Transaction Capital expects sustainable growth after hefty restructure

Non-deposit taking financial services group, Transaction Capital published results today declaring a 35% drop in headline earnings per share to 61 cents and a 36% drop in headline earnings to R351m. The company has a current market-cap of R4.4bn and declared a dividend of 10 cents per share, it expects sustainable growth in the medium to long term following a restructure. Alec Hogg was joined on CNBC Africa’s Power Lunch by David Hurwitz, CEO of Transaction Capital to discuss the results. – LF

ALEC HOGG: The second company that came out with results today… In fact, it was the third because we had Naspers early this morning and Omnia. Transaction Capital is a very interesting business. It’s a non-deposit taking financial services group. It’s declared a 35 percent drop in headline earnings per share, to 61 cents but it’s a restructured business and I guess that’s really, what it’s all about. R4.5bn market cap, continuing headline per share up by 18 percent and David Hurwitz is in the studio with us. A big difference from where you were a year ago, David. It was interesting, looking at your share price, that you’ve actually recovered all the ground that was lost through the payment of that special dividend of R2.10 after you sold off two big parts of your business. Let’s just go one step at a time. Bayport and Paycorp: how big were they? After they’ve gone, what’s the size of the business, relatively?

DAVID HURWITZ: From an earnings perspective, Bayport and Paycorp made up about 50 percent of our earnings, so it really was about half of the business and you’re right. We sold those businesses…we spoke about it last year this time, but the sales were only effective in November and January of this financial year. Post that, we declared a dividend of R2.10 per share. It’s interesting that the word you used was ‘loss’ because it was a loss to us but obviously, a gain to the shareholders. Subsequent to that, we’ve recovered very nicely, almost back to the levels where we were before.

ALEC HOGG: Yes, the share price was R7.00 at the time you declared the special dividend. It went down (as it should have) to R4.90. Now it’s at R8.00.

DAVID HURWITZ: Yes.

ALEC HOGG: So that’s an enormous turnaround. It’s almost as if people didn’t understand you.

DAVID HURWITZ: I think it was for two reasons. Firstly, we came to the market with four divisions and that was quite difficult for people to get their heads around. One of the divisions was involved in unsecured lending, so we timed that particularly well. The ownership of that division may have hampered our equity value. Post that, our asset-backed lending division and our risk services division have performed very nicely – good organic growth. As I said, 18 percent rise in continued headline earnings, coming purely from organic activities.

ALEC HOGG: I wonder what would have happened if you’d still owned the unsecured lending business at the time of the Abil collapse. You would have been contaminated.

DAVID HURWITZ: Absolutely. We would have been contaminated. There are winners and losers in that sector and I’d like to think that we owned one of the winners but certainly, the market would have painted it with a brush across the whole sector.

ALEC HOGG: So you’ve had no more exposure to unsecured lending, whatsoever.

DAVID HURWITZ: No more exposure to unsecured lending whatsoever, but our risk services division performs collection and credit services for the consumer market – the large banks and the large credit retailers.

ALEC HOGG: Debt collection?

DAVID HURWITZ: Debt collection – a little bit more than that. When it started, it was known as debt collection but there are IT services. We sell IT systems. We implement the systems. We consult on that – a lot of consulting work, and a lot of data analysis work. We would provide these credit providers with hot origination or enriched data to originate new clients.

ALEC HOGG: Is it a good business?

DAVID HURWITZ: It’s a fantastic business. We have about 60 different clients – all large credit providers in South Africa – no gatekeepers, it’s not capital-intensive, we accrue EBITDA by 18 percent in that division so it really, is a very exciting space for us

ALEC HOGG: And an area that continues to grow, as consumers get deeper and deeper into debt.

DAVID HURWITZ: Yes, I guess you could say it’s counter-cyclical in the sense that when the large credit providers in the country are under stress and when the consumer is under stress, then we get a lot more work. However, it becomes difficult to grow revenue in that environment because our revenue is effectively, the collection base from the South African consumer and when is under the pressure (as he is today) it becomes hard to collect from him.

ALEC HOGG: The other side of the business – the S.A. Taxi Association – so you lend money to people who buy taxis.

