THE RISE OF TRANSACTION CAPITAL (TCP): TCP is a young company. It was founded in 1999 by Michael Mendelowitz, Jonathan Jawno and Roberto Rossi. The company initially focused on providing specialist lending to the taxi owners – in short, a specialist taxi financier. Over the years, TCP expanded its operations and diversified its offerings. It acquired various companies in sectors such as debt collections, credit risk management, and financial technology.

Nine years later, David Hurwitz joined them in 2008. In that year they approached African Bank, which owned SA Taxi. TCP’s first big deal was acquiring SA Taxi in 2008 from African Bank. This made TCP big enough to lead to a listing on the Johannesburg Stock Exchange (JSE) in 2012. TCP was only 13 years old when it listed on the JSE through an initial public offering (IPO). The company focused on developing innovative technology-driven solutions to address the evolving needs of its clients.

The IPO allowed the company to raise capital and provided an opportunity for public investment. In 2012, TCP operated through its two main divisions: (1) SA Taxi and (2) Transaction Capital Risk Services (TCRS). SA Taxi provided a range of financial services to the minibus taxi industry, including vehicle finance, insurance, and maintenance solutions. TCRS specialized in credit risk management, debt collection, and related services across various industries not related to the taxi industry. On 1 July 2012 TCP was trading at R7.00 per share.

Eight years later, in September 2020, Transaction Capital did its biggest deal ever when it acquired 49.9% of WeBuyCars (WBC), an even younger company, from the Van der Walt brothers, Faan and Dirk for R1.8 billion. A year later, in September 2021, TCP acquired a further 24.9% for R1.6 billion giving them control over WBC. Transaction Capital has shown significant growth and expansion over the years, but WBC really fuelled growth post 2020. From 2012 to 2021 the share price multiplied more than seven times to R50.00, making it a seven-bagger stock.

WeBuyCars: WBC is a second-hand car dealership that was established by the two Van der Walt brothers, Faan and Dirk, in 2001. WBC managed to thrive in an otherwise unattractive industry by firstly focusing on the space between two markets (namely private sellers of vehicles and dealerships), and, later, expanding into complimentary activities and markets. By introducing activities that added value for customers and by removing transaction costs for customers, WBC created a “blue ocean” market for three different customer segments: sellers of cars, private buyers of cars, and dealerships that buy cars. WBC has been tremendously successful in the South African used car market; it has an extremely powerful and trusted brand and commands an 8% market share. Since its establishment in 2001, WBC has grown on average by 50 to 60% per annum for the last 19 years. WBC was so successful that it was the subject of a case study by students at the Harvard Business School in 2022.

BLUE OCEAN STRATEGY is the simultaneous pursuit of differentiation and low cost, to open a new market space and create new demand. It is about creating and capturing uncontested market space, thereby making the competition irrelevant. It is based on the view that market boundaries and industry structure are not a given and can be reconstructed by the actions and beliefs of industry players.

THE FALL OF SA TAXI: We expected Covid-19 to critically affect the economy. What we did not expect was how critically Covid would hit the taxi industry. The taxi industry was hit by a perfect storm of high inflation followed by interest rate increases, more expensive vehicles, increases in fuel prices, while consistent load-shedding has led to increased traffic congestion resulting in fewer trips. Covid regulations forced taxis to load fewer passengers per taxi. In addition, higher unemployment also leads to fewer passengers, who are highly resistant to fare increases. TCP has derated meaningfully over the past 12 months. Yet the directors did not share information with its shareholders.

It was only on 13 March 2023, after the markets closed, that the directors broke the news. They said they expected core earnings per share from continuing operations to fall by more than 20% in the half-year to end-March, but by no more than 50%. The share listed at R7.00 in 2012, it hit a high of R50.00 in April 2022, and is now back to R7.00. The impact of the perfect storm, combined with the directors’ lack of communication, had significant repercussions for SA Taxi and its shareholders.

Shareholders have the right to be informed timeously about the state of the company and any factors that may affect its financial health. It is generally expected that companies provide regular updates and disclose relevant information to their shareholders in a timely manner, especially during challenging times.

We hold TCP in our client portfolios. We have discussed the situation at length. TCP is now trading at R7.00. We feel that the downside is R7.00 and that all the unwelcome news has already been priced in. WBC is still a good business, but it is experiencing margin squeeze and more competition from more competitors. The lending business, now called NUTUN, (for Sir Isaac Newton) is healthy. Both businesses have good potential, and both have offshore exposure.

BOTTOM LINE: The market is panicking about the balance sheet. It will take time to recover. Perhaps the selloff was overdone. The directors showed their support for TCP by investing more than R60 million in TCP shares since March 2023. While the company will continue to face near-term headwinds as it battles the simultaneous repositioning of SA Taxi and a downturn in the used vehicle market, we continue to view Transaction Capital as having a very strong growth profile longer term. We decided to keep TCP. Please use this information as a reference only, rather than as a basis for making investment decisions. You are welcome to contact one of our friendly consultants for a free consultation.