the g spot
Transaction Capital a rare phenomenon on the JSE
Its shares have powered ahead by more than 25% in a year that has returned just 7.7% on the JSE’s all share index
Transaction Capital is a rare phenomenon on the JSE: its shares have powered ahead by more than 25% in a year that has returned just 7.7% on the JSE’s all share index. In part, that’s due to a growing track record of outperformance: headline earnings are up a compound 20% per year over five years while dividends have grown a compound 31%. The business has two legs: SA Taxi, which finances, sells, and repairs minibus taxis; and Transaction Capital Risk Services, a debt collection service that accounts for almost half its earnings and which is flexing its muscles abroad. We asked CEO David Hurwitz how big the collections market is in SA and Australia.
DH: In Australia, there are three listed participants that do what we do in SA, and then there are probably about 500 or 600 [other] participants. Most debt is collected through what they call a principal model: where a bank or a telecom will sell their nonperforming loans to a collector, and the collector would try to collect that at a profit. In Australia you have debt of about A$600m-A$700m. That means about A$7bn of face-value debt is being sold every year, so these markets are huge.
We think we’ve got about a 1.2% market share on book buying and that’s why we’re so excited about Australia; this is now our fourth year [in the country]. We didn’t place a big bet on entering Australia, we bought a small business where we could attract better people, and take the technologies that we’d bought in SA and overlay them into the Aussie business. Now we need to slowly just take our market share from 1.2% to maybe 5% over a few years, but that is tripling the business.
What about SA?
DH: There’s only one listed player (us), a few very small privately owned collectors who collect on an agency basis, where you get a fee contingent on collections, and three or four other sizeable book buyers. In SA we only spend about R1bn [buying debt], but that R1bn might be about R20bn of face value. Why we like that is it hasn’t attracted any international players, which is nice, but the other thing that we like is that we’re developing the market, so that’s really interesting. We’re starting to educate consumer-facing businesses like banks and retailers about the way Australian and European businesses manage their nonperforming debt.
We think there’s a lot of growth that can come both from bringing new sellers into the market, as well as changing the types of debt that people are selling.
So, historically, companies wouldn’t have thought to sell their nonperforming loans?
DH: To give you a feel, in Europe well over 80% of all consumer debts collected by an external party are through that party buying that debt.
About 70% of the debt in SA is still outsourced on a contingent basis, which is pretty inefficient, because it’s very hard to collect something when you only have a short period of time, say, three months [in which to do so]. If you buy something you can work that debt for a year or two. You can afford to be less aggressive.
If more consumers fall into arrears in SA, is that good or bad for Transaction?
DH: In a negative consumer environment you see two things: first, consumer-facing businesses become quite risk averse and we don’t see banks growing their books, so our market actually shrinks, and it’s more difficult to collect the debt. But instead of buying it for 10c in the rand, in good times, you would buy it for 8c, which is where we are right now.
Were banks to call in their debts against SAA or Eskom, would some sort of credit catastrophe pose a major risk to Transaction Capital in the year ahead, given that you rely on debt to fund your business?
DH: What we’ve done to counter this type of risk is have as diversified a funding model as possible, and that’s why we’ve got these international development finance institutions [DFIs] that typically would stand in to fund a business where there is a dislocation in the market. I think [a downgrade] is priced in. DFIs are about 23% of our debt and the rest is mainly from large SA funding businesses.
We might see an increase in the price of debt but I don’t think you’ll see them pulling back dramatically — and certainly not in the areas where we are.
You brought in the SA National Taxi Council as an equity partner this year. What will that do for your SA Taxi business?
DH: It is the most widely used form of public transport in SA — 15-million commuter trips a day — so it is unbelievable that it hasn’t managed to be more formalised, but it comes from various things, remembering that this industry gets no subsidy from government. We think this will create more profitability in the industry, and allow operators to run more sustainable businesses.