Inside Transaction Capital’s taxi trauma

For Transaction Capital, the past few months have been as hair-raising as a trip down Jan Smuts Avenue during load-shedding. For its investors, you could add to the picture a wheel spanner plugged into the spot where the steering wheel should be.

As the largest funder to the taxi industry — the most widely used form of public transport, carrying  15-million people a day — the fate of the company is of particular importance to South Africa.

But its prospects have never looked more dicey. Its share price has crashed a bone-shattering 80% this year, wiping out R19.4bn in value from a company now worth R4.7bn. And horrific results for the six months to March — a bottom-line R1.86bn loss from a R615m profit the year before, and a return on equity that halved to 7.3% — only emphasised this slide.

This was not what investors signed up for. Transaction Capital was meant to be one of the few growth firms on the JSE, with its advocates heralding it as the next Capitec. The case seemed solid: as the main financier of public transport in a world in which government failure has run bus and rail networks into the ground, the story seemed bulletproof.

The narrative was reinforced in 2021 when Transaction Capital bought South Africa’s fastest-growing second-hand car business, WeBuyCars, and its share price hit a record high of R52.50 — a 550% gain in a decade. Then in March, it hit a wall.

Taxi operators, it turns out, were in deep trouble. Scrambling to reassure everyone it was all under control, Transaction Capital set aside an extra R1.9bn in provisions for bad debt.

The severity of the slide was alarming: as one investor said, this is “the most depressing stock story since Steinhoff”, the fraud-riddled retailer that is destined to be wheeled into the scrapyard in the next few months.

Asked how rough it’s been, CEO David Hurwitz rubs his head, and points out that he used to have hair. “It has been very stressful, not just for me, but for the entire management team. It’s been all hands on deck to get the taxi business right,” he tells the FM. “But this is important, not just for us, but for the country, so there’s a real purpose here.”

Hurwitz, 51, was there at the start. Back in 2005, he joined the founders of the business — Jonathan Jawno, Rob Rossi and Michael Mendelowitz — to buy the taxi finance business from African Bank. This was the origin of SA Taxi which, in 2012, was incorporated into the new Transaction Capital.

He argues that as much as the taxi business is struggling, there’s an undeniable social imperative to get it right. “It provides access to capital for black entrepreneurs in the minibus taxi sector, where the banks haven’t been able to fill that gap. Taxis are the de facto public transport for most South Africans, so it’s not just any old business.”

The figures back this up. More people travel in the country’s 250,000 taxis than on all other public transport combined, and there’s been a 16% increase in taxi passengers over the past decade. By contrast, passenger numbers on state-run buses have fallen 28% in that time, while rail has seen an even more precipitous 64% decline.

The economic case for taxis seems bulletproof. So what went wrong?

In part, Transaction Capital was in the wrong place at the wrong time.

As the rand slid over the past eight years from R12.40/$ to R18, the cost of a Toyota Hi-Ace rose 52% to R544,700. Interest rates rose too: so taxi owners found themselves repaying R6,958 a month more than in 2015 for vehicle finance — a serious bite, considering operators are only estimated to make between R25,000 and R37,000 a month.

Sean Ashton, an independent analyst, paints a picture of a company displaying the clear scars of the beaten-down South African economy.

“You have a population that is, in aggregate, getting poorer because the economy isn’t growing, and where there are fewer people travelling by taxi because unemployment is rising. And then load-shedding comes along, where taxi drivers are stuck in traffic for longer, which means they’re not making the profit per route they used to. So taxi owners don’t make the sort of money they need to service the debt on taxis,” he says.

It doesn’t help that in the past year, fuel prices have risen to R22.85/l from R18.48/l a year before. So, no wonder fewer taxi operators can repay their loans.

The severity of the slide was alarming: as one investor said, this is ‘the most depressing stock story since Steinhoff’

But surely the writing was on the wall for some time? Why did it take Transaction Capital so long to figure this out, and hike its provisions for bad debt?

Hurwitz admits the company didn’t react as quickly as it could have.

“Our prediction was that the minibus taxi sector would rebound fully and quickly after Covid. But a number of things happened — interest rates, fuel prices rose, load-shedding — and then late last year we realised we couldn’t just wait for a recovery,” he says.

