Our opinion on the current state of TRANSCAP(TCP)

Transaction Capital (TCP) is a diversified company that operates three divisions: minibus taxis, risk services, and holds a 75% stake in WeBuyCars (WBC). Its subsidiary, SA Taxi, dominates the value chain of the minibus taxi industry in South Africa, handling financing, repairs, insurance, and sales. Since its listing in June 2012, TCP experienced a significant compound annual growth in earnings per share of 21% from 2014 until an abrupt halt in 2023 due to a R1.8 billion provision for bad debts in the minibus taxi division.

The minibus taxi industry is crucial in South Africa, with 69% of households relying on taxis for more than 15 million trips daily. These trips are mostly non-discretionary, which typically shields the industry from economic downturns. However, recent challenges such as rising interest rates, increased fuel costs, and decreased consumer spending have led to a perfect storm, significantly impacting TCP’s finances. The average taxi owner struggled with repayments around R6000 per month amidst these rising costs, leading to SA Taxi reducing its new vehicle financing and focusing on selling refurbished taxis.

In 2018, the South African Taxi Council (Santaco) acquired a 25% stake in SA Taxi for R1.7 billion, which has been mutually beneficial. Yet, the company’s broader financial health has been shaken, as evidenced by the considerable bad debt provisions and a reported headline loss of R3.7 billion for the year to 30th September 2023. This loss included a R1.1 billion write-down of repossessed taxis. The future of SA Taxi hinges on renegotiating terms with its debt funders, expected by March 2024.

On the corporate front, significant shareholder changes occurred with Coronation increasing its stake to 16.57% in March 2023, and the Hurwitz family trust selling 1.6 million shares in December 2022, which preceded a sharp decline in share price. Additionally, CEO David Hurwitz announced his resignation effective 31st December 2023, further impacting the company's share price.

In response to the ongoing challenges in the taxi division, TCP announced a strategic shift in January 2024 to unbundle and separately list WeBuyCars. This decision followed the poor performance in the taxi business throughout 2023. Following the unbundling, WeBuyCars demonstrated a positive trajectory with a 16% increase in revenue and a 20% rise in core earnings over four months, indicating potential as a solid standalone entity on the JSE.

Further reshaping its portfolio, TCP sold its holding in Nutun Australia for A$58.3 million in March 2023. As of April 2024, following the separate listing of WeBuyCars, the TCP share price adjusted to 361c, reflecting the market’s reaction to the restructuring.

This array of strategic moves and market challenges paints a complex picture for TCP. While the company faces significant hurdles, the strategic divestiture and focus on potentially more profitable segments like WeBuyCars could provide a foundation for recovery and future growth, presenting what could be an appealing investment opportunity at current valuations.