Transaction Capital’s divisions operate within carefully chosen market segments, where they can take advantage of South Africa’s demographic and socio-economic trends, enabling them to deliver both a social and commercial benefit. This intentional positioning continued to contribute to consistent organic growth since listing on the Johannesburg Stock Exchange more than four years ago.
While both SA Taxi and TCRS perform better in a positive economic environment, their defensive positioning enables them to withstand challenging macro- and socio-economic conditions, which have remained key features of the South African operating context.
These defining characteristics of the group resulted in strong progress towards achieving its strategic and operational objectives during the 2016 financial year, and delivering pleasing results in line with expectations. Headline earnings and headline earnings per share increased 17% to R458 million and 80.6 cents per share respectively, together with a sustained improvement across credit metrics.
In SA Taxi, retailing of both new and pre-owned taxi vehicles represents a significant medium-term organic growth opportunity. SA Taxi launched a retail dealership in Midrand in February 2016, which deepens its vertical integration in the minibus taxi market segment further. This dealership is one of the largest dedicated taxi dealerships in South Africa, selling Toyota, Nissan and Mercedes minibuses, and the bespoke Toyota Corolla metered taxi vehicles. SA Taxi’s entry into the retailing of new and pre-owned vehicles enables it to attract a client of better credit quality, to grow profitability through participation in product margin, and provides a channel to drive the uptake of its insurance offering. SA Taxi is piloting a second dealership in KwaZulu-Natal and considering a third dealership in Polokwane, Limpopo. SA Taxi’s focus on increasing its participation in the pre- owned vehicle market segment signals a shift in mindset from viewing the repossession, refurbishment and resale of pre-owned vehicles purely as a tool for mitigating risk, to establishing pre-owned vehicles as a core and profitable product offering.
SA Taxi’s specialist refurbishment capabilities, together with its retail dealership channel and well-regarded brand, uniquely positions it to grow its participation in this highly liquid market, and enables it to maximise profitability when selling pre-owned taxi vehicles. Market factors including currency volatility are exerting upward pressure on new vehicle prices, which creates a strong business case for providing quality pre-owned vehicles at a lower price-point, backed up by SA Taxi’s ability to service and maintain these vehicles going forward.
SA Taxi’s short-term comprehensive insurance business continues to be a key driver of non-interest revenue. The launch of SA Taxi’s auto body repair centre enables it to bring the cost of claims down even further by leveraging its scale, procurement capabilities and highly efficient refurbishment processes. SA Taxi’s ability to effect repairs faster and at a lower cost than other insurers – who outsource these capabilities – is a significant differentiator that enables it to get customers’ vehicles back on the road as quickly as possible. Looking forward, the introduction of newly developed insurance products specifically designed for taxi operators will further support the sustainability of SA Taxi’s small- and medium-sized enterprise (SME) customers. SA Taxi has also been successful in growing its portfolio of non-financed insured vehicles, and this presents a substantial opportunity for its insurance business going forward.
The acquisition and relaunch of Zebra Cabs enables SA Taxi to apply its specialist capabilities to create a defensible position in the adjacent metered taxi market segment. As with the minibus taxi business, SA Taxi brings a greater level of standardisation to this market – in terms of vehicle type, pricing, service levels and booking platform – which will support the further formalisation of an industry that is still largely fragmented. Zebra Cabs will enable SA Taxi to generate the deep data and telematics required to gain robust insights through its analytics capabilities, necessary for driving scale. Thus, SA Taxi’s intention is not to become a dominant operator of metered taxis, but instead to use its insights to develop financial and allied products and services that leverage its existing capabilities to support the sustainability of SMEs operating in this market segment, with the addition of booking systems and frictionless payment channels driven by data and technology; a capability that in future could also be applied to the minibus taxi segment.
Technology remains a key underpin to SA Taxi’s ability to operate in market segments perceived to be higher-risk. Its use of data and analytics has progressed over the years from repossession (tracking a vehicle’s physical location), to credit decision-making (to test prospective profitability of a proposed route), to collections (determining current profitability based on kilometres travelled in a specific month), to insurance (whether the vehicle’s average movement pattern has changed pointing to potential vehicle damage or theft). Leveraging this data to develop an application for minibus taxi operators represents the next step in SA Taxi’s technology evolution. This data-rich application will provide operators with real-time information on the performance of their vehicles, integrating the functionality and insights described above to enable them to better manage their business.
In TCRS, the two most prominent opportunities for driving organic growth are to further leverage and enhance its proprietary data and technology capabilities to improve efficiencies and grow revenue from its existing clients, and to apply its expertise to grow its presence in adjacent market segments – most notably in insurance, telecommunications and the public sector.