“Hope isn’t a strategy. So we said: ‘The change in the industry will be here for longer, so we have to adapt.’”

In March, Transaction Capital announced its “remedial action” for SA Taxi.

This involved cutting back on lending to taxi owners, selling its refurbishment arm, which was overhauling the taxis it repossessed, “resizing” its remaining assets, and nearly tripling its provisions for bad debt, from 5.5% of its loan portfolio to 16.3%.

(Typically companies, in the cringeworthy jargon of the day, call this “rightsizing”. Which is an interesting choice of words, given the obvious implication that they had it wrong before.)

It seemed to be the appropriate response. Only, it failed to reassure everyone — and the stock slumped.

So how worrying is the share price plunge for Hurwitz?

“Look, it hasn’t affected any debt covenants, and nobody has pulled any funding — the banks and development finance institutions continue to give us access to the facilities — but unfortunately, debt investors do watch the share price, and it creates a bit of panic. What this has meant, however, is that nobody has done anything positive either, in making new facilities available to us. And as a lending business, we need this,” he says.

Critically, he says there’s no new information, beyond what was detailed in March, that would justify further panic.

“Of course the environment is difficult, but in the taxi business, we’ve actually seen nice, incremental progress since March. I guess shareholders are waiting to see whether we’ll get more support from our debt funders before they take a view,” he says.

This, right here, is the axis on which Transaction Capital’s future revolves.

Like any bank, it needs access to money to on-lend. So it needs to ensure its debt funders remain confident in its future, so they keep the taps open. It’s this uncertainty that has spooked investors.

In banking circles, the joke is that the company is now referred to as “Requiring Capital”. It’s the kind of gallows humour that Hurwitz could do without.

Capital crunch

So just how tricky are things really for Transaction Capital? What are the odds of it getting access to more capital? And if they are relatively favourable, have the shares been overly punished? Or is there worse to come?

Hurwitz, as you’d expect of a “lifer”, is a big believer. He points out that the debt owed by SA Taxi is ring-fenced, so there’s no chance that any problems in that business will have a knock-on impact on the rest of Transaction Capital.

“The fact remains, our other two businesses — WeBuyCars and [customer engagement and collections business] Nutun — are doing great and are each worth more than the value of Transaction Capital on the JSE right now,” he says.

For the six months to March, WeBuyCars traded about 142,000 cars even though its profits slid 22%, while Nutun saw its profits rise 15%.

Of course, the grim upside of a brittle economy is that debt collection agencies do well. In South Africa, for example, there are 27-million adults with credit, according to the National Credit Regulator — and 24% of them have accounts that are more than three months in arrears.

It’s little wonder that Nutun’s revenue grew 50% in those six months.

Hurwitz’s point is that these companies will help compensate for what’s happening at SA Taxi.

Still, analysts are sceptical of this “recovery story”.

I’m not strong enough, even after a gym session, to catch a falling piano. It looks cheap, but there’s an old saying that if a stock can halve, it can halve again

—  Anthony Clark

Anthony Clark, the top-rated small caps analyst, says he wouldn’t touch the stock right now. “I’m not strong enough, even after a gym session, to catch a falling piano. It looks cheap, but there’s an old saying that if a stock can halve, it can halve again — and Transaction Capital certainly can halve again, given where we are in the market,” he says.

It’s a warning he first gave in May, when he wrote in the FM’s Investors Monthly of the risks.

It’s clear, Clark says, that the market is putting a value of zero on SA Taxi right now. Which may be harsh — but there are too many unknown factors to alter this narrative.

“In particular, they haven’t told anyone how much money they’ll need to stabilise themselves or where they’ll get it. Until then, people are staying away,” he says.

The problem is, Transaction Capital’s balance sheet looks woefully weak. Ostensibly, it had R41bn in assets, against R33.7bn in liabilities (which includes R24.5bn in interest-bearing debt).

But on the FM’s analysis, if you exclude more nebulous assets such as “goodwill” of R5.3bn (accumulated by buying various assets over the years), and the R3.39bn in “intangible assets”, this pushes its “tangible NAV” below zero.

