Transaction Capital continued to generate consistent organic earnings growth
Transaction Capital Limited announced its interim results for the half year ended 31 March 2017.
Share statistics performance
- Core headline earnings per share(1) 43.3 cents up 17% (2016 37.0 cents)
- Net asset value per share 581.3 cents up 22% (2016 477.2 cents)
- Interim dividend per share 15.0 cents up 25% (2016 12.0 cents)
Growth in core headline earnings(1)
- Transaction Capital Group R254 million up 21%
- Transaction Capital Risk Services R93 million up 33%
- SA Taxi R144 million up 22%
Core return on average equity (ROE)(1)
- Transaction Capital Group 16.1%
- Transaction Capital Risk Services 20.6%
- SA Taxi 24.1%
The group has delivered robust organic earnings growth consistently since it listed on the Johannesburg Stock Exchange (JSE) five years ago. Although SA Taxi and TCRS perform better in a positive economic environment, they are also defensive businesses able to withstand difficult economic conditions.
In line with its strategy to buy and develop complementary businesses that support the growth of its divisions, and to diversify internationally, Transaction Capital acquired the following businesses in TCRS during the period:
- 100% of Recoveries Corporation in Australia, effective 1 January 2017.
- 75% of Road Cover, effective 1 December 2016.
- 51% of The Beancounter, effective 1 December 2016.
Each business is cash generative with a proven track record and scalable business model, which the group is well placed to develop through active management and potential bolt-on acquisitions. Further information regarding the acquisitions may be found in the Stock Exchange News Service (SENS) announcement released on 22 November 2016, available on www.transactioncapital.co.za.
During the first half of the 2017 financial year, Transaction Capital continued to generate consistent organic earnings growth, which was accelerated by the earnings accretive business acquisitions. The group's earnings growth for the full 2017 financial year, excluding once-off acquisition costs, is expected to exceed the earnings growth achieved last year.
Transaction Capital grew core headline earnings by 21% to R254 million. Core headline earnings per share grew by 17% to 43.3 cents per share, diluted slightly by the 28.4 million shares issued as part of the R418.9 million accelerated bookbuild concluded on 2 February 2017. This enhanced the group's balance sheet, increasing net asset value per share by 22% to 581.3 cents per share, and creates the capacity and flexibility for further acquisition opportunities.
SA Taxi grew headline earnings by 22% and generated an ROE of 24.1%, while TCRS grew core headline earnings by 33% and generated a core ROE of 20.6%. TCRS incurred once-off acquisition costs of R22 million during the period.
Shareholders are reminded that the group early adopted IFRS 9 in the 2015 financial year, resulting in a more conservative and lower-risk balance sheet and a higher quality of earnings. This early adoption has removed uncertainty relating to the implementation of IFRS 9 on future financial results and ratios.
Acquisition of non-performing loan portfolios as principal
The current economic context, and TCRS' strong capital position, data analytics capability, technology and scale have enabled greater acquisitions of non-performing loan portfolios in South Africa from risk averse clients who prefer an immediate recovery against their non-performing loans.
During the first half of the 2017 financial year TCRS acquired 13 portfolios with a face value of R2.8 billion for R210 million. TCRS now owns 180 principal portfolios with a face value of R18.1 billion, valued at R930 million at 31 March 2017, up 63% from R571 million a year before.
Revenue from the collection of non-performing loans as principal has grown by 19%, a strong result when compared to the 9% growth for the half year ended 31 March 2016. Estimated remaining collections has increased to R1.5 billion from R1.1 billion at 31 March 2016, which is expected to support positive performance in future.
Before taking the business acquisitions into account, TCRS improved its operational leverage with total costs for the half year decreasing by 7%. The technological and operational enhancements implemented last year, together with aggressive cost containment initiatives, contributed to an improved cost-to-income ratio of 74.9% compared to 81.5% in the prior half year period. Prior to the effect of the acquisitions, TCRS grew earnings organically in the high-teens.
Effective 1 December 2016, the earnings of Road Cover and The Beancounter were consolidated for four months. Effective 1 January 2017, Recoveries Corporation's earnings were consolidated for three months. The operational integration of the three businesses, to ensure they deliver on their investment cases, remains a key strategic and operational focus. Each of the businesses is performing in line with expectations.
In Recoveries Corporation, TCRS will apply the group's analytics, pricing expertise and capital to the purchase of non-performing loan portfolios in a highly fragmented Australian debt collection market. As most debt recovery activity in the Australian industry is according to this model, this presents good prospects for growth. Recoveries Corporation is the market leader in the Australian insurance recoveries sector, and will facilitate the growth of TCRS' fledgling insurance recoveries offering in South Africa.
Opportunities in Road Cover include offering their products to the mass consumer market in South Africa through TCRS' existing banking, retail, insurance, telecommunications and other clients. A strategy to deliver Road Cover's product directly to consumers via data analytics, lead generation and direct marketing channels is also being pursued.
TCRS' diversified revenue model supported core headline earnings growth of 33% to R93 million for the half year ended 31 March 2017. Robust organic growth, augmented by the earnings accretive business acquisitions, underpinned this result.
As Recoveries Corporation was consolidated for only part of the period and currency movements were negligible, the impact of the foreign exchange translation loss on earnings was insignificant.
SA Taxi is a vertically integrated platform incorporating vehicle procurement, retail, finance, insurance, repossession, spare part procurement and refurbishment capabilities. Combined with SA Taxi's proprietary data, these specialist competencies enable the division to extend asset-backed developmental credit, distribute bespoke taxi insurance and sell focused vehicle models and other allied business services to taxi operators. By helping taxi operators to ensure the sustainability of their businesses, SA Taxi has a business model that delivers a commercial benefit while improving this fundamental mode of transport.
With 69% of all South African households utilising minibus taxis, this dominant mode of transport is responsible for more than 15 million commuter trips per day, with no reliance on any government subsidy. In contrast, bus and rail transport requires huge capital investment and ongoing subsidisation from government to build, maintain and operate, and on a combined basis only accounts for 11 million commuter trips per day. For the majority of South African commuters, therefore, minibus taxi transport is a non-discretionary expense that offers the most accessible and cheapest means of travel. This structural element of South Africa's public transport system makes the minibus taxi industry resilient and defensive regardless of the socio-economic environment.
On balance, the economic drivers affecting a minibus taxi operator's business model remain favourable. For the three-year period from January 2014 to December 2016, Toyota has increased the price of its minibus taxi vehicle by an average 8.7% a year, to a current price of about R400 000. Petrol prices have remained below January 2014 levels for 25 of the 36 months. The repo interest rate has increased by 200 basis points over the same period. Commuter fares, which are set by minibus taxi associations taking operators' costs and commuter affordability into account, have been increased appropriately. This can be measured by SA Taxi's improving key credit metrics, demand for minibus taxi vehicles exceeding supply and the proportion of repeat loans originated to existing clients, which during the rolling 12 months ended 31 March 2017 was approximately 23%.
SA Taxi estimates that of the 200 000 national minibus taxi fleet, only 70 000 to 80 000 of these are financed with the remainder estimated to be older than nine years. The limited supply of minibus taxi vehicles into the local market extends the under-capitalisation and age of the national fleet. This structural element has resulted in long-term demand exceeding the supply of minibus taxi vehicles, underpinning SA Taxi's credit performance as it achieves high prices for its refurbished vehicles and remains selective on credit risk.
In line with the stated dividend policy of 2.5 to 3 times, the board has declared an interim gross cash dividend of 15 cents per share for the six months ended 31 March 2017 to those members on the record date appearing below.