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Transaction Capital predicts fall in earnings post-Covid

CEO David Hurwitz notes that although R1.2bn of undeployed capital is available, it would be better to wait for year-end in the current environment.

NOMPU SIZIBA: Transaction Capital Limited released their interim results today for the six months ended March 2020. The company reported group core headline earnings from continuing operations at 19%, at R402 million. Its main subsidiary, SA Taxi, saw core headline earnings up 20% at R230 million, while its technology-led data-driven business, Transaction Capital Risk Services, registered earnings growth of 23% at R158 million.

But Transaction Capital says that the post-Covid-19 reality now means that earnings will be deleted somewhat, because of the way that the taxi industry is now having to operate, and the impact that it has on revenue and operators’ ability to pay for their obligations.

To take us through what happened in the recent past, and what the outlook is for the future, I’m joined on the line by David Hurwitz, the CEO of Transaction Capital. Thanks very much, David, for joining us. In the period under review, business was going along smoothly, and you were on track to achieve your usual annual compound earnings growth of around 20%. Let’s just stick to that period for now, and tell us how things were running in the period for SA Taxi, to begin with.

DAVID HURWITZ: Covid aside, we really did have a very good six-month period. This is the period from October 1, 2019 to March 31, 2020. The business performed very well. We saw earnings grow in SA Taxi by 20%. Our gross runs and advances booked now for R11 billion – and that grew by 14%. And our non-interest revenue line also grew very nicely. That was up by 4%.

So really good growth across the business in a difficult environment. Despite that, we felt that our clients – we’ve always said the minibus taxi industry is very resilient –  performed very well in a tough environment.

NOMPU SIZIBA: Transaction Capital Risk Services is your money-collection service, and it does a bit more than that. Just tell us about the operations there, and how they fared in the period under review.

DAVID HURWITZ: There we had, again, pre-coronavirus, we had a fantastic performance. We grew earnings by 23%. The main component of that business is the collection services by the business, where we help people like the banks and the retailers collect on their outstanding claims. We really did do, again, very well on that side, mainly driven by the acquisition of non-performing loans and then the collection of those loans at a premium. So a fantastic performance there as well.

NOMPU SIZIBA: You run your Capital Risk Services business in Europe and Australia, which are also faced with the Covid-19 pandemic. Do you anticipate a lot of difficulties for the business in those markets?

DAVID HURWITZ: In Europe, we really are very small. We’ve only got assets there of just over €8 million. So very, very small and too insignificant to impact anything.

In Australia we do have quite a large collections business over there, and the Australian economy seems to be rebounding quite quickly. What we’ve seen is that government has put aid into that market. We are already feeling the benefit of that aid flowing through into business’s hands, into small business’s hands, into the consumers’ hands. And the disruption in Australia seems to be less than what we’ve seen in South Africa.

The interesting thing about Australia is that they’ve actually had two things come at them in the six-month period; they had the bushfires, which were around from November, all the way right up until mid-January. And then as soon as that subsided, they started getting hit by Coronavirus. So they had a very difficult trading environment. But that business did really, really well and our Australian strategy is exactly on track. We are very excited about what were doing in Australia.

NOMPU SIZIBA: In your financial statement, you’ve drawn up post-Covid-19 assumptions, which see earnings heading southward. Primarily what challenges in your business do you face that you see as likely to undermine your earnings profile?

DAVID HURWITZ: That’s right. What we did is we passed two adjustments. These adjustments are non-cash, and it really is a prediction of the impact on the assets that we hold at March 31 – how those assets would be impacted over the next short-term period. So we are really looking at about the next six months.

NOMPU SIZIBA: Yes.

DAVID HURWITZ: It’s a non-cash adjustment, and those adjustments were pre-tax. In SA Taxi we know that collections are going to be down for the second half of the year which started on April 1, because already in April we did provide a loan-instalment relief programme to our customers, and the insurance-premium release programme. So we already know that our customers over this last month paid us less. Even though we gave them a relief programme, we still managed. All our customers still paid 20% of their monthly instalments. So we still did collect 20% of our monthly instalments. And that really is the biggest impact on this adjustment that we provided for, looking forward. Really what we’re saying is that we expected to collect much less in April. We expected nought, but we collected 20%. And we expect that then to normalise hopefully by the end of our financial year.

