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VEHICLE FINANCE

Transaction Capital, owner of WeBuyCars, tanks on news of taxi business restructuring

Transaction Capital, owner of WeBuyCars, tanks on news of taxi business restructuring
WeBuyCars on 15 December 2021 in Johannesburg, South Africa. (Photo: Gallo Images / Papi Morake)

Transaction Capital’s share price crashed by more than 40% on Tuesday after news of an aggressive restructuring of its taxi division and questions are now being asked about Transaction Capital CEO David Hurwitz's sale of shares worth R51-million late last year.

Add to that fuel prices climbing towards the R23/litre mark, floods, a lingering pandemic and an economy wallowing on the fringes of a recession, and financing taxis sounds like a terrible idea.

The market agreed, as Transaction Capital’s share price crashed by more than 40% on Tuesday, after news that it was to embark on an aggressive restructuring of its taxi division as a result of debt.

transaction capital webuycars

In a trading update ahead of the half-year ending on 31 March 2023, Transaction Capital said its divisions were well positioned to benefit from structural opportunities in the local and global environment and were “advantageously placed” to benefit from accelerated digital adoption.

“Our business models remain highly relevant and resilient; however, some parts of the group are being significantly impacted by the prevailing macroeconomic headwinds.”

Nutun, it says, remains on track to grow earnings in the 2023 financial year at a rate exceeding Transaction Capital’s historical levels, driven by increased acquisition and collection of nonperforming loan portfolios, and the delivery of a new broader range of digitally driven customer experience management services to a global client base.

WeBuyCars experienced “some margin pressure” in the first quarter of FY2023, which is likely to reflect a 20% decrease in earnings. Despite this, Transaction Capital says it is confident that the business will grow earnings as the long-term structural elements supporting the business model remain robust.

“WeBuyCars’ market position is unassailable and the business continues to increase market share. Take-up of finance and insurance products continues to increase.”

SA Taxi and Gomo, though, are to be restructured to a new mobility platform, which will be branded Mobalyz. GoMo was launched in the 2022 financial year as a mobility platform aimed at South Africa’s under-penetrated used vehicle finance and insurance sector.

At the time, Transaction Capital CEO David Hurwitz said, “GoMo leverages the best of SA Taxi’s credit intellectual property and WeBuyCars’ access to low-cost used vehicle distribution, as well as its ability to value and trade used vehicles efficiently.

“GoMo’s unique offering is the first in a range of innovative mobility products aimed at evolving and disrupting the used vehicle finance and insurance model in South Africa.”

In September 2022, Transaction Capital said that GoMo had received a positive market response, with the number of loan applications being significantly higher than anticipated. The product was strategically positioned within SA Taxi, although it will continue to drive vehicle sales growth and finance and insurance penetration within WeBuyCars.

The group noted that the floods in KwaZulu-Natal in April 2022 had temporarily disrupted public transport services and severely damaged Toyota’s manufacturing plant, resulting in its closure from mid-April to August 2022.

By September, production of the Toyota minibus taxis had resumed, but supplies were significantly constrained until at least the end of FY2022, which affected SA Taxi’s ability to originate new loans and grow its gross loans and advances portfolio.

While commuter activity was increasing, it remained lower than pre-pandemic levels and was not expected to return to normal levels in the short term.

‘Profitability stress’

“This, together with high fuel prices, has placed the minibus taxi industry’s profitability under strain, exerting pressure on taxi operators’ ability to afford their finance instalments and insurance premiums. The fare increase passed in July 2022 should partly offset this financial pressure.”

In this context, it warned that FY2022 headline earnings attributable to the group will remain below FY2021 earnings.

“Our strategic focus in the second half of FY2022 has been on optimising our core business lines. As we grow our GoMo offering, SA Taxi will seek to recalibrate its minibus taxi business by being more selective in the taxi operators and vehicle variants supported. This prudent approach will contribute to preserving credit quality, as SA Taxi targets higher quality and more experienced minibus taxi operators.”

