Transaction Capital: what went wrong

• The main cause of its decline is that SA Taxi, its largest division, is facing financial trouble due to the high number of taxi loans that are not being repaid

Transaction Capital’s fall from grace has been dramatic. At its peak in May 2022, the company’s market capitalisation stood at R35.2bn. However, the group’s value has now dwindled to just R5bn and it is one of SA’s worst stock performers in 2023. The company’s shares fell 35% on Wednesday and recovered somewhat on Thursday, but has dropped about 78% since the start of the year.

So what went wrong? Business Day Retail Writer Katharine Child, with the assistance of experts, seeks to answer some of the burning questions around the company’s meltdown.

What has gone wrong at Transaction Capital?

The primary cause of its decline is that SA Taxi, Transaction Capital’s largest division, is facing financial trouble due to the high number of taxi loans that are not being repaid. SA Taxi has increased its provisions (money set aside) for expected bad debt to 16%, up from 5.5% in the previous half-year to the end of March. This amounts to about R1.8bn for expected losses.

SA Taxi made a R2.1bn loss in that half-year, because of its debt provisions, which caused Transaction Capital to swing to a loss of R1.8bn. Protea Capital Management’s JP Verster says: “Transaction Capital is not in trouble. Only SA Taxi is.”

How much debt does it have?

Transaction Capital’s debt exceeds R24bn, with most of it being held at SA Taxi. However, there are growing concerns about the SA credit market and the ability of constrained consumers to repay loans, says Casparus Treurnicht, analyst at Gryphon Asset Management.

SA Taxi borrows money from a range of lenders, including banks and development finance institutions, and then lends that money to taxi owners, with R17bn lent out.

Luckily for Transaction Capital there are no legal agreements that link debt between its businesses. This means if SA Taxi defaults on its debt owing to unpaid taxi loans, the other divisions in the Transaction group will not be liable.

Transaction Capital has already given the troubled division R2bn and one analyst says they should not spend any more bailing out SA Taxi. “It’s crucial that Transaction Capital does not

LUCKILY FOR TRANSACTION CAPITAL THERE ARE NO LEGAL AGREEMENTS THAT LINK DEBT BETWEEN ITS BUSINESSES

contribute further funding from the healthy parts of the company to the troubled part, which is SA Taxi,” says Verster.

He said the share price drop on Wednesday sent a message “that the market doesn’t want the group to contribute a single additional cent to SA Taxi”.

The group has renamed SA Taxi to Mobalyz.

Does it have access to enough funding for future growth?

It has only seven months of liquidity instead of the preferred 12 months. Although discussions with banks for new lending have been positive, Transaction Capital has not yet received any new funding from banks for new taxi loans. As a result, its ability to do business and make money may be slowed down.

How much is the Santaco stake in SA Taxi worth?

Taxi industry body Santaco owns a 25% stake of SA Taxi, which cost R1.7bn in 2018. However, the debt used by Santaco to finance its stake now exceeds what the shares are worth. In other words, Santaco’s ownership stake in SA Taxi is worth less than zero and the Santaco debt needs refinancing from banks.

Santaco recently declined an interview on this topic.

Are taxis just too high risk to invest in?

Providing loans to taxi operators is risky and banks tend to avoid granting loans to them. However, this same risk allowed SA Taxi to issue loans with skyhigh interest rates starting at an average of 21%.

SA Taxi’s model of repossessing taxis when owners default on repayment, refurbishing them and reselling them is not sustainable as it has repossessed far more taxis than it can resell in a weak economic environment.

Treurnicht says Gryphon Capital believes the country’s taxi industry is in disarray, and it will be staying clear of any business involving taxis. “The government’s track record in addressing taxi issues is not positive,” he added.

It doesn’t help either that SA’s macroeconomic environment is weak.

What about its other businesses?

Apart from SA Taxi, Transaction Capital has other businesses, such as GoMo, a platform that provides tech and support to banks to help them finance cars older than five years. Banks typically do not like to finance older cars because of the difficulty of selling them if repossessed.

Transaction Capital’s GoMo can repossess and resell cars through WeBuyCars, allowing it to work with banks. The market for people buying older cars while using loans is growing, with cars older than five years accounting for 36% of all used cars bought, up from less than 30% a few years ago, it says.

Transaction Capital also runs Nutun, a more than 20-year-old debt collector that buys distressed debt from banks and retailers. Nutun provides customer care call centre services to clients in Australia, the UK and SA, which it says is a capital-light business providing it with earnings in foreign currency.

Transaction owns a 75% stake in second-hand car dealer WeBuyCars and fully owns GoBid, which sells damaged cars and older taxis.

Are there challenges at WeBuyCars?

WeBuyCars faces several challenges. It has more parking bays for cars than it sells, but says it will expand in time. Cashstrapped customers are buying cheaper cars, resulting in lower profits. However, Transaction believes that more customers will buy second-hand cars due to the tough times, providing it with an opportunity to grow.

SA’s used-car market is double that of new cars, with 1.2millon second-hand cars sold each year. WeBuyCars is growing — sales grew 21% in the halfyear. Transaction says GoMo, which helps drive financing of older cars, will help it to increase sales at WeBuyCars.

Will Transaction’s future earnings drop now that SA Taxi is running at a loss?

SANTACO’S OWNERSHIP STAKE IN SA TAXI IS WORTH LESS THAN ZERO AND THE SANTACO DEBT NEEDS REFINANCING FROM BANKS

Yes, as SA Taxi was its biggest earner it is now relying primarily on WeBuyCars and Nutun for profit — but these businesses are not facing the same challenges as the taxi lender.