Bringing rationality to Transaction Capital

This is an attempt to build a rational view of Transaction Capital (TCP).

We all know what has happened, but what could the underlying parts be worth?

Read:

First, let us lay out some assumptions:

1. Transaction Capital’s non-SA Taxi businesses are sustainable. Thus, the key question is what they are worth?

2. All the group and its subsidiaries’ debt, structures and linkages have been divulged, understood and, thus, the key near-term question centres on …

3. … SA Taxi, where the short-term bullet debt is around R505 million (see slide 8 in the group’s March update for the bullet debt due in six to 12 months’ time). If this debt cannot be rolled or refinanced, it could trigger a default in SA Taxi. If it can be rolled, then management has about a year to fix SA Taxi.

The third assumption above dovetails into our scenario analysis, which has two legs:

1. The lenders do not roll/refinance the debt, thus triggering a default by SA Taxi. This default likely makes SA Taxi unsustainable and, perhaps more importantly for Transaction Capital, is a default event for a major subsidiary, and thus makes a large chunk of central debt callable (as opposed to its current 2024/2027 maturity).

2. The lenders roll/refinance the debt, which buys SA Taxi an invaluable year.

There are some big unknowns in SA Taxi too – for example, what is the final shareholding in SA Taxi by the group (they are converting some debt into equity here)? What price, who and what are the commercials with the sale and effective lease-back of the Taxi Mart facility? If the debt is rolled/refinanced, at what interest rate is this done?

These ‘known unknowns’ are impossible to know and – to simplify things – we will assume that SA Taxi is worth nothing in both Scenario A and Scenario B above. Certainly, in Scenario B, this is unlikely, but let’s take that as ‘free upside’. (Along with SA Taxi’s zero value, another simplifying assumption is that Gomo – the pre-owned-vehicle financing collaboration between WeBuyCars and Mobalyz – is worth zero, which is unlikely due to the recent banking deal.)

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Scenario B is easier to unpack, as SA Taxi continues operating, group debt has time to be repaid per contract, and Nutun (which provides a range of business services to a global market) and WeBuyCars can be valued.

Therefore, how much are WeBuyCars and Nutun worth?

WeBuyCars

WeBuyCars (WBC): Worth around R2.2 billion to around R4.2 billion, but probably closer to R4.2 billion

WBC’s trailing 12-month profit attributable to Transaction Capital is R498 million (i.e. after 25.8% minorities). In H1:23, WBC saw some volume growth slow and some margin pressure that negatively dropped core profits to R316 million (H1:22 – R406 million).

This is not unique to them but is industry-wide and, thus, is reflected in trailing multiples in similar stocks all around the world.

An offshore peer group of 14 similar listed stocks trade on an average and median price-earnings (PE) ratio of 10.5x and 8.5x respectively (given the dispersion of multiples in this group, we think using the median is worthwhile). If we use an ‘SA Inc’ 20% discount on these two multiples and use the trailing 12-month profits above, then this implies that WBC is worth between R3.2 billion or around 423 cents per share (cps) to R4.2 billion or around 550cps per Transaction Capital share.

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Onshore, WBC is not a great comparative to other auto retail stocks, but let’s use Motus (MTH) and Combined Motor Holdings (CMH) as our imperfect relatives. Motus and CMH trade on an average PE of 4.6x 12-month trailing profits.

On that multiple, Transaction Capital’s stake in WBC would be worth R2.2 billion or 300cps, but WBC has arguably far outgrown these other groups with many advantages they do not have. We think that the offshore peers are a better valuation tool than the domestic ones, but let’s ignore that for now.

Averaging the above range of fair values for WBC, we arrive at ball-park fair value of around R3.2 billion or around 424cps per Transaction Capital share.

(It is worth noting that if we ignore the domestic relative valuation, then WBC could be worth closer to around R3.7 billion or around 500cps).

This fair value puts the business on a PE of around 6.5x, which is much lower than the current 9.8x PE for the JSE All Share Index.

Nutun

Nutun: Worth at least around R6 billion.

Like WBC, we apply the same valuation approach to Nutun. That said, there are no locally-listed peers, so we drop that leg of the valuation.

This global peer set is made up of six large ‘customer experience’ (CX) players around the world that see their shares currently trading on an average PE of 18.7x based on trailing 12-month profits (the listed global peer group has a tight distribution of multiples, so the use of a median is less relevant.). If we apply that multiple (with another ‘SA Inc’ 20% discount) to Nutun’s trailing 12-month profits, it is worth around R6.4 billion or around 854cps per Transaction Capital share.

