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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 No. 2016/130129/06)
JSE share code: TCP Bond Company code: TCII
ISIN: ZAE000167391
(“Transaction Capital” or “the company” or “the group”)
STATEMENT BY THE GROUP CHIEF EXECUTIVE OFFICER AHEAD OF THE AGM
This statement details the information to be presented to shareholders at the annual general meeting
(AGM) to be held on 7 March 2019. It will also inform management’s interaction with investors and
analysts from 25 to 27 March 2019, prior to Transaction Capital’s closed period.
The significant economic headwinds in South Africa over the past few years persisted into 2019. Despite
these conditions, our entrepreneurial management teams’ unrelenting investment in innovative
strategies, to further diversify and expand divisional earnings, supported a strong operational and
financial performance in the first quarter of the 2019 financial year. We expect the ongoing precise
implementation of these strategies to translate into robust organic earnings and dividend growth over
the medium term, at least in line with the group’s past performance.
SA Taxi and Transaction Capital Risk Services (TCRS) have demonstrated their resilience in this low-growth
environment. The likelihood of a meaningful macro- and socio-economic recovery remains uncertain,
and will be contingent on bold structural reforms that at best will be considered only after the national
election in May. We have not factored into our guidance any prospect of economic upturn, so there may
well be upside potential for our growth expectations over the next three to five years.
The group’s balance sheet remains well capitalised, liquid and ungeared, with funding requirements for
the 2019 financial year already secured and excess capital of more than R1 billion. Our growth
expectations assume no accretive investment of the group’s excess capital, making further upside
possible in the medium term.
SA Taxi’s strong balance sheet subsequent to the SANTACO transaction, coupled with the group’s
high-quality earnings growth supported by high cash conversion rates, positions the group to maintain
its dividend policy and further improve pay-out rates over the medium term.
TRADING ENVIRONMENT
Our macroeconomic outlook is similar to that at the end of the 2018 financial year. Economic growth will
remain sluggish, constrained by low consumer and business confidence, high unemployment and
household debt, low wage growth, a volatile Rand, the 0.25% increase in interest rates in November
2018, rising costs of household essentials and stagnating credit extension. While the recent decline in
fuel prices will alleviate some pressure on household spending and debt burdens, sustainably lower fuel
prices over the medium term will be required for any meaningful improvement to materialise.
TRANSACTION CAPITAL RISK SERVICES (TCRS)
Operating context
Transaction Capital’s Consumer Credit Rehabilitation Index (CCRI) showed that South African consumers’
propensity to repay debt remained unchanged in the last quarter of 2018 compared to the quarter
before, and deteriorated by 0.3% from a year ago. This indicates that consumers’ ability to repay debt
has neither improved nor deteriorated.
Acquisition of non-performing loans as principal
In South Africa, the economic climate and TCRS’ data, scale and capital position continues to favour the
acquisition of non-performing loan portfolios from risk averse clients who prefer an immediate recovery
against their non-performing loans. TCRS acquired more non-performing loan portfolios during the first
quarter of the 2019 financial year, compared to a year earlier. This acceleration in book acquisition, which
is expected to continue over the financial year, has supported strong growth in estimated remaining
collections and underpins future revenue growth within this business.
TCRS’ cautious and selective approach in applying its analytics, pricing expertise and capital raising
capabilities to acquire non-performing loan portfolios in Australia is gaining traction with additional
portfolios acquired during the quarter.
Contingency and fee-for-service revenue
The South African contingency and fee-for-service collections business is performing in line with
expectations in light of the difficult consumer credit environment. Management remains focused on
improving effectiveness and efficiency through technology, industry sector specialisation and innovative
new products.
Recoveries Corporation in Australia posted a robust performance and delivered operational efficiencies
in the first quarter of 2019. Our strategy of augmenting management competencies, implementing TCRS’
business information, payment automation and collection technologies, and outsourcing certain
operations to our South African low-cost centre of excellence supported this pleasing result.
Other specialised credit sectors
Transaction Capital’s business model, proven over close on two decades, is to effectively deploy
permanent capital to originate or acquire alternative assets in the specialised credit sector. We are able
to assess, mitigate, underwrite and price the inherent credit risk of these alternative assets to generate
risk-adjusted interest returns, and to mobilise the optimal balance of equity capital and leveraged debt
to fund their growth. Our ability to identify and partner with exceptional entrepreneurial founders and
management teams, in building and scaling operational platforms to manage these assets and achieve
capital appreciation, underpins the outcomes we have achieved for our shareholders to date.
After thorough analysis, we believe the fragmented segment of the European specialised credit market
presents an attractive opportunity to leverage the TCRS business model. The European specialised credit
market is many times larger than the South African and Australian markets, with known participants in
this market being large credit management and collection platforms, asset managers or private equity
funds. However, the segment of the market we are targeting is the smaller portfolios of higher-yielding
alternative assets originated within the corporate and consumer sectors. Private specialist credit
managers typically acquire these niche portfolios via bespoke, off-market sales processes.
Over recent years, we have created a partner network of specialist credit managers, alongside whom we
will co-invest to acquire a diversified portfolio of specialised credit related assets over time. This strategy
will give Transaction Capital and our shareholders unique access to niche European specialist credit
managers, without concentration risk in any particular portfolio, asset class, asset originator, collection
platform or geographic market. No investment in goodwill or in business integration costs or risks will be
required.
