Transaction Capital Limited


Company Overview
Transaction Capital Limited is a financial services company that specialises in asset-based lending and debt collection services. The company emerged from the amalgamation of MBD CS, CMS, SA Taxi, PIC Solutions and Kanderlane Group in 2007. It operates through two divisions, namely SA Taxi and Transaction Capital Risk Services. SA Taxi lends to SME minibus taxi operators in South Africa and provides insurance and allied services to the operators. Transaction Capital Risk Services (TCRS) manages receivables by purchasing non-performing loans thereby providing working capital to businesses in South Africa and Australia. Transaction Capital Limited was listed on the Johannesburg Stock Exchange in June, 2012.

The acquisition of Recoveries Corporation Limited, Australia has helped Transaction Capital to take advantage of the debt collection industry in Australia and diversify its operations.

David Hurwitz is the chief executive officer while Christopher Seabrooke remains the chairman of the board of directors of Transaction Capital Limited. Diane Radley and Buhle Hanise were nominated as independent non-executive directors on 15 July 2018 and 1 January 2019 respectively. Olufunke Ighodaro resigned as independent non-executive director on 30 November 2018.

Investment Thesis
TCRS produced 4.6% of net interest income in 2018 compared to 7.6% of the previous year, 2017. However, it produces the bulk of non-interest income (2018:77.3%; 2017:76.7%). Over the past three years, TCRS has grown its purchased book debts by 34.8% and non-interest income by 24.5%. In addition, this segment has grown its headline earnings by 17.2% year-on-year to R273 million.

SA Taxi has been expanding both its loan portfolio and net interest revenue. Gross loans and net interest income increased at a compound rate of 14.7% and 13.4% respectively in the past three years. Net interest margin was 11%, losing 0.4% year-on-year. Besides, non-interest income rose 30.7% on a 3-Year CAGR basis. Non-interest income has been largely driven by its insurance business. The effort made to broaden its insurance client base by extending its insurance services to clients not financed by the SA Taxi is a welcome development. The minibus taxis are an integral part of the public transport system in South Africa and require funding which may not be easily accessible to SME  minibus taxi operators from commercial banks. SA Taxi bridges the funding gap.

The South African National Taxi Council (SANTACO) acquired 25% stake in SA Taxi in November 2018 for R1.7 billion.  The proceeds will be used to pay off debts and provide additional finance for the business. Though it would lead to dilution of SA Taxi’s shareholding, the acquisition is expected to reduce interest obligations and improve net interest margin.Earnings Chart of Transaction Capital Limited

In addition, the company established Taxi Auto Parts (TAP) in March 2018 to procure and distribute vehicle parts to SA Taxi’s refurbishment centre and its approved external auto-body repairers. This would help lower insurance claims and credit losses associated with vehicle repossession from defaulters.

Transaction Capital is trading at R22.11 per share which is above our fair value estimate for a share of the company. Our estimate for a share of the company is between R14.5 and R18.

Financial Overview
Interest and similar income rose to R2.2 billion from R2 billion; this translate to a year-on-year gain of 9.3% compared to 16.8% of the prior year.  Non-interest income leapt 22.7% to R2.4 billion in 2018.  Net interest income recorded 9.2% improvement on the previous year’s figure of R1 billion. 89% of net interest income is attributable to SA Taxi (2017:87.9%) while TCRS produced 77.3% of non-interest income (2017:76.7%). In the last three years, SA Taxi has grown non-interest income by 30.7% while TCRS has added 24.5% to non-interest income. PBT added R145 million to close the year at R916 million.  PAT was R698 million, up by 2.9% from R568 million of the previous period. PAT translates to EPS of R1.12, 16.7% better than what was achieved a year before. Shareholdersꞌ fund expanded by 11.2% while Book Value Per Share  (BVPS) increased by 9%. The company generated Return on Equity (RoE) of 16.7% and Return on Assets (RoA) of 4.6%.Graph of returns of Transaction Capital Limited

Purchased book debts by TCRS are on the rise, increasing by 54.2% in 2018 to R1.4 billion. This was better than 2017 in which purchased book debts recorded a 22.4% improvement. However, non-interest income from TCRS gained 23.7% in 2018 compared to a 54.1% in the previous year.

Gross loans granted by SA Taxi amounted to R9.4 billion in 2018, 13.2% more than the amount extended a year ago. Non-performing loan ratio rose 0.6% to 17.7% and credit loss ratio stood at 3.3% (2017: 3.2%).

Business Risk
Transaction Capital faces high risk by virtue of the nature of its business and the target market. Lending to SME taxi operators poses risk of default to SA Taxi. TCRS purchases overdue accounts which may make recovery difficult thereby adversely affecting non-interest income and profit.

Recommendation: Sell

Vital Statistics of Transaction Capital Limited

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