Integrated Annual Report

With David Hurwitz




We have refined our business model over the last 20 years and proven its effectiveness in generating attractive risk-adjusted returns from carefully identified credit-orientated alternative assets. The strong growth of our business platforms, which manage these assets, has significantly increased their value, adding capital appreciation to the total return delivered to our shareholders.

An important contributor to Transaction Capital’s success has been the hands-on involvement of the group’s founders, who individually remain among our largest single shareholders. This has become part of the group’s DNA; as an active shareholder, we are highly engaged in the strategic positioning of our businesses and the development of their growth strategies. We continue to identify and acquire new credit-orientated assets within the specialised asset classes that continue to be our focus, to drive future earnings growth — which is the basis for shared value.

The ability of our business platforms to grow consistently and return value to our shareholders is rooted in highly competitive value propositions that support their customers’ profitability (commercial value). This is significantly enhanced by the value they create for their stakeholders more broadly; by focusing on under-served market segments and contributing to the effective functioning and sustainability of their respective industries, our business platforms are positioned as socially relevant (social value). This concept of delivering shared value is a key consideration in operationalising the group’s business model, and in the relevance and resilience of our business platforms.




SA Taxi’s core competency at inception was in providing bespoke finance to minibus taxi operators through SA Taxi Finance. A high degree of specialist skill is required to accurately assess, mitigate, underwrite and price the credit risk associated with these loans, so we identified a highly specialised management team to run the business. Over the years, this team has co-invested in SA Taxi, reflecting their entrepreneurial character.

Working closely with the management team, we expanded the platform to include SA Taxi Direct (our retail division that procures and sells new and refurbished minibus taxis), followed by SA Taxi Auto Repairs (our autobody and mechanical refurbishment facility – which plays an instrumental role in managing credit losses in the event of default and repossession). SA Taxi Auto Repairs rebuilds pre-owned minibus taxis efficiently to a high quality, and SA Taxi Direct sells these reliable pre-owned vehicles, providing an affordable alternative to new vehicles for operators seeking lower finance instalments. This enhances the value of repossessed vehicles, enabling SA Taxi to recover more than 75% of the loan value given repossession. In addition, this vertical integration along the minibus taxi value chain served to enhance SA Taxi’s service offering to customers, and diversified its revenue model and earnings base.

SA Taxi’s analytics expertise and proprietary database, supported by a sophisticated telematics network, is another key competitive advantage for SA Taxi Finance, providing data insights that are applied to reduce credit risk, underwrite credit and inform collection and repossession strategies.

The next iteration of development for SA Taxi came from the realisation that we could leverage these competencies in another segment of the minibus taxi value chain – by providing insurance to minibus taxi operators using SA Taxi’s data to inform the pricing of insurance premiums, and accident prevention and detection. Further, lowering the cost of insurance claims is a competitive advantage as the auto repair work relating to a portion of our insurance claims is done internally by SA Taxi Auto Repairs. This allows SA Taxi Protect to offer competitively priced premiums to its customers.

In SA Taxi Protect (our minibus taxi insurance business), we grew a team of insurance specialists within the business who already understood the minibus taxi industry. We built a portfolio and enhanced our data capabilities to mitigate insurance risk. (It is worth noting that each new segment we penetrate in the minibus taxi value chain enriches our data advantage across all our businesses.) SA Taxi Protect has achieved substantial growth by developing new insurance products for minibus taxi operators and expanding its addressable market beyond clients financed by SA Taxi Finance. These open market clients are acquired via its established and growing broker network.

The most recent addition to SA Taxi’s service offering has been SA Taxi Auto Parts, launched last year. SA Taxi Auto Parts started by importing parts directly from manufacturers to lower the cost of repair in SA Taxi Auto Repairs. It moved into retailing these parts directly to the industry soon after that, including new and refurbished quality checked parts salvaged from repossessed or written-off vehicles that are uneconomical to repair. Besides extending SA Taxi’s service offering to its customers, this vertical integration reduces the cost of repair with knock-on benefits to SA Taxi Finance’s credit loss ratio and SA Taxi Protect’s claims ratio.