Ashton concurs with this assessment. “The share price is telling you the market doesn’t believe that the price they paid to acquire assets, with all their goodwill, was worth it, or alternatively, that more capital will be required for SA Taxi. If you’re happy to remain a shareholder, you should have enough money to support a possible rights issue, if that were to transpire,” he says.

While Ashton hasn’t studied the company for some years, he says that given the ratio of its debt-to-equity, the low market value, and uncertain future for SA Taxi, the risk of an approach to shareholders for more capital isn’t immaterial.

One insider, who knows the company’s management well, says that while the theory is that SA Taxi’s ructions are ring-fenced, the worry is that Transaction Capital may try to “save” the taxi business rather than cut its losses.

Potential funders are worried about precisely this sort of contamination — even though Hurwitz is adamant this won’t happen.

It doesn’t help that last month, ratings agency Moody’s downgraded 11 of the bonds issued by Transaction Capital’s subsidiaries for SA Taxi, while keeping two ratings intact.

Moody’s said this was because of the “worse than expected collateral performance”, and its “revised assessment of financial disruption risk”.

The taxi industry, the agency said, has been badly hurt by South Africa’s economic performance and is “unlikely to rebound at a rate in line with original expectations”.

Profitability remains “stressed”, with fuel prices high, vehicle price hikes and “persistently low commuter volumes”. The taxi sector, Moody’s says, is now characterised by its “lower attractiveness ... in terms of prospects and profitability”.

That picture isn’t brightened by the fact that taxi owners can’t just hike their fares as they want. As it is, the average poorer South African spends 40% of their income on transport costs, according to Stats SA’s national household travel survey — about R960 a month in 2020.

It’s the sort of figure that attests to just how tough it is on the streets, how much rests on SA Taxi’s shoulders, and how little flexibility it has to move.

All bets on WeBuyCars

But if there are all manner of potholes for the taxi sector, can WeBuyCars, Nutun and new business Gomo step up their game to fill the gap?

Clark doesn’t believe WeBuyCars is the big white knight that Transaction Capital makes it out to be. Hurwitz’s team first bought 49% of the company in September 2020 for R1.8bn, and has since hiked its share to 74.9%. The business has had a blockbuster few years, in which the number of cars it sold doubled to 12,000 a month. But can this continue?

“All second-hand car businesses are struggling in this economy for all sorts of reasons, so why would WeBuyCars think it’ll be different?” asks Clark.

But Hurwitz bristles at any suggestion that WeBuyCars’s growth has stalled.

“We absolutely view WeBuyCars as a growth business. It won’t grow this year, but what we’ve seen internationally is that as new cars become more expensive, second-hand cars become a more viable option. In South Africa, the second-hand car market is at least double the size of the new car market — this year, we expect about 1.2-million second-hand cars to be sold, compared to between 500,000 and 600,000 new cars,” he says.

Over 10 years, he says, average annual used car sales have risen 1.8%, while for new cars the average dropped 0.5%.

Hurwitz says WeBuyCars is different to other second-hand sellers, such as Motus, in that it typically sells cars that are six years and older. The AutoTrader Car Industry report shows that 74% of used vehicles traded are older than five years — something that WeBuyCars describes as a “significant opportunity”.

He also says there’s a bright future for Transaction Capital’s new business, Gomo, which has begun to offer financing and insurance on these older models too. “That is something that WeBuyCars hasn’t capitalised on yet, and we see big growth there.”

It’s certainly an interesting niche, given that South Africa’s commercial banks have largely shied away from funding the purchase of older cars, as they have struggled to price these vehicles

It’s certainly an interesting niche, given that South Africa’s commercial banks have largely shied away from funding the purchase of older cars, as they have struggled to price these vehicles.

Hurwitz says the WeBuyCars database changes the game for the banks, as it’s now possible to value these older cars properly, so customers can get a secured loan at a better interest rate, rather than having to take out an unsecured loan at an exorbitant rate.

Gomo, he says, could become a R20bn business over time.

“We’ve run it on our own balance sheet for the past 18 months to prove it works. It’ll make a loss this year, then break even next year, and be profitable from 2025,” he says.

But Clark’s point remains: ultimately, car sales are capped by what’s happening in the wider economy. And why would WeBuyCars do any better that the other car dealers, such as Motus?