NOMPU SIZIBA: David, just in terms of the arrangement that you have with your clients, is it similar to what we’ve heard the commercial banks are doing with individuals and businesses – giving them a three-month payment window? Or is it a bit more than that, depending on what happens with the lockdown?

DAVID HURWITZ: It is very similar. The payment window that we offered for our taxi operators was one month, and it was a full payment reduction. If you look at insurance, most insurers have just reduced premiums, where we actually said our customers don’t have to pay any premium at all – and they still get covered. So in insurance we gave a little bit more; on the finance side of our business we gave a little bit less.

But really what we’re saying is that we supporting our clients. And we also think that the minibus taxi industry will be one of the first industries to recover, one of the quickest industries to recover because we do know that, as the government relaxes these restrictions to open up economic activity, the precursor to any economic activity is commuting ability – people need to move around.

NOMPU SIZIBA: Yes.

DAVID HURWITZ: And the bulk of that is happening in the minibus taxi industry. So we really see that the minibus taxi is absolutely an essential service – and we also expect a quick recovery to normalise operations, hopefully by the end of our financial year.

NOMPU SIZIBA: Isn’t it a concern for you that obviously, because of social distancing, the taxis are not going to be able to have full capacity for quite some time to come, because Coronavirus is going to be around with us for quite some time; even the President said that the other day. So therefore, even post the crisis, we’re still going to have to observe those rules. And presumably not fully capacitating the taxis will mean less money, and they’ll have less in terms of what they need to fulfil in terms of their obligations.

DAVID HURWITZ: Yes, it is a concern. But I think what we’ve seen is, first of all, that the minibus taxi industry has been able operate, certainly throughout the lockdown, although there was reduced activity; so we saw only 68% of our fleet operate. And as soon as the lockdown cap came out, we have seen a much greater component of our fleet operating. So the first thing is that we will see the fleet operating.

Around keeping loads at 70%, you know, clearly is a very difficult environment. We do not see this as being around for a long period of time. The industry just simply cannot sustain it for a start. But, secondly, if you’ve got nine people in a taxi or if you’ve got 13, I don’t think we are really being able to achieve social distancing in any scenario. And what we need, and what we’ve spent a lot of money on – we’ve spent over R7 million – is on cleaning taxis and sanitising taxis and putting hand-sanitisers in the taxis to make sure that commuters are sanitised, and the taxi itself is sanitised. And of course distributing face masks and the like.

So, because Corona and Covid will be with us for a period of time, I think people have to be taking it upon themselves to look after their health and safety. If we reduce to below 70 or 60 or 50%, it’s not going to make a difference.

NOMPU SIZIBA: I hear you. You indicate as a group that you’ve usually been quite averse to debt, but that you do have an undrawn debt facility of a few hundred million rand should you need to tap into it. Do you think you may need to tap into it in the second half of your current financial year, given some of the challenges that you are faced with?

DAVID HURWITZ: We’ve got a very conservative capital strategy, you are right. We have R800 million of excess undeployed capital at a holding company level, and we then do have the R400 million facility that you’re talking about. So we do have R1.2 billion worth of capital available.

The way that the we’ve structured our debt, I think there is a high likelihood that we don’t need that facility, but nonetheless it is available to be there kind of as a safety net. But I think our balance sheet is very well structured and there’s a good chance that we won’t need that money.

NOMPU SIZIBA: David, of course these are your interim results that we’ve been talking about and they were fairly decent. Yet you’ve decided not to pass on something to shareholders. Why not, given that the numbers were decent?

DAVID HURWITZ: I think, again, it’s kind of taking a very cautious approach. Right now there’s a lot of uncertainty in the market, and the feeling was that this is only interims – let’s rather wait until year-end, and then at that point take a decision around paying a dividend.

Certainly, as we say, if we need to be using the facility because of cash-flow disruption and we start using R400 million facility, then surely we shouldn’t be sending money back to shareholders and borrowing. I’d rather be saving our dividend and utilising that, so we don’t have to go into utilising that facility. But we will definitely revisit that at year-end.

NOMPU SIZIBA: Thank you for your time this evening, David.

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Lockdown | Taxi industry will likely be one of few beneficiaries.

The taxi industry was the biggest killer in SA by far and now is the biggest conduit for Covid-19.

End of comments.

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