Market overreacted to statement on 'aggressive restructuring' of SA Taxi, says Transaction Capital CEO David Hurwitz

23 Mar 2023

Transaction Capital CEO puts more ‘meat on the bone’ around a trading statement that sent shares crashing last week, saying the market overreacted.

Transaction Capital had expected the minibus taxi industry – which was significantly affected by the Covid lockdown, a plethora of pressures and bad luck – to recover quickly after the pandemic, but it hasn’t. And it’s not likely to fully recover for quite some time.

Transaction Capital believes the issues with its SA Taxi division are structural and unlikely to be resolved in the short to medium term, which has forced it to take radical – and some argue, desperate – measures, shocking the market.

Now, in an effort to clarify “that” trading statement issued last week – which sent the investment management company’s share price crashing by more than 40% after news of the aggressive restructuring of its taxi division – CEO David Hurwitz spoke to Business Maverick about the turbulence with SA Taxi, their plans for the future, and why he sold R51-million in shares three months before the crisis.

Read more in Daily Maverick: Transaction Capital, owner of WeBuyCars, tanks on news of taxi business restructuring

In the trading update ahead of the half-year ending on 31 March 2023, Transaction Capital highlighted issues with the taxi lending model, which was significantly affected by the prevailing macroeconomic climate, and had become a liability as bad debt provisions were a drain on the group.

It also announced that SA Taxi and Gomo, its mobility platform aimed at the under-penetrated used vehicle finance and insurance sector, are to be restructured into a new mobility platform, Mobalyz.

WeBuyCars (WBC), although an “extremely profitable” and “fantastic business”, had experienced some margin pressure in the first quarter of FY2023, which is likely to reflect a 20% decrease in earnings. Despite this, Transaction Capital said it was confident it would grow earnings as the long-term structural elements supporting the WBC business model remained robust.

Questions were also asked about Hurwitz’s sale of shares late last year, with many suspecting he had done so to mitigate against an expected share price crash.

He denied there was anything untoward about the sale, saying he had used shares as security for bank debt of about R47-million.

“We issued results on 15 November and between the 15th and the 13th of December, the share price went down from about R42 to about R33, which was almost a 25% reduction in the price. What that did is put me in breach of my funding arrangements [with my bank].”

Hurwitz said he sought approval, in terms of the company’s share-dealing policy, from his executive directors and chairman Chris Seabrooke (who was about to step down, while remaining as director) and copied in the new chairman.

“I was in a position where my bank was forcing me to sell. So I took the view that I should settle all of the debt and pay all of the taxes, which is what I did. So I sold about R50-million worth of shares.”

Crisis mode

The taxi sector has been crucial to Transaction Capital’s success in previous years, but SA Taxi has been battered by wave after wave of crises.

“What we’ve always said [as Transaction Capital] is that the minibus taxi industry is baked into and structurally set into the South African economy. It’s a non-discretionary spend within the economy – as people walk out the door, the first few rands that they spend every day is within that sector.

“It’s the dominant form of public transport that moves around 15 million commuters every day, whereas buses and trains move around less than a million.”

With the collapse of rail transport, the minibus taxi industry has filled the gap and it’s done this without much government support. But it’s buckling under the pressure: Transaction Capital had expected the industry to recover quickly and for its division, SA Taxi, to recoup its losses fully. That hasn’t happened.

Instead, there has been a structural change in commuter patterns, driven further off the cliff by second and third Covid lockdowns, rioting in KwaZulu-Natal and Gauteng, taxi violence in the Western Cape and serious flooding, which also forced the closure of the Toyota plant in Prospecton, south of Durban.

Since Toyota is the dominant vehicle in the taxi sector, the flooding was hugely disruptive. Adding to the hardship in the sector came higher fuel prices and interest rates, reduced consumer affordability, lower commuter movement and less frequent fare increases.

“This cost cannot be passed on to the commuter, so the industry has kind of absorbed a whole lot of pressures without being able to price for those pressures. And what we had been doing over the past three years, as we have been saying, let’s make some small adjustments here and there to the business so we became more conservative in the way we granted credit.

“We became cleverer in the way that we collect… We adjusted the construct of our products to make the loan slightly longer and hence more affordable. But our main strategy was to say, this industry will recover and we will continue to repair every vehicle that we repossess and sell and refinance those vehicles back into… the middle market of the minibus taxi industry.”

Unprofitable

The taxi industry’s bottom end of the market has become unprofitable: the routes are not successful, the taxis are older and more beaten up, owners cannot afford to acquire even second-hand vehicles and cannot repay loans.

SA Taxi operates at the top end of the market, where operators run profitable routes and can afford to buy and finance new Toyotas, and in a thin middle segment: where they repossess a vehicle, they can rebuild it to a high quality, sell it to a sector that has profitable enough routes to support repayments for second-hand but not new cars, and get a great recovery if it has to be repossessed.

But with all of these pressures, they have had to repossess “slightly more” cars. This has thinned out the middle sector of the market as operators are falling off due to financial pressure, and dropping to the bottom end of the market.

“Our strategy was to continue doing that [repossessing and refurbishing] at greater volume, together with all the other tinkering around the business, and wait for the recovery which we thought was going to come.”

The recovery never happened and for the past three years, earnings have gone south.

The industry will take years to recover. To regain consumer confidence, bold and aggressive steps are needed to change the business model: “We have to auction and scrap some of the cars that we repossess. This is a forward-looking revision because new loans will give us a lower recovery because we auction a portion of them.”

Scrapping these vehicles in one shot also means the losses are already reflected on the income statement, which might enable them to reset the business for pre-Covid growth.

This, they had hoped, would set them up for growth in the short and medium term, but that strategy hasn’t worked. Hurwitz said he thinks the market feels it is either too aggressive or that it has misunderstood it.

“I think the market hasn’t understood that… I think shareholders are slowly starting to understand it. Debt investors have got it. And now I need to explain this more broadly.”

SA Taxi plans to sell its vehicle refurbishment and repairs business to a strategic partner.

The Public Investment Corporation is Transaction Capital’s largest shareholder, followed by Coronation. Rand Merchant Bank is its debt sponsor and Investec is the equity sponsor. It has more than 20 debt investors, ranging from development finance institutions to banks, institutional investors, fixed-income funds and asset managers.

Hurwitz said what he is concerned about, and where they need support, is growing SA Taxi. “We are a lending business and we need support from the debt capital markets. I need debt investors to continue supporting this business. Thus far, all of our banking partners have been very supportive. We also have money from European and American development finance institutions, who have been extremely supportive.

“They love this business because we are supporting public transport in South Africa, supporting small SMEs in South Africa, who are all black-owned. We’re expanding access to finance. The banks typically don’t serve this sector, so they have expressed support to continue to engage with us.

“One of our banks has already written us a letter saying that our facilities are in place and they remain in place. Thus far, all of our debt investors have been very supportive.”

On 20 March, the group announced that it expected to suffer a significant loss in its six months to the end of March, of about R2/share, compared to the previous year’s interim period when it announced a profit of 73c/share.

And it won’t issue any more of its shares to finance a further 15% acquisition in WeBuyCars, but will use cash instead. BM/DM

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Crisis mode

Unprofitable