Hurwitz responds: “Critics ask: ‘Isn’t this just another Motus or Supergroup?’ But nothing could be further from the truth. What makes us unique is we have the ability to buy cars directly from consumers, and we’ve got this infrastructure that allows us to get to that car on the day of inquiry, and buy it immediately. That’s very different to a vehicle dealership.”

He says people underestimate how big the platform has become — WeBuyCars now sells as many cars every year in South Africa as Toyota.

It’s a compelling picture — in line with what Clark has called the “highly polished, clearly rehearsed and scripted” narrative that Transaction Capital has put out to reassure people that it has cauterised the problems within SA Taxi.

Hurwitz argues that if these new businesses — WeBuyCars, Gomo and Nutun — can grow as expected, the story will become less and less about SA Taxi.

“If that happens, then SA Taxi will be really tiny in the greater scheme of things. So, I know there’s a lot of focus on the taxi business, and questions about the balance sheet risk, but it’s becoming smaller and smaller as we grow,” he says.

Already it’s happening. Two years ago, 45% of Transaction Capital’s profit came from SA Taxi (R208m), but for the half-year to March, this was down to 11% (R52m). And while WeBuyCars contributed 25% two years ago (R113m), this has risen to nearly half (R234m).

Contingent liabilities

There are, however, a lot of qualifications in Transaction Capital’s telling: if Gomo grows as expected; if WeBuyCars can maintain its streak; if SA Taxi’s fallout can be contained ...

Part of the problem, it seems, is that the market doesn’t quite believe Transaction Capital’s story.

Sasfin’s Alec Abraham is one of a few analysts who still cover the company. After Transaction Capital’s update flagging the half-year loss, he published a research note saying analysts “clearly don’t believe management’s expectations” around what its full-year results will look like.

Abraham slashed his share price expectations, saying the company’s identity has changed structurally from a “niche bank lending to the high-risk taxi industry, but with an in-house risk-mitigation capability” to a “discretionary retailer operating in a tough consumer environment”.

He also poured cold water on Transaction Capital’s belief that, while SA Taxi would struggle, it could rely on WeBuyCars to become the linchpin of its profit.

He pointed out that in recent times growth in used car sales has lagged new car sales — which “points to the economic toll being taken by the more vulnerable lower- to middle-income segment [which is] the target market of the used-vehicle sector”.

I’m not convinced the company’s management is realistic in their assumptions. After all, they didn’t see the deterioration in SA Taxi in September last year, and only woke up to it in February

—  Zwelakhe Mnguni

And, with South Africa’s GDP growth forecast to be just 0.3%, that means there’ll be zero economic growth (actually, figures last week showed the country had shed 97,000 jobs over the 12 months to end-March), all of which puts a ceiling on the aspirations for WeBuyCars.

Zwelakhe Mnguni, chief investment officer of Benguela Global Fund Managers, is another who remains sceptical.

“I’m not convinced the company’s management is realistic in their assumptions. After all, they didn’t see the deterioration in SA Taxi in September last year, and only woke up to it in February,” he says.

Mnguni says it’s not clear why the company waited so long to act, as the poor performance should have been no surprise.

“For its last full financial year to September, SA Taxi’s core earnings had already dropped 26%, and this actually fell 52% in the second half of that year. So that was a major indicator, even back then, that all was not well,” he says.

At that point, he says, half of SA Taxi’s loans to taxi operators were in arrears, to some extent. So the company should have set aside higher provisions at that stage for bad debts, under the International Financial Reporting Standards.

“If the customer has not paid you for three months, you have to step up the expected credit loss. They didn’t do it, and tried to sail through, but in March it became inevitable,” he says.

The fact that the company didn’t hike provisions when it should have has left a cloud over its credibility.

The way Mnguni sees it, SA Taxi is in the ICU. “Its liabilities, I believe, exceed its recoverable assets, so Transaction Capital would do well to sell that business to plug the funding holes,” he says.

This credibility factor was knocked further by revelations that, before all the bad news tumbled out, Transaction Capital’s top brass had been selling shares.

