Integrated Annual Report
2020

with DAVID HURWITZ / CEO


How has the impact of the COVID-19 crisis affected Transaction Capital’s impressive long-term growth trend?

  • Like most businesses across the world, COVID-19 subdued the group’s performance in the 2020 financial year, interrupting our long-term growth trend and our proven track record for financial outperformance.

    Prior to the impact of COVID-19, the group was on track to deliver earnings growth in line with our past performance. However, the impact of
    COVID-19 on our results was significant. Our conservative approach to modelling credit impairment charges in SA Taxi and adjustments to the carrying value of purchased book debts in TCRS meant they were much higher than historical periods. It is important to note, though, that these non-cash adjustments to the anticipated impact of COVID-19 on future cash flows will protect our balance sheet as the pandemic runs its course.

    SA Taxi and TCRS have shown remarkable resilience in their agile responses to the volatile dynamics accompanying the pandemic. Their operational, financial and strategic flexibility allowed them to quickly align their operating models, financial structures and growth plans to prevailing economic realities and emerging opportunities. The group’s swift responses to the impacts of the pandemic underpinned this decisive recovery and also enabled significant strategic progress in the year.

    One thing is certain, the business models of both our divisions have gained relevance in a post-COVID-19 environment. With operational activity in many instances now nearing prelockdown levels, they are both well placed to return to their long-term track records for growth in the coming financial year.


How has the pandemic changed operating conditions for the minibus taxi industry?

  • Rather than changing the structural factors that support the minibus taxi industry’s defensive character, the crisis confirmed just how indispensable the industry is to South Africa’s economic productivity. It remains the largest and most vital component of the country’s integrated public transport network.

    Importantly, the industry does not receive government subsidies like other forms of public transport, specifically bus and rail services, which have floundered in recent years. In contrast, the minibus taxi industry is transitioning closer to normal operational activity as restrictions ease and the economy reopens. With most commuters choosing to use minibus taxis due to their accessibility, reliability, convenience, flexibility and competitive pricing, the industry has been an early beneficiary of economic and social recovery.

    This is not to say that the socioeconomic environment presents no significant challenges for minibus taxi operators. Lower commuter mobility due to COVID-19, restricted operating capacity and increasing vehicle prices are impacting the profitability of SA Taxi’s clients, despite the moderating effects of lower interest rates, lower fuel prices and fare increases.

    On balance, though, because of the factors I have already outlined and the fact that commuter spend on minibus taxis is non-discretionary, the industry remains particularly defensive. We are confident that SA Taxi’s clients will be able to afford their loan and insurance instalments as the industry’s steady recovery continues.

How has the challenging environment played out in SA Taxi?

  • As noted, SA Taxi’s performance was subdued due to the operational disruptions caused by COVID-19 and more so by the far higher credit provisions it necessitated. The division still managed to grow its core pre-provision profit by 11%, and strong cost control measures supported an improvement in the core cost-to-income ratio to 43.2% (2019: 44.2%).

    SA Taxi’s gross loans and advances book grew 14% to R12.2 billion, supported by the retention of market share and higher retail prices for new vehicles. Restricted repossession and settlement activity due to COVID-19 slowed the attrition rate, which resulted in gross loans and advances growing despite the number of loans originated declining by 27%. Repossession activity returned to normal by September 2020. Collections recovered to around 85% of pre-COVID-19 levels by September 2020, with collections expected to normalise by January 2021.

    Non-interest revenue was up 4%, driven by 10% growth in gross written premiums, albeit offset by higher lapse rates due to COVID-19. Lower minibus taxi sales further dampened non-interest revenue, with constraints on the supply of new and pre-owned minibus taxis coming to the market, and the closure of SA Taxi Direct, SA Taxi Auto Parts and SA Taxi Repairs for more than two months of the year. Higher vehicle prices partly offset the decline.

    Clients financed by SA Taxi are required to have fully comprehensive insurance, and most of SA Taxi Finance’s clients continued to choose SATaxiProtect. Premiums in the insured and financed portfolio remained stable, but reduced in the open market portfolio (insurance clients not financed by SA Taxi Finance) and increased marginally in other insurance products. Claims and cost ratios remained stable.

    In consultation with the industry, SA Taxi was quick to provide a relief programme for all clients in good standing, allowing them to defer the repayment of their loan instalments and insurance premiums during April 2020. Additional payment relief was provided to approximately 3 000qualifying clients (mainly operators of long-distance routes) for May and June 2020. In total, these relief measures amounted to approximately R400 million. SA Taxi also spent around R9 million on initiatives to protect the health and safety of operators and commuters, supporting the industry’s effort to curb the spread of COVID-19.

