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5 Things You Should Know About Trans-cab Holdings’ Upcoming IPO

Credit: Simon Cunningham

Investors, there’s a new company about to be listed and it’s none other than Trans-cab Holdings. The company would likely be a familiar name to most Singaporeans given that it’s Singapore’s second largest taxi operator behind ComfortDelgro Corporation Limited (SGX: C52).

But, did you know that Transcab started with humble origins when it commenced operations with a fleet of just 50 taxis in January 2004? The company, which was established in 2003 when Singapore started liberalizing the taxi industry, has come a long way since with its current fleet size of 4,686 taxis and 7,400-strong pool of drivers (as of 30 June 2014).

With this as a backdrop, let’s dive into the five things you should know about Transcab’s initial public offering.

1, The nitty-gritty

Trans-cab’s shares would be priced at S$0.68 each in the IPO. The company would be issuing 168 million new shares of itself and that amount represents 25% of its enlarged share capital post-IPO.

Six cornerstone investors – mainly made up of large money managers – would be taking up 65 million shares out of the pool of 168 million. Some of these cornerstone stone investors include Eastspring Investments (Singapore), FIL Investment Management (Hong Kong), and Lion Global Investors.

Of the 168 million shares to be issued, only 8.8 million would be made available to the general public. The public offer opened yesterday at 9am and will close at 12 noon next Tuesday, on 18 November.

2. Singaproe’s taxi land scape

According to Trans-cab’s listing prospectus, “Singapore’s taxi industry is highly consolidated, with only six licensed taxi operators operating a fleet of approximately 27,000 vehicles.” As mentioned earlier, ComfortDelGro and Transcab take up the top two positions with SMRT Corporation Ltd. (SGX: S53) coming in third.

Company Fleet size (as of 2013) % of Singapore’s total taxi fleet in 2013
Comfort 16,602 60%
Trans-cab 4,403 16%
SMRT 3,454 12%

Source: Trans-cab IPO prospectus

Trans-cab believes there is a high possibility of further consolidation in the industry as smaller operators are struggling with higher costs and rising standards imposed by the government. To that effect, Transcab sees an expansion of its fleet as a crucial part of its growth strategy:

“We believe that in order to enjoy economies of scale, our taxi fleet has to achieve critical mass and we have to be aggressive in our expansion plans to remain competitive in the industry.”

An acquisition of smaller competitors can be an easy way for Trans-cab to gain scale.

The outlook for the taxi industry as a whole also looks promising as both rising income levels and the prohibitive costs of private car ownership would likely result in more spending on taxi services.

Growth in Singapore’s tourism industry can also lend another helping hand to boost the overall utilization of taxi fleets here. In Trans-cab’s prospectus, it’s stated that tourist arrivals had grown from 9.7 million in 2009 to 14.5 million in 2012 and with it, tourists’ receipts on local transportation (which includes taxi services), had also grown from S$591 million to S$805 million.

3. Trans-cab’s business fundamentals

Between 2011 and 2013, Trans-cab had seen consistent growth in revenue and profit after tax as seen in the chart below. In particular, the company’s profit had grown at a very healthy average rate of 14.3% per year in that period. Trans-cab’s high net profit margins – it has ranged from 15.5% to 21% in those three years – is also a plus point.

Transcab revenue and profit

Source: Trans-cab IPO prospectus

But while the steady growth in top- and bottom-line is a strong point for Trans-cab, investors might want to keep an eye on the company’s balance sheet, which is not the strongest.

Between 2011 and 2013, Trans-cab has consistently been in a net-debt position (where its total cash on hand is lower than its finance leases). Based on the company’s unaudited financials as of 30 June 2014, Trans-cab actually had only S$8.64 million in cash while having total finance leases (both of the long-term and short-term variety) of S$183 million.

4. Use of proceeds

Trans-cab would raise around S$97.8 million in cash from the IPO after deduction of expenses. Of that sum, S$30 million would go toward the expansion of the company’s taxi operations. On that note, Trans-cab had stated in its prospectus that it plans to expand its taxi fleet to 5,010 by the end of 2014 and to 5,234 by 2015. That S$30 million would likely be spent to achieve that aim.

Interestingly, another S$30 million of the S$97.8 million in proceeds has been earmarked for “Diversification into other transport businesses.” To that effect, Trans-cab laid out a few possible options: 1) Bid for upcoming rights to operate public bus services following the recent revamp of Singapore’s public bus industry by the government; and 2) enter the vehicle leasing business.

Another S$30.8 million will be used for working capital, and the remaining S$7.0 million would go toward investment in technology and innovation and the refurbishment of Trans-cab’s corporate headquarters.

5. Valuation

Based on Transcab’s listing price of S$0.68, its shares would be valued at a price to earnings (P/E) ratio of 12.6 times its 2013 profit. For some perspective, ComfortDelgro and SMRT are currently trading at 20 and 30 times their trailing earnings respectively.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn't own shares in any companies mentioned.