In December, Hurwitz’s family trust sold 40% of its shareholding (1.6-million of his 3.9-million shares) for R51m. The company issued a statement saying Hurwitz had no choice, as the trust was “in breach of certain covenants relating to debt it held”, and that he’d had “no insider information” at the time.

The FM also calculated in March that the three founders — Mendelowitz, Jawno and Rossi — have also been quietly lightening their stake for years. Whereas they held 60.3% in 2010, it had fallen to 14.2% by last year.

However, Rossi told the FM that this was partly because the founders are “all getting a bit older”, and have “sold some to rebalance our portfolios”.

Still, it left a bad taste for investors who’ve seen their own fortunes plunge.

Mnguni, for one, says it’s “unsettling when a CEO sells a substantial stake 10 weeks ahead of the worst announcement for the business ever”, especially as it was clear there was a slowdown. While insiders protected their interests, “shareholders were left high and dry”, he says.

Requiring Capital

So given these red lights, should shareholders stick it out?

One company that still has shares in Transaction Capital is Anchor Capital.

“We’re obviously not happy with what’s happened to the share. We’re actually very unhappy, but we still think there’s value there,” Anchor CEO Peter Armitage tells the FM.

He says whether SA Taxi survives boils down to one essential question: the willingness of funders to continue providing capital. If not, then its days are numbered.

While this would be disastrous for South Africans, it wouldn’t be fatal for shareholders in Transaction Capital.

As Armitage explains: “The debt of SA Taxi is ring-fenced, so even if that business goes to zero, the other parts of Transaction Capital — WeBuyCars, Nutun and Gomo — are worth more than the share price currently.”

The investment thesis hinges heavily on whether Transaction Capital taps existing shareholders for more money. Since rights issues for troubled companies are usually at a vast discount to the share price, it implies a heavy dilution of their existing stake for investors.

Asked about this, Hurwitz doesn’t rule out a rights issue — but he says a lot would need to happen before this is considered.

“Before we talk of a rights issue, we need to understand whether there is a capital deficiency. We’re revising our funding models — for one thing, our clients are taking longer to pay us, so we need to shift into structures where we can repay over a longer time. And even then, there are five or six things we could do to remedy a capital deficiency before a rights issue,” he says.

These options include selling a stake in SA Taxi to a strategic investor, selling other assets (like its auto facility), or raising more ring-fenced debt in SA Taxi through new convertible instruments. “A rights issue would be at the bottom end of the spectrum. There are levers we could pull first, before we even talk about that,” he says.

So when would such a decision be taken? Given that this prospect has cast a dark shadow over the share price, surely Transaction Capital should provide clarity sooner rather than later?

Hurwitz responds: “Well, we’ve got six months’ worth of funding to operate, so within that time — before the end of this year — we’d want to have firmed up the support of our debt funders, and then we’ll look to amend our debt profile, to ascertain if we need additional capital.”

Amid it all, there stands the real possibility that SA Taxi may be cut loose or shrink to irrelevance. And if that happens, South Africa’s poorest consumers — who’ve already borne the collapse of government public transport — will lose out again.

Hurwitz concedes that this would be a disaster from a social perspective.

“If taxi owners couldn’t get finance, you’d revert to what we had in the 1990s, with operators buying taxis and running them for more than 10 years. And there’d be far more unsafe vehicles on the roads. But I think our debt investors see this, and that’s part of the reason they’d want to support us, since the social imperative and commercial objectives are aligned,” he says.

Perhaps development finance institutions would see it, but banks are hardly likely to cut a company slack just because it fulfils a social imperative.

Armitage agrees that SA Taxi is “absolutely” an important business for society. “But that’s a different issue — investors make decisions out of greed and fear — so there has to be a viable business model attached to it for it to work,” he says.

Instead, what funders will want to see is firm evidence of a U-turn in Transaction Capital’s business. So how long would this take?

Hurwitz says it’d be too quick to expect a big change in six months; two to three years is a more feasible timeline.

“We’ve had three very, very difficult years, but we need time. We’ve done a lot over the past six months: cutting costs, becoming more selective in advancing credit, and augmenting our management. Hopefully, that should be enough to convince debt investors to keep supporting the business,” he says.

Because, he says with characteristic understatement: “It’s better for everyone if SA Taxi keeps operating.”