Since Transaction Capital listed on the JSE Limited five years ago, the group has delivered high quality organic earnings growth with high cash conversion rates. Headline earnings per share for the five years to 30 September 2017 grew at a compound annual growth rate (CAGR) of 21%, with dividends per share growth at a CAGR of 36% since 30 September 2014.
During the 2017 financial year, Transaction Capital extended its track record of organic earnings growth. Earnings accretive acquisitions accelerated this growth, with core headline earnings up 26% to R577 million. Core headline earnings per share rose 20% to 96.4 cents, diluted slightly by the issue of 28.4 million shares as part of the accelerated bookbuild concluded on 2 February 2017, which raised R419 million. The group’s strong balance sheet provides the capacity and flexibility for further acquisitions.
Despite difficult economic conditions, the performance of SA Taxi and Transaction Capital Risk Services (TCRS) has again demonstrated their defensive character, as detailed in the divisional reviews.
The adoption of IFRS 9 in the 2015 financial year resulted in a more conservative, lower-risk balance sheet and higher quality earnings. This early adoption has removed any uncertainty relating to the implementation of IFRS 9 on future financial results and ratios.
The summarised financial results of the group are included in the financial information section available in downloads. Core financial ratios exclude once-off acquisition costs of R22 million incurred during the financial year.SUMMARISED CONSOLIDATED SEGMENT REPORT
Financial and credit performance
SA Taxi is a vertically integrated platform incorporating a unique blend of vehicle procurement, retail, repossession and refurbishment capabilities with financing and insurance competencies for focused vehicle types. These competencies, combined with its proprietary data and analytics skills, enable the division to provide asset-backed developmental credit and bespoke taxi insurance, and sell suitable vehicle models and allied services to taxi operators. Through this offering, SA Taxi delivers commercial benefits to taxi operators, helping them to ensure the viability and sustainability of their businesses.
SA Taxi’s divisional review includes details on its operating context, evolution since listing and engagement with stakeholders. A thorough understanding of its context and continuous engagement with stakeholders is vital to secure the effectiveness and sustainability of the industry, which will ultimately have a positive impact on SA Taxi’s business over the long term.
SA Taxi’s loans and advances portfolio, which comprises 28 724 vehicles, grew 16% to R8.3 billion. Growth of 9% in the number of loans and a 20% increase in the Rand value of loans originated supported this result. SA Taxi now finances more than 40% of new Toyota minibus taxi sales, compared to 36% in 2015.
Net interest income grew 19% to R885 million in line with book growth. SA Taxi’s net interest margin increased to 11.4% due to slightly lower gearing and an improved non-performing loan ratio, despite an increase in the cost of borrowing. The recent downgrades of South Africa’s credit rating and the industry protest action are not expected to have a meaningful impact on SA Taxi’s net interest margin or credit metrics.
The risk-adjusted net interest margin improved to 8.2% from 8.0% in the prior year. The credit loss ratio of 3.2% remained at the bottom end of the division’s risk tolerance of 3% to 4%, and the non-performing loan ratio improved to 17.1% from 17.4%. A combination of strong collection performance, high credit quality of loans originated in the retail dealership and conservative credit granting criteria supported this improvement.
Enhancing the value of vehicles through refurbishment enables SA Taxi to recover more than 73% of loan value on the sale of repossessed vehicles. The division operates the largest minibus taxi repair facility in Africa, and the average cost to repair repossessed vehicles was reduced further in the year. This was due to efficiencies achieved in the combined auto body repair and mechanical refurbishment centre.
Due to fewer non-performing loans, the reduced average cost to repair repossessed vehicles and higher recoveries on the re-sale of these vehicles, provision coverage reduced to 5.2%. At this level, SA Taxi’s after tax credit loss remains conservatively covered at 2.3 times.
Despite political uncertainty and concern about the sovereign rating downgrades, SA Taxi raised R6 billion in debt facilities during the year, securing its requirements for the 2018 financial year.
SA Taxi’s vertically integrated business model generates diversified non-interest revenue streams, including revenue from the sale of vehicles, telematics services and insurance products. New revenue streams are currently being explored together with industry leadership. Non-interest revenue for the year grew 36% to R427 million, now 33% of SA Taxi’s revenue after interest expenses (2012: 26%).
