SA Taxi loans get a lift
SA Taxi drives Transaction Capital
Extensive data on the industry gives minibus financier enormous advantage when it comes to assessing risk
Business is booming at Transaction Capital’s SA Taxi.
The minibus taxi financier grew gross loans and advances 16% to R7.8bn for the six months to March. Earnings grew 22% to R144m, constituting more than half of group earnings, which increased 21% to R254m.
SA Taxi’s loan growth is almost four times larger than was recorded by the big four banks, as well as Capitec and Investec, last year. Banks’ total combined advances grew 4.1% in 2016 to R3.6 trillion. This is the weakest loan growth in five years, says EY, reflective of constrained consumer and business spending, as well as a decline in loans in the rest of Africa.
Widespread minibus taxi usage among commuters and an ageing national taxi fleet makes for high demand for taxi finance, says Transaction Capital CEO David Hurwitz.
"Minibus taxi transport is a nondiscretionary expense," he says.
Transaction Capital estimates that there are more than 15m commuter trips daily by minibus taxi, compared to 9m bus trips and 2m train trips. Minibus taxis account for 68% of public transport trips to work.
This makes SA Taxi a remarkably defensive business that thrives even in tough times, says Liam Hechter, an analyst at Anchor Capital.
Of SA’s 200,000-odd taxis, 70,000-80,000 are financed and insured, with around 120,000-130,000 unencumbered and aged, according to Transaction Capital, which finds taxis to be on average nine years old.
Eyeing a gap not filled by banks, SA Taxi jumped onto this market opportunity.
Today it has 27,142 financed vehicles on its books. More than 85% of these are insured through SA Taxi, which also provides an auto body repair centre through which it is able to refurbish more than 220 taxis a month.
Apart from owning the value chain, SA Taxi’s other major competitive advantage is the extensive proprietary data it has on the taxi industry and the way it uses it.
For example, rather than rely on traditional credit-scoring models to vet potential borrowers – many of whom don’t have bank statements or salary slips anyway – SA Taxi explores whether the would-be taxi operator’s proposed route is likely to be profitable, given how many taxis are already servicing the route and what the demand from commuters is like.
In 2016 alone, SA Taxi GPS-tracked 1.5bnkm travelled by its taxi fleet. Its vehicles travel on 6,500 routes, covering more than 800,000km.
It applies this data to everything from credit scorecards to collection strategies and insurance pricing. For example, it can determine the current profitability of a vehicle based on kilometres travelled in a specific month.
It plans to develop an application for taxi operators, which will provide them with real-time information on their vehicles’ performance, enabling them to better manage their business.
"SA Taxi has incredibly rich data on taxi routes, making it extremely difficult for banks to compete," says Keith McLachlan, a fund manager at AlphaWealth. "The credit metrics of this business have also improved consistently."
SA Taxi’s nonperforming loans ratio improved from 18% in the previous period to 17.2% for the six months to March, while its credit loss ratio improved to 3.3% from 3.4% in 2016.
It charges an average interest rate of 24.9% on its loans, considerably higher than the average rate charged on a regular vehicle finance agreement (around 13.5%). Rates vary from 18% to 28%, says Hurwitz.
SA Taxi defines its credit agreements as "developmental", which, in terms of credit regulations, allows it to charge higher interest rates.
Hurwitz says SA Taxi is financing individuals who would not get finance from banks. "If we reduced the interest rate at this risk level we wouldn’t be able to make money, or the majority of operators won’t get access to finance."
Still, SA Taxi’s net interest margin (the difference between its cost of funds and the interest it earns from other loans and assets) is at a healthy 11% — nearly three times higher than that of the big four banks.
It raised R4bn in debt facilities during the period, including from international development finance institutions, securing its annual debt requirements for the 2018 financial year.
Hechter predicts group earnings growth of 16%-18% a year for the next three years, but says this doesn’t include possible earnings-accretive acquisitions.
The group has R600m in excess cash on its balance sheet, which Hurwitz says it hopes to deploy in bolt-on acquisitions that fit into its existing businesses.
* This article has been amended to show the interest rates on taxi finance loans vary from 18% to 28%, instead of 16% to 34% as previously stated.