Express Transindo More Cars Hit The Road

Express Transindo (TAXI IJ) is Indonesia’s second largest taxi operator that offers: i) a high predictability of future cash flow due to daily fixed payments, ii) robust volume-driven growth, and iii) minimum exposure to operating expenses such as fuel and maintenance. We initiate coverage with a BUY and DCF-based TP of IDR2,100, providing a potential upside of 31%. Our FV implies a FY14 P/E of 26.9x.

Volume-driven growth
The company is targeting to have 10,000 cars by end-2013 and around 15,000 cars by 2015 vs its existing fleet of 8,664 cars over 8M13. We expect that TAXI’s revenue and net profit to surge at 30% and 40% CAGRs for the 2012-2015 period respectively. We see margins improve across the board as a result of higher economies of scale. Meanwhile, operating margin is expected to widen from 19.4% to 22.2% while EBITDA margin will also stretch from 63.3% to 67.5%. elsewhere, net margin will also improve, rising from 15.2% to 18.5% for the 2012 to 2015 period.

Manageable risk with predictable cash flow
As TAXI requires its drivers to pay it IDR235k per day, the company’s revenue can be predicted more accurately. With this scheme, TAXI can generate around IDR400m per car over the vehicle’s 7-year useful life at an initial investment of IDR205m. This reflects an IRR of 20%. Furthermore, most of its operating expenses – such as fuel and maintenance – are borne by the drivers. Thus, any changes in fuel price will have a minimum impact on TAXI’s financial performance. Meanwhile, interest rate risk is the company’s main concern as it will reach a gearing of 1.1x in 2013 and 1.2x for 2014.

Initiate with BUY, TP IDR2,100
We value the company with DCF on assumption of an 8% risk free rate, 3.02% equity risk premium and a capital structure of 60% debt:40% equity, reflecting WACC of 9.4%. from these, we derive a FV of IDR2,100, reflecting a 26.9x FY14 P/E. We remain positive on the company’s outlook going forward as taxi ridership is on an uptrend. Furthermore, we believe that Jakarta’s mass rapid transportation is still far from completion, thus making taxis the most reliable and convenient mode of transportation in the city.

Industry Analysis
Taxi spending revs up. The total taxi spending for customer in 2012 was IDR5.1trn, of which 60% was from the Greater Jakarta area. This shows that the Jakarta market is robust, riding on a growing number of customers who are willing to pay more for convenient and efficient transportation. In terms of type of car, the standard saloon (sedan with engine capacity <2,000cc) and luxury cars (engine capacity >2,000 cc) are preferred for their affordability, reliability and comfort. Currently, brands such as Toyota Limo, Nissan Sunny, Proton Wira, Kia Rio, Nissan Latio and Chevrolet Lova being used as taxi armada.

Looking at the historical numbers in 2012, the contributions were still dominated by standard saloons with a 93% share while the remainder is from luxury cars. The taxi market has been growing at a 21% CAGR for the past five years. Due to unresolved traffic jams in Jakarta, many of the middle income customers prefer to use taxis rather than drive their own cars. On these grounds, we expect the future demand for taxis to remain resilient.

According to the Directorate General of Land Transportation, customer spending will grow at 23.9% CAGR from 2013-2016 period, reaching IDR11.7trn in 2016 for the Indonesian market. Furthermore, the fleet will expand to 128,300 cars by 2016 for a 16.7% CAGR from 2013-2016 while the number of passengers will increase to 765,509, or 18.9% CAGR over the same period. We still see Jakarta market as the largest contributor to the industry. By 2016, the capital city will have 51,600 fleets and IDR4.8trn in taxi spending, reflecting a 40% market share of the industry. Thus we see the Jakarta’s taxi fleet benefitting the most from the burgeoning market.

