With a market capitalization of R26bn Transaction Capital (TCP) is by no means a small company, in fact by market capitalization it comfortably ranks within the top 100 listed companies on the JSE, sitting at number 71. Despite this TCP remains a relative unknown to many South African investors, and the share price used to reflect this, growing under the radar at a steady rate of 14% a year. However, that all changed when TCP acquired WeBuyCars.
Transaction Capital has three main divisions, Transaction Capital Risk Services, SA Taxi and newly acquired WeBuyCars (WBC). WBC is the second largest car buying platform in South Africa. Since TCP's late 2020 acquisition of a 74,9% stake in WBC for R3,4bn, TCP has been thrust into the limelight and the share price has risen an astonishing 106% to R37. Justifiable considering WBC has generated a revenue CAGR of 62% since 2017 and a profit CAGR of 58%. Their latest full year revenue and profits reached R6 681m and R341m respectively. All the while, WBC’s after-tax profit per car has remained consistent and low at R5 200, which is why this is an especially smart acquisition for TCP.
WBC trades through a technology-led e-commerce infrastructure, supported by a national footprint that includes seven physical vehicle supermarkets and 19 buying pods. A solid foundation, but the real growth opportunity for WBC lies in their ability to grow their margins by offering their customer base car finance, insurance and tracker options. This is where TCP comes in, through their existing SA Taxi business they have a wealth of experience and the necessary expertise to offer these value-added services. Just a 1% increase in penetration of these services could yield an increase in profit of R9,3m. Which SA Taxi has proven capable of successfully implementing, and resultingly has revolutionized the taxi finance sector by providing finance to previously unbanked entrepreneurial taxi owners.
The South African used car market currently generates R87,6bn in sales annually. WBC makes up just 11% of that, leaving plenty of opportunity for volume growth. Which is made all the more likely as WBC, the digital market leader, capitalizes on the e-commerce revolution ushered in by the Covid-19 pandemic. At first, market share will be gained from the vulnerable, independent dealerships that will see their conventional retail margins of approximately 30% cut to just 10 or 15%. WBC can remain profitable at these lower margins as they operate a warehouse model that emphasizes selling a large volume of cars rather than maximizing margins on each sale.
Aside from small independent players, WBCs does find direct competitors in the form of Motus, Bidvest, and getWorth. Meanwhile Barloworld has reduced its exposure to the motor retail industry, which should tell you everything you need to know about the challenges that are coming for existing incumbents. Motus is the largest genuine competitor with $3,1bn in revenue compared to WBC’s $389m. Motus focuses on automotive rental and supplying dealerships in the new and used car market. However, this does not preclude WBC from growth opportunities provided they can continue to enhance their already competitive offering (read economic moat) by delivering a digital, affordable and most importantly high customer satisfaction solution to buyers and sellers of used motor vehicles. For example, WBC provides a Dekra report on every car, so consumers know what they are buying up-front.
Transaction Capital has a robust balance sheet with R23bn in assets and R14bn in debt. This gives TCP a debt ratio of 0,62, acceptable given their recent acquisition of WBC. Which is a perfect example of how debt allows a business to grow at an accelerated rate and ensures the equity of the investor is working harder. This is evident in TCP’s ROE of 13% which has now been amplified by acquiring WBC’s with a ROE of 62%.
Transaction Capital is currently trading at a market capitalization of R26,51bn and R37 a share, more than double its 12-month low of R18. TCP has a hefty PE of 60, but a more reasonable forward PE of 23, which better accounts for the expected growth of WBC in volume and margin as synergies between TCP and WBC are realized. After performing a DCF and assuming the continuation of the existing growth rate of 9%, I believe TCP could achieve a share price of R46, providing a potential further upside of 24%.
Comments