Loans originated through SA Taxi’s dealership are more profitable than loans originated through external dealerships, with better product margins, insurance revenue and credit performance. Increasing the number of new and pre-owned taxi vehicles sold through the division’s owned dealership therefore presents good opportunity for organic growth.
SA Taxi’s dealership now also offers funding from certain South African banks, providing a wider choice of options and broadening its client base with the intention of offering its insurance and vehicle tracking products to these clients.
SA Taxi’s short-term insurance business is a key driver of non-interest revenue, offering bespoke insurance products including comprehensive vehicle cover, passenger liability and instalment protection cover. The division is broadening its product offering, having initiated a credit life product during October 2017. On average, SA Taxi’s insured clients have 1.8 SA Tax insurance products each.
SA Taxi’s insurance operations now earn gross premiums of more than R550 million per year. At 30 September 2017, more than 85% of SA Taxi’s financed clients were also insured by SA Taxi, with an annualised new premium written for its financed clients at R231 million for the year. In addition, SA Taxi has broadened its client base, now also insuring taxi operators not financed by the division. During the year under review, SA Taxi’s annualised new premium written for non-SA Taxi financed clients was R52 million.
Loss ratios for both the financed and non-financed insurance portfolios are improving as a result of operational efficiencies. The business aims to improve its offering by processing a greater proportion of its insurance claims via SA Taxi’s combined auto body and mechanical repair facility.
SA Taxi restructured its insurance operation during the year, which will now be consolidated in accordance with IFRS.
The application of unique technology and data analysis is key to mitigating SA Taxi’s risk. Data is accumulated daily from each minibus taxi and applied to credit decisions (to assess the prospective profitability of a proposed route), to collections (to determine profitability based on kilometres travelled in a specific month), and to repossessions and insurance.
With 16% growth in gross loans and advances, increasing net interest margins, strong credit performance, 36% growth in non- interest revenue and the cost-to-income ratio improving to 48.6% (2016: 51.1%), it is evident that SA Taxi’s credit, operational and financial performance is robust. This translated into 22% growth in headline earnings of R303 million for the year.
FINANCIAL AND OPERATING PERFORMANCE
TCRS is a technology-led, data-driven provider of customer management solutions in South Africa and Australia. The division’s scalable and bespoke fintech platform improves its clients’ ability to originate, manage and collect from their customers. The division leverages its technology and data to mitigate risk and maximise value for clients throughout the customer engagement lifecycle.
TCRS acts both as an agent on an outsourced contingency or fee-for-service (FFS) basis, and as a principal in acquiring and then collecting on non-performing loan portfolios. This diversified revenue model across various consumer credit sectors is central to the division’s defensive positioning, supporting its performance in different market conditions.
In line with its strategy to buy and develop complementary businesses, TCRS acquired 100% of Recoveries Corporation in Australia (effective 1 January 2017), 75% of Road Cover and 51% of The Beancounter (both effective 1 December 2016). The acquisitions will diversify TCRS’ earnings over time, by geography and by sector. The operational integration of the three businesses in the year was executed successfully, and they performed to expectation.
TCRS’ divisional review includes details on its market context, business activities and evolution since listing.
TCRS’ strategy to deepen its penetration in its traditional market segments (i.e. retailers, specialist lenders and banks) and grow revenue from adjacent sectors supported its organic earnings growth in South Africa. In 89% of its 231 outsourced collection mandates in South Africa, TCRS is ranked as either the top or second-best recoveries agent. Furthermore, the adjacent insurance, telecommunication and public sectors now contribute 27% of TCRS’ local contingency and FFS revenue, compared to 20% in the prior year.
The acquisition of Recoveries Corporation has diversified this revenue stream further. This business generated approximately R370 million in hard currency revenue over nine months, from a diversified client base in the insurance (24%), telecommunication and utility (16%), banking (16%) and public (25%) sectors in Australia. Recoveries Corporation is the market leader in the Australian insurance recoveries sector, and will facilitate the growth of TCRS’ insurance recoveries offering in South Africa.
