Transaction Capital dividend up by 20%
Transaction Capital Limited released its interim results for the half year ended 31 March 2016.
- Headline earnings per share up 20% to 37.0 Cents
- Headline earnings up 19% to R210 million
- Return on average equity up to 15.9% from 15.0%
- Return on average assets up to 4.2% from 3.9%
- Gross loans and advances up 11% to R7 143 million
- Non-performing loan ratio improved to 17.0% from 17.9%
- Credit loss ratio improved to 3.2% from 3.9%
- Non-interest revenue up 7% to R611 million
- Interim dividend up 20% to 12 cents per share
At the core of Transaction Capital's 2015 three year strategy is the reconstitution of its portfolio of assets into two autonomous and decentralised divisions of scale, being the asset-backed lending and risk services divisions. The combination of the restructured divisions, together with their leading and defensive market positioning has enabled robust organic earnings growth for Transaction Capital during the first half of the 2016 financial year.
While both the asset-backed lending and risk services divisions perform better in a positive economic environment, they are also highly defensive businesses intentionally positioned to withstand a challenging macro- and socio-economic context as currently experienced in South Africa. Thus, notwithstanding the stressed economic and regulatory environment, Transaction Capital's financial, credit and operational performance was in line with expectations for the first half of the 2016 financial year, growing headline earnings per share organically by 20% to 37.0 cents, whilst continuing to report an improvement in all credit metrics.
South Africa's economic growth remains constrained, exacerbated by various macro- and socio-economic challenges. Employment levels have remained low for a prolonged period, with little or no real wage growth. Economic pressure has intensified due to currency weakness, a 125 basis point increase in the repo interest rate over the last 12 months, and increased electricity and fuel costs. The combined effect of these conditions results in pressure on the economy as a whole with both the already distressed consumer and the small-to-medium enterprise (SME) sectors remaining vulnerable.
The regulatory environment remains volatile. Regulatory changes have been proposed or enacted regarding caps on interest rates, fees and related credit insurance premium charges. Legislation containing amendments to the National Credit Act (specifically as regards the prescription of debt) was enacted almost 18 months ago while regulations regarding affordability assessments have recently been introduced. Recent court activity regarding the use of emolument attachment orders has been widely publicised and awaits clarification from the Constitutional Court. Finally, authenticated collections are set to replace non-authenticated early debit orders (NAEDO) as the primary debit order collection mechanism from 1 October 2016, although at this late stage there remains uncertainty as to the final process and the ability of the banks to implement in time.
Whilst the abovementioned regulatory changes are largely irrelevant to the asset-backed lending division, Transaction Capital's risk services division (TCRS) has been actively engaging with all relevant stakeholders regarding the authenticated collections process and lobbying through industry bodies.
Transaction Capital's operations delivered strong results in line with expectations, despite challenging market conditions. Headline earnings grew by 19% to R210 million and headline earnings per share increased by 20% to 37.0 cents per share. Net interest income increased by 7%, driven by an 11% growth in gross loans and advances and increases in the prime interest rate, offset in part by a higher average cost of borrowing of 11.0%. Non-interest revenue increased by 7% to R611 million, mostly driven by growth in SA Taxi's direct vehicle sales following the opening of its dedicated taxi vehicle dealership. Return on average equity increased to 15.9% in the current period driven by the increase in earnings and effective but conservative capital deployment. Transaction Capital's equity and debt capital position remains robust, despite the IFRS 9 equity charge during the prior financial year, with a capital adequacy level of 42.8% and uninterrupted access to the debt capital markets.
The asset-backed lending division (comprising SA Taxi) operates as a specialist asset-backed lender and short-term comprehensive insurer, currently focusing predominantly on servicing independent SMEs mainly in the minibus taxi industry, but with the intention to expand into other adjacent markets or asset classes.
The national minibus taxi fleet of approximately 200 000 privately owned vehicles is responsible for 69% of all South African household commuter trips. SA Taxi estimates that only 70 000 to 80 000 of these minibus taxi vehicles are subject to finance. As at 31 March 2016, SA Taxi's R6 688 million loans and advances portfolio comprises 25 591 vehicles, and thus accounts for one in every three of the financed national minibus taxi fleet. The under-capitalised and ageing national fleet, exacerbated by the under-supply of premium minibus taxi vehicles in our local market, continues to create a robust demand for the vehicles, finance, short-term comprehensive insurance and related services provided by SA Taxi. In addition, despite the depressed consumer economy, commuters' use of minibus taxis has remained consistently high due to transport spend being non-discretionary and minibus taxis comprising the dominant component of public transport.
The division continues to entrench its leading market position encompassing the entire value chain within the minibus taxi industry. This is achieved by augmenting its distinctive competencies well beyond credit assessment, collections and capital mobilisation and management. Distinctive competencies now also include vehicle and spare part procurement, direct vehicle sales, vehicle refurbishment, short-term comprehensive insurance and telematics. In line with SA Taxi's strategic objective to achieve deep vertical integration within its market segment, during the first six months of this financial year SA Taxi opened its dedicated minibus taxi vehicle dealership and also established a new auto body repair facility to augment its existing mechanical refurbishment capabilities.
