Integrated Annual Report
2020

STRATEGY

Transaction Capital continued to make significant strategic progress during the year. This was underpinned by its swift and agile responses to the financial and operational impacts of COVID-19, its conservative approach to capital management, the defensive characteristics of its divisions’ market sectors, and their deliberate positioning in relation to socioeconomic dynamics. Together, these factors position the group for even greater relevance in a post-COVID-19 environment.

STRATEGIC OBJECTIVE 01 ORGANIC GROWTH

  • Leverage specialised capabilities at group and divisional level to develop industry solutions that deepen vertical integration, driving good commercial returns and meaningful social impact.
  • Apply these competencies to create new positions within adjacent and new market segments, and new geographies to drive organic growth.
LINK TO MATERIAL MATTERS
Maintain sustainable, high-quality earnings growth in variable conditions
Provide strategic flexibility and operational resilience through sophisticated capital management
Ensure integrity through good governance
LINK TO MATERIAL RISKS
Funding and capital risk
Uncertain regulatory environment
Acquiring NPL Portfolios
Impact on revenue of difficult economic conditions, exacerbated by COVID-19
Diversifying revenue streams across the minibus taxi value chain
Market forces beyond the group’s control impacting affordability of monthly instalments
Original equipment manufacturers as suppliers of vehicles and parts

SA TAXI

   

KEY OUTCOMES IN 2020

SA TAXI FINANCE

  • Gross loans and advances book grew 14% to R12.2 billion, comprising 32 890 loans.
    • Supported by retention of market share and higher retail prices for new vehicles.
    • Restricted repossession and settlement activity due to COVID-19 slowed the attrition rate, resulting in gross loans and advances growing despite the lower number of loans originated. Repossession activity normalised by September 2020, while collections are expected to normalise early in calendar year 2021.
  • Loans originated declined due to:
    • Interrupted new minibus taxi supply from Toyota.
    • Constrained availability of pre-owned minibus taxi stock due to the closure of SA Taxi Auto Repairs during lockdown.
    • Lower sales volumes due to closure of SA Taxi Direct and external dealerships during lockdown.

SA TAXI PROTECT

  • Gross written premiums increased 10% to R907 million despite deferred repayment of insurance premiums in April 2020 under SA Taxi’s COVID-19 relief programme and other disruption.
  • Higher lapse rates experienced as COVID-19 affected the affordability of insurance cover.
  • Broadened product offering supported high single-digit growth in the number of policies on book, with the development of other bespoke products for the industry remaining a strategic priority.
  • The strategy to specifically target open market clients continued to yield positive results.

SA TAXI DIRECT

  • Minibus taxi sales down on the prior year due to the closure of SA Taxi’s dealerships in April and May 2020. Sales further impacted by disruption in new vehicle supply resulting from industrial action at the Toyota plant in January 2020 and the closure of the plant during lockdown.
    • New minibus taxis sold down 44% (2019: flat).
    • Pre-owned minibus taxis sold down 28% (2019: up 44%).

SA TAXI AUTO REPAIRS

  • Closure of SA Taxi Auto Repairs during April and May 2020 constrained pre-owned minibus taxi stock.
  • Increased refurbishment capacity (to 250 from 220 in 2019), will increase SA Taxi Auto Repairs’s supply of pre-owned minibus taxis to our dealerships and, in turn, support loan originations.
FUTURE FOCUS
  • Establish a transactional business that combines SA Taxi’s telematics capabilities, rewards programmes, client data and finance offerings into a single transactional account relevant to South Africa’s 250 000 minibus taxi operators.
  • Increase sales of pre-owned minibus taxis through SA Taxi Direct and expand refurbishment capacity to meet increasing demand for quality affordable pre-owned minibus taxis, which remains far higher than supply.
  • Leverage accelerated deployment of new technologies to further drive efficiencies, including the direct sales model.
  • Continue to target open market insurance clients and develop new bespoke insurance products to deepen penetration.
     

