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TRANSACTION CAPITAL LIMITED - Statement by the Group Chief Executive Officer ahead of the AGM

Release Date: 09/03/2022 08:00
Code(s): TCP TC002 TC001     PDF:  
Wrap Text
Statement by the Group Chief Executive Officer ahead of the AGM

Transaction Capital Limited                         TransCapital Investments Limited
(Incorporated in the Republic of South Africa)      (Incorporated in the Republic of South Africa)
Registration number: 2002/031730/06                 Registration number: 2016/130129/06
JSE share code: TCP                                 Bond company code: TCII
ISIN: ZAE000167391
(“Transaction Capital” or “the group”)


The information in this announcement will be presented to shareholders at our annual general meeting
(AGM) on 10 March 2022. It will also inform our interaction with investors and analysts prior to our closed
period. The information in this announcement has not been reviewed and reported on by Transaction
Capital’s external auditors.

Transaction Capital’s performance in the first four months of the 2022 financial year (FY2022) has been
strong, in line with our expectation. Although the COVID-19 pandemic continues to redefine the global
operating context, the group’s historic growth trend resumed during 2021. By the end of the 2021
financial year (FY2021), our divisions had largely recovered to pre-COVID levels of business activity and
earnings growth. Based on our current assessment of operating conditions and growth prospects, we
expect headline earnings per share (HEPS) in FY2022 to exceed FY2021 HEPS at a rate higher than pre-
pandemic growth rates. This performance is supported by a continued steady recovery by SA Taxi, and
high-growth earnings from WeBuyCars and Transaction Capital Risk Services (TCRS), which are both on
track to grow at a rate higher than prior years.

SA Taxi, TCRS and WeBuyCars continue to demonstrate their resilience and relevance in an environment
still characterised by the effects of the pandemic. All our divisions have compelling strategic organic
growth initiatives under way and in development and continue to deliver strong operational performance
in tough markets. In addition, Transaction Capital has springboard opportunities to accelerate earnings
growth in the short to medium term, including international expansion through TCRS and WeBuyCars,
where we are able to leverage our homegrown competencies and rand-denominated resources to grow
organically. This spread of opportunity will enable us to further diversify our revenue and risk profile to
yield higher growth and deeper resilience.

Against a backdrop of socioeconomic fragility and systemic threats, a stagnant local economy and global
uncertainty, we have demonstrated our ability, both strategically and operationally, to allocate capital
towards identifying and driving growth in dynamic markets and volatile operating conditions. Transaction
Capital’s recovery in this environment illustrates the entrepreneurial mindset and operational resilience
of our businesses. We remain confident that the group can continue to generate strong commercial
returns in the medium term, while simultaneously deepening our support for our industry stakeholders
and creating net positive, long term value for broader society.
WeBuyCars is a leading principal trader of used vehicles through its vertically integrated e-commerce and
physical infrastructure, offering finance, insurance and other ancillary products. This uniquely composed
offering, which combines customer convenience and competitive pricing, positions it well to benefit from
current market conditions.

The outlook for the used vehicle market in South Africa is resoundingly positive. Structural support for
the resilience and future growth includes cash-strapped consumers trading down to less expensive used
vehicles, a trend given momentum by the economic implications of COVID-19. In addition, mobility trends
from 2013 to 2020, show that more people are moving from being passengers in personal vehicles to
owning their first car, with vehicle ownership an aspiration deeply rooted in South African culture.
Further, the recent microchip shortage and supply chain disruptions have affected the global supply of
new vehicles, an added tailwind for the used vehicle sector.

WeBuyCars reached new heights in several categories during FY2021, including total revenue and units
bought and sold. This trend has continued into the first four months of FY2022, with the volumes of
vehicles sold per month being just under our 10 000 short-term target. The increase in the number of
vehicles traded has been driven in part by the expansion of WeBuyCars’ physical footprint. During the
last three months, we have launched our largest vehicle supermarket at the Dome in Johannesburg, with
a total capacity of 1400 bays, and a smaller dealership in Polokwane with 175 bays. This is pursuant to
our geographic expansion strategy to establish physical dealerships across South Africa, which will vary
by size depending on the size and demand of the town, ranging from our large vehicle supermarkets with
more than 800 bays in major centres to dealerships holding less than 200 vehicles in small centres. This
strategy is augmented by our newly designed buying pods, which are conveniently located in high traffic
areas such as shopping centres.

The COVID-19 lockdown has irreversibly accelerated digital adoption and the shift to purchasing goods
and services online. WeBuyCars has increased investment into its e-commerce platform as well as brand
marketing and online lead generation. Online sales remain at approximately 30% of total monthly sales
with business-to-consumer (B2C) e-commerce capabilities, which were introduced in 2021, now
accounting for approximately 16% of total online sales, up from circa 8% at the end of FY2021. In the
medium-term, WeBuyCars’ digital capabilities and e-commerce platform will support more efficient stock
turn and even higher growth.

WeBuyCars earns a gross margin on vehicle sales, with additional margin earned on finance and insurance
(F&I) products. The latter includes commissions earned from F&I products sold on behalf of banks,
insurance companies and a vehicle tracking business. Take-up of F&I products continues to increase, with
approximately 17% of all sales now including F&I. In addition, pursuant to our strategy to offer vehicle
finance as a principal, this year we have launched WeBuyCars’ personal vehicle finance offering,
leveraging SA Taxi’s expertise and credit capabilities.

SA Taxi has steadily come through the worst impacts of COVID-19, demonstrating the resilience of the
business and the industry at large. The minibus taxi industry remains indispensable to South Africa’s
economic productivity, with most South Africans relying on public transport. It is the largest and most                                                                                                      
vital service in the country’s integrated public transport network and more commuters choose minibus
taxis over bus and rail services due to convenience and accessibility. Spending on minibus taxi transport
is largely non-discretionary, making the industry defensive in tough economic conditions.

