IN THIS WEEK’S BOTTOM LINE
CONTRIBUTED BY GIELIE FOURIE | OVERBERG ASSET MANAGEMENT
It is wonderful to find a company on the JSE that is immune to bad news, whether it be political instability and corruption, economic downturns or social unrest. A company that won’t be the next Steinhoff.
There are several companies listed on the JSE with good track records. They won’t shoot the lights out, but they will deliver good results year after year. Often, they are not glamour stocks and may even appear to be rather boring. At Overberg we like boring. We found such a company a few years ago in Transaction Capital (JSE code TCP).
TCP’s main business is called SA Taxi. SA Taxi supplies finance to minibus taxi owners. There is nothing glamourous about minibus taxis. The only glamourous thing is that the share price has increased from R6.88 to R22.15, (20% per year) over five years. In addition, dividends have increased at an average rate of 31% per year. It is rare for dividends to grow faster than earnings. But then, TCP is a rare company. Shareholders are laughing all the way to the bank. TCP also has a profitable loan business, called Risk Services, which is very profitable. The business is very similar to Capitec. We will concentrate on the taxi business.
TCP supplies taxi owners with a complete package to set up a taxi business – a one-stop service with everything under one roof. TCP owns two Toyota dealerships in Midrand and Polokwane. The dealerships sell new and pre-owned minibus taxis, which provide operators with a reliable and affordable alternative to buying new vehicles from other dealerships. The retail price of a Toyota HiAce diesel vehicle is R451,600 – TCP will provide credit. With that investment a new business can be set up. TCP supplies value added products and services like finance, insurance, tracking devices and taxi routes. TCP also provides panel-beating services where damaged and repossessed taxis can be repaired and refurbished.
Income Statement: In the 2019 financial year, despite the economic deterioration in South Africa, TCP delivered excellent organic growth. Core headline earnings and core headline earnings per share (HEPS) increased 18% to R803 million and 131.3 cents, respectively.
Balance Sheet: The balance sheet is strong. TCP is cash flush. The balance sheet is ungeared and liquid. The company’s capital strategy remains conservative and appropriate in the current economic environment, with undeployed capital of more than R950 million. TCP also attracts fixed investments to South Africa. Toyota is investing R1 billion in SA to build a plant that will manufacture minibus taxis. The new minibus taxis will include features like money safes. In addition, Bridgestone partnered with TCP to launch a tyre programme. Bridgestone is investing R700 million to build a plant that will manufacture high quality tyres, at a lower cost for minibus taxis. The minibus taxi industry ‘consumes’ around a million tyres per year. Taxi owners will get substantial discounts of more than R500.00 per tyre. TCP monitors minibus taxis’ finances to ensure that they make decent profits. The total package and support provided by TCP, Toyota and Bridgestone, is incredible.
The minibus taxi industry is massive. Since 2008, TCP has provided credit of more than R25.7 billion to taxi operators, supporting the creation of over 81,000 SMEs (small and medium size enterprises), and more than 145,000 direct and 243,000 indirect jobs. In total, 250,000 taxis transport 15 million people per day. By enabling taxi operators to replace old vehicles with new, safer and lower emission minibus taxis, TCP assists in improving the quality of this critical component of South Africa’s public transport network. TCP and the Taxi Owners Association work closely together to improve the image of the taxi industry. Taxis provide reliable transport to commuters. Our dysfunctional Passenger Rail Association, Prasa, now under administration, is incapable of providing reliable transport to commuters. While Prasa’s passenger count has been dropping for many years, taxi owners saw their passenger count increasing consistently. When Prasa fails, taxi owners score. Furthermore, taxis can pick up commuters close to their homes in townships – trains and busses can’t provide that level of service. Taxis also provide feeder services by transporting commuters from their homes to railway stations.
The taxi industry may not be a glamour industry. But behind the scenes taxis are making a big contribution to the economy. TCP created small businesses for thousands of taxi owners and created thousands of jobs. They were instrumental in convincing Toyota and Bridgestone to invest close to R2 billion in SA, thereby creating many more jobs in the supply channel. TCP has programmes in place to proactively drive behavioural changes in the minibus taxi industry. This has a positive social impact in enhancing commuter safety and improving the image of the industry. The reckless minibus taxis on the roads are not necessarily TCP clients. TCP monitors their taxis for reckless driving on their allotted routes.
With an investment in TCP, you get exposure to a growth industry that is immune to economic and political noise. Such investments are few and far between in the current environment.
Read More: Overberg Market Report 11 December 2019