TRANSACTION CAPITAL RISK SERVICES

   

KEY OUTCOMES IN 2020

TCRS SOUTH AFRICA

  • Implemented world-class work-from-home capabilities and proactively restructured its staff complement and infrastructure in anticipation of the medium-term effects of COVID-19.
  • Transitioned to a combination of work-from-home and on-site collection services activity, which yielded higher productivity per agent due to more flexible working hours.
  • Invested R653 million to acquire NPL Portfolios (2019: R1 064 million). As market dynamics become clearer, there may be the opportunity to accelerate investment beyond 2019 levels.
  • Contingency and FFS operations performed in line with expectations in a difficult consumer environment, with fewer matters handed over for collection by clients due to muted retail sales and credit extension from March 2020.
  • Established in July 2020, Transaction Capital Transactional Services (TCTS) integrates Transaction Capital Payment Solutions, Accsys and Fihrst, creating a more resilient and efficient payment and transactional services platform.

RECOVERIES CORPORATION IN AUSTRALIA

  • Double-digit organic revenue growth was enabled by greater management depth, investment in data and analytics, the deployment of technologies proven in South Africa, and the implementation of business information, payment automation and collection technologies.
  • Transitioned to a combination of work-from-home and on-site activity.
  • Its diversified business model positions Recoveries Corporation to respond effectively to the shift in client preference for FFS and contingency collection mandates over the sale of their NPL Portfolios.
  • Invested R80 million in acquiring NPL Portfolios (2019: R122 million).
FUTURE FOCUS
  • Accelerate the acquisition of NPL Portfolios in South Africa and Australia, and through co-investing in partnership with specialist credit managers in Europe. Due to their larger size compared to South Africa, these international markets represent a meaningful opportunity for growth even at a smaller market share.
  • Grow services revenue through business process outsourcing and customer service offerings, where TCRS can leverage its current technology, data and analytics capabilities.
  • Grow TCTS as a more focused and substantial payment and transactional services business, diversified by payment activity, client and sector.
  • Drive further efficiencies by continuing with the work-from-home model, which is expected to yield significant benefit into 2021.
     

TC GLOBAL FINANCE

   

KEY OUTCOMES IN 2020

  • Management of TC Global Finance was moved to the executive office during the year.
  • Investment to date of €8.7 million in the higher-yielding niche of the European specialised credit market.
  • Invested €7.4 million in the first half of the 2020 financial year, with no further investment in the second half of the year.
 
FUTURE FOCUS
  • Our strategy to invest in Europe remains valid and will be pursued, however we will maintain our cautious and selective approach to opportunities in this market over the medium term.
 

STRATEGIC OBJECTIVE 02 RISK AND CAPITAL MANAGEMENT

  • Maintain conservative capital management approach by accessing and deploying capital optimally and efficiently.
  • Apply an investment approach that emphasises exhaustive due diligence investigation, data analysis and risk quantification to add value to the design and implementation of operational strategy.
  • Prevent the destruction of stakeholder value by ensuring risk is kept within tolerance levels through deliberate planning, arranging and controlling of activities and resources to minimise the negative impact of risks, and maximise potential opportunities associated with risk.
LINK TO MATERIAL MATTERS
Ability to consistently create shared value by assessing, mitigating and pricing credit-related and other specialised risk
Provide strategic flexibility and operational resilience through sophisticated capital management
Ensure integrity through good governance
LINK TO MATERIAL RISKS
Funding and capital risk
Acquisition risk
Acquiring NPL Portfolios
Impact on revenue of difficult economic conditions, exacerbated by COVID-19
Entry into select international markets

CAPITAL MANAGEMENT

   