With activity nearing pre-COVID-19 levels, what are SA Taxi’s prospects for the years ahead?

  • As the industry consolidates its recovery, SA Taxi’s strong market position, track record as an industry pioneer and vertically integrated business model positions it well to serve clients along the full minibus taxi value chain. We believe SA Taxi is well positioned to resume its long-term track record of double digit percentage earnings growth using 2019 as the base. The division has ample liquidity in the form of undrawn facilities to cover funding requirements for loan originations well into 2022.

    Also, demand for both new and pre-owned vehicles remains far higher than supply. Qualifying applications approved prior to COVID-19 were more than three times higher than the loans taken up, and this has again been the case from June 2020. As vehicle supply recovers to pre-COVID-19 levels (expected by the end of January 2021), the recovery in the number of loans originated should follow suit, despite SA Taxi tightening its credit criteria.

    SA Taxi’s strategy to drive the sale and finance of its fully refurbished pre-owned minibus taxis continues to enjoy strong momentum. In the challenging economic environment, operators are opting for this affordable yet reliable alternative to buying a new vehicle. SA Taxi is committed to keeping the prices of its pre-owned minibus taxis as affordable as possible – now more than 10% lower than a new vehicle. The increased refurbishment capacity at SA Taxi Auto Repairs will support higher pre-owned vehicle supply to our dealerships and, in turn, loan originations.

    SA Taxi’s vertically integrated business model effectively mitigates credit risk. Its ability to refurbish repossessed vehicles to provide high-quality income generating minibus taxis enables it to recover more than 75% of the loan value on the sale of these pre-owned vehicles. This limits SA Taxi’s loss in the event of default. Improved recoveries on repossessed vehicles, attributable to a lower average cost to refurbish them, are due to efficiencies in SA Taxi Auto Repairs and SA Taxi Auto Parts’s cost-efficient procurement of parts. This will continue to support the recovery of the credit loss ratio. Higher new vehicle prices will also support the prices of pre-owned vehicles, further improving credit recoveries.

    SA Taxi Protect’s competitive advantage is its ability to reduce its cost of claim through efficiencies in SA Taxi Auto Repairs and SA Taxi Auto Parts, which supports competitively priced insurance premiums. The development of other bespoke insurance products for the industry remains a strategic imperative.

    SA Taxi will continue to assess opportunities for further vertical integration, to broaden its addressable market and support future organic growth. An important growth initiative will be to establish a business that combines its telematics capabilities, rewards programmes, client data and finance offerings into a single transactional account relevant to South Africa’s minibus taxi industry. With the South African National Taxi Council (SANTACO) as a strategic partner, SA Taxi will leverage its unique position in the market to drive growth over the medium term, to the benefit of minibus taxi operators and the broader minibus taxi industry.

Moving to TCRS, how has the division weathered the COVID-19 storm, which has exacerbated an already challenging consumer credit environment?

  • TCRS’s business model is highly defensive, with diversified revenues earned across collection, transactional and value-added services. Further diversification across geography, sectors, clients, mandates and individual consumer accounts deepens this defensiveness. In its most significant business activity of collection services, TCRS acts either as a principal in acquiring and then collecting on NPL Portfolios, or as a service provider on an outsourced contingency or FFS basis. Agency collections thrive in a positive consumer credit environment, while the acquisition of NPL Portfolios is more conducive to a negative consumer credit environment, enabling the division to perform well in varying market conditions.

    Despite the difficult consumer environment, TCRS’s resilience and agility supported an excellent set of results. Collections activity in South Africa and Australia was robust, with collections revenue increasing by 14%. This was all organic growth and supported the 12% increase in core
    pre-provision profit. Recoveries Corporation in Australia managed to maintain earnings growth in line with pre-COVID-19 expectations.

    For the second half of 2020, collections on NPL Portfolios stabilised at around 85% of normal levels, well above expectations communicated to the market at half year. However, we anticipate that future collections will recover slower and over a longer period, to about 96% of pre-COVID-19 levels. This required an adjustment to the carrying value of our purchased book debt, which increased 270% to R588 million. As noted, our conservative approach in modelling this adjustment will protect our balance sheet and ensure that future yields on our existing book aligns with past performance.

    TCRS continued to contact and transact with consumers throughout the lockdown period, enabled by the speed and effectiveness with which
    TCRS implemented its work-fromhome capabilities across all its call centres. This was supported by TCRS’s omni-channel and data analytics capability. The positive response of consumers to non-voice and digital channels, specifically in Australia, supported higher levels of right-party contact and online payments. TCRS also proactively restructured its staff complement and infrastructure in anticipation of the medium-term effects of
    COVID-19.

