lives in, along with the imperial system and the right to bear arms.

In its recent half year report, Emerchants reported gross debit volumes (GDV) of $3.58 billion, up 86 per cent. The company’s actual revenues also grew by 18 per cent to $38.2m, with ebitda of $13.5m (up 35 percent) and a net profit of $2.03m (up 50 percent).

But since late November Ecommerce shares have tumbled almost 50 percent. The first catalyst for the sell down was CEO Tom Cregan selling four million shares, pocketing $8m.

Director (and former Bank of Queensland chief) David Liddy peeled off 800,000 shares – half his holding – for $1.59m.

In a statement pitched at “confused and upset” shareholders, Emerchants Chairman Peter Martin said the selling was for personal reasons and it did not reflect the company’s "excellent” long-term outlook.

Cregan still owns 16m shares – 6.6 percent of the company – and doesn’t plan to shed any more.

The stock then fell further after February’s half year results, which saw full-year GDV guidance trimmed from $7-8bn to $6.7-7bn.

Emerchants executed a flurry of deals with 2017, notably to provide pre-paid cards for customers of salary packager McMillan Shakespeare.

The company also signed up Mize Houser, a Kansas-based accounting firm that manages the accounts payable functions for restaurants.

Then it acquired Sweden’s Presend Prepaid Solutions, which supplies non-reloadable cards for shopping malls.

In a show of faith in Emerchants, the Swedes accepted only $1.6m of the $11.1m in up-front cash, with the rest in deferred scrip.

Over five years, Emerchants has managed compound annual revenue growth of 63 per cent (to $58m) and ebitda growth of 237 per cent.

At its peak the company was valued at $550m and its still bears a healthy $285m market cap.

If that sounds over the odds, consider that reverse lay-by play (and recent market darling) Afterpay is still valued at close to $1bn, despite recent concerns about fraud and irresponsible lending.

In the current financial year, Emerchants and Afterpay are expected to generate similar ebitda of $20-23m.

A key difference is that Emerchants is more globally diversified and does not bear any credit risk when the interest rate cycle turns.

On the contrary, Emerchants would love to see higher interest rates globally, it earns interest on balances held with banks on behalf of Emerchants customers.

 

 Cabcharge (CAB) $1.89

Unlike Emerchants, Cabcharge is a hardly a start-up, but a 44 year old payments operator (and listed embodiment of the taxi industry) trying to protect its patch against new entrants.

Cabcharge may not have declared victory against Darth Vader – a.k.a. Uber -  but CEO Andrew Skelton believes the worst is in the rear view mirror.

For the first time in years, Cabcharge is seeing top line growth in terms of both fare volumes and the company’s actual revenue derived from processing non-cash fares.

“We are a little ahead of where we might have thought,” Skelton says.

In effect, more people are using taxis and Cabcharge itself is winning market share from other in-cab payment operators such as GM Cabs and Ingogo.

In terms of top-line fare volumes, Cabcharge bucked a two-year decline trend and reported a one per cent increase in the December half, to $515m. The company also saw fare growth in every state and territory.

Cabcharge’s share of taxi fare mobile app downloads ahs also increased, from 6 per cent in the previous first half to 10 per cent.

Skelton claims younger passengers stung by Uber’s surge pricing are ‘discovering’ taxis, while ride-share drivers are turning to cabs as they realise the cost of maintaining their own vehicle.

There’s also some regulatory angles helping and hindering Cabcharge.

Firstly, most states have reduced the allowable payments surcharge from a lavish 10 percent to 5 percent.

In theory, this halved Cabcharge’s payments revenue overnight but it hit its newer rivals even harder.

Queensland implemented the cut in November and that’s still washing through. Cabcharge’s dramatic long term decline in payments revenue decline has, well, declined.

The second regulatory move presents both advantages and headwinds because of the dichotomous approaches of the NSW and Victorian governments.

In Victoria, taxi plates have been abolished and replaced with a $52.90 annual licence fee. At their peak, the plates were worth up to $500,000.

In NSW, the government has capped taxi numbers to protect the plate owners’ investment.

As a result, the number of cabs operating under Cabcharge’s network in Victoria grew by 445. But in NSW its taxi pool shrunk by 600 vehicles.

Skelton argues NSW’s stance is unsustainable because taxis simply won’t be able to meet demand growth. “It’s been a frustrating experience not to be able to grow in biggest market.”

A state election looms next year but it’s not clear whether Labor’s stance will be any different.

In theory, the top-line growth will trickle down into improved earnings for Cabcharge.

Cabcharge also expects an uplift from its investment in hailing apps and its handheld terminals called Spotto, which in part enable cabbies to be paid more quickly.

It’s also poised to launch a digital version of a Cabcharge voucher that can be sent directly to the user’s mobile phone wallet or other device such as an Apple Watch.

The handbrake to the Cabcharge recovery theme is the entry of two new ride share operators, Taxify (which started nationally last December) and Ola (in Sydney and Perth).

As well as providing better returns to drivers, the newcomers don’t employ Uber’s unpopular surge pricing (which on anecdotal evidence is wearing thin with passengers).

Despite the spirited fight back, Cabcharge shares are trading not much above their record low of $1.60 in late November.

On March 19 the stock was chucked out of the ASX300 index.

Despite (or because of) this, Pinnacle Investment Management became a substantial shareholder with a 13 percent stake.

Spheria Asset Management has also upped its stake from 10 percent to 11.4 percent.

Unlike the lavish valuations ascribed to Emerchants or Afterpay, the market is valuing Cabcharge assuming ever-diminishing margins.

But the $200m market cap Cabcharge is still profitable and pays a fully-franked dividend yielding around 5 per cent.

Tim Boreham edits The New Criterion

Tim.boreham@independentresearch.com.au

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.

ENDS