SA Taxi anticipates selling, financing and insuring an estimated 2 000 vehicles per year directly via its newly launched dedicated minibus taxi vehicle dealership. This dealership is considered to be one of the largest dedicated minibus taxi dealerships in the country selling new and pre-owned Toyota minibuses, Nissan minibuses, Toyota bakkies and the bespoke Toyota Corolla metered taxi vehicles. The profitability of new and pre-owned vehicles financed directly through SA Taxi's dealership outstrips the profitability of loans originated through other sales channels (i.e. affiliated and non-affiliated dealerships). This can be ascribed to a much greater proportion of non-interest revenue earned in the direct sales channel (being product margin and increased insurance revenue) and reduced impairment charges. A greater focus on retail marketing and the potential expansion of SA Taxi's geographical dealership footprint will assist in originating greater volumes through SA Taxi's direct sales channel.
After a capital investment of R25 million, SA Taxi's auto body repair facility commenced operations at the beginning of February 2016. SA Taxi's combined auto body repair and mechanical refurbishment facility now spans more than 20 000 square metres.
In addition, SA Taxi continues to leverage its distinctive competencies to create defensible positions within identified adjacent market segments, financing asset classes such as "bakkies" and, more recently, point-to-point metered taxis.
A significant proportion of SA Taxi's management attention is focused on building the foundation of a point-to-point metered taxi business of scale, with the intention of consolidating, recapitalising and formalising the existing metered taxi industry, estimated to comprise 17 000 vehicles in the national fleet. SA Taxi purchased Zebra Cabs in November 2015, resulting in an entire fleet of 84 vehicles (as at March 2016) being upgraded to Toyota Corollas and rebranded as Zebra Cabs. Zebra Cabs provides customised luxury vehicles, a technology platform (including a booking app with multiple payment channels) and a niched combined sales channel that the industry does not currently have access to. Zebra Cabs has commenced operations in Gauteng, and in time will expand its footprint into the Western Cape and thereafter KwaZulu Natal.
The Zebra Cab business model remains agnostic to the payment platform method and allows for cash collections, point of sale devices installed in the vehicle, the UBER application (for those operators who have chosen to use multiple lead generators), corporate sales, web based sales and centralised call centre and dispatch.
Following SA Taxi's vertically integrated business model, Zebra Cabs will procure its vehicles via SA Taxi's established procurement channels and thereafter sell these vehicles via its direct dealership. SA Taxi will provide the finance, insurance, telematics data, vehicle servicing capability, multiple booking systems and payments channels required to support the metered taxi operator, thus enhancing their chances of establishing a sustainable metered taxi small business. Zebra Cabs plans to have 3,000 metered taxis in its portfolio by 2020.
The asset-backed lending division increased headline earnings attributable to the group by 23% to R118 million for the six months ended 31 March 2016.
Gross loans and advances grew at 12% as credit granting criteria remain consistently conservative and the supply of new Toyota minibus taxis remained constrained after Toyota closed its local assembly facility for five months during the prior year to enable the plant to be reconfigured. Supply had not yet fully recovered by the start of the 2016 financial year, but has subsequently normalised. The de-recognition of the written off book, higher impairment charge, and lower gross loans and advances under IFRS 9 have been explained in Annexure 1 (Pro forma financial effects of the adoption of IFRS 9).
Further, as the recently launched Nissan minibus taxi is still relatively new to the industry, SA Taxi is cautiously tracking the Nissan vehicles' credit performance before growing the portfolio aggressively. Despite being a small proportion of monthly origination, financing long distance minibus taxi routes remains profitable for SA Taxi. Historically a variety of long distance models were financed including the Mercedes, Volkswagen and Iveco. Going forward, SA Taxi intends to focus its efforts solely on the sale of Mercedes primarily via its direct dealership thus increasing profitability as product margin, efficiencies and increased volumes are captured.
SA Taxi's exposure to Entry-level vehicles has significantly reduced resulting in improving credit quality for the portfolio. Entry-level vehicles are now carried at a fair value of R90 million and account for less than 1.5% of the value of SA Taxi's loan portfolio.
The net interest margin decreased marginally to 11.0% as a result of a slightly higher cost of funding of 10.4%. The credit loss ratio has improved to 3.4% for the half year, as recovery rates have improved slightly to 72%, owing to the nature of the loan which is secured by an asset of value which can be enhanced through the Taximart refurbishment operation. The efficiency of the procurement, repair and resale operations of Taximart, now one of the largest Toyota repair centres in Africa, assists in maintaining low levels of ultimate credit loss.
The non-performing loan ratio has improved to 18.0% due to a combination of continued strong collection performance and conservative credit granting criteria, which are continuously enhanced via the analytics applied to SA Taxi's telematics data. This data is accumulated daily from each minibus taxi and applied to credit score cards, route profitability assessments, collection strategies and insurance pricing. Provision coverage remains high at 7.8% being 3.2 times SA Taxi's after tax credit loss.
SA Taxi continues to uplift, diversify and enhance its non-interest revenue via the procurement and direct sales of new and refurbished vehicles and its short-term comprehensive vehicle insurance product. SA Taxi requires all minibus taxis financed by it to be fully insured, and has thus designed a bespoke insurance product to meet its taxi owners' specific needs, including comprehensive vehicle cover, passenger liability as well as business interruption cover. In addition to product design, SA Taxi is also responsible for distributing the insurance product, collecting premiums and managing claims including parts procurement and refurbishment. Given these responsibilities, SA Taxi participates in the underwriting profits associated with this insurance business. As at 31 March 2016, 81.4% of SA Taxi's financed clients chose to also insure with SA Taxi, with the remaining financed clients being insured with other reputable insurers. Additionally, SA Taxi insures a further 3 299 non-financed minibus taxis.
With moderate growth in gross loans and advances, improving credit metrics and a stable cost-to-income ratio of 48.4% it is evident that SA Taxi's credit, operational and financial performance has been robust in the first six months of the 2016 financial year.