Loan and insurance policy affordability continues to be constrained. Retail prices for minibus taxis have
risen 3.5% between October 2021 and January 2022. At the end of 2021, the 12-month average for petrol
and diesel prices were 19% and 17% higher than a year ago, with the petrol price breaking the R20/litre
level. Petrol prices are expected to increase further in the coming months, driven by international oil
price increases. Russia’s military action in Ukraine could push international oil prices up even higher,
compounding the increases in local fuel prices. We are tracking this situation and the potential impact it
may have on the affordability of our operators. Minibus taxi fares have increased on average by
approximately 9.3% per year since 2013, to absorb these financial effects. With number of trips and
passenger loads down due to the impact of COVID-19, the industry’s profitability is under strain and
further fare increases may be needed.

Foundational to SA Taxi’s business model are propriety data sets that allow us to manage credit and
insurance risk in real time. Over the COVID-19 period, we have seen vehicles financed by SA Taxi travel
between 82% and 98% of pre-COVID distances due to the various lockdown restrictions and spates of
civil and taxi unrest experienced in 2021. The fourth wave of COVID-19 infections in December 2021 was
less severe than previous waves, however the ripple effects of the pandemic continue to drive sluggish
growth across most sectors resulting in lower commuter volumes. Although commuter activity is
increasing as economic activity in South Africa increases, in the short-term it is not expected to reach
levels experienced prior to the pandemic.

SA Taxi Finance, SA Taxi Auto Repairs and SA Taxi Auto Parts
Demand for new minibus taxis and Quality Renewed Taxis (QRTs) is exceeding COVID-19 levels and
remains far higher than supply. SA Taxi continues to grow loans and advances whilst preserving credit
quality in the current environment. To this end, we are targeting better quality and experienced minibus
taxi operators, resulting in lower loan approvals.

The focus on QRTs continues to provide SA Taxi’s clients with an affordable yet reliable alternative to
buying a new minibus taxi. QRTs now constitute approximately 40% of total loans originated and growth
in QRT loan originations is expected to exceed growth in new minibus taxi loan originations in FY2022.
SA Taxi has built out its capacity to refurbish QRTs from 280 per month in 2020 to approximately 400 per
month currently, whilst increasing access to spare parts by enhancing its import processes. The increased
refurbishment capacity in SA Taxi Auto Repairs will support higher QRT vehicle supply, and in turn, grow
loan originations.

Despite the environmental factors mentioned above, collections on SA Taxi’s gross loans and advances
portfolio have recovered since the initial economic shock of the pandemic but have not yet reached pre-
COVID levels. The recovery is taking longer than originally expected, given the additional disruptions in
2021 caused by a prolonged and severe third wave which coincided with civil and taxi industry unrest in
parts of South Africa. Provision coverage remains conservative to protect the balance sheet.

SA Taxi Protect
With most of SA Taxi Finance’s clients choosing to insure their vehicles through SA Taxi Protect, gross
written premium revenue continues to show growth above pre COVID-19 levels. Comprehensive vehicle                                                                                                       
insurance claims are in line with past performance. As expected, COVID-19 has resulted in higher credit
life claims and higher lapse rates in FY2022, although lower than that experienced in FY2021.

TCRS has made significant progress in shifting its business model to focus on three core service offerings;
collection services, transactional services and business process outsource (BPO) services. These are
centred on our vision to create a global technology services business that leverages our South African
technology platform and call centre IP. This competitive advantage positions TCRS for high-potential
opportunities in each service offering.

While we expect South Africa to enter a post-lockdown period in the near future, the South African
consumer is still facing many challenges at the start of 2022, including high unemployment, rising interest
rates and rising cost of living as fuel prices and inflation trend higher. TCRS’s business model continues
to gain relevance in this environment, as we support our clients’ ability to extend credit by freeing up
their operational and balance sheet capacity and rehabilitating indebted consumers.

In its most significant business activity, TCRS acts either as a principal in acquiring and then collecting on
non-performing loan (NPL) portfolios, or as a service provider on an outsourced contingency or fee-for-
service (FFS) basis. In the first quarter of FY2022 more NPL portfolios came to market in South Africa with
TCRS’s investment activity on track to exceed FY2021 levels. We see this trend continuing as the impact
of COVID-19 plays out over the medium term. As household income erodes and the number of
consumers in debt increases, the pressure on consumer-facing businesses will increase as their credit
portfolios deteriorate. This provides more scope for TCRS, as our clients deal with bigger NPL portfolios
and the consumers’ impaired ability to service debt.

Despite this, collections in South Africa on NPL portfolios owned as a principal, as well as contingency
and FFS collections, have recovered fully. In addition, cost containment measures implemented during
the COVID-19 period continue to achieve operational efficiencies.

TCRS is proving its ability to deliver comprehensive data-enabled business process outsourcing services
in South Africa and abroad. For international clients, South Africa’s low-cost skills and our stable digital
infrastructure make TCRS an attractive alternative to in-house administrative and customer management
services. This is an exciting opportunity for TCRS to leverage our rand cost base, local technology platform
and IP, and deep experience in managing large call centre operations to earn international revenue and
create jobs locally.

Transaction Capital’s results for the half year ending 31 March 2022 will be released on SENS on
Wednesday, 18 May 2022.

Hyde Park
9 March 2022

Nomonde Xulu - Investor Relations

Corporate & Equity Markets Broker and JSE Equity Sponsor: Investec Bank Limited
Debt Sponsor: RAND MERCHANT BANK (A division of FirstRand Bank Limited)


Date: 09-03-2022 08:00:00
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