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1 Important Risk About Trans-cab Investors Have to Note

A soon-to-be-listed company in Singapore has got investors buzzing and it’s none other than Trans-cab Holdings. The company’s the second largest taxi-operator here in Singapore, wedged in between ComfortDelgro Corporation Limited (SGX: C52) and SMRT Corporation Ltd. (SGX: S53).

Company

Taxi fleet size % of total taxi fleet in Singapore
Comfort 16,602 60%
Trans-cab 4,403 16%
SMRT 3,454

12%

Source: Trans-cab’s listing prospectus; data as of end of 2013

Based on a quick read of the company’s prospectus, it would seem that Trans-cab’s valuation could be an attractive point for investors.

A cheap share

At its listing price of S$0.68 per share, the taxi-operator is actually valued at 12.6 times its earnings for the whole of 2013.

Based on its closing price last Friday, the SPDR STI ETF (SGX: ES3), an exchange-traded fund which mimics the market barometer the Straits Times Index (SGX: ^ST), is carrying a trailing price/earnings ratio of 13.5. Meanwhile, ComfortDelgro and SMRT are valued at 20 and 30 times their trailing earnings, respectively.

Although it’s not exactly an apples-to-apples comparison – given that the aforementioned valuations figures for the SPDR STI ETF, ComfortDelgro, and SMRT are on a trailing-12-months’ basis – Trans-cab’s valuation multiple can still give investors some perspective on how cheap the company seems to be. In addition, Trans-cab’s earnings had also been growing consistently at a rather fast clip of 14.4% per year between 2011 and 2013 – that’s another plus point for the company.

But here’s where an important risk with Trans-cab appears.

Sources of profit

Trans-cab’s IPO (initial public offering) prospectus contains detailed information about the company’s financials, as it is with all other prospectuses. It turns out that in 2012 and 2013, Trans-cab’s bottom-line had been the beneficiary of some significant one-off gains related to the scraping of a part of the company’s taxi fleet. These one-off gains are logged under the “Other credits and charges” part of Trans-cab’s income statement.

  2011 2012 2013
Other credits and charges -S$422,000 S$5.8 million S$13.1 million
Profit net of tax S$24.0 million S$28.1 million S$36.5 million

Source: Trans-cab’s listing prospectus

As you can see from the table above, a large portion of Trans-cab’s profit growth in 2012 and 2013 had come from the increase in “Other credits and charges.” This is how the company describes the changes in the item between 2011 and 2012 in its prospectus:

“Other credits and charges increased by S$6.2 million from a net charge of S$0.4 million in FY2011 to a net credit of S$5.8 million in FY2012, which was mainly attributable to:

(i) proceeds of S$5.7 million received from PARF [preferential additional registration fee; it is a rebate granted to the registered owner of a vehicle upon de-registration of a vehicle] and COE [certificate of entitlement] rebates of 515 vehicles scrapped in FY2012;

(ii) one-off recognition of negative goodwill of S$0.4 million in FY2012 arising from the acquisition of Solid Capital; and

(iii) a decrease in allowance for doubtful debts of S$0.1 million.”

To translate, a significant portion of the increase in “Other credits and charges” in 2012 had occurred because of regulatory rebates given to Trans-cab that comes with the scrapping of a portion its vehicles.

It was a similar situation in 2013 as 1,013 vehicles were scrapped that year (note the increase in the number of vehicles scrapped), leading to an increase of S$7.8 million in PARF- and COE-related rebates.

Unsustainable earnings?

Trans-cab’s main business lies in the “daily rentals collected from renting out taxis to [its] taxi drivers.” These rents make up more than 80% of Trans-cab’s revenue per year currently. Meanwhile, the other chunk of the company’s revenue comes from the provision of automotive engineering services (think vehicle accident repair services and sale of diesel).

The scrapping of vehicles might be a very natural part of Trans-cab’s business (it is after all an owner of more than 4,500 vehicles currently), but it’s not exactly a part of the company’s daily operations.

This thus throws doubt onto the sustainability of Trans-cab’s earnings growth. If its bread-and-butter activity of renting taxis out can’t provide sufficient growth in earnings, the company might have to scrap an ever-increasing number of vehicles each year if it wants to keep its profit growing.

Investors interested in Trans-cab would thus have to understand the company’s sources of profit and ask themselves if they’re comfortable with the situation.

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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 writer Chong Ser Jing doesn’t own shares in any companies mentioned.