Transaction Capital worth a punt – Wayne McCurrie
FNB Wealth and Investments’ Wayne McCurrie said Transaction Capital would make a good long-term punt as it remains a good business.
Transaction Capital saw a massive drop in its share price earlier this year following a trading update which revealed its earnings per share from continuing operations would decrease by “no more than” 50%.
This update saw the company’s share price plummet by more than 38% in one day.
The company’s share price had remained under pressure since but saw another significant drop last week when its results for the 6-month period that ended in March 2023 were released.
Its results showed a colossal loss of R1.9 billion, which is 390% worse than the corresponding period in 2022. This saw the share price fall by 36%, wiping R3 billion off the company’s market cap.
McCurrie told Business Day TV that South Africa is currently at the bottom of the commodity cycle.
However, when interest rates and inflation fall and global growth picks up, the commodity cycle will bounce back.
In turn, the rand will strengthen, and Transaction Capital’s shares “will probably go up because they’re very cheap where they are now”.
Lower interest rates and better economic conditions will directly benefit Transaction Capital’s two main businesses – WeBuyCars and SA Taxi.
McCurrie added that even if SA Taxi continues its bad run, it is not an existential threat to Transaction Capital as the management team will not hesitate to dispose of that business.
WeBuyCars and Nutun are good businesses with bright futures to drive growth for Transaction Capital and help the company’s recovery.
SA Taxi was the largest reason behind Transaction Capital’s significant impairment loss of R2.4 billion on loans and advances that the company realised during the half-year period.
The taxi industry faced significant challenges during the Covid-19 pandemic, and SA Taxi experienced many defaults on taxi loan accounts.
SA Taxi, therefore, implemented a debt rehabilitation program in 2022 to increase its efforts in taxi loan collections.
Unfortunately, this program was unsuccessful and had no material impact on the company’s financial performance. Consequently, Transaction Capital reported an R18.7 billion modification expense related to debt rehabilitation.
To address the problems with SA Taxi, Transaction Capital CEO David Hurwitz said they would change everything within the business.
The company said it would change its business model, focusing on better credit quality checks and partnering with Gomo, a mobility finance and insurance partner of WeBuyCars, to refurbish taxis on a service-level agreement basis.
However, McCurrie said Transaction Capital’s management “will either get SA Taxi profitable or they will just close it”. Therefore, SA Taxi’s recent performance should not be the most significant consideration when choosing whether to invest in the company.
WeBuyCars is in a better position than SA Taxi but faces some challenges.
WeBuyCars is experiencing a downward trend in its core earnings and EBITDA margins.
The company faces challenges such as longer vehicle selling periods, which result in increased costs and lower profit margins.
It operates in a challenging economic environment with high interest rates, making it difficult for lenders to acquire capital and impacting car sales.
However, the company continues to increase its car buying and selling operations. In addition, once South Africa reaches the top of the commodity cycle and interest rates are cut, the company will benefit and likely recover.