Financial director's
report

RONEN
GOLDSTEIN

Ronen Goldstein
16%
111.7 CENTS

CORE HEADLINE EARNINGS PER SHARE1
(2017: 96.4 CENTS)

25%
50.0 CENTS

TOTAL DIVIDEND PER SHARE
(2017: 40.0 CENTS)

 
  CORE HEADLINE EARNINGS1    
  TRANSACTION CAPITAL
GROUP
SA TAXI TRANSACTION CAPITAL
RISK SERVICES
 
 
18%
21%
17%
 
  R682 MILLION R368 MILLION R273 MILLION  
 

1. Headline earnings attributable to the group.

TRANSACTION CAPITAL'S OPERATIONS DELIVERED PLEASING FINANCIAL RESULTS, DESPITE CHALLENGING MARKET CONDITIONS THROUGHOUT THE 2018 FINANCIAL YEAR.

Since listing on the JSE Limited in June 2012, the group has consistently achieved compound annual growth in earnings per share of 20%, with dividends per share growing even faster at 33%, supported by high cash conversion rates.

In the 2018 financial year, the group extended its track record of high-quality organic earnings growth, with core headline earnings up 18% to R682 million. Core headline earnings per share grew 16% to 111.7 cents, diluted by the issue of 28.4 million shares in the prior year (February 2017) that raised R419 million.

 
For details on the operating environment, see the Chairman's report.

Despite positive political developments, macro- and socio-economic conditions in South Africa have deteriorated, with the economy entering a technical recession in the first half of 2018. SA Taxi and Transaction Capital Risk Services (TCRS) are resilient businesses, strategically well positioned in their chosen markets. They have adjusted to the persistently difficult economic conditions by refining and diversifying their fintech platforms and achieving operational efficiency.

The early adoption of IFRS 9 in the 2015 financial year, ahead of the 2018 deadline, resulted in a lower-risk balance sheet and higher-quality earnings. At 30 September 2018, the group’s balance sheet was well capitalised and flexible, with excess capital of approximately R650 million available to fund growth. This is expected to grow to over R1 billion after the transformational ownership transaction between SA Taxi and the South African National Taxi Council (SANTACO) is implemented.

The summarised financial results of the group are included in the financial results section. Core financial results and ratios exclude once-off acquisition costs incurred in the 2017 financial year.

SUMMARISED CONSOLIDATED SEGMENT REPORT

  SA Taxi   Transaction Capital
Risk Services
  Group executive office (GEO)*   Group  
  2018 
Audited 
Rm 
  2017 
Audited 
Rm 
  2018 
Audited 
Rm 
  2017 
Audited 
Rm 
  2018 
Audited 
Rm 
  2017 
Audited 
Rm 
  2018 
Audited 
Rm 
  2017 
Audited 
Rm 
 
SUMMARISED INCOME STATEMENT                                
FOR THE YEAR ENDED 30 SEPTEMBER                                
Net interest income  979    885    51    77    70    45    1 100    1 007   
Impairment of loans and advances  (299)   (253)   (15)   (7)   –    –    (314)   (260)  
Non-interest revenue  540    427    1 837    1 485    –    25    2 377    1 937   
Operating costs  (723)   (638)   (1 510)   (1 260)   (11)   (12)   (2 244)   (1 910)  
Non-operating loss  –    –    (3)   (3)   –    –    (3)   (3)  
PROFIT BEFORE TAX  497    421    360    292    59    58    916    771   
Headline earnings attributable to equity holders of the parent  368    303    273    211    41    41    682    555   
Once-off transaction and other acquisition-related costs  –    –    –    22    –    –    –    22   
CORE HEADLINE EARNINGS ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT  368    303    273    233    41    41    682    577   
SUMMARISED STATEMENT OF FINANCIAL POSITION                                          
AT 30 SEPTEMBER                                         
ASSETS                                         
Cash and cash equivalents  677    608    168    161    55    175    900    944   
Loans and advances  9 026    7 872    566    584    –    –    9 592    8 456   
Purchased book debts  –    –    1 374    891    –    –    1 374    891   
Other assets  2 036    1 438    1 426    1 297    14    18    3 476    2 753   
TOTAL ASSETS  11 739    9 918    3 534    2 933    69    193    15 342    13 044   
LIABILITIES                                         
Bank overdrafts  116    136    –    –    –    –    116    136   
Interest-bearing liabilities  8 333    6 879    1 107    968    377    344    9 817    8 191   
Group loans**  1 170    1 164    238    107    (1 408)   (1 271)   –    –   
Other liabilities  482    408    698    501    36    36    1 216    945   
TOTAL LIABILITIES  10 101    8 587    2 043    1 576    (995)   (891)   11 149    9 272   
TOTAL EQUITY  1 638    1 331    1 491    1 357    1 064    1 084    4 193    3 772   
* Group executive office numbers are presented net of group consolidation entries.
** Of SA Taxi's group loans of R1 170 million at 30 September 2018 (2017: R1 164 million), R479 million (2017: R400 million) are not permanent facilities. The remaining R691 million (2017: R764 million) group loans are subordinated debt facilities with fixed repayment terms. TCRS' total group loans of R238 million (2017: R107 million) are not permanent facilities.

