Published Date: 2021-09-27 | Source: INCE|Community | Author: The Finance Ghost
In a pre-close statement for the year to September 2021, my favourite JSE company confirmed that trading has been in line with expectations for the year. The established divisions (SA Taxi and Transaction Capital Risk Services) delivered organic growth and the newbie to the group, WeBuyCars, brought the growth story.
I always enjoy seeing a strategy of strong underlying businesses that help pay for exciting new growth stories, provided there is an excellent management team making the capital allocation decisions. Luckily, that has been the case with this group.
Still, the pandemic has affected the business. Earnings growth will only exceed FY19 by "mid-teen percentages" - not an exciting through-the-cycle result. The company does at least expect to declare a full-year dividend.
The balance sheet is critical for a group like this. After an accelerated bookbuild that raised R1.17bn in equity capital in July 2021, the balance sheet is adequately capitalised to ensure that the group can respond to opportunities as they arise.
The SA Taxi business has had to deal with extensive disruption of public transport services from the virus, as well as taxi conflict in the Western Cape. Despite this, SA Taxi is expected to report earnings close to FY19 levels, as consumer spending on taxi services is largely non-discretionary in nature.
SA Taxi has extensive data on its fleet, which helps with the management of credit and insurance risk. Due to civil unrest and taxi conflicts, the average distances travelled dropped from 92% of pre-Covid levels in March to May 2021 to between 82% and 92% from June to August 2021. Due to the industry pressure, taxi operators have taken advantage of the company's Quality Renewed Taxis offering, which constituted around 40% of total loans originated (up from 32% the prior year).
The non-performing loan (NPL) ratio in this business is expected to recover to the mid-20% range, with the credit loss ratio at the upper end of the 3% - 4% target range. The group notes that it follows a conservative approach to provision coverage, which means that potential write-offs are generally recognised before they are actually incurred.
Encouragingly, the insurance offering in SA Taxi Protect is showing growth in gross written premium revenue that is above pre-Covid levels.
Transaction Capital Risk Services (TCRS)
TCRS' most important activity is to act as either a principal in acquiring and collecting non-performing consumer loan portfolios, or as a collections service provider on a contingency or fee-for-service basis.
After a "strategic realignment", the business is focusing on delivery in three key areas: collections, transactions and business outsource services. I would argue that this division probably has the weakest investment thesis in the group, with numerous competitors in this space. Still, it's a solid business that is only overshadowed strategically by the brilliance of SA Taxi and WeBuyCars.
Of concern for all South Africans should be the group's Consumer Credit Rehabilitation Index, which measures the propensity of South African consumers to repay debt. Despite the lowest interest rates that anyone can remember, the index has continuously deteriorated since December 2019. The unemployment rate is obviously a massive worry for consumer health.
TCRS' acquisition of loan portfolios is almost at pre-Covid levels, with annual investment of nearly R1bn. The group notes that collections are in line with expectations in South Africa.
The Australian business isn't doing so well, with fewer loan portfolios available for sale and greater credit leniency being granted in the wake of an aggressive Covid-management strategy by the Australian government.
WeBuyCars has benefitted from its positioning as a used car specialist. With disposable income under pressure and commodity input costs driving significant increases in new vehicle pricing, consumers have turned to the used car market to find value. Sales of new and light commercial vehicles in South Africa were 9.6% lower in August 2021 than in August 2019.
Online sales now account for 30% of WeBuyCars' sales, with sales primarily to other dealers. This has allowed WeBuyCars to capture margin in a portion of the value chain in a highly capital-efficient manner.
There are now more than 5,800 bays available to WeBuyCars and the purchase of The TicketPro Dome in Johannesburg will add another 1,100 bays initially with capacity for 1,400 bays in total. In other words, there is still significant scope for growth in this business.
For more on this business and the deals that Transaction Capital put in place to acquire it, refer to last's week article
that I wrote on the topic.
Timing of full results
Look out for the full results announcement for the year to September 2021, which is due to be released on 16th November.
After a rally of over 60% this year, investors have taken a breather on Transaction Capital with the share price only up 3.7% in the past 90 days. I'll be holding my shares for many years to come.
Disclaimer: the author holds shares in Transaction Capital