Fragmented competition with several dominant players
Indonesia’s taxi services are fragmented, with Blue Bird and Express Group dominating the market. Based on 2011 numbers, around 45% of the market is controlled by the top four players. Currently, Blue Bird sits at the top of the food chain with more than 20,000 cars while Express Group is second with a target of 10,000 taxis by end-2013. Over the past three years, no major player has entered the market. Only Cipaganti Group (CPGT IJ, NR) acquired PT. Star Line in 2011 to expand its fleet of buses.

In the same year, Panorama Sentrawisata (PANR IJ, NR) expanded its fleet with a IDR160bn investment, of which 80% was from bank loans and the remainder by equity. We believe the future competitive map will remain the same with several new players coming in but the majority will still be held by the big players.

Rising middle income segment a growth catalyst
In tandem with GDP growth over the years, we also expect Indonesia middle income segment to grow. Boston Consulting Group (BCG) expects Indonesia to have 141m middle-class and affluent consumers (MAC) by 2020 vs 74m in 2012. Thus, we expect around 8-9m people each year to make it to the MAC segment. As a growing number of people have more money in their pockets, this will boost their purchasing power. Other than an increase in basic needs expenditure, people will spend more in other categories such as transportation, which we believe will propel taxi ridership.

The sorry state of Jakarta’s public transport system
With the residential areas located outside Jakarta, people will need to commute every day to the city for work. Jakarta’s residents use several modes of transport, but most of the public transportation is in a dire state. Public transport companies such as Kopaja, Metromini or PPD use buses that have been in use for over 20 years. This has forced the layman to use any available mode of transport, sometimes putting aside safety considerations.

Jakarta moves towards mass transportation
Since 2004, the Jakarta Government has been trying to provide reliable transportation by introducing TransJakarta Buses. Buses were confined to lanes restricted to other traffic and separated by concrete blocks on the streets that became part of the bus routes. However, with the scarcity of buses compared to the demand for mass transport, buses are always very packed. This has caused inconvenience to those who use TransJakarta despite its affordability, ie IDR3,500 per trip.

Upcoming mass transport projects
Since 1980, there have been more than 25 studies to assess the possibility for mass rapid transportation (MRT) in Jakarta. However, these have encountered challenges such as the 2998 financial crisis and funding problems, which has left the plan stuck at the blueprint stage until now. Under current governor Joko Widodo, the project has made significant progress. It will be funded via USD2.4bn debt from Japan Bank for International Cooperation at an annual interest of 1% and tenor of up to 40 years. The payment will be shared between the central government (49%) and Jakarta administration (51%).

Another crown jewel of the Jakarta Government is providing for the monorail namely Jakarta Eco Transport (JET) monorail for intra-city transportation. In June 2013, the governor gave the nod for the project, with initial proposed price of IDR10,000/trip. The Jakarta Monorail consortium is owned by Singapore-based Ortus Group (90%) and Indonesia Transit Central (10%). A deal has been signed to buy the pylons built between 2004 and 2007 from PT Adhi Karya for IDR190bn (USD19.5m). The consortium plans to finance the IDR8trn project with 70% debt and the balance by equity.

However, judging from the project timeline, we believe that this grand project of mass transportation would take years to complete. In the meantime, with the demand for transportation still growing and people looking for reliable alternative transportation that is also convenient, taxis will remain the best solution for the current situation.

Fleet Expansion Equals Robust Growth
Expanding fleet to boost revenue. With its partnership mechanism and fixed daily payment, TAXI’s growth has been determined by increasing volume. Thus, as its long term strategy, the company will add around 2,000-2,500 cars per year while adjusting the daily payments along the way. The company is targeting to have 10,000 cars by end-2013 and around 15,000 cars by 2015. We believe this is a sound strategy while keeping in mind that taxi demand is still growing rapidly in Jakarta area and company’s main revenue contributor will still be from regular taxis.

Solid forecast numbers with margin improvements
We expect TAXI’s revenue and net profit to grow at 30% and 40% CAGRs for the 2012-2015 period respectively. We also see margin improvements across the board, with operating margin rising from 19.7% to 22.2%, EBITDA margin widening 66% to 67.5% and net margin improving from 16.6% to 18.5% for the 2013 to 2015 period.