DIVISIONAL REVIEWS

GROUP PORTFOLIO MIX
CORE HEADLINE EARNINGS ATTRIBUTABLE TO GROUP 2018
Rm
  2017
Rm
  2018
Growth
 
SA Taxi 368   303   21%  
TCRS 273   233   17%  
Group executive office 41   41   0%  
TOTAL 682   577   18%  
CORE HEADLINE EARNINGS PER SHARE (CENTS) 111.7   96.4   16%  
COMPOSITION OF EARNINGS  
COMPOSITION OF EARNINGS 2018 COMPOSITION OF EARNINGS 2017
 
For details on SA Taxi's strategic and operational highlights, market context, performance since listing and business activities, see SA Taxi's divisional review.
SA TAXI

SA Taxi is a vertically integrated business platform, providing a comprehensive financial, insurance and allied services offering to minibus taxi operators. The division offers a unique blend of vehicle procurement, retail, repossession and refurbishment capabilities with asset-backed developmental finance and insurance specifically designed for the minibus taxi industry.

      For the year ended 30 September  
      2018   2017   Movement  
FINANCIAL PERFORMANCE                
Headline earnings attributable to the group Rm   368   303   21%  
Non-interest revenue Rm   540   427   26%  
Net interest income Rm   979   885   11%  
Net interest margin %   11.0   11.4      
Cost-to-income ratio %   47.6   48.6      
CREDIT PERFORMANCE                
Gross loans and advances Rm   9 402   8 303   13%  
Non-performing loan ratio %   17.7   17.1      
Credit loss ratio %   3.3   3.2      
 
For more detail on the terms of the transaction, see the SENS announcement released on 19 November 2018 (available at http://www.transactioncapital. co.za/SENS. php).

In addition, details on the commercial and financial benefits of the SANTACO transaction are included in the Q&A with David Hurwitz, CEO and the Q&A with Terry Kier, SA Taxi CEO.
Ground-breaking ownership transaction and initiatives with SANTACO

SA Taxi and SANTACO have engaged over several years to formalise the industry’s participation in revenue streams of the minibus taxi industry value chain, and to achieve meaningful and sustainable commercial benefits for industry participants. This supports the viability of minibus taxi operators’ businesses and, in turn, their ability to repay loans and afford insurance premiums.

This relationship has deepened considerably in recent years, culminating in a unique and transformational ownership transaction that formalises SA Taxi’s relationship with SANTACO. Via a subscription for new shares to the value of R1.7 billion, SANTACO will acquire a 25% interest in SA Taxi. Proportional ownership, allocated to SANTACO and a trust representing its broad-based provincial structures, will ensure that the economic benefits of this investment accrue to all levels.

Of the total future dividend flows, 90% will be applied to reducing debt with 10% flowing to the industry from the outset, to be administered and allocated according to a predetermined charter. This dividend income will support relevant infrastructure and other developmental projects designed to create sustainable value for minibus taxi associations, operators, commuters and other stakeholders. Partnerships with local government will be sought to leverage this investment in infrastructure for greater socio-economic impact.

Of the R1.7 billion subscription price, R1.2 billion will be funded by Standard Bank of South Africa and Futuregrowth Asset Management, with the remainder facilitated by SA Taxi in the form of vendor funding. SA Taxi will use approximately R1 billion of the net proceeds of R1.2 billion to settle interest-bearing external and shareholder debt, with the remainder retained by SA Taxi to fund growth.

