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Prior to Transaction Capital (TCP) entering a closed period ahead of its FY2022 results, the company hosted a call with analysts to provide some guidance on trading conditions.

Let’s start with what everyone wants to guided that the increase in headline earnings per share (HEPS) in the 2022 financial year to 30 June (FY2022), is expected to be in the "high teens".

Because the market is driving by expectations, it must be noted that this increase is slightly lower than guidance provided at the interim results (1H22), of “almost 20%”.

While WeBuyCars and the Transaction Capital Risk Services (TCRS, now renamed Nutun Digital Business Services or NDBS) debt collection business continued to perform very well and above 1H22 guidance, SA Taxi’s performance deteriorated further in 2H22, for the following key reasons:

        1. The Kwa-Zulu Natal floods impacted production at Toyota for longer than had been anticipated and is in fact still not back to 100% production. This is of enormous importance because Toyota accounts for most new minibus taxis sold by SA Taxi. This shortfall in Toyota production caused a shortage of new minibus taxis for sale.
        2. TCP missed their raised targeted number of refurbished minibus taxis for re-sale, so couldn't make up for the new minibus shortfall from Toyota. These factors negatively impacted the number of loan originations.
        3. Given higher interest rates and operating costs, taxi operator profitability has come under increasing pressure resulting in slightly higher credit losses.

A mitigating factor, from a group perspective, of SA Taxi’s muted performance is that by FY2022 SA Taxi will be the smallest division within TCP as WeBuyCars and TCRS continue to outgrow SA Taxi by some margin.

Furthermore, the investment made in new operations to lift the future growth trajectory, will also impact the FY2022 result.

        1. The cost to income ratio was slightly elevated by a deliberate intention to grow the market share of the used car market from the current estimated 10% to the medium-term target of >20%. This entailed opening new sites (which meant higher build, stock, and staff costs), more aggressive marketing spend and paying a little more for cars to push competitors out.
        2. The launch and higher than anticipated initial uptake of GoMo, the recently launched used car financing and insurance business. GoMo is expected to boost future earnings growth leveraging off the group’s used sales capabilities and infrastructure, better used vehicle valuation capabilities and the in-house refurbishment capabilities, all of which the banks don’t have.
        3. Finally, TCP has expanded its debt collection business into new territories (e.g., UK) and a wider client base, all operated from the established South African collection and customer servicing infrastructure.

In conclusion, we remain confident of TCP’s defensive growth model and astute management team and expect that the expansion of operations into adjacencies around WeBuyCars and NDBS (debt collection and business services), to raise the earnings growth trajectory beyond the roughly 15% p.a. since listing.

About the Author

Alec Abraham
Senior Equity Analyst, Sasfin Wealth

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