    Finally, TCRS has the ability to adjust its pricing methodology to the prevailing environment. This ensures that the purchase price paid for future NPL Portfolios can be adequately adjusted to achieve targeted returns and collection multiples. Furthermore, the structure of the business supports higher levels of revenue generation without incurring additional cost.

What are TCRS’s prospects going forward?

  • TCRS’s business model has gained further relevance in a post-COVID-19 environment, characterised by higher unemployment and indebtedness impairing consumers’ ability to repay their debt. This has been referred to as a ‘debt cliff’ in the international markets. TCRS’s clients – banks, insurers, retailers and other consumer-facing entities – are having to manage much larger NPL Portfolios than ever before. As their balance sheets and operations come under pressure, we believe their appetite to sell NPL Portfolios will increase significantly. Also, they are likely to reduce fixed costs and shift to variable cost structures, via outsourced collection services.

    With its sophisticated ability to price NPL Portfolios appropriately for prevailing conditions and extensive collections infrastructure, TCRS is strongly positioned to accelerate the acquisition of NPL Portfolios to be collected as principal and to win agency collection mandates over the medium term. Its value proposition has been further enhanced by the success of its robust work-from-home capability, which has seen increased levels of efficiency and productivity from its call centre agents.

    In the Australian collections market, market participants are experiencing reduced access to funding, increased regulatory compliance, lower sales of NPL Portfolios and a shift towards FFS contracts. Despite these challenges, a small position in this large and fragmented market still provides a meaningful opportunity for TCRS to grow its market share in agency mandates and to accelerate its acquisition of NPL Portfolios.

    The integration of Transaction Capital Payment Solutions, Accsys and Fihrst under TCTS in July 2020 establishes a more focused and substantial payment and transactional services business. As TCTS grows its business to scale, it will be better placed to withstand prevailing market conditions and lift performance.

    We believe the division is well positioned to manage difficult conditions and capture emerging opportunities, braced by its proven operational agility and enduring cash flows. It is also pursuing opportunities to grow services revenue through business process outsourcing and customer service offerings, where TCRS can leverage its leading technology, data and analytics capabilities. TCRS is well positioned to resume its long-term track record of double-figure percentage earnings growth from a 2019 baseline.

A milestone for Transaction Capital this year was its transformational investment in a 49.9% share of WeBuyCars. What motivated the group to undertake this investment in such a challenging environment?

  • In establishing a third adjacent market vertical for the group, the WeBuyCars investment represents an extraordinary opportunity for Transaction Capital to expand its earnings base and accelerate its growth rate in the years to come. Importantly, it was the group’s strong capital position that enabled it to take up this opportunity, employing the excess capital held prior to COVID-19 and the new equity raised during the financial year.

    The investment has been immediately earnings- and valueaccretive, converting interest income on our undeployed capital into operating earnings. Options are available to the group to increase our stake in WeBuyCars to 74.9%.

    WeBuyCars is an exceptional business, with a track record for high-quality predictable earnings and high cash conversion rates proven over two decades. In line with the group’s business model, we have invested in an entrepreneurial founder-led business, with the founders still actively involved and materially invested in delivering on its robust organic growth prospects. WeBuyCars is uniquely positioned in South Africa’s large and resilient used vehicle market, with favourable structural characteristics supporting its resilience in an environment redefined by COVID-19.

    What made us really excited about this investment is that WeBuyCars compares well against its international peer group. Its profitability surpasses these peers, driven by WeBuyCars’s efficient inventory management and effective advertising spend. Its financial performance has also been outstanding: WeBuyCars is a high-growth business that has achieved CAGR in revenue of 62%, earnings before interest, taxes, depreciation and amortisation of 65% and earnings of 58% over four years. And remarkably, it has maintained stable margins over this period of high growth.

    In assessing the WeBuyCars business prior to the investment, it is worth noting that the business matched almost all our stringent acquisition criteria.

    Its competitive advantages include its proprietary data, with around 20 years of price, consumer and other data combined with artificial intelligence (AI) to ensure that vehicles are bought and sold at a fair price. WeBuyCars is also able to flex its pricing according to the value and demand for specific vehicles, which preserves its margins and high stock turn. Its e-commerce platform includes an established business-tobusiness (B2B) platform that transacts with vehicle dealerships, as well as early-stage business-to-consumer (B2C) capabilities that will support its growth in the years ahead as the desire for contactless services on credible digital platforms escalates.

    Finally, WeBuyCars is a well-known, reputable and trusted brand in an industry where trust and customer satisfaction have traditionally been low. Achieved through effective advertising (with spend of more than R100 million a year) and consistently high satisfaction levels among its customers, this is a competitive advantage that should not be underestimated.

