How do you get into the business of financing and insuring an industry as risky as minibus taxis in SA and still make a profit?

You own the whole value chain.

That’s what minibus financier and insurer SA Taxi has done. The company has been running a profitable venture in an area where most traditional financial services companies are not prepared to play.

Transaction Capital bought African Bank’s commercial vehicle finance division in 2006 and renamed it SA Taxi. Since its listing on the JSE in 2012, Transaction Capital — which also owns debt collection business Transaction Capital Risk Services (TCRS) — has achieved a compound annual growth rate of 20% in earnings per share while dividends per share grew by 33% over the same period.

Other asset financiers and short-term insurers in SA had much lower compounded growth. For instance, the most recent bank to release that figure, Standard Bank, recorded growth of 13% in the five years to 2018 while SA’s biggest short-term insurer, Santam, increased dividends by 9.2% a year over the past decade.

David Hurwitz: To cut its losses, SA Taxi does not auction off the repossessed taxis. Picture: SUPPLIED
David Hurwitz: To cut its losses, SA Taxi does not auction off the repossessed taxis. Picture: SUPPLIED

Transaction Capital CEO David Hurwitz says his company is able to achieve this level of growth despite its risky target market because its businesses are built to be highly defensive.

"We only finance minibus taxis and not other types of vehicles. Providing all the allied services needed by minibus taxis allows our business to be defensive, while taxi operators appreciate the one-stop shop nature of our service. Most minibus taxi operators aren’t treated as platinum clients in a bank or by insurers.

"It helps that we are catering for the people who are underserved and provide them with a full suite of what they need to keep their taxis on the road."

SA Taxi makes profit on every level of minibus taxi operations except manufacturing, as it does not have a partnership with any carmaker.

"When we buy and sell the cars, we make a retail margin. When we finance the cars, we get the financing margin; we insure the car and make insurance profit. And in instances where a car needs to be repaired or repossessed, we have our own business that can refurbish the car fully and then we resell it through our dealership," says Hurwitz.

Transaction Capital owns the taxi financing and insurance business SA Taxi, minibus taxi refurbishing operations Taximart, spare parts distributor Taxi Auto Parts and collections business TCRS.

Its taxi financing business has just over 30,000 financed customers with R10bn on the loan book. The insurance business has more than 26,000 insurance customers, from whom it collects around R800m in gross written premiums a year.

Operating across the whole value chain helps SA Taxi mitigate its risks. By having its own panel-beating business, it is able to repair the vehicles it insures at a fraction of the cost.

Defensive as it may be, there are unavoidable losses in a business like SA Taxi. Its nonperforming loans sit at around 17% while its insurance claims ratio hovers at 60%-70%. The claims ratios at MiWay and Santam are less than 60%.

Hurwitz says two in 10 of SA Taxi’s customers do not succeed and the company repossesses their taxis. To cut its losses, SA Taxi does not auction off the repossessed taxis. Instead, it rebuilds them, puts new engines in and resells them as second-hand taxis. This way it recovers a higher amount than it would at auction, and the customer’s shortfall is reduced.

At the end of its 2018 financial year, Transaction Capital had R1bn in excess capital after a deal with the SA National Taxi Council (Santaco), in which Santaco took a 25% stake in SA Taxi. This will be used for bolt-on acquisitions in the debt collection business TCRS, which operates in SA and Australia.

Transaction Capital buys nonperforming consumer lending books that have been written off by banks, retailers and specialist lenders. In 2018, the company spent R640m buying nonperforming unsecured loan books in SA.

"We have been doing this in SA for over 20 years," says Hurwitz. "Because we collect from a varied range of consumer-facing businesses, it gives us a broader exposure to SA consumer records." He says when TCRS buys a claim from a bank, it has a good idea of the likelihood of it being repaid because it understands the consumer.

TCRS relies mostly on digital platforms and phone calls to collect these loans. The company’s 2,100 call centre agents make about 38-million calls a month.

David Talpert, analyst for speciality finance at Avior Capital Markets, says Transaction Capital is a defensive business that should be able to continue delivering earnings growth in high double-digit figures even if SA economic growth remains slow.

Talpert says that because the company is well managed, it can continue outperforming other general financial stocks.

"SA Taxi is a high-quality business operating in the underserviced taxi industry. I think the sale of 25% of the business to Santaco will make the operation more sustainable. The debt-collection business is also doing well, and if there is improved economic growth earnings growth should accelerate."