High-quality growth stock, but not cheap

Over the past five years, there have not been many SA Inc companies that have delivered winning risk-adjusted returns to shareholders. Transaction Capital is a standout achiever, with a five-year share price performance of nearly 120%.

It has focused on operating its core competencies at scale, while achieving attractive diversification across just two central pillars.

Transaction Capital Risk Services (TCRS) has been a pioneer in the consumer credit market in SA, giving lenders a liquidity option on nonperforming loan (NPL) portfolios. It also operates in Europe and Australia. There is still significant room for growth in SA as a relatively underdeveloped market by global standards.

SA Taxi dominates in the minibus taxi industry, which holds nearly 70% of the public transport market share, with more than 120,000 individual taxi operators in SA transporting 16-million people a year. SA Taxi extends credit in this niche industry and offers value-added services like repairs, parts, insurance and even the direct sale of taxis. Its BBBEE partner in the business is the SA National Taxi Council.

Shareholder support for these businesses is clear: the company raised nearly R560m in June 2020 in an accelerated bookbuild at a 2.2% premium to the 30-day-volume-weighted average price.

A third pillar has now been added to Transaction Capital in the form of WeBuyCars, in a deal that was finalised on September 11 2020.

Transaction Capital will initially hold 49.9%, but has the option to take this as high as 74.9% within three years. Clever use of vendor finance and an equity component to the deal means the initial purchase consideration of R1.8bn includes only R1.12bn of cash from Transaction Capital.

Judging from the 2019 financial year, WeBuyCars should contribute 13% of group earnings, SA Taxi 48% and TCRS 34%. The remaining 5% is the group executive office as a profit centre (which is unusual).

It’s unclear what the mix will be in the 2020 financial year results after the disruption of the lockdown. What we do know is that core headline EPS (HEPS) will drop between 60% and 70%. The severity of the current crisis has hit both TCRS and SA Taxi.

TCRS has informed the market that a write-down of R250m-R300m is coming in the results for 2020. The collectability of the NPL books has been negatively impacted by lockdown and TCRS has been more cautious in buying books in a time of uncertainty.

Group profit from continuing operations was R773m in 2019, so this write-down is a significant contributor to the drop in core HEPS that is expected at group level.

Lockdown was tough on the taxi industry and activity still hasn’t returned to normal.

SA Taxi is a well capitalised and stable business, but the credit loss ratio will blow out in the 2020 results to between 7% and 8% (vs the normal target of 3% to 4%).

TCRS and SA Taxi have suffered a temporary setback, with a negative impact on earnings that will come through in the 2020 financial year results. Both companies continue to hold market-leading positions in their respective industries. As the economy recovers, there is every reason to believe double-digit earnings growth will resume from 2021.

With WeBuyCars, Transaction Capital has acquired another market-leading business in a profitable vertical market. Economic pressure supports the used-car industry.

Transaction Capital isn’t cheap, but is a high-quality growth stock that has achieved what many other SA companies could not over the past few years. ●