The financial benefit of the transaction (improved net interest margins from lower leverage and interest expense savings) and the operational benefits of a stronger and enhanced relationship with SANTACO are significantly accretive to SA Taxi’s earnings over the medium term and are expected to support higher growth rates.

This capitalisation of SA Taxi’s balance sheet increases its net asset value by approximately R1.2 billion, which will reduce gearing significantly and position SA Taxi strongly for its next wave of organic growth. Growth will be funded predominantly by more efficiently priced senior debt. Despite the capitalisation, accretive earnings growth over the medium term will enable SA Taxi to generate a return on equity of about 20%.

The vendor finance made available by SA Taxi will result in Transaction Capital consolidating 81.4% of SA Taxi's earnings. Although Transaction Capital's proportionate share of SA Taxi's earnings will be smaller, earnings are expected to increase due to the settlement of debt. Seen together with the operational benefits expected from greater alignment with the minibus taxi industry, this ground-breaking transaction is expected to be earnings accretive to the group over the medium term.

Vehicle financing

SA Taxi’s loans and advances portfolio, comprising 30 617 vehicles, grew 13% to R9.4 billion. Growth of 7% in the number of loans on book and the increase in minibus taxi prices supported this result. Focussed loan origination strategies resulted in higher credit quality, with 75% of loans originated in better risk categories, and repeat loans to existing clients increasing to approximately 31% from 26% a year ago.

Net interest income grew 11% to R979 million. Effective capital management kept SA Taxi’s net interest margin at 11.0%, despite a marginal increase in the cost of borrowing. The risk-adjusted net interest margin remained robust at 7.7%. The credit loss ratio increased marginally to 3.3% and remains at the bottom end of the division’s risk tolerance of 3% to 4%. This increase was partly due to SA Taxi electing to dispose of a portion of repossessed vehicles via auction or salvage as opposed to refurbishment and refinance. The difficult economic conditions combined with high minibus vehicle prices and escalating fuel costs, resulted in an increase in SA Taxi’s non-performing loan ratio to 17.7%.

A marginally higher non-performing loan ratio, offset by the reduced average cost to refurbish repossessed vehicles and higher recoveries on the resale of these vehicles, resulted in the division reducing provision coverage to 4.0%. At this level, SA Taxi’s after-tax credit loss remains covered at 1.7 times.

 
For further detail on funding initiatives during the year, see the Q&A with Mark Herskovits, executive director: capital management.

SA Taxi’s funding requirements for the 2019 financial year are secured, with a diversified funding base of 44 distinct debt investors. The business continues to balance the cost of international debt against the benefit of diversified funding.

Vehicle retail

SA Taxi’s retail dealership, Taximart Dealership, sells new and pre-owned minibus taxis, with turnover of about R800 million a year. Its vertically integrated business model enables SA Taxi to rebuild high quality income-generating pre-owned minibus taxis that give operators a more affordable alternative to purchasing new vehicles.

Loans originated through SA Taxi’s dealership perform better from a credit performance perspective and provide SA Taxi with the opportunity to earn product margin and insurance revenue. Within its dealership, SA Taxi limits unnecessary charges and add-ons to vehicles that add no incomeproducing value, making vehicles more affordable.SA Taxi is expanding its dealership network and opened a dealership in Polokwane during October 2018. Additional dealerships are being considered.

Vehicle insurance

SA Taxi’s insurance business is the main driver of non-interest revenue, growing faster than the vehicle financing business. In 2018, the division’s gross written premium grew 23% to R687 million, supported by broadening its client base and product offering. SA Taxi’s credit life portfolio grew strongly as it continued to extend its client base. On average, SA Taxi’s insured clients each have two SA Taxi insurance products, with the launch of new products planned.

More than 85% of SA Taxi’s financed clients are insured by SA Taxi, with the remainder insured by other reputable insurers. To grow its base of open market insurance clients (that is, insurance clients not financed by the division), SA Taxi initiated its broker network strategy during 2018, with more than 100 brokers participating. Take-up rates are steadily improving, with the number of insurance clients up 10% from the prior year. Annualised new business premium grew to R349 million for the year (2017: R283 million).