In this systematic way, SA Taxi has built a strong market position in an industry that is highly resilient and performs a critical function in South Africa’s national transport system. SA Taxi’s credibility in the industry was certainly the basis on which we were able to originate and conclude, on 6 February 2019, the first-of-its-kind ownership transaction with SANTACO.

With SANTACO as a strategic partner, SA Taxi gains a first-hand understanding of the industry – insight that is already being applied to developing highly bespoke and competitive new products. This stands to deepen SA Taxi’s relevance in the minibus taxi industry even further, and is an exciting next phase in its growth story. We are excited to demonstrate the full extent of the shared value this transformative partnership can create for the minibus taxi industry.

  See the Q&A with Terry Kier, SA Taxi CEO for details on the benefits of the ownership transaction with SANTACO.




Most importantly, the benefits of SA Taxi’s strategic partnership with SANTACO exceeded our expectations of what could be achieved in so short a time. The expected financial benefits of the ownership transaction, in improved net interest margins from lower leverage and interest expense savings, combined with the almost immediate operational benefits of the partnership with SANTACO, boosted SA Taxi’s operational and financial performance in the year.

SA Taxi Finance grew its loans and advances portfolio significantly. Strong financing of SA Taxi’s pre-owned minibus taxis, which increased to an average of about 220 units per month (from about 150 per month last year) supported this result. Our consistently conservative credit granting criteria and strong collection performance buffered the impact of the difficult economic conditions on customers’ ability to service their loans, keeping our NPLs and credit loss ratio in line with our expectations.

SA Taxi Direct experienced strong sales in the pre-owned minibus taxi segment, driven by SA Taxi’s reputation for providing reliable pre-owned vehicles, which provide an affordable alternative to new vehicles for operators seeking lower finance instalments and insurance premiums.

On average, SA Taxi Protect kept its premiums stable. As I have explained, its ability to reduce its cost of claim through SA Taxi Auto Repairs and SA Taxi Auto Parts supports competitively priced premiums. The 20% increase in gross written premium recorded for the year was realised mostly through new customer acquisition, mainly in the open market, and from the sale of new insurance products.

Sales in SA Taxi Auto Parts exceeded our expectations. Pleasingly, around half of its clients are not existing finance or insurance clients of SA Taxi, which demonstrates the success this business has had in broadening its total addressable market and cross-selling to new clients.

SA Taxi Rewards also made good progress, launching a new partnership with Bridgestone to provide custom designed and more cost-effective tyres that will enhance both the profitability of minibus taxi operators and the safety of their vehicles.

SA Taxi invested around R100 million in different technology systems this year, including an insurance claims administration system and a stock management system. These systems were implemented on time and within budget, and are working well. Investment into technology has continued, including implementing a front-end credit assessment system and a loan management system.

  See the Q&A with Terry Kier, SA Taxi CEO for more detail on SA Taxi's operational performance.
  See the CFO's report for details on SA Taxi's financial performance.




The new strategic springboard established through SA Taxi’s partnership with SANTACO will support good earnings growth, at least over the medium term.

The drivers of this growth will be our fast-growing finance and insurance businesses. SA Taxi Finance should sustain mid-teen growth in gross loans and advances, with the trends seen in 2019 expected to continue. SA Taxi Protect will grow its gross written premium by continuing to broaden its product offering and expanding its client base through its broker network. There is still scope to improve its insurance claims ratio and credit losses via technology, data management and predictive analytics, along with procurement and operational efficiencies in SA Taxi Auto Repairs and SA Taxi Auto Parts.

SA Taxi Auto Parts and SA Taxi Rewards will support a broader earnings base in the medium term and beyond. While earnings from SA Taxi Auto Parts and SA Taxi Rewards are currently a small component of non-interest revenue, both businesses are growing and are set to become meaningful contributors from 2021 onwards.