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Given that 40% of Nutun’s revenue was from overseas markets, where it has competed head-on with these global peers and clearly won, there is a fair argument that the discount should be less. Or none. Or, given South Africa’s advantage (low cost, good time zone for large EU and UK markets, and strong, neutral English accent), perhaps a premium given? We won’t be that bold and will stick to our simplistic 20% discount approach.

Thus, Nutun appears worth at least around R6.4 billion or around 854cps per Transaction Capital share.

Sum-of-the-parts value

Sum-of-the-parts for Scenario A & Scenario B: Share worth over 1 200cps.

If we zero out Gomo, the head office (let’s assume Gomo’s fair value offsets the head office costs) and SA Taxi, then Transaction Capital’s stakes in WBC and Nutun appear collectively worth around 1 279cps (424cps + 854cps).

This 1 279cps fair value is almost double the current share price, thus implying that the market thinks that our valuation is wrong, that SA Taxi has a negative value, or both.

In Scenario A (SA Taxi default), SA Taxi could be worth zero to Transactional Capital shareholders. But the group has also lent R2.3 billion into SA Taxi. Let’s assume that is worth zero too. Then, finally, the default should trigger around R1.6 billion of group central debt payable immediately – and let’s assume that the lender demands immediate payment (the literal worst case scenario!).

We understand that there is around R800 million of cash in the centre that can pay back half of the R1.6 billion loan immediately. This leaves a shortfall of R800 million in capital owing. We expect both Nutun and WBC to generate between around R800 million of cash (after minorities) in FY 23 and could declare this back to the group as a dividend (they normally have an around 50% payout ratio, but this could be jacked up to 100% for this year). Thus, it is possible that existing cash and subsidiary dividends could mostly settle any central debt in an extreme SA Taxi default scenario.

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In this extreme scenario, we impair SA Taxi to zero, goodwill across the group to zero, impair intra-company loans, suck out the R1.6 billion immediately from group and do several other harsh things to arrive at a group whose net asset value (NAV) may look closer to 700cps (interestingly close to the current share price).

Importantly here, though, although the NAV of the group and group balance sheet looks totally different, the knock-on effects to WBC and Nutun (appear) limited and, thus, their fair values should remain largely intact (i.e. >1 200cps of fair value on the table).

Maybe Transactional Capital cannot get R800 million of dividends out of WBC and Nutun and must sell a stake in these businesses? Given their collective around R9.7 billion fair value, a fire sale of a 10-20% stake in Nutun or WBC could well handle this (surely?). Maybe management proactively buys out the bullet payment in SA Taxi from the group’s current cash reserves (buying out R505 million of debt that triggers immense pain for the group is theoretically possible with the R800 million of cash sitting at the centre)? Maybe there is a rights issue, private placement or bookbuild for fresh equity?

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Now let’s look at Scenario B where SA Taxi does not default. This is much easier to explain: business continues as normal, debts are repaid from cash flows and dividends and, while a much smaller SA Taxi is likely worth less, the group is likely worth more (than Scenario A). The long-term effect on the group here will likely be reflected in lower interest margins from increased lending costs, but our above simplistic sum-of-the-parts fair value would probably prove to be conservative (i.e. >1 200cps plus SA Taxi fair value on the table).

It is worth noting that the original vendors of WBC have a put option for their remaining minority stake in WBC and they may force Transaction Capital to buy them out. While this may be absorbable in Scenario B, in Scenario A this may amplify the liquidity scramble. Could the group use shares to pay for this stake?

Given the low share price, could this trigger a reverse takeover? If this did trigger a reverse takeover, would these vendors push for a full-fledge takeover and perhaps a delisting?

What about the taxi union minority in SA Taxi? Could they not buy the SA Taxi bullet loan and protect their investment and theindustry? Lots of ‘known unknowns’ here that make our above two scenarios admittedly simplistic …

While the above is simplified and the debt may yet prove disastrous and our valuations may be wrong, it is quite clear that the market is currently pricing in the worst case scenario for Transaction Capital.

Yet, arguably, even in the event of a SA Taxi default, Transaction Capital’s WBC and Nutun subsidiaries are worth at least 1 200cps versus the current share price in the 700cps range. Then, if SA Taxi does not default, there could be even more multiples of value left on the table here …

Whatever happens and however Transaction Capital’s future plays out, it seems clear that we will know sooner rather than later.

Listen to this MoneywebNOW podcast with Simon Brown (or read the transcript here):

You can also listen to this podcast on iono.fm here.

* Keith McLachlan and some portfolios managed by Integral Asset Management hold shares in Transaction Capital.

Keith McLachlan is chief investment officer at Integral Asset Management.