TAXI’s revenue and net income growth will not be affected by the recent fuel hike as the cost is borne by taxi drivers. The company’s largest cost is depreciation and interest rate expense. As the company is using bank loans to finance its fleet expansion, it is susceptible to changes in interest rates. The company has secured long term loans from Bank Central Asia (BBCA IJ, NEUTRAL, TP IDR12,000) worth IDR1.4trn at an average interest rate of 10.5%.

Capex still the lifeline for fleet expansion
As the company is expanding its fleet at 2,000-2,500 cars per year and is targeting 15,000 taxis in 2015, TAXI’s capex will be substantial going forward. We believe that it will need to allocate over IDR650bn per year to capex. Assuming that the price of a new taxi car is IDR225m, to increase this by 2,500 taxis a year will cost it IDR560bn. Based on historical experience, around 80% of total capex will be used for fleet expansion while the remainder will be used to develop new pools and for other operating expenses.

Based on our calculation, the company will finance 75% of its capex with bank loans and the rest from internal cash. Further, as we assume that the car price will increase by around 5% a year, we see the company’s gearing staying at around 1.1x-1.2x while its net gearing will be at 1x going forward.

Dividend policy
TAXI has a policy of paying a dividend of 30% of its earnings. Based on the company’s prospectus, it will start to distribute dividends this year from its 2012 net income. We are aligning our dividend distribution with the company’s policy, at a 30% payout going forward. The company’s net income increases over time as its fleet expands and as economies of scale go up. In our model, we are forecasting dividends per share of IDR11, IDR16.7, and IDR23.4, for dividend yields of 0.6%, 0.9% and 1.3% for 2013, 2014 and 2015 respectively.

What our sensitivity analysis shows
Given the fact that TAXI adopts a partnership program comprising fixed daily payments, its cash flow is predictable and it relies on a growing fleet to expand. As the company also relies heavily on loan financing to support its fleet expansion, it is also sensitive to changes in interest rates. That being said, we will attempt to describe the company’s performance given the change in: i) additional capacity achieved, ii) changes in daily fixed payments, and iii) changes in interest rates.

Valuation
Initiate coverage with BUY, TP IDR2,100. We value the company with DCF, assuming an 8% risk free rate, 3.02% equity risk premium, and a capital structure comprising 60% debt and 40% equity, reflecting WACC of 9.4%. On these grounds, we derive a FV of IDR2,100, reflecting a 26.9x FY14 P/E. We are positive on the company’s outlook going forward for its: i) stable income due to fixed daily payments from drivers, ii) aggressive fleet expansion to cater to growing demand in taxi ridership, and iii) the fact that current solution for mass rapid transportation are still far from completion, making taxis the most reliable and convenient mode of transport in cities like Jakarta.

Higher ROE and net margins warrant a premium
In comparison to its peers, TAXI provides the highest net margin of 16.6% vs its peers’ 8.4%. On an ROE basis, it also offers the highest return of 16.1% compared to the peers’ 12.1%. We like TAXI’s daily fixed payment from drivers compared with its car rental peers, whose earnings are more volatile due to depreciation in second-hand car sales value. On a PEG basis, TAXI is deemed inexpensive despite its implied FY14 P/E of 26.9x as the rise in spending power will buoy its earnings prospects.

Company Background
Taxi service provider with solid track record. Express group was established in 1989 with only 10 cars in operation. With over 20 years of experience on the road, it has become one of the largest taxi service providers in Indonesia with current target of 10,000 units by end-2013. The company operates in several big cities in Indonesia such as Greater Jakarta area, Surabaya, Semarang and Medan. It has also expanded into the premium taxi segment and value added transport business (VATB) or limousine/busses rental services. Its premium taxi, Tiara Express, serves Jakarta while the value added transportation business (VATB) – namely via Express Car Rental, Express Limousine and Express Eagle High (bus) – operate in Jakarta, Bandung, Bali and Lombok.

