Transaction Capital CEO David Hurwitz is under pressure to convince the market to buy into the group's new strategy aimed at regaining profitability in its taxi business and rebuilding the trust of investors after an earnings update shook the market.
“I am feeling a little bit of pressure and working hard to get the market to understand exactly what we are doing here and the changes we are implementing,” Hurwitz said in an interview this week. He said Transaction Capital would “have to earn trust from the market. We have to show that this change in business strategy works and that we are trying to take the full pain in a single year instead of spreading it out.
“We are changing the business model quickly and take the pain associated with that so the business can start growing from here. We hope to be in that position for SA Taxi to grow from where we are.”
The issues at SA Taxi first flagged last week hit the company's share price and the sell-off was accelerated by the fact that Hurwitz's family trust had sold a lot of shares a few months earlier.
It didn’t help that on Monday this week the group issued a more detailed earnings forecast, with half year core earnings per share from continuing operations expected to be between 46% and 41% below the prior corresponding period.
Last week the company’s share price lost about 59%, but has been lifted a little by share purchases from Transaction Capital ’s directors, investment company Sabvest ’s founder Chris Seabrooke and fund manager Coronation, which increased its stake to 16.57% from 14.41%. This week the share price was up 25%.
SA Taxi, which provides finance for about 40,000 taxis, is 75% owned by Transaction Capital and the rest by the South African National Taxi Council (Santaco).
Hurwitz said that during the Covid epidemic Transaction Capital was unable to repossess taxis for 13 months and now has a lot of catching up to do. Before Covid, the company repossessed 200 taxis a month which it refurbished and resold, with financing.
Since it was unable to repossess for more than a year, it now has more taxis that need to go through the process. However, profitability of the taxi industry has shrunk and it will not be able to sell all the repossessed vehicles. Hurwitz says it can sell and refinance only about 75% of them and the rest will have to be auctioned or disposed of in other ways.
The taxi industry’s profitability remains stressed because of high fuel prices, vehicle price increases, sharp interest rate hikes, low commuter volumes and limited fare increases. Load-shedding has increased traffic congestion, causing longer commute times and fewer trips.
Hurwitz says that because of this, “the market thinks there is a hole in their [SA Taxi's] books or collections and that is not the case. We realised the industry would not recover to pre-Covid levels and hence we can't increase the number of refurbished taxis we sell and refinance.”
As part of the restructuring, management will make a provision coverage that will reflect the current view of future uncertainty and risk, as the company aims to refurbish and refinance fewer repossessed taxis, Hurwitz said.
He said previously marginally profitable routes are now loss-making and “the sector is not strong enough to repair and refinance as many of the repossessed taxis as we used to”.
“We came up with a strategy that we thought was quite aggressive but sensible. Quite frankly, we didn't expect this aggressive reaction from the market,” Hurwitz said.
Since last Monday the share price has lost 57%, but has been lifted a little by share purchases from Transaction Capital’s directors, investment company Sabvest founder Chris Seabrooke and fund manager Coronation, which increased its stake to 16.57% from 14.41%.
Jan Meintjes, portfolio manager at Denker Capital, said this was a vote of confidence in the business. “Sabvest has a long history with this business and they understand it well. Coronation is backing itself and following through on recent purchases.”
Hurwitz said the company will not put more money into SA Taxi. It will convert the SA Taxi shareholder loan of R2bn into equity. It's not clear how much its stake will increase to as the company is still in discussions with Santaco, which owns 25% of SA Taxi.
Independent market analyst Jimmy Moyaha said given that the headwinds outlined by Transaction Capital are largely macro-related, the business will have to make some strategic adjustments to its portfolio and reduce its reliance on the SA Taxi and WeBuyCars segments. Both businesses contributed 67% of Transaction Capital’s 2022 earnings.
“Potentially looking at new diversified revenue could benefit the business in the short term. Maybe a business with synergy opportunities if they don't want to deviate from what they know,” he said.
Moyaha said market confidence at this stage is most likely a function of performance, given the difficult climate. “We have seen time and time again companies taking a more cautious approach to the guidance they give out because factors like inflation, consumer demand and interest rates are beyond their control.”
Hurwitz said WeBuyCars had great prospects as the business was far more nimble than its competitors and had reduced trade in high-end vehicles to focus more on lower-priced used cars.
Though margin percentages were temporarily affected by this response, they have since normalised and the adjustment in the stock and trading mix towards lower-priced vehicles is now aligned with consumer demand.
Hurwitz said WeBuyCars uses a pricing algorithm that tracks prices of similar high-end cars on sale and was able to reduce prices faster than competitors. This has enabled the company to clear excess stock.
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