Transaction Capital takes 48% profit hit after downsizing taxi business

Transaction Capital opted to skip dividends after booking a R2.1 billion headline loss in its SA Taxi business for the six months to 31 March 2023.

The 46% drop in the group’s core earnings at the half way stage to R353 million (2022: R648 million) will have a knock-on effect for the full year, although CEO David Hurwitz says the objective is to take the pain in one go and position the group for growth in the second half.

SA Taxi, once the bedrock of the group, has been relegated to the junior league, ranking behind WeBuyCars and debt recovery and outsourced services business Nutun in terms of profitability.

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WeBuyCars continues to increase market share, particularly in the lower vehicle price ranges, with a stable 12 000 vehicles sold a month.

Smaller dealers found it difficult to move more expensive models as South African buyers traded down, while business-to-consumer online sales increased 29%.

New vehicle sales dip

New vehicle sales have dropped marginally year-on-year over the last decade, while used vehicle sales have grown 1.8% a year. Roughly 515 000 new vehicles are added to SA’s 11 million car parc each year, out of which 300 000 vehicles are written off annually.

The good news for WeBuyCars was that used vehicle sales have returned to 2019 levels after the Covid disruptions of 2020 and 2021. Another trend in its favour is that about three-quarters of vehicles traded are five years or older, which Hurwitz says presents a major opportunity for the group, particularly for financing arm Gomo. Banks are reluctant to finance vehicles five years or older, which is a market segment Gomo is keen to exploit.

Read: Big holders dump Transaction Capital – but who’s been selling?

Debt recovery and outsourced business solutions division Nutun reported a 50% jump in revenue to R1.94 billion, much of this coming from the purchase of non-performing loan books. Some 56% of the division’s revenue now comes from services that are light on capital and can be delivered from SA, where costs are low relative to other parts of the world.

Taxi business refocused

The SA Taxi business remains the problem child, a victim of the damage inflicted by Covid lockdowns, floods and civil unrest in Kwazulu-Natal and Gauteng, and rising taxi and fuel prices.

By early 2023, it became clear that the taxi industry would not quickly recover to pre-Covid levels any time soon. A decision was made to downsize the business. What had been one of the most spectacular stocks on the JSE of the last decade was unceremoniously dumped, and now trades back at 2015 levels.

Read: Directors, founders nibble at Transaction Capital after share price collapse

One of the innovations introduced by SA Taxi was refurbishing older taxis (also known as Quality Renewed Taxis or QRTs) and then returning them to service. These lower cost taxis were ideal for less profitable routes, and SA Taxi eventually scaled up to more than 500 refurbished taxis a month. This business model worked well at lower volumes of around 200 a month, but it was clear the market could not handle 500 QRTs a month, given the waning profitability on more marginal routes.

The credit loss ratio on the SA Taxi loan book of R17.1 billion averages 5.5-6%, which is high compared to the likes of WesBank, which reported a credit loss ratio of 1.1% last year.

The resizing of SA Taxi as a leaner, more profitable business sets the foundation for future recovery, but shareholders will need some convincing after a devastating share price plunge in the first four months of the year.

The group has sufficient funding for the next seven months, but this should ideally be closer to 12 months, said chief investment officer Mark Herskovits in a results presentation on Wednesday.

There are opportunities to build its in-house vehicle finance arm, Gomo, though that will require additional capital, and the jury is out about the condition of the taxi industry and its likely recovery rate. That leaves future growth in the hands of Nutun and WeBuyCars, which both have promising expansion paths ahead of them.

Transaction Capital’s share price closed at R7.11 on Wednesday.

Listen to Fifi Peters’s inerview with Transaction Capital CEO David Hurwitz:

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