Vehicle and taxi financier Transaction Capital faced a bloodbath this week as investors, shaken by a trading update that flagged problems in its taxi finance business and used-vehicle operation, dumped its shares at such a rapid rate that the share price halved.
On Monday, Transaction Capital said in a trading update that it expected a more than 20% drop in half-year earnings amid margin pressure at WeBuyCars, in which it has a 75% stake. It said its SA Taxi business was unlikely to recover to pre-Covid levels in the short to medium term, leading to the restructuring of the unit.
By the end of the week the company's share price had lost 59.1% wiping off more than R10bn of its value. But it seemed the decline was arrested on Friday as the counter gained some ground, rising 31% on the day to close at R11.50 giving the company a market capitalisation of R8.7bn.
The company’s share price was also hammered by speculation that Transaction Capital CEO David Hurwitz had sold shares worth millions of rand in December because of inside knowledge he had of the state of the company.
But Transaction Capital defended Hurwitz, saying he had advised the company chair and company secretary that the family trust that owned Hurwitz's shares was in breach of certain covenants relating to debt it held from its bankers against its Transaction Capital shares, and that it requested permission to sell 1.6-million shares to reduce its debt. The trust still holds 2.3-million shares.
Jan Meintjes, portfolio manager at Denker Capital, said: “We have to take the statement at face value but clearly this unfortunate transaction will make it very difficult [for the company] to regain the trust of the investment community.”
Meintjes said the outlook for the company was obviously less clear but, on the positive side, the outlook for its Nutun business (in isolation) remains intact.
Nutun is a debt-collection business.
Meintjes said many of the uncertainties are at the centre of the business. “There are material amounts of debt at the centre (R4.4bn) as well as at an operational level. Will this be sustainable with weaker operating businesses?”
Transaction Capital said the SA Taxi business was unlikely to recover to pre-Covid levels in the short to medium term as the industry’s profitability remains stressed due to stubbornly high fuel prices, vehicle price increases, sharp interest rate hikes, persistently low commuter volumes and the lack of corresponding fare increases.
Record levels of load-shedding had also increased traffic density, causing longer commute times and thus fewer trips completed by taxi operators.
Management has restructured the business and established a new platform, to be branded Mobalyz, which will house, among other things, its credit, insurance, data sets and technologies to support SA Taxi.
Meintjes said the ability of taxi operators to repay loans in a weaker economy was unclear. It was also unclear if the funding structure of SA Taxi would be sustainable.
He warned that “if they were required to pay the banks for an asset that is not worth much, it could create a very uncomfortable situation as Santaco (South African National Taxi Council) members also own many of the taxis financed by SA Taxi”.
Anchor Capital said the main risk lies in whether there is a departure of funders from SA Taxi.
“We think the group has established a long-standing relationship with its funders which makes this unlikely but the timing of its announcement of a change in risk appetite in the SA Taxi business [is] extremely unfortunate ... given the jitters among banks globally.”
Hurwitz told Bloomberg on Friday that "we made quite a bold and quite an aggressive restructuring, and the size of the restructuring is perhaps concerning to investors.”
“Maybe the extent of the restructuring has caught people off-guard and thinking it is too aggressive but I am sure most informed investors and shareholders should have been expecting some type of plan from management.”
Regarding WeBuyCars, Meintjes said the outlook “is less certain, as the uninterrupted growth path up to now has been broken and seems more cyclical than anticipated”.
Anchor Capital said the conditions in the car market were normalising and “maybe there is a headwind from the weaker economy”.
The visibility of WeBuyCars in the market due to its volumes and the data it accumulates means it should be able to adjust in line with the changing dynamics of the market.
“We now get to see how nimble it is and how well it uses its data. Maybe it has to lower its growth ambitions a bit for now. We need to see this business moving dynamically with the changing macro environment — management of WeBuyCars, who are still involved with the business, have seen cycles in this industry before and we will be very disappointed if they fail to manage this change in the cycle well, since it has been pretty evident to everyone that the cycle is turning and WeBuyCars has the granular data to see that in real time far better than anyone else.”
Analysts say Transaction Capital will survive the setback.
Makwe Masilela, founder of Makwe Fund Managers, said for the taxi industry Transaction Capital needs to revisit its terms and conditions, especially on interest rates charged.
“If all our macroeconomic challenges remain or take forever to be resolved, recovery might be challenging. Their offerings to the taxi industry were initially seen as a silver bullet but now the very same taxi owners have their own dissatisfactions, such as high interest rates charged by the company and its repossession policy.”
Meintjes said Transaction Capital has to show that its current capital structure is sustainable. This may well require some further restructuring at the centre and preferably a delay in the further purchase of shares in WeBuyCars, he said.,
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