Transaction Capital shares took a breather this week after their 78% jump, year to date. But results for the year ended September were still astonishing: core headline earnings up 264% year on year and 27% on pre-pandemic 2019, with some dividend largesse to boot. The FM spoke to CEO David Hurwitz.
What could possibly go wrong?
DH: There are a lot of things on the risk register [laughs]. But if you take a look at these results the one area where growth was not as good as we were hoping for was SA Taxi. There are various headwinds; the obvious ones are the petrol price, cars still being very expensive, and commuter activity is still not back to where we want it to be. This was all compounded in June/July — the longer third wave of Covid, civil unrest in KwaZulu-Natal and parts of Gauteng, and then we also had taxi unrest in the Western Cape.
But loans and net interest income were much higher than 2019. So why were earnings still behind?
DH: IIn credit life, we paid out an extra R120m worth of credit life claims — the total payment was R170m — and then if you benchmark the typical collection levels pre-Covid and what we saw over the year, we’re probably at about 90% of normal. So provisioning levels stay higher, and that comes through as credit losses. Operationally, loan originations, book growth, insurance, all of that is at normal levels.
WeBuyCars has been astoundingly strong. Is it naive to expect the used-car boom to continue indefinitely?
DH: I like to describe it as an industry with structural benefits, but at the moment there are cyclical tailwinds. WeBuyCars trades in only second-hand cars, and older second-hand cars. What that allows is to be an entry level for people migrating from public transport to be first-time private vehicle owners. That’s a very robust market. The banks typically don’t like to finance older vehicles, and because we buy and sell them all day long we understand the value of those vehicles, and that allows us to inject finance into that space. Then there’s the e-commerce story. One of the effects of Covid was higher digital adoption and vehicles was kind of the last big asset class to benefit from that.
Cyclically, the big thing is the worldwide chip shortage and the rand/dollar exchange rates, which have pushed the price of new vehicles up. So it makes demand for second-hand cars higher.
WeBuyCars makes about R6,100 per vehicle sold. Does that number go up, as more cars go through the system?
DH: It does show we aren’t ripping people off. We’re looking to make much smaller margins, but to do that 10,000 times a month. As we get more scale, things like employee costs, rent, and so on all go down. The one area that did not go down was advertising spend. We are throwing more money into the brand to make sure we are the known brand.
There are lots of new contenders. Are you worried about them?
DH: It is a highly competitive but huge market: 1.2-million second-hand vehicles are traded in a year and there are 11-million passenger vehicles in SA. If we’re selling 90,000, that’s a tiny market share so we’ve got a long way to go. Also, new entrants will develop this market. With newer entrants and people being more trusting of the system, people will trade their cars more regularly. And we are uniquely positioned as a stock holder. A lot of the new entrants are tech platforms, putting a buyer with a seller but not actually owning the car. We’re not earning a click fee — we’re earning a margin by taking risk on the vehicle and we can do that because we have better intelligence than most.
Your shares have had a stonking year. Would you still buy them? Or use them to grow the business?
DH: I see huge growth for Transaction Capital. We think SA Taxi can grow earnings in a difficult environment. Transaction Capital Risk Services (TCRS) can grow earnings higher than it did this year — so, above 15%. As for WeBuyCars: we’re looking at growing earnings, again, by maybe 30%. Then yes, with a highly rated stock we should be looking for acquisitive opportunities. There are many companies similar to WeBuyCars internationally and I think we are well structured to understand and affect those businesses. WeBuyCars is big on any stage: the number of cars we trade a month makes us a player of scale. And we see nice growth opportunities in TCRS, in outsourcing our services.
Everywhere else in the world you’re seeing this "Great Resignation". No-one wants to work and in SA we’ve got unemployment, good labour and good rand-denominated tech stacks where we can provide services to international companies.
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