Transaction Capital’s results for the year ended September 2021 tell us a few surprising things about the SA economy.
Firstly, used car sales are booming, as reflected in WeBuyCars’s nearly 50% growth in transaction volumes since 2019.
Secondly, South Africans are taking advantage of low interest rates to pay down debt. The second-largest profit generator in the group is Transaction Capital Risk Services (TCRS), which uses fancy technology and artificial intelligence to recover outstanding loans.
The largest part of the business, SA Taxi, is still not back to pre-Covid trading levels, but is getting there.
A longer and more severe third Covid wave, the July looting in KwaZulu-Natal and Gauteng, and taxi unrest in the Western Cape kept an otherwise promising looking sector in the shade. Headline earnings of R413 million, while up 113% on 2020, are still 11% below comparable figures for 2019.
One of Africa’s largest vehicle markets
WeBuyCars, 74.2% of which was acquired by Transaction Capital between September 2020 and May 2021, reported nearly 180 000 used vehicles bought and sold in the last financial year, up roughly 50% from 2019.
The timing could not have been more sweet.
Even more impressive was the 74% hike in headline earnings to R541 million since 2019, of which R270 million is attributable to Transaction Capital for the financial year just ended. In October the company sold more than 9 000 units, putting it within a whisker of a key target of 10 000 units a month, and 15 000 units a month in the medium term. The acquisition of The Dome in northern Johannesburg gives it another 7 000 bays, making it arguably the largest vehicle supermarket in Africa.
WeBuyCars buys the Dome to create enormous used car dealership
Used car prices surge as hard-pressed consumers hunt for ‘bargains’
Transaction Capital CEO David Hurwitz says the new car market is under pressure as a result of tighter disposable incomes and new vehicle price inflation, and that’s prompted a move to used cars.
“We’ve been able to keep our car price inflation under check, and if we continue growing at this rate, with our current margins, we can expect an even better performance in 2022.”
The strategy to sell vehicles online via its e-commerce platform continues to deliver positive results, with e-commerce sales increasing significantly to approximately 30%.
“WeBuyCars’s strategy to grow its e-commerce offering, expand geographically and enhance unit economics by higher penetration of finance, insurance and allied products continues to yield results,” says Hurwitz.
More efficient use of technology and e-commerce should translate into more efficient stock turn and even higher growth.
Further growth will come from extending its services to include offering vehicle finance as a principal.
Listen: David Hurwitz discusses Transaction Capital’s annual results on the SAfm Market Update with Moneyweb
Consumers are managing to repay debt
In its most significant business activity, TCRS acts either as a principal in acquiring and then collecting on non-performing consumer loan portfolios, or as a service provider on an outsourced contingency or fee-for-service basis.
Following the strategic realignment of TCRS earlier this year, the business is now structured to deliver in the three key areas of collections, transactions and business process outsource services. TCRS intends to leverage its scale, its South African rand-denominated resources and technology, data, and analytical capabilities to drive both local and global growth of these businesses.
The business is becoming more relevant to the South African economy, given the pressures on consumers.
The SA Reserve Bank in July 2021 reported that SA banks’ bad debt provisions were 7.2% higher year on year, while total credit extension grew an average of only 2%.
“Furthermore, the disruption to the collection infrastructures and capabilities of consumer-facing entities has made it more difficult for them to collect on their non-performing loan portfolios,” says Transaction Capital’s year-end results statement.
Collections in 2021 were up 8% compared with 2020, and 23% compared with 2019.
“People are taking advantage of low interest rates to pay down debt, and it is encouraging that roughly one third of our customers in this business unit are in the informal sector – they too are taking advantage of these very low interest rates to pay down debt,” says Hurwitz.
A bright spot on the horizon for Transaction Capital is to leverage its hard-won intellectual property and relatively low SA cost base to drive both global and local growth in this business.
All of SA Taxi’s clients have been able to operate since June 2020, albeit with travel distances slightly below pre-Covid averages.
“SA Taxi will continue to assess opportunities for further vertical integration to broaden its addressable market and to enter new adjacent sectors in support of future organic growth,” says Hurwitz.
Overall, the group delivered 234% better core headline earnings per share of 147.9 cents over 2020, which was a 15% improvement on 2019. A dividend of 52 cents per share was declared for the year. The group has undrawn borrowing facilities of R870 million, giving it a decent war chest to pursue acquisitions of expansion plans.