KEY OUTCOMES IN 2020

GROUP

  • Prudent capital management strategy and resilient group capital structure was tested and proven during 2020.
  • Increased provision coverage and conservative approach applied to the anticipated impact of COVID-19 on future cash flows protected the balance sheet.
  • Good standing with investors allowed Transaction Capital to:
    • Issue ~R900 million in new equity on a pre-emptive basis to facilitate the transaction with WeBuyCars:
      • R560 million new equity raised via accelerated bookbuild in June 2020.
      • R329 million new equity issued to partly fund WeBuyCars investment.
    • Secure ample debt facilities to fund our strategic organic growth initiatives:
      • Over R4.0 billion of new debt facilities raised since April 2020.
      • ~R1.2 billion of committed facilities at holding company for strategic growth initiatives.
  • Following the transaction with WeBuyCars, the group’s balance sheet remains well capitalised with unrestricted access to liquidity to fund our growth aspirations.
  • New debt facilities at holding company level will support our ability to invest further in our TC Global Finance strategy.
  • The group’s capital structure, and the long-term nature of our assets, provide sufficient financial flexibility and headroom should recessionary conditions intensify:
    • Capital adequacy ratio: 28.5% (2019: 29.9%).
    • Equity: 24.8% (2019: 26.7%).
    • Subordinated debt: 3.7% (2019: 3.2%).
  • No final dividend declared to preserve financial flexibility and liquidity given the impacts of COVID-19.

SA TAXI

  • Increased provision coverage to provide for impact of lower collections performance, which is expected to return to pre-COVID-19 levels over the medium term.
  • Negotiated capital repayment relief for the period 1 April to 1 October 2020.
  • Adequately capitalised, with a capital adequacy ratio of 20.9% and R2.7 billion of equity.
  • Access to liquidity remains unfettered with more than R4.0 billion of new debt facilities concluded since April 2020.
  • Ample liquidity is available in undrawn debt facilities to fund loan origination into the 2022 financial year.

TCRS

  • Robust balance sheet with R5.1 billion of assets and R1.9 billion of senior debt underpinned by R1.7 billion of equity.
  • As market dynamics become clearer, the acquisition of NPL Portfolios in South Africa, Australia and Europe may provide opportunities to accelerate capital deployment for attractive risk-adjusted returns.
  • TCRS’s funding requirements for the acquisition of NPL Portfolios in South Africa and Australia are secured into the 2022 financial year.
FUTURE FOCUS

Capital management initiatives over the medium term:

  • Further diversify funders in TCRS by leveraging our formalised ESE framework as a measurable way of demonstrating the division’s positive social impact.
  • Access and deploy capital to grow investment portfolio in Europe through TC Global Finance.
  • Optimise the group’s mix of funding structures to reduce cost of funding.
  • Ensure sufficient access to capital should there be a sharp deterioration in consumers’ ability to service their debts.
  • Strengthen the group’s long-term strategic relationship with RBH.
  • Further diversify the group’s shareholder base, with a specific focus on attracting international shareholders.
  • Maintain and enhance good standing with debt and equity investors through positive operational and financial performance and transparent reporting.

CREDIT RISK MANAGEMENT

   

KEY OUTCOMES IN 2020

SA TAXI

  • Lower origination of new loans and the disruption to collections resulted in a higher NPL ratio of 32.3% (2019: 17.9%). A high proportion of NPLs may well convert to performing loans, as these customers’ propensity to pay is higher than typically observed. The NPL ratio is thus expected to improve to around 25% in 2021, returning to normal levels of approximately 20% over the medium term.
  • Credit loss ratio of 7.3% (2019: 3.2%) exceeded the target range of 3% to 4% as SA Taxi continued to age and provide for the loan book as usual, in line with its conservative approach. The credit loss ratio is expected to normalise around or slightly above the upper target range by the 2022 financial year.
  • 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 vehicles, limiting 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, which will continue to support the recovery of the credit loss ratio.
  • Higher new vehicle prices will also support higher prices for pre-owned vehicles, further improving credit recoveries.
FUTURE FOCUS
  • Increase the volume of loans originated for pre-owned minibus taxis, which represent a more affordable option due to lower purchase price, interest rate and insurance premium compared to a new vehicle.
  • Consider financing vehicle brands other than Toyota and investigate the potential for alternative fuel vehicles.
     

INSURANCE RISK MANAGEMENT

   

KEY OUTCOMES IN 2020

SA TAXI

  • Implemented deferred payment of insurance premiums in April 2020 under SA Taxi’s COVID-19 relief programme.
  • Despite payment relief and other disruptions, gross written premiums continued to grow.
  • Higher lapse rates experienced as COVID-19 affected the affordability of insurance cover.
 
FUTURE FOCUS
  • Further reduce cost of cover through efficiencies via SA Taxi Auto Repairs and SA Taxi Auto Parts.
 
