WeBuyCars’ uphill battle
WeBuyCars has seen a downward trend in its core earnings and EBITDA margins but continues to buy and sell more cars.
Transaction Capital recently reported a loss of R1.9 billion for the 6-month period that ended in March 2023, 390% worse than the corresponding period in 2022.
The largest contributor was a significant impairment loss of R2.4 billion on loans and advances that the company realised during the half-year period. These impairment losses relate to SA Taxi.
WeBuyCars performed much better than SA Taxi and is core to Transaction Capital’s future growth and shareholder returns.
However, the second-hand car buying and selling service has also faced headwinds over the last two years.
In its latest financial reports, WeBuyCars reported an EBITDA margin of 5.62% and a core earnings margin of 3.21%. It is down from 8.22% and 5.49% two years ago.
Another challenge is that it takes longer to sell cars. In HY 2022, it took, on average, 23 days for a vehicle to be sold. It has now increased to 30 days.
Holding on to vehicles for longer increases the cost of selling a car and, in turn, results in lower profit margins.
WeBuyCars remains an excellent business and continues to increase the number of cars bought and sold.
However, it is operating in a challenging economic environment with high interest rates which is bad news for durable assets like cars.
The poor economic growth and the highest interest rates in a decade make it difficult for lenders to acquire capital, hurting car sales.
Another reason for the downward trend in profitability can be due to the increase of competitors in the used vehicle space.
Since the success of WeBuyCars, many competitors have entered the market, forcing the company to lower their profit margins.
This is consistent with the data showing that profitability had fallen since 2021 when interest rates were still low.
Some have also suggested that the lower profit margins are due to WeBuyCars selling more lower-end vehicles than more expensive ones.
It is not clear whether it is possible to maintain the same profit margins on lower-end vehicles.
The charts below provide an overview of WeBuyCars’ performance over the last four years.