In the current economic climate, building a thriving business has become more challenging than ever. Enterprise Africa talks to Transaction Capital CEO, David Hurwitz and asks how the company has managed to buck the trend and achieve outstanding financial results in such a challenging operating environment.
JSE-listed Transaction Capital is one of the country’s leading non-deposit taking financial services groups operating in under-served segments of the asset-backed lending and risk services markets. Founded in 2007 and listed in 2012, the company is driven forward by a team of highly experienced professionals and, across all divisions, its more than 3800 people are encouraged to take part in an entrepreneurial culture.
The beginning of Transaction Capital, in 2007, saw four companies – MBD, CMS, SA Taxi and Principa – merged with Paycorp and the group was formed. Total income in that year was R1,280 million. In 2008, Transaction Capital acquires 90% of Rand Trust and then in 2010, acquired 82.65% of Bayport. In June 2012, the company was listed and total income for the year was R3,882 million. In 2014, Paycorp and Bayport were disposed of in separate transactions and today the group consists of SA Taxi (comprising of SA Taxi Finance, SA Taxi Protect, SA Taxi Direct, Taximart Autobody Repair Centre, SA Bakkie and Zebra cabs) and Transaction Capital Risk Services (comprising of MBD, Principa, Rand Trust and BDB).
Thanks to an extremely well-thought out strategy and a unique business model, operating in market segments perceived to be of higher risk, Transaction Capital utilises excellent human capital, highly differentiated proprietary data and data analytics, and technology capabilities to consistently realise positive results – this is truly an example to follow for any company. After releasing its half-yearly results in May, Transaction Capital is celebrating a robust first half and CEO, David Hurwitz tells Enterprise Africa how the group managed to post 19% organic growth in headline earnings and headline earnings per share.
STRONG PERFORMANCE
“We reported a 19% profit growth for the half year and that is against a back drop of a zero growth economy. In that context, it’s pretty impressive and we’re certainly very pleased with that result,” he says.
“We break down the business into two main parts; you have SA Taxi on one side and Transaction Capital Risk Services on the other.”
The South African economy has seen its outlook deteriorate over the past few years and, even though it escaped a downgrade recently, it still faces the possibility of junk status in future reviews. Fortunately, this position has not impacted Transaction Capital in a big way.
“In difficult times like this, individuals or consumers may well be feeling financial pressure, but they still need to use a taxi every day to go to work and back. Spend on taxi transport is a non-discretionary element of consumers budgets – people are taking taxis just as they always do; in fact, there’s evidence that there’s even more people taking taxis now as people who were using private vehicles can no longer afford to do so. That explains why, in SA Taxi, we’re able to grow our profit by more than 20%,” explains Hurwitz.
Currently SA Taxi only finances Toyota, Nissan and Mercedes given their superior mechanical quality. Prior to 2014 Chinese vehicle brands were also financed but these have historically proven not to last the term of loan, due to the rigours of the minibus taxi industry, and attract a less experienced operator.
“Our other division, Transaction Capital Risk Services, is also facing a difficult economy. Of the companies that operate on that side of the business, the biggest is MBD. MBD is the largest collector of consumer receivables in the country. We collect as agents on behalf of credit providers in South Africa including banks, retailers, specialist lenders and municipalities – they use us to collect on matters where they cannot collect anymore. We also acquire non-performing books of consumer receivables outright from credit providers and we collect as a principal for our own account. It’s roughly a 50/50 split between the agency and principal elements of that business.
“In an environment like we have today, where the consumer is under pressure and has less income available to repay debts, it’s more difficult and more costly for us to collect.
“What offsets that is our clients are clearly facing the same problems in trying to collect from their customers so they need our assistance more than ever and so the volume of matters that are available to be purchased or handed over to us to collect is on the increase. That is why we end up with defensive positioning and that is how the MBD business also managed to grow earnings by more than 20%,” says Hurwitz.
The company has also managed to contribute profits through its head office, mainly from interest earned on the excess cash available for future acquisitions – in most businesses with ascertainable profitability divisions, the head office is not often recognised as a profit centre.