Claims ratios improved further as the proportion of insurance claims processed via SA Taxi’s combined autobody and mechanical refurbishment facility continued to grow.

SA Taxi’s insurance operation is consolidated in accordance with IFRS.

Autobody repair, mechanical refurbishment, salvage and parts procurement and distribution

SA Taxi’s autobody repair and mechanical refurbishment facility is designed to reduce the cost of insurance claims and lower credit losses in the event of repossession. Enhancing the value of repossessed vehicles through a high quality but efficient refurbishment process enables SA Taxi to recover more than 73% of loan value on the sale of repossessed vehicles.

Despite a weaker Rand causing inflationary pressure on spare part costs, the average cost to refurbish repossessed or insured vehicles reduced further in the year, due in part to greater efficiency in SA Taxi’s focussed refurbishment facility.

SA Taxi established its own parts procurement and distribution, and vehicle salvage operation in March 2018, called Taxi Auto Parts (TAP). Via TAP, SA Taxi is able to import quality parts directly at a lower cost and distribute these to SA Taxi’s own refurbishment centre, as well as its network of preferred external autobody repairers.Through TAP, SA Taxi is also able to optimise the salvage value of vehicles.

Apart from reducing the credit loss and insurance claims ratios, TAP benefits taxi operators by supplying them with well-priced vehicle parts, ultimately managing insurance premiums, reducing the cost of claims and reducing credit shortfalls in the event of repossession.

Conclusion

SA Taxi’s operational, credit and financial performance remains robust. This is evident in: 13% growth in gross loans and advances, net interest margins at 11.0% and good credit performance in a challenging environment; 26% growth in non-interest revenue from insurance products, vehicle sales and telematics services now comprising 36% of SA Taxi’s revenue after interest expenses (2012: 26%); and significant operational leverage via the improvement in the cost-to-income ratio to 47.6% (2017: 48.6%). This supported 21% growth in headline earnings to R368 million for the year.

FINANCIAL PERFORMANCE CREDIT PERFORMANCE
FINANCIAL PERFORMANCE CREDIT PERFORMANCE
 
For details on TCRS' strategic and operational highlights, market context, performance since listing and business activities, see the TCRS divisional review.
TRANSACTION CAPITAL RISK SERVICES

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, combined with its technology and proprietary data, enables it to mitigate risk and maximise value for clients throughout the customer engagement lifecycle.

      For the year ended 30 September  
      2018   2017   Movement  
FINANCIAL PERFORMANCE                
Core headline earnings attributable to the group Rm   273   233   17%  
Non-interest revenue Rm   1 837   1 485   24%  
PURCHASED BOOK DEBTS                
Price of purchased book debts acquired Rm   662   356   86%  
Purchased book debts Rm   1 374   891   54%  
Estimated remaining collections (120 months) Rm   2 989   1 867   60%  
Collection services

Acquisition of non-performing loan (NPL) portfolios as principal

In South Africa, the economic climate and TCRS’ data, scale and capital position favour the acquisition of NPL portfolios from risk averse clients who prefer an immediate recovery against their NPLs. Activity in this sector was higher than in the 2017 financial year, with opportunities to purchase loan portfolios emanating from traditional lenders, credit retailers, municipalities and state-owned enterprises.

Whereas TCRS historically focussed on acquiring portfolios of written-off unsecured retail debt, it has extended its focus to non-performing consumer portfolios in alternative asset classes such as secured loans, debt review portfolios and consumer debt prior to write-off, with the latter typically not sold on a public auction basis.

In South Africa, TCRS acquired 33 portfolios with a face value of R13.4 billion for R639 million during the 2018 financial year and Recoveries Corporation in Australia invested a further R23 million in portfolios during the period. At 30 September 2018, TCRS owned 239 principal portfolios with a face value of R22.4 billion, valued at R1.4 billion, up 54% from R891 million a year ago. Estimated remaining collections grew to R3.0 billion, up 60% from R1.9 billion a year ago, which will underpin future performance.

TCRS continues to be cautious as it seeks to apply its analytics, pricing expertise and capital raising capabilities to the selective purchase of NPL portfolios in Australia. Although the debt collection market is highly fragmented, it is estimated that NPL portfolios are acquired annually for an aggregated purchase consideration of AUD600 million, many times larger than the South African market, giving some indication of the growth opportunity for TCRS in this market.