Establishing a master data universe has created a robust database of individual consumer records that further improves the collections process, in terms of assessing customers’ credit track records and assessing how likely they can be successfully contacted when needed. This database is continuously enhanced with internally generated data (including recent collection data or whether a contact attempt is successful or not), as well as information from credit bureaus, other external sources and from principal portfolios acquired by Transaction Capital Recoveries. TCRS may also apply its master data universe to generate leads directly for its proprietary products, or on behalf of its clients.
Together with an enhanced predictive dialer and increasingly sophisticated workforce management, TCRS is set to further improve its collections performance and grow revenue from its core client base – most notably credit retailers and specialist lenders – in an environment in which collections are becoming increasingly challenging. The business will also focus on increasing revenue from the Tier 1 banks, where its penetration has been disproportionately lower.
In addition to economic challenges impacting on collections, regulatory changes regarding affordability assessments, prescription, interest rate caps and credit life insurance are tempering credit providers’ ability to extend credit. Although growth in the national unsecured credit book has not yet shown signs of slowing, it is anticipated that this will become increasingly evident over the next few years as the slowdown in new credit extension filters through. TCRS’s focus on applying its specialist capabilities to adjacent sectors not regulated under the National Credit Act – including the insurance, telecommunications and public sectors – will help mitigate a potential drop-off in collections mandates from credit retail clients. The division has appointed industry experts to deepen penetration into these sectors, which already account for a significant and growing proportion of its sector exposure.
A benefit of current economic conditions is that TCRS can apply its strong balance sheet and extensive data to the selective acquisition of certain of the increased number of non-performing loan portfolios available for purchase, as clients seek immediate recovery against their non-performing loans. The risk of more challenging recoveries against these acquired portfolios is mitigated by database and technology investments. Also, the constant improvement in its data has enabled TCRS to continuously refine its pricing methodology for these portfolios and reliably predict the value and timing of recoveries.
This diversification – in terms of undertaking both agency and principal collections – is central to TCRS’s defensive business model, which enables it to continue delivering a positive performance under a variety of market conditions. To further grow its portfolio of purchased book debts, it has initiated exclusive negotiations for the structured and ongoing sales of portfolios with several larger clients, and in some cases, it proposes gain share agreements to enable clients to continue participating in the value of their non-performing loan portfolios.
Transaction Capital’s ability to successfully access and deploy capital is essential to growing and enhancing the competitive positions of its divisions. Transaction Capital has a proven track record in this regard; it has demonstrated its skill for converting higher-risk asset classes into viable investments that fall within investors’ risk parameters by identifying, mitigating and packaging risk, and ensuring the right strategies and people are in place to sustainably deliver appropriate risk-adjusted returns. It is an effective approach that is evidenced by the continued excellent credit ratings Transaction Capital has achieved.
To mitigate the impact of the potential downgrade of South Africa’s sovereign credit rating on future funding requirements, Transaction Capital intensified its fundraising activities. Transaction Capital achieved a notable success in diversifying its funding structures and instruments by establishing a R2 billion credit-rated and JSE-listed Domestic Note Programme, namely TransCapital Investments Limited, which was awarded an A- (Long Term, National Scale) and A1- (Short Term, National Scale) credit rating from Global Credit Ratings Co. Transaction Capital anticipates that this programme will enable it to access a new capital pool at an attractive cost to fund organic and acquisitive growth activity.
SA Taxi continued to enjoy uninterrupted access to both local and international funding pools, raising more than R3.5 billion of debt during the year and fulfilling most of its annual debt requirements for the 2017 financial year.
Transaction Capital continued to scan the environment for opportunities to make acquisitions and deploy excess capital, favouring a conservative approach with a narrow focus on assets operating within existing or adjacent market segments. In evaluating opportunities, Transaction Capital looks for acquisitions that have high-quality earnings, with high cash conversion rates and strong organic growth prospects that make them sound acquisitions on a standalone basis. Transaction Capital also seeks acquisitions with the potential to be developed and enhanced through active management, and benefit from and contribute to Transaction Capital’s skills and technology capabilities; as well as international acquisitions to diversify earnings and risk exposure geographically.