“The final piece of the puzzle relates to the earnings of the head office which traditionally should be a break even entity as there’s no real activity that takes place. However, right now, the head office is sitting with a lot of excess cash, going back to 2013 when Transaction Capital sold two of its businesses and we generated a lot of capital and cash thanks to generating a large profit. We paid out R1.3 billion cash as a special dividend but we were left with about R1-billion of cash which we plan to deploy into organic capital deployment opportunities within the group as well as into new business opportunities as the acquisition search continues. Right now, we’re still sitting with around R800-million cash and that has generated a return resulting in profit from the head office,” explains Hurwitz.
This strategy, which spans the entire group, directly contributed to the aforementioned 19% organic growth in headline earnings and headline earnings per share, and also an increase in return on average equity up to 15.9% and an increase in interim dividend, up 20%, amongst other positive results.
INVESTMENT & GROWTH
Through the rest of the year and into 2017, Transaction Capital will seek further growth and evidence of the group’s hunger to achieve development is shown in the recent investment into a vehicle refurbishment centre, new dealership, and advancement of the group’s Zebra Cabs business (which is aiming for 3000 metered taxis in its portfolio by 2020).
“Zebra Cabs is a new venture for us; it’s early days but we see a very nice opportunity to enter the metered cabs industry and it’s catalysed by the start-up of Uber in this country which has been a big disrupter to the market, like it has been in every country.
“We’re looking to modernise the existing fleet of metered taxis in this country, which are old and undercapitalised, and change the image of the industry which currently lacks trust. If we can bring the industry into the modern world, by designing a booking app and creating a brand which is recognisable with exceptional service, then we think we have an opportunity to grow this young market,” says Hurwitz.
Zebra Cabs currently operates mainly in Gauteng under the SA Taxi business division. Transaction Capital has spent approximately R6 million in the last six months acquiring three small metered taxi businesses, including fleets of drivers and operational infrastructure, and Zebra Cabs now has a fleet of approximately 180 Toyota Corollas. The business hopes to expand to the Western Cape and KZN in the near future. Zebra offers multiple booking and billing options, including corporate client accounts, making the process as simple and flexible as possible for customers.
The new auto body repair and refurbishment centre will service SA Taxi’s existing minibus taxi fleet along with Zebra Cabs vehicles.
“The new facility, which falls under our Taximart business, is specifically related to our panel repairs or auto body repair shop. We’ve always had Taximart in the business, which refurbs old or repossessed taxis, but we never used to undertake the external auto body repair work. Now that we have our direct dealership, we can bring that in house, creating better efficiencies. Both of these initiatives started earlier this year and are both areas that will benefit our business going forward,” says Hurwitz.
The recently opened SA Taxi dealership in Johannesburg is expected to sell, finance and insure around 2000 vehicles per year, specialising in new and pre-owned Toyota minibuses, Nissan minibuses, Toyota bakkies and the bespoke Toyota Corolla metered taxi vehicles.
“Dealerships is an area that we would like to grow,” says Hurwitz. “There’s a number of benefits when we originate loans through our direct dealerships when compared to loans that come from the external dealer channel out in the market. One of our strategic goals is to drive more and more traffic into our dealerships and that means we are going to open more dealerships elsewhere in the country, such as KwaZulu-Natal in the coming months. We only have one dealership in Johannesburg and it’s been such a success story so we want to replicate that.”
EXCELLENT HUMAN CAPITAL
One of the reasons that Transaction Capital has managed to continue driving business excellence, both internally and externally, is the fact that it is led by a hugely experienced and professional directorate who are all tumultuous, dedicated and ambitious and this leads to confidence from all stakeholders.
“Jonathan, Michael and Roberto, who founded Transaction Capital, are immensely experienced in this sector. They have been active in these market segments since the 90s, and have been involved in SA Taxi and MBD for a similar time period. They are all active directors and shareholders. This is an ongoing journey towards building a significant group and everyone is committed to do that in the long-term. The management are well known, well respected and investors take comfort from their involvement,” the CEO explains.
And this management team are now carefully planning the next steps forward for this innovative group. The development of the Zebra Cabs business will remain ongoing for the next three years at least and Transaction Capital will also look for further complementary acquisitions to bolster its portfolio.
“People have been asking us about acquisitions ever since we sold our two businesses in 2013 but we’re yet to conclude one and won’t put time frames on when we will. We are currently as active as we’ve ever been in terms of our search for appropriate acquisitions. We’re cautious and narrowly focussed – we want to buy something that sits in one of the two main focus groups for our business,” Hurwitz concludes.