Three months later, Hurwitz sold 1.6 million shares held in his Dovie family trust’s stake in the company for about R50.994-million.

At the time, “The Passive Income Guy” Dave Hazelwood tweeted, “Transaction Capital CEO sells 40% of his stake in the company. Probably nothing”, followed by, “I prefer to buy when the CEO is buying, not selling”. To which independent analyst Anthony Clark commented: “#TCP [Transaction Capital is] one of my Top 3 stocks to AVOID for Q1 2023 for a number of very obvious reasons [in a] Dec 6th interview @BusinessDayTV#TCP was [as I said] a contentious call BUT one I had confidence in. This CEO sale is just added icing on the baked cake.”

Over the past six months, Transaction Capital’s share price has dropped by more than half.

transaction capital webuycars

Now, Transaction Capital has said it believes the cyclical headwinds facing SA Taxi’s business model have become more structural in nature, and the business is unlikely to recover to pre-Covid levels in the short to medium term.

It blamed the problems on an unexpected lingering impact of the pandemic, the civil and minibus taxi industry unrest during FY2022, and the negative impact of the six-month disruption to Toyota’s production due to flooding in April 2022.

“This has resulted in a systemic change, reducing our ability to serve this lower-end segment of the industry.”

During FY2022, SA Taxi increased its capacity to repossess, refurbish and refinance “quality renewed taxis” from 220 a month in 2019 to about 600 a month.

The pressure on the division has necessitated a reassessment of SA Taxi’s business model, with specific attention on its auto refurbishment and repair facilities, which will be downscaled and disposed of.

It has now been forced to increase its bad debt provision for SA Taxi to R1.85-billion, while reducing repossessed vehicle stock by about R150-million.

The new mobility platform – Mobalyz – houses the group’s credit, insurance and funding intellectual property, datasets and technologies, making it the operating engine powering SA Taxi and Gomo. But Mobalyz is expected to report significantly lower core earnings from continuing operations than HY2022, “primarily as a result of the structural shifts in the minibus taxi operating environment”.

The market response to the Gomo offering, it said, has exceeded expectations, and to capture and maximise this growth opportunity, significant progress has been made in securing a symbiotic arrangement with a substantial funding partner that will allow Gomo to write loans directly on the funder’s balance sheet.

Transaction Capital’s trading update for HY2023 reveals that core earnings per share from continuing operations is expected to decrease by more than 20% – but no more than 50% – YoY.

Nutun is expected to grow FY2023 earnings at a rate exceeding Transaction Capital’s historical levels. But SA consumers are facing financial stress as higher interest rates and inflationary pressure erode disposable income, causing high levels of indebtedness.

transaction capital webuycars

WeBuyCars in Johannesburg. (Photo: Gallo Images / Papi Morake)

High used vehicle demand

WeBuyCars benefited from high demand for second-hand vehicles in the first four months of 2022, due to supply chain issues, chip shortages, higher consumer confidence, lower fuel prices and interest rates.

Over the past year, these supportive conditions have reversed as higher interest rates, fuel prices and rolling blackouts snuffed out consumer confidence.

It believes WeBuyCars’ agile business model and quick stock turn enabled it to respond immediately to these market changes, reducing trade in high-end vehicles to focus more on lower-priced used cars.

“Although margin percentages were temporarily impacted by this response, they have since normalised, and the adjustment in our stock and trading mix towards lower-priced vehicles is now aligned with current consumer demand.”

Sales volumes were up by more than 20% over the past 12-month period, currently at around 12,000 vehicles.

The group said despite the headwinds, it has over the past 10 years demonstrated a strong ability to allocate capital towards driving growth in volatile markets.

“We are confident in our ability to navigate this unprecedented macroeconomic environment. FY2023 will be a challenging restructure year for SA Taxi, but we believe that the group’s swift response in rebasing this business will give it the operational, financial and strategic flexibility to recover and grow.” BM/DM

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