DAVID HURWITZ: Yes, it’s a phenomenal business. Effectively, we view ourselves as an innovative asset-backed lender with very special competencies. It’s not just about assessing their credit, collecting the money, and providing capital to him. It’s more about business support so we will procure vehicles directly and sell them to him. We provide him with a uniquely designed insurance product that we make. We obviously provide him with the finance. We provide him with telematics and data around where his vehicle is travelling and how he can do better and in that business, we’ve gone from strength to strength. In actual fact, our credit metrics improved in that business, which is contrary to the current credit environment that other lenders are seeing.

ALEC HOGG: Through technology, as you’ve explained. Is it mainly the taxis (the big Hi-Aces) or do you also have the smaller sedans?

DAVID HURWITZ: No, for the meantime, we are exclusively in the minibus tax market, not sedan at all although that could be a growth area that we are looking at, and we’ve even shifted to be almost exclusively a financier of Toyota products. The new Nissan product will provide us with a nice, new opportunity. There are a few Mercedes-types of products, which are more on long-distance, but we exited the Chinese market (or the financing of Chinese vehicles) some time ago.

ALEC HOGG: Why?

DAVID HURWITZ: The Chinese vehicle just wasn’t robust enough for the South African market. What we found was if the vehicle wasn’t good enough…if the vehicle breaks down, the operator can’t make money. If the operator can’t make money, then we end up losing money.

ALEC HOGG: What brand names are those?

DAVID HURWITZ: There were about seven or eight. The big one was the Photon.

ALEC HOGG: The Photon tractor.

DAVID HURWITZ: I’m not sure if the tractor was good, but maybe I shouldn’t mention them by name. We weren’t happy with the Chinese vehicle at all though, and we’ve exited that market. About 16 or 17 percent of our portfolios still consists of Chinese vehicles, but that’s reducing quite quickly.

ALEC HOGG: What’s happening to the taxi market? From time to time, as members of the public we see the taxi owners going on strike for one grievance or another.

DAVID HURWITZ: You must remember that the taxi industry was born out of necessity. When it was born, it was absolutely…and for the first few years (many years), right up until about 2006, the taxi industry was unregulated, informal, and I guess, self-regulated and born out of necessity. The previous Government…the demographic of the country – where people were placed – was poor. There was no infrastructure to move people from the place where they lived, to work so the taxi industry was born out of necessity. There are about 200,000 taxis on the road and what we’ve seen over the last while is more and more regulation coming into the industry. The industry’s becoming more formalised and we obviously participate in that, and we benefit from that.

ALEC HOGG: How many of the 200,000 do you have?

DAVID HURWITZ: Of the 200,000, we only have about 24,000 but remembering that only about 70,000 of those are financed. That is the drive. We don’t see big growth in the national fleet. If it grows at GDP, that would be a low single figure – one to two percent growth in the fleet. However, what we do see is the older vehicles being taken off the roads because of legislation and a greater proportion of the fleet being subject to finance.

ALEC HOGG: You mentioned the strike.

DAVID HURWITZ: The strike doesn’t really impact us. The type of action that we see lasts for a day here and a day there, and it’s often regional as opposed to if you look at what goes on in the Post Office or the mining sector where strikes are prolonged for four to five months. From our perspective, that hasn’t really impacted on our business.

ALEC HOGG: But the grievances to do with the issuing of licences or more permits: is that no something that will affect your business in time?

DAVID HURWITZ: I think it will affect our business but hopefully, on the positive side because as I say, the business becomes more and more regulated and more formalised. With that, the business opportunities obviously grow, so we don’t see that as a negative at all.

ALEC HOGG: David, you’ve produced the goods. The numbers are on the table. One has to have a look at it as continuing operations, rather than where you were a year ago. If that’s up at 18 percent, is it sustainable?

DAVID HURWITZ: Absolutely. We think it’s sustainable. We’d like to grow the businesses. We see very good organic growth opportunities in our two divisions. We want to grow our divisions to be large. As I said, in the taxi industry there are different products that we can finance. You’ve already mentioned the sedan taxi, which is quite exciting. The new Nissan taxi vehicle opens up a new market for us as well. In addition, we have a bakkie finance portfolio. If you think about it, 1000 taxis are being imported or assembled in the country. There are 4000 bakkies per months so that’s a market, which is at least four times as big, so great organic growth opportunity there.

ALEC HOGG: David Hurwitz is the Chief Executive of Transaction Capital.