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Transaction Capital sees 56% growth in earnings, looks to up stake in WeBuyCars

Annual results. SA Taxi and all the businesses recovered to at least 2019 levels operationally, and delivered financial numbers exceeding 2019: CEO David Hurwitz.

NOMPU SIZIBA: JSE-listed Transaction Capital, the owners of SA Taxi and Transaction Capital Risk Services (TCRS), released half-year results. For the six months ended March, 2021, the company reported robust numbers and earnings recovery. It notes that core headline earnings per share from continuing operations attributable to the group rose by 43% to 65.5 cents compared to the six months ended March, 2020. The company has resumed paying dividends, giving shareholders an interim dividend of 19 cents a share. They also put out a cautionary message to shareholders today, indicating that they’re looking to buy a further 25% stake of their existing investment in WeBuyCars.

To give us the back story to the numbers I’m joined on the line by David Hurwitz. He’s the CEO at Transaction Capital. Thanks very much, David, for joining us. You’re reporting a good recovery across your businesses following the shock of the Covid-19 impact last year. Tell us how the SA Taxi business did in the reported period.

DAVID HURWITZ: Thanks, Nompu. As far as the reported period goes, what we are doing is we are comparing everything to 2019. We think that that should be used as the base; 2020 was artificially low because of Covid. I’m really happy to report that SA Taxi, but really all of our businesses have recovered to at least 2019 levels operationally, and financially have delivered results above 2019.

SA Taxi recovered nicely. And we saw a combination of both organic and acquisitive growth in Transaction Capital. SA Taxi really grew completely organically. Those earnings were up quite nicely. Looking at 2019 they were up by 4%, so recovered to 2019 levels and up. I think that is really driven by the resilience of the minibus taxi industry, which has operated pretty well through Covid.

NOMPU SIZIBA: How is the underlying taxi industry doing? Are there still restrictions in terms of long-distance travel, or are they all pretty much able to operate at full capacity? And how has the change in the operating environment impacted on issues like the level of provisioning that you had to make?

DAVID HURWITZ: Starting off with the level of activity, the activity in the industry is back to normal in terms of the number of taxi operators currently operating, and the distances that they are travelling. There are no restrictions any more. However, what we have seen is that the number of people moving around and the loads in the taxis seem to be lower. They’ve recovered pretty well. What we saw very low levels of activity in March and April last year, when the country was in full lockdown. But what we did see is that the minibus taxi industry is an essential service and it still operated at a much higher level than other industries that were completely closed. So we thought that it was resilient, and then it recovered very quickly. By the time we got to December we saw that all of our minibus taxis were operating, and they were pretty much driving at a hundred percent, but we would estimate that the number of commuters in the taxis was down by about 30%.

NOMPU SIZIBA: And what’s your reading of what consumer behaviour was at the time when we knew that we were in a wave? In the first wave, in the second wave in December, for example, did you see fewer consumers going to use the taxis because we were experiencing a wave and people may be a bit more cautious?

DAVID HURWITZ: Yes. I’m using collections as a proxy. We’ve got various empirical data points. One would be the tracking devices that we have in the cars, which really cover time of travel and distance of travel. The other one would be collections – how much we collect from our minibus taxi operators in terms of payments, which has a high correlation to their profitability. And what we saw is the industry recovered to December to about 95%. Then, as we went into that restricted Level 3 in January, collections dropped to the high eighties. So kind of from the mid-nineties we dropped into the high eighties for January. But then February was better than January and March was better than February, recovering back up in March to the mid-nineties again.

So what we anticipate as the country goes into different waves – wave three and wave four – is that industry activity will vacillate between the high eighties and the mid-nineties. This assumes that there’s no hard lockdown. And at that level you raise provisioning. We are adequately provided and this business can continue to grow earnings in that type of scenario. And quite frankly, at rates similar to what we saw pre-Covid.

NOMPU SIZIBA: You’ve announced to the market that you’re looking to ramp up your ownership stake in WeBuyCars to just under 75%. Ultimately is it your plan to buy the business outright? You do indicate that it’s been an immediate earnings winner for you guys since you started investing in it.

DAVID HURWITZ: Yes. This business has been a phenomenal business for us. The idea is not to buy it outright. Transaction Capital is a great partner for entrepreneurial founders of businesses. We’ve done that in the past. All of our businesses have had founders involved, and the three founders of Transaction Capital are still actively involved in NDTC as it listed. We would want to own about 74.9%, together with Faan and Dirk van der Walt, who are the two founders of the business, and now own 25.1% – and we’ll grow the business with them. I guess in the fullness of time that’s not sustainable and over the medium term – three, four, five, six, seven years, I don’t know, there’s no talk of that just yet – over that term I guess Transaction would increase its stake slowly.

I just want to say this is an amazing sector. I think internationally what we’ve seen is the used-car markets and used-vehicle sales growing much quicker than new-vehicle sales, which in actual fact have contracted. That’s an international phenomenon, wherever you look. And the other thing is that vehicles as an asset class is now becoming very well suited to e-commerce. So this is kind of making the online second-hand vehicle market one of the hottest sectors in the world, and we think that we compare very favourably with some of the international peers, and [this could give] us some nice potential international growth.

NOMPU SIZIBA: Excellent. In the meantime, how’s the company balance sheet looking?

DAVID HURWITZ: We’ve done well. We raised about R1.2 billion worth of equity over the last 12 months. All of that went into funding our stake for WeBuyCars. But what it’s done is that it’s altered our equity base. We’ve also built provisions in the other businesses that you mentioned earlier. So the balance sheet is in good shape and, with the kind of cash generation that we are achieving, it’s really good.

And, finally, we have been very well supported by our debt funders, both local and international debt funders – banks and institutions – and we have more than adequate access to debt to be able to achieve the organic growth opportunities that we see. I’m pretty comfortable with that.

NOMPU SIZIBA: And then just in terms of your outlook, David?

DAVID HURWITZ: We believe now – if you take a look at the construct of this set of results – in good, strong organic growth from SA Taxi and TCRS, with WeBuyCars bringing some acquisitive growth from the investment that we made and growing quicker than TCRS and SA Taxi. What we think is that we can now return to an earnings growth rate similar to what saw pre-Covid, which was high teens, and also return to paying dividends. We’ve already declared a dividend of 19 cents today, and are hoping that over the next year or so we get back to our normal dividend cover. So all in all we are very happy with where we are.

NOMPU SIZIBA: That was David Hurwitz, the CEO at Transaction Capital.

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I find it truly disgusting that TC is doing nothing to transform the ‘killing machine’ known as the taxi industry.

The SA Taxi industry is officially South Africa’s biggest killer by far and according to another Moneyweb article earlier in the week it seems to be the industry that pays least tax of all.

It’s time to take out the magnifying glass for this industry that kills with impunity, receives massive govt substances and doesnt pay tax.

Perhaps then another Level 5 lockdown to stop the killing. And once that is finished we can lockdown for the obese and after that for TB.

End of comments.

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