The current economic climate and TCRS’ data, scale and capital position favour the acquisition of non-performing loan portfolios in South Africa from risk averse clients who prefer an immediate recovery against their non-performing loans. TCRS acquired 29 portfolios with a face value of R5.2 billion for R356 million during the year. TCRS now owns 195 principal portfolios with a face value of R12.2 billion, valued at R891 million at 30 September 2017. This is up 22% from R728 million a year ago.Estimated remaining collections are at R1.7 billion, up from R1.3 billion at 30 September 2016, which will support future performance.
TCRS continues to seek opportunities to apply its analytics, pricing expertise and capital to the selective purchase of non-performing loan portfolios in a highly fragmented Australian debt collection market.Other activities
Transaction Capital Payment Solutions specialises in customised, innovative and flexible payment services, processing R27 billion in value per year via approximately three million disbursements and seven million debit orders and non-authenticated early debit orders (NAEDOs) for over 1 200 clients.
Through its acquisition of Road Cover, TCRS has entered the adjacent value-added services market segment in South Africa. Road Cover offers proprietary value-added services to the mass consumer market on a subscription basis. At a low cost, members have access to high quality legal and administrative services, including the administration of Road Accident Fund claims, Compensation for Occupational Injuries and Diseases Act claims, and claims against various road agencies and municipalities relating to damage to a member’s motor vehicle due to poor road conditions. Road Cover’s products are typically embedded in other subscription based products in the insurance, banking, motor and retail sectors, and are also distributed to consumers as a standalone product via direct marketing channels.
Transaction Capital Business Solutions (TCBS), incorporating The Beancounter, provides business support (including fully outsourced accounting, payroll and tax services through “software-as- a-service” technology to small- and medium-sized enterprises (SMEs) on a monthly retainer basis) and SME finance to small businesses that may not otherwise have access to credit, thereby facilitating both SME growth and job creation.
TCBS’ main activity includes disclosed invoice discounting, incorporating the outsourced management of debtors’ books, processing on average 450 000 invoices to the value of approximately R8.5 billion per year. Other SME financing activities include targeted trade and property finance. At 30 September 2017, gross loans and advances grew to R570 million, up 15%.
Before taking the business acquisitions into account, TCRS’ cost-to- income ratio remained stable from the prior year. The technological and operational enhancements initiated in 2016, together with aggressive cost containment initiatives, contributed to this result.
Including the effects of the acquisitions, core headline earnings growth of 39% to R233 million was achieved for the year ended 30 September 2017. Solid organic growth, augmented by the earnings accretive business acquisitions, underpinned this result.
The impact of foreign exchange on earnings from Recoveries Corporation was insignificant.
The group executive office contributed R41 million to the group’s headline earnings for the year, resulting from efficient capital management and treasury functions relating to excess capital of around R650 million.
The dividend policy has been amended to a reduced cover ratio of 2 to 2.5 times (previously 2.5 to 3 times). This change has been implemented due to the improved quality of earnings as evidenced by high cash conversion rates and lower balance sheet risk, the stable capital requirements of the group and the ungeared net position of the holding company. All of these factors allow for a higher sustainable dividend policy going forward.
Following the interim dividend of 15 cents per share (2016 interim: 12 cents per share), and in line with the new dividend policy, the board has declared a final gross cash dividend of 25 cents per share (2016: 18 cents per share) for the six months ended 30 September 2017.
It is Transaction Capital’s objective to ensure that appropriate, understandable and sustainable accounting policies are adopted and implemented, which are aligned with the group’s commercial realities, risks and strategies to the greatest extent possible.
There were no significant changes in accounting policies during the year under review. Accounting estimates have been assessed for appropriateness and validity.
The auditors issued an unmodified audit opinion for the financial year. Refer to the 2017 annual financial statements, for more detail.
No events which would have a material impact on either the financial position or operating results of the company have taken place between 30 September 2017 and the date of release of this report.
My sincere thanks to the group and operational finance teams for their diligence in ensuring that Transaction Capital is able to provide stakeholders with an accurate and meaningful analysis of its financial and operating performance, in line with the objectives set at the time of listing the group.