HOW TRANSCAP FOUNDERS CUT THEIR STAKE

The taxi business isn’t as profitable as it once was, with implications for everyone

David Hurwitz, the CEO of Transaction Capital, knew he was going to have a tough week. “I know this announcement seems a bit alarming,” he told a meeting of investors last week after warning that profits would tumble for the six months to March. This week, he quantified the damage: earnings per share would be 370%-375% lower than last year.

As it turned out, “a bit alarming” doesn’t begin to describe the panic. Transaction Capital’s stock was trampled, losing 68% over three days before clawing back some dignity.

So why the pandemonium for a company still making a profit? Part of the answer is that Transaction Capital operates a high-risk lending business in SA Taxi, which finances minibus taxis, and owns WeBuyCars, which has been soaring for years but now seems to have hit a pause in its stratospheric growth.

Until now, the appeal for investors has been the steep growth but when the music stops, and SA Taxi isn’t making a heap of new loans, there’s little to cloak the full horror of bad debts.

This is how fragile it is: by last September, of the R14.8bn in loans and advances it had made, borrowers were overdue on repaying R5.8bn of those loans, while another R3.1bn had been impaired as “bad debt”. Worryingly, more than R2bn in loans was overdue by more than three months narrowing the odds of ever being repaid.

Still, until November Hurwitz was expecting the taxi business to recover from the grenades lobbed its way: Covid, flooding at the factory which makes taxis, sky-high fuel prices and an asphyxiating economy choking the sector’s 15-million commuters.

He now admits the company fluffed this projection. “If there’s one area where I can say we as a management team got it wrong, it was in that assumption [of recovery]. We probably underestimated the impact of [those events].”

The remedy, he says, is an overhaul of SA Taxi’s business, while Transaction Capital will shunt R2bn extra into provisions for bad debt. As CFO Sean Doherty said: “We’re going to be more selective on our credit, so that we have a lower probability of default.” So far, so alarming. But what really set the cat among the pigeons was that before this bloodletting, Hurwitz’s family trust sold 40% of its shareholding in Transaction Capital in December (1.6-million of his 3.9-million shares) for R51m.

Questions swirled: had he known of the crash coming and sold to protect himself? After all, it’s never a good sign when a CEO slashes his own stake but when it comes ahead of a horrific trading update, the red flags go up.

To calm the nerves, Transaction Capital issued a statement saying Hurwitz had no option but to sell those shares, since his trust was “in breach of certain covenants relating to debt it held from its bankers”. And, it said, Hurwitz had “no price-sensitive information or insider information” when he sold.

Some analysts find this far-fetched. Says one: “Transaction Capital now says the shift in the taxi industry isn’t just cyclical but a structural downturn, so they’ve likely been discussing this in board meetings. I’m very uncomfortable that he sold shares in December the JSE should investigate.”

Still, Hurwitz’s trust was never a big shareholder anyway, always less than 1% of Transaction Capital.

But what investors probably haven’t noticed is that the three founders Michael Mendelowitz, Jonathan Jawno and Rob Rossi

have been quietly lightening their far more considerable stake since Transaction Capital listed on the JSE in 2012.

The three men go way back. They were dealmakers in various lending businesses before they ended up at African Bank in the early 2000s, managing its vehicle finance arm, A1 Taxi Finance.

In 2006, when African Bank wanted to sell A1, Jawno, Rossi and Mendelowitz snapped up the business that would later become SA Taxi. The following year, they stitched a number of lending business together to form Transaction Capital, including SA Taxi, debt collectors MBD, Credit Management Solutions Group, Paycorp and, later, microlender Bayport.

By 2010, the trio held a powerful 60.3% of the company, with 94.7-million shares each. By 2012, their combined stake had fallen to around 53%, which ebbed further to 41% by 2017. By 2019, the FM’s analysis reveals, Jawno, Rossi and Mendelowitz held only 59.3-million shares apiece (now equal to a combined 29% of the company). And by last year, this had dwindled further to just 36.3million shares apiece, or a combined 14.2% of the company.

So, besides the fuss over Hurwitz’s sale, Transaction Capital’s insiders have been lightening their exposure for years before the hazard lights on SA Taxi’s business were even visible.

Asked about this by the FM, Rossi says the founders haven’t sold a share since 2020. “It is true that over a decade ago, we held many more shares [and] as you correctly point out, it’s currently 14%. The reduction is partly due to our sell-down, but also because of the issue of new shares in Transaction Capital to staff and the investor market. More prosaically, we’re all getting a bit older now. So as the value of our shares increased, we sold some to rebalance our portfolios.”

The problem now for everyone who is left is that the trajectory is scary. Last year, for example, R961m was written off in bad debt a steep rise from R542m a year earlier.

In a note to clients, Sasfin Wealth analyst Alec Abraham says the sell-off is due to investors “fearing potentially large write-offs at SA Taxi”, and that the growth at WeBuyCars “may have run its course, at least for the time being”. Abraham says the path back to growth “will not be easy, nor short, when seen against the backdrop of the poor real GDP growth outlook in South Africa”.

This is why investors panicked: without growth to paper over these cracks, the considerable risk of bad debt becomes far less notional and disturbingly real.