TCRS grew revenues in this segment organically by 22%.

Contingency and fee-for-service (FFS) revenue

TCRS’ strategy to diversify geographically, deepen its penetration in its traditional market segments (banks, retailers and specialist lenders) and grow revenue from adjacent sectors (insurance, telecommunications and public sectors) supported its organic earnings growth.

In South Africa, adjacent insurance, telecommunications and public sectors contributed 38% of TCRS’ local contingency and FFS revenue, compared to 27% in the prior year. In addition to these strategies, TCRS is continually assessing opportunities for bolt-on acquisitions to enter adjacent sectors and penetrate new product types.

Recoveries Corporation in Australia made excellent progress in achieving its strategic imperative of driving operational efficiencies by deepening management competence and overlaying TCRS’ technology and business information capabilities. With the operational integration substantially complete, the business is expected to yield an enhanced return on future revenues. On a like-for-like basis, Recoveries Corporation’s revenue was in line with expectations, supported by a broad client base in the insurance (23%), telecommunications and utilities (12%), banking and commercial (32%), and public (33%) sectors.

Although Recoveries Corporation is still a small component of TCRS, it continues to diversify the division’s contingency and FFS revenue. For a relatively small initial investment, the opportunity to gain a deep understanding of the Australian collections industry and participate in emerging opportunities is proving meaningful. In addition to achieving operational leverage, growth opportunities include bolt-on acquisitions of specialist collectors and the selective purchase of NPL portfolios.

TCRS grew revenues in this segment by 19%.

Transactional services

The transactional services business includes Transaction Capital Payment Solutions and Transaction Capital Business Solutions (TCBS). Management is exploring progressive fintech and payment technologies to create future opportunities, including the development of an online client portal and technology-based origination platform. Cognisant of higher risk in the small and medium-sized enterprises (SME) lending environment, TCBS remains disciplined, intentionally curbing book growth to maintain risk tolerance and ensure high-quality earnings from its SME lending activities.

Value-added services

Acquired in December 2016, Road Cover has been fully integrated and performed to expectation. The growth prospects of this business, including the application of data and analytical skills to augment the Road Cover offering, are encouraging.

Data and technology

Technological and operational enhancements initiated in 2016 and implemented throughout 2017 and 2018, including the optimisation of the dialer and workforce management, have resulted in higher productivity and lower operating costs. On a like-for-like basis, excluding recently acquired businesses, TCRS’ cost-to-income ratio improved to 76.8%, compared to 77.3% in the prior year.

TCRS continues to explore the implementation of new technologies, including artificial intelligence technologies. Changing demographics, increased smartphone penetration and increased access to and reducing cost of data are driving changes in consumers’ preferred method of communication to non-voice channels.

In addition, TCRS is expanding and enriching its database of South African consumers, which now includes performing and non-performing credit-active consumers.

Conclusion

Strong growth in revenues from principal collections of acquired non-performing consumer portfolios and contingency and FFS revenue supported core headline earnings growth of 17% to R273 million for the year. Future performance is well underpinned with the fair value of purchased book debts and estimated remaining collections growing by more than 50%.

FINANCIAL PERFORMANCE
FINANCIAL PERFORMANCE
1. Core EBITDA (including Transaction Capital Business Solutions).
2. Excluding the effect of acquisitions.
GROUP EXECUTIVE OFFICE

The executive office added R41 million to the group’s headline earnings for the year through the efficient management of the R650 million of excess capital. Post the ownership transaction with SANTACO, the group executive office’s balance sheet will be free of debt with approximately R1 billion of excess cash, positioning the group for growth.

DIVIDEND POLICY AND DECLARATION

Following the interim dividend of 21 cents per share (2017 interim: 15 cents per share), and in line with the stated dividend policy of 2 to 2.5 times, the board has declared a final gross cash dividend of 29 cents per share (2017: 25 cents per share) for the six months ended 30 September 2018. Total dividend cover for the financial year was 2.2 times.

ACCOUNTING POLICIES AND ESTIMATES

Transaction Capital’s objective is to ensure that appropriate, understandable and sustainable accounting policies are adopted and implemented, and aligned to 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.

AUDIT REPORT

The auditors issued an unmodified audit opinion for the financial year. Refer to the 2018 annual financial statements.

APPRECIATION

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 operational performance.