We expect SA Taxi’s recent investment in technology to support further operational efficiencies, and we will consider additional investments over the medium term to enhance its operational resilience in economic conditions that show little sign of improvement.




The same iterative process of asset growth and business development informed TCRS’s entry into the Australian debt collection market in 2016. TCRS in South Africa has, over the last 20 years, developed a market-leading business in the collection of NPL portfolios. We identified that this specialist skill could be largely replicated and tailored to the Australian collections market, which is concentrated in this asset class but significantly larger than the South African market.

In Australia, we identified a privately owned business with a 25-year track record of collecting unsecured consumer claims as an agent in various sectors. Recoveries Corporation, an owner-managed business with a strong entrepreneurial management team, was an excellent strategic fit for TCRS. The business was under-invested in technology and management capability, and did not have the capital to invest in acquiring NPL portfolios as principal, which forms the major part of the Australian collections market. Our relatively small initial investment in acquiring this business gave us a foothold in the market and the opportunity to gain a deeper understanding of the Australian collections industry.

We’ve worked closely with the business to develop greater management depth, and have invested in technology, data and business information systems, proven in South Africa, to drive operational efficiencies and growth. We’re currently assessing the viability of outsourcing certain functions to our South African low-cost centre of excellence in an ongoing pilot project.

Underpinned by our growing Australian database and the technology, analytics and pricing expertise we established in the business, Recoveries Corporation is now cautiously and selectively acquiring NPL portfolios as principal. This represents a significant medium-term opportunity for TCRS to grow and diversify Recoveries Corporation’s earnings base.

  See the Q&A with David McAlpin, TCRS CEO for details on progress in Australia.

The latest development in TCRS’s growth story has been to establish TC Global Finance to pursue credit-orientated asset growth in select international markets. We believe that specific niches in the fragmented distressed debt and specialised credit market in Europe, which is many times larger than the South African and Australian markets, presents a compelling growth opportunity.

Transaction Capital’s founders, in their personal capacity, have been investors in the global distressed debt and specialised credit market for many years, particularly in Europe. Their direct involvement in this opportunity, alongside TCRS, has enabled a low-risk entry into these selected niches of the European market and provided us access to their network of specialist credit managers in this region.

It is important to reiterate, as we have done in our engagement with investors, that we do not intend to pursue the larger and more concentrated segment of the European distressed debt and specialised credit market, which represents unacceptably high risk for insufficient returns. This segment is highly competitive, dominated by large players with access to cheap capital and leverage, deployed for moderate returns.

Instead, TCRS will focus on acquiring a highly selective and diversified portfolio of specialised credit-related alternative assets with the potential for higher yields. Initially, these assets will be accessed through and managed by specialist credit managers in Europe who co-invest with TC Global Finance. Over time, we will consider direct acquisitions through bilateral transactions.

This strategy is giving Transaction Capital and our shareholders unique access to attractive niche opportunities in a very large market, without concentration risk in any particular portfolio, asset class, asset originator, collection platform or geographic market. Our entry into the European specialised credit market has required no initial investment in goodwill and we have not had to incur the costs or risks of business integration. TCRS has invested €2.7 million to date, with €1.4 million of this amount invested after our financial year end. Initial returns have been in line with our expectations and on this basis, we have allocated a portion of our undeployed capital to this strategic growth initiative.

  See the Capital management report for details on capital allocation to strategic growth initiatives.

Although the capital earmarked for this growth opportunity is small in proportion to the group’s asset base, it will diversify TCRS’s earnings base further and we expect it to continue generating low double-digit hard currency risk-adjusted interest returns. For a relatively small initial investment, the benefit of gaining a deeper understanding of the international credit-oriented alternative assets sector, with the potential to participate in emerging opportunities, is meaningful.