Although the capital we have earmarked for this growth opportunity is small in proportion to Transaction
Capital’s asset base, it will further diversify TCRS’ earnings base and we expect it to deliver double-digit
hard currency risk-adjusted interest returns. For a relatively small initial investment, the added benefit
of gaining a deeper understanding of the European collections industry, with the potential to participate
in emerging opportunities in future, is already proving meaningful. In time, we intend to build and
operationalise a scalable business platform to achieve capital appreciation. This platform will manage
our European assets, leveraging off TCRS’ high South African IP and know-how, and its low-cost collection
infrastructure combined with leading technologies.
Conclusion
Strong performances from acquiring and collecting on non-performing consumer portfolios, excellent
results from Recoveries Corporation in Australia, together with ongoing cost containment, continue to
support TCRS’ improving cost-to-income ratio and earnings growth.
SA TAXI
South African National Taxi Council (SANTACO) transaction and industry initiatives
The ownership transaction between SA Taxi and SANTACO was finalised on 6 February 2019.
Shareholders are referred to the SENS announcements on 22 November 2018 and 6 February 2019
(available at http://www.transactioncapital.co.za/SENS.php ) for more detail on the transaction. This
transaction is expected to support growth in the finance, insurance and retail businesses, and unlock
further opportunities to provide allied services within the broader taxi community, enabling a deeper
penetration of the total addressable market. SA Taxi working closely with SANTACO leadership, has made
good progress on various initiatives designed to deliver sustainable benefits to SA Taxi, its clients and the
industry as a whole.
Of the R1.2 billion net proceeds from the transaction, SA Taxi has settled approximately R1 billion of
interest bearing debt, with the remainder retained to fund growth. We expect the financial benefit of the
transaction (improved net interest margins from the lower leverage and interest expenses savings) and
the operational benefits of a stronger relationship with SANTACO to be significantly accretive to SA Taxi’s
and Transaction Capital’s earnings over the medium term.
The vendor funding made available by SA Taxi will result in Transaction Capital consolidating 81.4% of SA
Taxi’s earnings, compared to 98% prior to the transaction. Despite this, we expect the growth in the
actual amount of SA Taxi earnings to be consolidated by Transaction Capital to be in line with growth
rates achieved in prior periods.
Operating context
The structural dynamics detailed in previous announcements and the group’s latest integrated report,
support the minibus taxi industry’s resilience despite challenging macro-economic conditions in South
Africa. Fuel prices declined by more than 20% between October 2018 and February 2019, which should
alleviate some pressure on minibus taxi operators. Even after today’s fuel price increase of approximately
70c per litre, prices have declined by 15% since October 2018. As mentioned above, lower fuel price
levels are needed over the medium term for any meaningful benefits to materialise.
Vehicle retail
Although Toyota increased vehicle prices by 2.5% since September 2018, SA Taxi’s Midrand retail
dealership experienced strong momentum during the first quarter of 2019. The Polokwane dealership,
opened in October 2018, is performing in line with expectations. Additional dealerships are being
considered.
Vehicle financing
SA Taxi’s loans and advances continue to grow in the low- to mid-teens, with effective capital
management keeping net interest margins above 11%. The credit loss ratio improved marginally
compared to the first quarter of 2018 but remained within the division’s risk tolerance of 3% to 4%. The
difficult economic conditions, partially offset by a robust collection performance, high quality of loans
originated and conservative credit granting criteria resulted in a marginal increase in SA Taxi’s non-
performing loan ratio compared to the end of 2018.
SA Taxi returned to the local listed debt capital markets in February 2019 launching Transsec 4, a
R2.5 billion Moody’s credit rated and JSE-listed debt securitisation programme. The Transsec 4 issuance
auction commenced today. SA Taxi’s funding requirements for the 2019 financial year are already
secured.
Vehicle insurance
SA Taxi continues to broaden its client base and product offering by focusing on enhancing customer
service, benefits and existing products, and launching new products. The broker network distribution
strategy has gained traction, contributing to strong growth in gross written premium. Operational
efficiencies in SA Taxi’s combined autobody and mechanical refurbishment facility resulted in improved
loss ratios in the financed and open market insurance portfolios.
Autobody repair, mechanical refurbishment, salvage and parts procurement and distribution
SA Taxi’s autobody repair and mechanical refurbishment facility is designed to reduce the cost of
refurbishment, thereby lowering both insurance claim costs and credit losses in the event of
repossession. Its parts procurement and distribution, and vehicle salvage operation established in March
2018, called Taxi Auto Parts or TAP, contributed to improved efficiencies. TAP enables SA Taxi to import
and locally procure new parts at lower cost, as well as quality refurbished parts via its salvage operation.
These are distributed to SA Taxi’s own refurbishment centre as well as its network of preferred external
autobody repairers. TAP also optimises the salvage value of vehicles.
The TAP retail initiative, which sells well-priced new and refurbished vehicle parts to taxi operators, is
exceeding our initial expectations.
Conclusion
SA Taxi’s operational and financial performance remains robust with consistent growth in gross loans and
advances, a stable net interest margin, stable credit performance and similar growth in non-interest
revenue. Its cost-to-income ratio remains below 50%.
INTERIM RESULTS ANNOUNCEMENT
Transaction Capital’s interim results for the half year ended 31 March 2019 are expected to be released
on SENS on Wednesday, 15 May 2019.
The information in this announcement has not been reviewed and reported on by the group’s external
auditors.
Dunkeld West
6 March 2019
Enquiries:
Phillipe Welthagen - Investor Relations
Telephone: +27 (0) 11 049 6700.
Sponsor: RAND MERCHANT BANK (A division of FirstRand Bank Limited).
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Date: 06/03/2019 11:14:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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