     

INVESTMENT RISK MANAGEMENT

   

KEY OUTCOMES IN 2020

TCRS

  • While collections on NPL Portfolios performed better than expected, future collections are expected to recover more slowly and over a longer period.
  • Estimated remaining collections (ERC) up 16% to R5.2 billion (2019: R4.5 billion).
  • As ERC is expected to be about 4% lower over the medium term, TCRS adjusted the carrying value of purchased book debts down by R588 million (2019: R159 million) to ensure future yields remain aligned with those achieved in the past.
  • Continued diversification across sectors, clients and geographies will further lower concentration risk and support good performance and returns in different market conditions.
 
FUTURE FOCUS
  • Enhance investment risk management by updating models and applying detailed data analytics to ensure accurate and realistic pricing of NPL Portfolios coming to market following the impacts of COVID-19, to bring margins and returns in line with prior years.
 
     

STRATEGIC OBJECTIVE 03 DATA, TECHNOLOGY AND ANALYTICS

  • Leverage data, technology and analytics to scale and support highly competitive and efficient operating platforms that deliver sustainable and profitable growth.
  • Generate in-depth insights from the continuous collection and analysis of diverse, accurate and valuable data sets to enable precise decision-making and proactive risk management.
LINK TO MATERIAL MATTERS
Ability to consistently create shared value by assessing, mitigating and pricing credit-related and other specialised risk
Provide strategic flexibility and operational resilience through sophisticated capital management
Ensure integrity through good governance
LINK TO MATERIAL RISKS
Information and technology risks
Acquisition risk
Acquiring NPL Portfolios
Impact on revenue of difficult economic conditions, exacerbated by COVID-19
Entry into select international markets
Diversifying revenue streams across the minibus taxi value chain
 

SA TAXI

   
 
  • Investment in technology drove operational efficiencies, supporting an improved cost-to-income ratio.
  • Telematics data enabled granular insights into the impact of the COVID-19 lockdown on minibus taxi operators’ activity and profitability, enabling SA Taxi to respond appropriately in managing potential losses and supporting operators through the period.
     
 

TCRS

     

KEY OUTCOMES IN 2020

  • Past investments in data, technology and analytics capabilities created the basis for TCRS to respond quickly to the impacts of COVID-19, with more than 1 300 call centre agents in South Africa enabled to work from home without compromising data security or access to technology.
  • World-class valuation technology and predictive methodologies developed over 20 years in South Africa continue to be applied in creating credible platforms in other markets.
  • A key driver of the integration of Transaction Capital Payment Solutions, Accsys and Fihrst to create TCTS is the opportunity to apply best-in-class technology from each business.
FUTURE FOCUS
  • In SA Taxi, continue to apply rich data and analytics capabilities to support minibus taxi operators and the broader industry, and develop new products that can further benefit operators and commuters.
  • In TCRS, leverage current data, technology and analytics expertise to grow services revenue through transactional services and business process outsourcing.

STRATEGIC OBJECTIVE 04 ACQUISITIVE GROWTH

  • Target quality assets in focused market segments, in line with defined acquisition criteria, to enhance the specialised capabilities, growth prospects and value of divisions.
LINK TO MATERIAL MATTERS
Ability to consistently create shared value by assessing, mitigating and pricing credit-related and other specialised risk
Maintain sustainable, high-quality earnings growth in variable conditions
Ensure integrity through good governance
LINK TO MATERIAL RISKS
Funding and capital risk
Acquisition risk
Impact on revenue of difficult economic conditions, exacerbated by COVID-19
Entry into select international markets
Diversifying revenue streams across the minibus taxi value chain

KEY OUTCOMES IN 2020

  • While most businesses were focused on managing risk at the expense of growth, we were able to conclude the acquisition of a non-controlling 49.9% interest in WeBuyCars, to establish our third adjacent market vertical. This transformational investment in WeBuyCars has been immediately value accretive, converting interest income on undeployed capital into operating earnings. The WeBuyCars investment was considered against our acquisition criteria (as below) and matched all relevant requirements.
  • TCRS acquired 100% of the equity in Fihrst in December 2019, which was integrated into TCTS during the financial year.
  • TC Global Finance invested €7.4 million in the higher-yielding niche of the European specialised credit market in the 2020 financial year.
     