Unique car partnership program
Through its car partnership program, TAXI aims to build a better relationship between the drivers and the company. This program allows the driver to own the car seven years into the contract. The program adopts a financial lease scheme. Initially, a driver has to make a security deposit of IDR7m at the beginning of the contract and pay a daily fixed payment of IDR235,000. After the end of year 6, the driver can choose to return the car and get his security deposit back, or extend the contract for another year and own the car by end of year 7. Most of the drivers choose to stay for 7 years and then sell the car at a second hand value of around IDR70m-80m. This scheme has inculcated a sense of belonging in the drivers, as a result of which the driver turnover rate is minimal for TAXI.

Fixed daily payment ensures stable cash inflow
The daily fixed payment of IDR235k from drivers ensures that the company receives a constant cash inflow. Further, the company could apply different tariff among drivers depending on the date of agreement. As consequences, TAXI will have good pricing flexibility in response towards market condition. We also see that with daily fixed payment, the company will have minimal impact towards seasonality factor in comparison to commission based payment where customers might be fewer during certain time of the day.
TAXI also applies two driver categories which are Bravo and Charlie.

Bravo is typically a driver who signs an agreement with the company and has the opportunity of owning the car by the time the contract expires at the end of year 7. These drivers will work on 2:1 basis, working for two days and then taking one day off. On the other hand, “Charlie driver’’ act as a backup for the “Bravos” on their days off. “Charlies’’ are not eligible under the car partnership program and are not required to pay the IDR7.5m security deposit but are still bound to make the IDR235k daily payment. Based on this scheme, more and more drivers are joining TAXI as it is more profitable for them compared with other companies that are commission-based.

Minimal exposure to fuel price hike, maintenance expenses
TAXI’s car partnership program miinimises its exposure to fuel price increases because this cost is fully borne by the drivers. As result, the company will still post stable margins despite the hike in fuel. However, it can propose to the Land Transportation Owners’ Association (Organda) for an increase in passenger tariff to ensure that its drivers’ income will not be squeezed. For example, during the recent fuel hike, the initial tariff was adjusted from IDR5k previously to IDR6k while the fare per kilometer was lifted to IDR3k from IDR2.5k.

In addition, maintenance expenses also borne by the drivers via maintenance reserves which the drivers set aside every day up to IDR40k on top of a IDR235k daily payment. In addition, drivers’ union also collects accident insurance of up to IDR25k daily. This will bring the daily payment from drivers to IDR300k. This partnership arrangement ensures that the company incurs minimal expenses in relation to its daily taxi operations as it is being paid by the drivers.

Govt rules may curb growth in private cars to the benefit of taxi industry
Current governor Jokowi has proposed several ideas to limit the growth of private cars in Jakarta and reduce traffic jams. Some of those now being legislated are increasing parking tariff in Jakarta by 100% in early this year. Further regulations such as a progressive tax rate hike, higher downpayment on new cars or the long-established 3-in-1 policy on Jakarta’s main streets during peak hours are some examples of the Government’s commitment to cutting down the use of private cars. On the contrary, its regulations will encourage people to use other means of transportation.

Taxis have become the main choice as it is the most convenient compare to other public transportation. Taxi provides point-to-point transportation while others such as buses provides station stop to station stop, which might require the customer to change lanes several times before reaching their destination. All in all, we see the Government’s efforts to reduce the use of private cars making a positive impact on TAXI’s performance.

Prospects for premium taxi and VATB
We believe that demand for premium taxi and VATB will also rise in tandem with the population’s growing purchasing power. Currently, Tiara Express serves premium customers using its fleet of Toyota Alphard and Mercedes Viano as well as securing partnerships with Four Seasons Hotel Jakarta. We also expect the market for luxury taxis to expand at a 36% CAGR from 2013-2016. We believe that the demand for luxury transportation will grow in tandem with the rise in purchasing power among the middle income segment. However, it is worth noting that TAXI has only minority interest in both the premium taxi and VATB business segment, which means the revenue contribution is minimal.