Transaction Capital: Transporting the nation
Transactional Capital is a niche f inancial services company that has stayed under the radar of many investors, despite a strong track record. The group refined its strategy and business model in 2014, when it restructured following the timely disposal of unsecured lending business Bayport and payment services company Paycorp.
These disposals were value accretive, reduced complexity and derisked the business substantially. Paycorp was effectively sold for a 19 times earnings multiple and generated an internal rate of return of 18.2% for the group. More impressively, Bayport was sold during the unsecured lending storm for R1.3bn, banking a 32.6% internal rate of return! Management distributed some excess capital from the sale of these assets back to shareholders in the form of a handsome 210c capital distribution.
Currently, the group’s main operating divisions are split between asset-backed lending (60%) and risk services business (40%).
Its SA Taxi-division is one of the neatest operating businesses I have come across in South Africa. Largely misunderstood, the business currently finances 25 000 taxis or rather, 25 000 small and medium enterprises. The taxi industry is a vital component in the growth of our economy, responsible for 63% of public transportation, moving 2.5m commuters each day.
The group has successfully mastered the asset-backed lending model by f inancing, insuring, refurbishing and monitoring the performance of each business, or taxi. While most banks shy away, deeming it to be more risky, SA Taxi has seized the opportunity, understanding the customer, business and risks associated with this market. SA Taxi holds a wealth of data collected over the years, enabling it to analyse the route, estimate cash flows and the market size of each taxi owner’s permitted and regulated trips. This greatly assists the company in correctly pricing each taxi as a business, which is a key differentiator to the big banks. The major edge that SA Taxi has is its ability to repossess this asset in the event of non-payment. Banks simply do not have the data, systems or capabilities and hence are unable to compete head-to-head with pricing.
The margin enhancement as well as the other benefits from keeping much of the business in-house is material. From an insurance perspective, the business model is excellent: the claim rates are far lower than those of traditional insurers. Taxi drivers do not bring the taxi in for hail damage or a small bumper bash, as this puts them out of business for a while. When there is a major accident, SA Taxi is able to repair, refurbish and recycle the asset in under three days through its Taxi Mart warehouse with dedicated mechanics, panel beaters and importers of the Toyota mini bus. The repair work is done in half the time it takes traditional repair shops and at a fraction of the price. This enables SA Taxi to charge lower premiums, return the asset to the driver timeously and hence reduce the effect on the businesses cash f low, increasing the owner’s ability to pay.
At first glance, the non-performing loans ratio of 26% on the R6.6bn loan book seems daunting. But the key figure to analyse is the credit loss ratio of 5.1%, as the business model enables SA Taxi to recover the asset. Provisions against non-performing loans (value that can’t be recovered from fixing and reselling the taxi) are also sufficient in our view.
Complementary to SA Taxi is t he group’s r i sk ser vices division, predominantly a collections business of non-performing loan books acquired at deep discounts. While the consumer environment is a tough one presently, any improvement will result in more debts being recovered which, in turn, will generate an attractive return for this business as economies of scale are improved.
Management’s interests are well aligned with shareholders, evidenced by a 46% ownership stake. Transaction Capital is significantly overcapitalised a nd we e nv is a g e a s ubst a nt ia l increase in prof itabilit y when more capital is deployed as management continues to search for at t ractive business opportunities within its core competencies.