FUTURE FOCUS
  • To expand our total addressable market and increase our earnings base, we continue to assess opportunities to make investments or acquisitions that fit directly into our existing market verticals (including complementary bolt-on acquisitions). We will also consider investing into new adjacent verticals where our existing capabilities can be successfully deployed.

1  BUSINESS MODEL

  • Scalable business model with a proven track record.
  • Focused business with potential for high return on equity (ROE).
  • Driven by systems, data and analytics, and ability to augment these with Transaction Capital’s technology capabilities.
  • Ease of integration into Transaction Capital’s existing divisions.
  • Ability to enhance Transaction Capital’s current services to clients.
  • Scalable business platforms whose competitiveness and value can be developed and enhanced by Transaction Capital.

2  CULTURE

  • Alignment with Transaction Capital’s values.
  • Client- and solutions-orientated.
  • Entrepreneurial management who are co-invested.
  • Strong relationships with clients.
  • Experienced teams whose skills will benefit those of the group.

3  CAPABILITIES

  • Deep knowledge of its industry and chosen market sectors.
  • Strong management team.
  • Business platforms that can be developed and scaled.
  • Intellectual property (IP) and expertise that can augment Transaction Capital’s existing capabilities and facilitate access to new verticals.

4  MARKET POSITION

  • Established platforms with robust organic growth.
  • Delivering predictable, quality earnings with high cash conversion rates.
  • Niche market participant within Transaction Capital’s existing or adjacent market sectors.
  • Potential for consolidating market position.
  • Strong organic and acquisitive growth prospects.
  • International targets that will grow the portfolio, diversify risk and contribute hard currency earnings.
 
 

STRATEGIC OBJECTIVE 05 PEOPLE

  • Maintain best practice governance standards, led by a board with skills relevant to the group’s strategy and markets.
  • Identify, assess, develop and partner with entrepreneurial, innovative and experienced founders, owners and managers of businesses.
  • Develop, engage and reward employees and executives to engender an entrepreneurial, high-performance, ethical and inclusive culture.
LINK TO MATERIAL MATTERS
Attract and retain the best leadership and operational management
Ensure integrity through good governance
LINK TO MATERIAL RISKS
Uncertain regulatory environment
Acquisition risk
Impact on revenue of difficult economic conditions, exacerbated by COVID-19
Entry into select international markets
     
   

GROUP

           

KEY OUTCOMES IN 2020

 
  • Board skills and independence strengthened through the appointment of new independent non-executive directors with insurance, legal and technical financial skills.
  • In response to COVID-19, the group executive office activated campaigns to ensure that its people are informed about the impacts on the business and to provide overall support for their emotional, social and physical wellbeing.
 
     

SA TAXI

           
  • Implemented full COVID-19 detection and prevention protocols after lockdown restrictions eased and once business operations had resumed, and provided emotional support to employees given the psychological stress experienced during lockdown.
  • Appointed a transformation manager in June 2020 to drive progress, particularly in employment equity, skills development and diversity and inclusivity.
  • Improved to Level 4 B-BBEE rating from Level 7 in 2019.
 

TCRS

           
  • Highly effective work-from-home strategy implemented in response to the impacts of COVID-19, with enhanced oversight, and monitoring and managing of performance. Call centre agents have responded positively, with efficiency and productivity enhanced.
  • Proactively restructured staff complement and infrastructure to reduce costs and increase efficiencies to reduce the impacts of COVID-19, requiring the commencement of a Section 189 process that affected 544 employees by the end of the financial year.
  • Transaction Capital Recoveries currently has a Level 1 B-BBEE rating.
 
   
FUTURE FOCUS
  • Continue to support transformation objectives in South Africa that seek to address historical imbalances. From 2019, transformation targets included as qualitative measures in the short-term incentive structures of key executives.
  • Provide ongoing support to employees in adapting to new ways of working due to the impact of COVID-19.
  • Ongoing focus on training and development.
  • Continue to identify and address board skills gaps to ensure sufficient depth of knowledge and experience for strategic execution.