TCRS’s deep skills in specialist credit, especially its analytics and pricing expertise, in combination with its operational scale, is proving credible in identifying, investigating and negotiating with our European counterparts. TCRS’s operational platform in South Africa is large by European standards and, in time, we believe the potential exists to leverage its high-IP, lower-cost services (including our best-of-breed technology and back-end processing) to support our European partners, as we have done in Australia.

Over the medium term, in line with our business model, we will consider the merit of building our own business platforms to manage our credit-orientated asset portfolios in Europe, by partnering with entrepreneurial owners and management teams to grow these businesses to scale.




In collection services, TCRS’s business activities are diversified across sectors, clients and geographies, which lowers concentration risk. This supported a good performance and returns in very tough market conditions in South Africa. This business segment delivered excellent revenue growth, with the collection of NPL portfolios acquired as principal performing better than we expected and offsetting the impact of the slowdown in contingency and FFS collections.

In a considerably easier market environment, the Australian collections business outperformed our expectations. As I’ve mentioned, TCRS is deploying technologies proven in South Africa in its Australia operations, and this delivered higher productivity, effectiveness and efficiency, and lower operating costs per activity in the year. In the transactional services and value-added services segments, however, our businesses felt the pain of the operating environment in South Africa. Despite this, Transaction Capital Payment Solutions and Road Cover both managed to contribute positively to earnings growth.

The increasing risk in the small- and mediumsized enterprise (SME) sector in South Africa has forced Transaction Capital Business Solutions (TCBS) to proactively curb its extension of credit to the sector, which has affected growth in gross loans and advances since the second half of 2018. TCBS has been clustered with TC Global Finance within Transaction Capital Specialised Credit, which will focus on deploying capital in specialised credit markets, as I have described.

  See the CFO's report for details on TCRS's financial performance.




TCRS’s existing NPL portfolio, which will deliver predictable annuity revenue growth, will underpin its future performance. In the coming financial year, we expect the acquisition of NPL portfolios to be at least in line with activity in 2019. In South Africa, the economic climate and higher levels of credit extension (reported by the National Credit Regulator) will support this expectation. In Australia, TCRS will continue to establish a more meaningful position in the Australian NPL portfolio market, and we have allocated a portion of our undeployed capital to support this strategic growth initiative.

Expanding and enriching its database and ongoing investment in new technologies should enable TCRS to deliver even higher productivity and operational efficiencies, particularly in its Australian operations. Given the smaller relative size of the Australian business, it stands to benefit from enhanced efficiencies as we grow this platform to scale. We will continue to assess the pilot project to outsource certain functions in our Australian business to our South African low-cost centre of excellence. We believe this has the potential to deliver further efficiencies and revenue growth, in addition to providing a scalable platform for third-party offshoring solutions.

In the medium term, TC Global Finance will complement TCRS’s organic growth opportunities in the fragmented segment of the European distressed debt and specialised credit market. Our deployment of capital in this market will be patient and cautious. We expect this venture to make a small contribution to earnings in the 2020 financial year, becoming more meaningful from 2021 onwards. As we have said in our announcements to the market, the pace and progression of this opportunity will depend on the risk-adjusted returns we achieve on the initial investments we make.

With its strong balance sheet, TCRS will continue to assess opportunities for complementary bolt-on acquisitions in adjacent sectors in both South Africa and Australia.




The group’s strong balance sheet provides the financial capacity and strategic flexibility to fund the organic and acquisitive growth opportunities I have outlined. We expect the group to deliver organic earnings over the medium term in line with the group’s past performance. This assumes no investment acquisitions, which if achieved, may present further upside in earnings growth. Of course, although our businesses are both highly resilient, any upturn in South Africa’s economic growth trajectory could also mean upside potential for our growth expectations in the next three to five years.

The strategic progress we’ve made in the last year should give our stakeholders confidence in the group’s ability to continue applying our business model in new avenues for growth, to sustain our trajectory of delivering good commercial returns and positive social impact in our markets.