Transaction Capital does damage control after terrible two weeks

To understand what led to Transaction Capital’s share price being slashed by more than half in the last two weeks, you have to look at what is happening in the minibus taxi market.

At a presentation on Thursday, outgoing CFO Sean Doherty laid out the stats that prompted the group to warn that profits from continuing operations could fall 41-46% in the current six-month period to March 2023.

Read: Transaction Capital halts share issuance to part-fund further WeBuyCars stake

The problem lies in the taxi market, which is vital to the SA economy. Some 250 000 taxis carry 15 million commuters a day, which is in orders of magnitude higher than buses and trains. Buses and trains receive state support, but taxis do not.

There’s been just one taxi fare increase in three years, and that’s started to weigh on the entire taxi ecosystem.

The cracks started to appear with the onset of Covid lockdowns in 2020.

Taxi loan collections – a key part of Transaction Capital’s business – dropped to between 23% and 66% during the hard lockdowns in 2020.

However, these loan collections recovered strongly to as high as 99% before being smashed by floods in KwaZulu-Natal and fuel price increases last year. In more recent months, the collection rate on loans has ranged between 85% and 91%.

That’s one part of the story.

Shorter taxi rides

The other is that the average distance per vehicle has yet to recover to pre-Covid levels. Shorter taxi rides and fare increases insufficient to cover the massive rise in fuel process over three years equate to less ability to service the loans used to finance these taxis.

That’s not counting vehicle prices escalating by 5-6% a year, along with the costs of maintenance and parts also increasing.

Transaction Capital’s SA Taxi business cornered the quality renewed taxi (QRT) market, where pre-owned taxis are refurbished and sold under a 12 month or 60 000km warranty.

It is this end of the market that has taken a beating, and SA taxi will recalibrate the business for loan originations of around 220 a month, well below previous targets of around 400.

This will have an impact not just on new originations, but provisions for bad debt going forward, and growth prospects.

The group has also decided to put a halt on dividend payments from SA Taxi for the next three years.

This is the predicament in which Transaction Capital finds itself.

Questions have been asked as to whether Transaction Capital’s SA Taxi unit is a sustainable business, given the flatlining market.

“We are absolutely committed to taxi industry. It’s an industry built into the structure of SA,” said Transaction Capital CEO David Hurwitz.

Chief investment officer Mark Herskovits detailed the group’s funding structure, explaining that there have been no breaches of loan covenants nor any defaults.

He said there is no possibility that default in one of the subsidiaries would contaminate any of the other subsidiaries.

The group’s complex funding structure, with varying asset and liability maturity profiles sourced from a wide range of funders, is deliberate. This reduces exposure to any single source of funding, and executives have spent the last two weeks explaining to their funders that the pillars of the business, and the balance sheet, remain solid.

Read:
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There’s little concern in the other two key divisions, WeBuyCars, the used car business, and Nutun, the debt recovery arm.

SA Taxi remains the problem child.

Some 38% or R5.9 billion of its debt is sourced from 24 investors in so-called ‘pass through structures’ which have no fixed repayment schedule. Debt is repaid as collections are received.

When collections are down, so too are the repayments. A further R1.9 billion is tied up in “warehousing facilities” with funds sourced from two banks, with debt repayments made from either collections or the sale of pool assets.

Another R6.8 billion is housed in “private structured finance” from 16 debt investors, including developmental finance institutions, and these debts carry a fixed repayment schedule.

Restructuring

Some corporate and management restructuring is also imminent, with the sale of the assets of Auto Parts – a key subsidiary in holding down the costs of parts and repairs – and finding a new institutional partner for its finance and insurance business, GoMo.

SA Taxi and GoMo have been rebranded as Mobalyz. The sale of R420 million in Auto Parts assets under a strict service level agreement has the benefit of converting a fixed cost base into a variable one.

WeBuyCars accounted for 43% of 2022 earnings, and has a unassailable position in the used car market, showing continued growth in market share, according to the group’s Sens announcement on 13 March.

Read: Used car sales are flying, and Transaction Capital’s results prove it

The group has delayed plans to acquire another 15% (on top of the 74.9% already owned) of WeBuyCars, due to the fact the agreement called for 30% of the purchase price to be settled in now devalued Transaction Capital shares.

Instead it will acquire 7.5% later this year using cash resource, and another 7.5% next year.

There’s nothing wrong with SA Taxi’s business or chosen market segment, said Herskovits. What’s needed is a restructuring and downsizing to reflect changing market realities. The share price certainly reflects these changing realities.

Listen to Transaction Capital’s CEO explaining the situation the group finds itself in with Moneyweb editor and RSG Geldsake host Ryk van Niekerk (or read the transcript): 

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