Our opinion on the current state of TCP

Dec 12, 2023

Transaction Capital (TCP) is a company which has three divisions - minibus taxis, risk services, and 75% of WeBuyCars. Its subsidiary, SA Taxi, specialises in financing, repairing, insuring and selling minibus taxis in South Africa. It completely dominates the entire value chain associated with the minibus taxi industry. The company listed in June 2012 and since then and until 2023, the company generated an annual compound growth in earnings per share of 21% since 2014. That ended abruptly in 2023 when the company revealed that it had to make a R1,8bn provision for bad debts in its minibus taxi division. About 69% of South African households use taxis with more than 15m trips per day. Most of this is non-discretionary - which means that this industry tends to be defensive and not generally impacted by the state of the economy at large. The South African Taxi Council (Santaco) acquired a 25% stake in SA Taxi for R1,7bn in 2018 which is benefiting both parties. The directors of TCP own 32% of the company. The company has had a compound growth in earnings of 20% per annum for the past five years and was partially derailed by COVID-19. The company is also involved in debt-collection in South Africa and Australia through Transaction Capital Risk Services (TCRS). It is apparent that the taxi industry has suffered from a perfect storm of rising interest rates, rising fuel costs and lower consumer spending resulting in a massive increase in TCP's bad debt provision. The average taxi owner cannot afford to make repayments of around R6000 a month in the face of steep increases in the fuel price, rising interest rates and declining commuter traffic. The result has been that SA Taxi has stopped financing and buying as many as 600 new Toyota minibuses a month and is reduced to selling between 180 and 200 refurbished taxis. The company is owed about R17bn by taxi owners most of whom are behind on their repayments. On 15th March 2023 the company reported that the controlling Hurwitz family trust had sold 1,6m shares in December 2022 - since then the share has halved in price. To us, the sell-off in TCP shares since the beginning of May 2022 and the sharp 40% drop following its results presented a buying opportunity. Notably, the company announced on 23rd March 2023 that Coronation had increased its holding in TCP to 16,57% of the issued shares. In its results for the year to 30th September 2023 the company reported a headline loss of R3,7bn mainly because of a R1,1bn write down of repossessed taxis. Much now depends on SA Taxi's debt funders and it is expected that a deal with them to re-finance will be in place by March 2024. We Buy Cars earnings fell by 14% and Nutun's earnings increased by 10%. The group made a headline loss of 99c per share down from the previous year's profit of 224,4c. In a report in the Business Day on the 12th of December 2023, the company reportred that it will no longer finance new minibus taxis - only second hand ones. SA Taxi attributes its problems to: "...elevated fuel prices, - high interest rates, - increasing cost of parts and maintenance, - record levels of load shedding, - persistently lower commuter volumes as a result of depressed economic activity, and - taxi operators' inability to increase fares given already financially stretched consumers". Hopefully, if you were holding the shares, you sold out on your stop back in May 2022 at prices above R40 per share. On 13th May 2023 we recommended that you apply a 65-day exponentially smoothed moving average to the Transcap share price and wait for a break above that. That happened on 6th November 2023 at 577c per share. Since then it has moved up to 800c - a gain of over 38% in one month. On 12th September 2023 the company announced that its CEO, David Hurwitz, would resign with effect from 31st December 2023. The news caused the share price to drop sharply. We see this share as a potential turnaround that is probably cheap at current levels.