What are some of the structural factors driving the growth prospects for WeBuyCars?

  • The used vehicle industry is resilient, defensive and growing, despite South Africa’s economic climate. Due to the impact of COVID-19, consumers’ disposable income is under strain and the weak rand continues to drive up the price of new vehicles. As a result, more consumers are electing to trade down from new to used vehicles; used vehicle sales have increased by 1.7% between 2014 and 2019, while new vehicle sales have reduced by 3.4% over the same period. These factors are amplifying the relevance of WeBuyCars’s business model. Also, we are seeing a strong recovery in used vehicle sales, which have rebounded to pre-COVID-19 levels.

    WeBuyCars’s medium-term target is to increase the volume of vehicles traded to 10 000 vehicles a month. The business is seeking to expand its nationwide footprint with additional vehicle supermarkets and buying pods in selected highdemand locations across South Africa, as well as enhancing its brand awareness through targeted marketing campaigns. Key strategic initiatives include driving higher online penetration, and optimising its vehicle acquisition and stock turn efficiency.

    Currently, financial and insurance (F&I) product margin is earned on 15% of vehicles sold. WeBuyCars estimates that for every 1% increase in penetration, earnings will increase by R9.3 million. As such, driving higher take-up of F&I products stands to enhance unit economics and margins per vehicle sold. The business also plans to enhance existing arrangements with providers of F&I products and to add additional products suited to its market. In the longer term, WeBuyCars aims to offer F&I products to underserved segments as a principal.

Given the relevance of the group’s operating platforms, and the emerging opportunities, which of the group’s strategic growth initiatives will be emphasised going forward?

  • One of Transaction Capital’s strategic imperatives is to grow our earnings base. Primarily, we will achieve this through further vertical integration and expanding the total addressable markets in each of our market verticals – this focus will not change.

    All our divisions have proven organic growth track records, with resilient and agile operations supported by exceptional management and specialist teams. Actions taken to restructure our businesses, which were necessary to support business continuity during the COVID-19 pandemic, will yield significant cost savings going forward. We anticipate that the organic growth initiatives being pursued by the divisions will deliver the results we expect, despite volatile market conditions.

    Our group remains well capitalised after TCRS’s investment into WeBuyCars, with unrestricted access to liquidity to fund our strategic growth initiatives. SA Taxi will continue developing new and relevant products, including its single transactional account targeting South Africa’s 250000minibus taxi operators and bespoke insurance products. The division will also seek to drive higher sales of pre-owned minibus taxis and increase the take-up of insurance products by expanding penetration into the open market. Deploying new technologies stands to drive efficiencies, including in the direct sales model.

    As market dynamics become clearer, TCRS's acquisition of NPL Portfolios in South Africa and Australia to be collected as a principal provide opportunities to accelerate capital deployment for attractive risk-adjusted returns. Also, TCRS’s strategy to acquire non-performing consumer-based loan portfolios in Europe remains valid and will be pursued. The European collections market is many times larger than the South African market and a small position in this market, as in Australia, will provide a meaningful opportunity for the group. We will, however, maintain a selective and cautious approach and the European portfolio will be diversified by asset originator, collection platform and geographical region.
    The intention here is still to co-invest in partnership with specialist credit managers.

    TC Global Finance will continue to drive our strategy to invest in the higher-yielding niche of the European specialised credit market. We will maintain our cautious and selective approach to opportunities in this market, but remain confident that this growth strategy remains valid.

    Transaction Capital is well placed to build on its long-term track record of growth for 2021 and beyond, at similar earnings growth rates when applying 2019 as a base. Moreover, entering our third adjacent market vertical via the investment in WeBuyCars is expected to support the group’s growth trajectory to return to at least historical trends. WeBuyCars’s focus on increasing the volume of vehicles traded, expanding its physical and e-commerce footprint and enhancing brand awareness, as well as increasing take-up of F&I products, also stands to boost its earnings.

    The group’s strategic progress over the most difficult year in its history, and the resilience our business platforms have shown, has been ultimately underpinned by their social relevance. Deep and proactive engagement with our stakeholders and, especially, moving decisively to support our clients and customers when they needed it most, have strengthened the relationships on which our expectations for growth and returns are contingent, as we move beyond the immediate challenges of COVID-19. Our shared-value model will remain central to the way we do business, and we will be able to measure our positive impacts with greater rigour due to the adoption of formal ESE frameworks.

    I am truly thankful for the skill and dedication showed by our exceptional founders, entrepreneurial management teams, and the tireless effort put in by all our people across the group under extraordinary pressure. At a time when most other businesses were focused on managing risk at the expense of growth, the group has been able to position itself not only for a return to growth, but for sustainably higher growth in the years ahead.