Trans­ac­tion Cap­i­tal: Trans­port­ing the na­tion

Finweek English Edition - - PRO PICK - BY SA­MAN­THA PAUWELS Port­fo­lio man­ager at Cannon As­set Man­agers

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.

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