In line with these intentions, Transaction Capital entered into three acquisitions in the latter part of the year, all within the scope of TCRS’s activities. The first, Recoveries Corporation Group Limited (Recoveries Corporation), signals Transaction Capital’s expansion outside South Africa. Based in Melbourne, Australia, Recoveries Corporation provides domestic consumer customer management solutions in the government, insurance, banking and finance, utilities and telecommunications sectors. It is an efficient platform that Transaction Capital intends to develop and scale, growing it beyond its exclusive focus on agency collections to leveraging the group’s analytics, pricing and capital management capabilities to expand adjacently into the purchase of non-performing loan portfolios in Australia. The Australian debt collection industry is highly fragmented (with approximately 20 companies accounting for 85% of the market), which provides Transaction Capital with an opportunity to build on this acquisition and expand acquisitively in Australia. Furthermore, Recoveries Corporation’s vast expertise in the insurance recoveries industry will augment Transaction Capital’s competencies and facilitate the growth of its fledgling insurance recoveries offering in South Africa.
The second acquisition – a controlling interest in RC Value Added Services (Pty) Ltd (Road Cover) – provides TCRS with a strong entry into the adjacent value-added services market, where it can leverage its existing competencies to enhance Road Cover’s market position. The primary intention is to provide Road Cover’s subscription-based legal and administrative services to consumers through TCRS’s existing clients as a value-added product, enabling its clients to generate higher risk-adjusted returns. As a separate strategy, leads can be generated and value-added products can be distributed directly to customers within TCRS’s internal database.
Lastly, as a fully outsourced accounting, payroll and tax services provider through “software as a service” technology, the acquisition of The Beancounter Financial Services (Pty) Ltd (The Beancounter) will enable TCRS to augment its offering to its SME client base. The Beancounter provides services on a monthly retainer basis and is one of the leading specialists in cloud accounting. The business is well-positioned with solid organic growth prospects.
In line with Transaction Capital’s investment strategy to retain executive talent and institutional knowledge, the founders of these businesses will remain vested, closely involved in driving organic growth and managing day-to-day operations. All are excellent businesses in and of themselves, with scalable business models and proven track records.
Transaction Capital’s high-performance culture is a product of many of the factors that make its business unique. Its entrepreneurial culture is retained by devolving authority and responsibility into its divisions to give its people a sense of ownership. This motivates them to innovate within defined business model and risk parameters, and with corporate support including a robust governance framework.
Executives within the group are appropriately qualified and have deep experience within their areas of specialisation. The highly defined market segments in which Transaction Capital operates requires them to typically apply this intellectual capital to a much smaller asset base than in larger organisations, with the concomitant expectation of higher performance.
This need for specialist application of skills – to apply a narrower focus that requires a different approach to what an individual may be accustomed to – extends throughout the working environments across Transaction Capital and its divisions. It has proven its ability to retrain people with a broader skillset to be effective in these environments: whether a generalist mechanic who now understands that to mitigate credit risk, their role is to get a customer’s vehicle back on the road quickly and work to a standard that ensures a vehicle can operate reliably for an extended period; or an insurance agent who understands that their role is not to repudiate claims, but to, again, mitigate credit risk by getting a customer’s claim resolved as quickly as possible. Throughout the divisions, Transaction Capital’s people are specialists – in raising capital or managing risk in the minibus taxi industry, specialist Toyota minibus mechanics, specialists in taxi insurance, specialists in customer and capital management in specific industries, and specialist collections agents for specific clients or sectors.
Transaction Capital provides fair remuneration commensurate with the level of skill, experience, seniority of its people as well as industry practice. Performance incentives are utilised where appropriate, to further motivate high performance. The Transaction Capital Limited Conditional Share Plan, approved by shareholders on 20 October 2016, is a mechanism to attract and retain key employees while providing them with the opportunity to participate in the value created within their division, and to align their interest with that of shareholders.
The societal relevance of Transaction Capital’s divisions also means that it offers meaningful employment, and its people understand the broader social significance of their roles. This includes supporting the functioning of South Africa’s public transport system and helping to rehabilitate indebted consumers. Having a sense of purpose in what you do is a key underpin of a high-performance culture.
Transaction Capital is comfortable that the current composition of its portfolio is correct. The positioning of its businesses is sufficiently defensive within their respective market segments, enabling them to prosper despite South Africa’s challenging macro- and socio-economic context. Transaction Capital remains comfortable that it can successfully navigate a dynamic regulatory environment, and where there may be second-order effects on its clients, that its diversification strategies will sufficiently mitigate potential negative impacts.
Transaction Capital remains committed to investing in organic and acquisitive growth opportunities in SA Taxi and TCRS. This will be done in a manner that augments and develops these platforms to enhance their scale and entrench their leading market positions, thereby generating societal and stakeholder value. Given its positioning within this socio-economic context, Transaction Capital remains confident that the group is well-positioned for continued growth in the medium term.