Our opinion on the current state of TCP

Transaction Capital (TCP) operates through three distinct divisions: minibus taxis, risk services, and a 75% ownership stake in WeBuyCars. One of its key subsidiaries, SA Taxi, specializes in financing, repairing, insuring, and selling minibus taxis in South Africa, effectively dominating the entire value chain associated with this industry. The company went public in June 2012, and from that time until 2023, it had consistently achieved an annual compound growth in earnings per share of 21% since 2014. However, this growth trajectory experienced an abrupt interruption in 2023 when TCP disclosed a R1.8 billion provision for bad debts in its minibus taxi division.

It's essential to recognize the significance of the minibus taxi industry in South Africa, with approximately 69% of households relying on taxis for transportation, resulting in over 15 million daily trips. This industry primarily caters to non-discretionary needs, making it relatively defensive and less influenced by the broader economic climate. In 2018, the South African Taxi Council (Santaco) acquired a 25% stake in SA Taxi for R1.7 billion, a mutually beneficial arrangement. Notably, the directors of TCP collectively hold a 32% ownership stake in the company.

TCP has demonstrated a consistent compound growth in earnings of 20% per annum over the past five years, with a minor disruption caused by the COVID-19 pandemic. Additionally, TCP operates in debt collection services in both South Africa and Australia through Transaction Capital Risk Services (TCRS). However, it is evident that the taxi industry has faced significant challenges, including rising interest rates, escalating fuel costs, and reduced consumer spending, leading to a substantial increase in TCP's bad debt provision.

Many taxi owners, facing monthly repayments of around R6000, are struggling to meet their financial commitments in the wake of soaring fuel prices, higher interest rates, and reduced commuter traffic. Consequently, SA Taxi has curtailed its financing and acquisition of new Toyota minibuses, now focusing on selling refurbished taxis, with outstanding debt from taxi owners totaling around R17 billion, with many falling behind on payments.

On March 15, 2023, the controlling Hurwitz family trust disclosed the sale of 1.6 million shares in December 2022, a move that coincided with a 50% drop in TCP's share price. Despite these challenges, some investors viewed the sell-off in TCP shares as an opportunity, especially after the sharp 40% decline following the release of its results. Notably, Coronation increased its holding in TCP to 16.57% of the issued shares, as reported on March 23, 2023.

TCP reported a headline loss of R3.7 billion for the year ending on September 30, 2023, mainly attributed to a R1.1 billion write-down of repossessed taxis. The company's prospects now heavily depend on the re-financing agreement with SA Taxi's debt funders, expected to be finalized by March 2024. We Buy Cars experienced a 14% decline in earnings, while Nutun's earnings increased by 10%. Overall, the group reported a headline loss of 99 cents per share, a sharp contrast to the previous year's profit of 224.4 cents per share.

A Business Day report on December 12, 2023, indicated that TCP would no longer finance new minibus taxis, opting to focus solely on second-hand vehicles. SA Taxi attributed its challenges to various factors, including elevated fuel prices, high interest rates, rising parts and maintenance costs, record levels of load shedding, persistently lower commuter volumes due to economic slowdown, and taxi operators' inability to raise fares given consumers' stretched financial circumstances.

For investors, it may have been opportune to exit TCP shares back in May 2022 when they were trading above R40 per share. On May 13, 2023, a recommendation was made to apply a 65-day exponentially smoothed moving average to the Transcap share price and wait for a break above that level. This occurred on November 6, 2023, at 577 cents per share, subsequently rising to 800 cents, marking a gain of over 38% within one month.

On September 12, 2023, TCP announced the resignation of its CEO, David Hurwitz, effective December 31, 2023, which led to a sharp drop in the share price. Despite the challenges, TCP is viewed as a potential turnaround opportunity and may be considered undervalued at current levels. On January 31, 2024, TCP announced its intention to unbundle and separately list WeBuyCars due to its underperformance in 2023.