In October 2021, when Transaction Capital was trading at about R42 per share, our price target was R48. That was reached by January 2022, and it would have been a good time to take profit because the share ran out of puff this year.
It’s difficult to put Transaction Capital in a particular box. If you’re tempted to compare the share’s performance to the FINI 15, its 13% slump in the year to date looks poor, since the index is up nearly 6.7%. Focus on WeBuyCars and it looks even worse, since sector peers Motus and Combined Motor Holdings are up 9% and 12.5% respectively.
This view is over a short timeframe though. Over three years, Transaction Capital has registered an impressive compound annual growth rate (CAGR) of 22.7%. Over 10 years, the CAGR is 19.1%.
The relative underperformance in 2022 is explained by SA Taxi, a vertically integrated business that has the South African National Taxi Council (Santaco) as its empowerment partner.
Pandemic lockdowns caused havoc in the taxi industry and subsequent challenges have included higher fuel costs, fewer passengers and floods in KwaZulu-Natal that closed the Toyota factory for months.
This put pressure on SA Taxi because a material part of its business is to originate loans on new taxis. If they’re not being delivered, you can’t lend against them.
SA Taxi looked to fill the gap with “quality renewed taxis” but it couldn’t push enough volumes through the business.
WeBuyCars has transformed the group and given it a powerful market position in an industry that offers exceptional return on capital
In the pre-close call, CEO David Hurwitz said SA Taxi would take a knock of more than 20% this year. By the time you read this, final results will be out and we will know for sure.
The good news story is WeBuyCars, which contributes about half of group earnings. It has been a remarkable acquisition that has transformed the group and given it a powerful market position in an industry that offers exceptional return on capital.
With listed peers focused more on new cars, Transaction Capital’s positioning is unusual and capable of substantial further growth.
The company’s goal is to achieve 20% market share in the medium term. To reach this target, WeBuyCars is starting to target regional cities such as Bloemfontein and Mbombela (Nelspruit) in addition to building car “supermarkets” in the largest cities.
The starting point is a car-buying pod to test demand before a new site is established. Though it takes about six months before efficient stock turnover is achieved, the sites are profitable from the first month.
To complement the growth in unit sales, the economics are improved through higher finance and insurance penetration which creates more layers of profit on a vehicle.
Penetration has increased from about 12% to the high teens, and the introduction of Gomo as a finance product for older vehicles should give it even more momentum . The skill set behind this business is in SA Taxi.
Transaction Capital Risk Services has rebranded to Nutun and is seeing more opportunity to deploy capital into nonperforming loan books in SA. Overall, Transaction Capital has taken a cautious approach in this business in recent times and it has been ticking over.
The strategic misstep in the past year was a R1.28bn capital raise at R35.50 a share. This was a discounted price that didn’t make sense and caused painful dilution for most shareholders, since only a few institutions were invited to buy at that price. The proceeds were mainly earmarked for the WeBuyCars acquisition.
Core EPS guidance of 169.7c-176c means the p:e multiple is around 23. With earnings growth in the high teens, this is slightly high but not terribly demanding.
The risk to the story is in used car prices, as a major dip would hit WeBuyCars. But with a recovery expected in SA Taxi, Transaction Capital remains an attractive option.
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