Transaction Capital reported double-digit growth in interim headline earnings as the weak economy yielded opportunities to buy distressed debtors’ books, while demand for finance from minibus taxi operators supported robust loan growth.
For the six months to March, the financial services group grew earnings 21% to R254m. Transaction Capital Risk Services grew core earnings 33% to R93m. It bought 13 debtors’ books for R210m in the period — the same number of books it had bought for the year to September 2016.
A difficult consumer environment made it more difficult for banks and retailers to collect on nonperforming loans, said group CEO David Hurwitz. Transaction Capital bought these books, which were often already heavily provided for or written off, for less than 10c in the rand, Hurwitz said.
It collected on average 2.5 times that amount, or 25c in the rand, from consumers by using analytics about consumers’ propensity to pay, the right time to call and the right day to pay, he said. With data on 94% of SA’s 9.8-million nonperforming borrowers, Transaction Capital planned to next provide claims-recovery services to insurance companies. It estimated there was a book of R8bn-R10bn in claims from insurance companies against uninsured third-party drivers. It would use intellectual property from Recoveries Corporation Group, a business it bought in Australia in 2016 that collected for insurance companies, to launch this business in SA.
This would reduce Transaction Capital’s reliance on SA, said Keith McLachlan, fund manager at Alpha Wealth. While many South African companies had come unstuck in Australia, Transaction Capital was "sticking to its knitting", which was positive, he said.
SA Taxi, meanwhile, grew gross loans and advances 16% to R7.8bn, indicating high usage of minibus taxis among South African commuters and the defensive positioning of the business in a weak economy.
This loan growth had come while banks were growing loans in low-single digits, said Liam Hechter, an analyst at Anchor Capital.
SA Taxi provided an inflationary hedge, since rand weakness increased the value of
the loan book, due to the increased cost of imported parts, said Hechter.
SA Taxi’s nonperforming loans ratio improved from 18% in the previous comparable period to 17.2%, while its credit loss ratio improved to 3.3% from 3.4% in 2016.
The business planned to offer customers by the end of 2017 credit life insurance that it had earlier discontinued, but for which there had since been demand, Hurwitz said. It would also offer extended-warranty products to these customers.
Transaction Capital’s earnings growth over time had come from the management’s ability to allocate capital effectively into its businesses, whether for organic or acquisitive growth, at very high marginal returns, said McLachlan. "[The stock] has positively rerated over the last couple of years.
"My sense is that the vast majority of the upward rerating of the stock is over and further share-price growth will come from earnings growth," he said.
Hechter estimated earnings would grow 16%-18% a year for the next three years. "Growth prospects are largely baked into the stock’s current valuation," Hechter said.
Transaction Capital declared an interim dividend of 15c per share, a 25% increase on the previous period.