WeBuyCars - Listing on the JSE in April
Transaction Capital (TCP) shareholders approved the unbundling of WeBuyCars (WBC) to shareholders. Prior to the listing and unbundling, TCP is looking to raise between R900 million and R1.25 billion by selling WBC shares. Apart from a possible value unlock for TCP shareholders, the coinciding capital raising initiatives will help strengthen TCP's financial position.
TCP will use the proceeds from selling WBC shares to settle or significantly reduce its debt (R1.1 billion revolving credit) and remove the cross-default triggers currently in place - the liability Transaction Capital has to lenders if its ailing SA Taxi division defaults on its debt. SA Taxi carries a significant debt burden of more than R17 billion, of which ~R5.3 billion is at risk of default. The unbundling will further result in the cancellation of a contingent put option liability contracting TCP to buy the 25.1% stake in WBC held by its founders, Faan and Dirk van der Walt, at their discretion.
Remaining assets post unbundling
Nutun
Nutun combines its proprietary technology and data and analytics competencies to provide a broad range of business services to an increasingly global client base - with a focus on SA, Australia, and the UK. The global business earns hard currency revenues, while the cost base is mainly local.
The company was previously heavily focused on acquiring non-performing loan (NPL) books and then collecting on these books as well as offering collection services as an agent. While this is still part of the business (Capital Enabled Services [CE]), Nutun has recently pivoted its focus to customer experience management (CXM) services.
Capital enabled services (CE)
Customer experience management (CXM) services
This segment includes Synergy, a sizeable CXM services provider, which has positioned Nutun as one of the largest CXM service providers in Australia. Nutun is positive on the growth dynamics in this space, particularly in South Africa.
Gomo
Gomo was launched in January 2022 in response to a need for finance and insurance solutions for older second-hand vehicles, where traditional vehicle asset finance (VAF) is unavailable. Gomo writes business onto a bank's balance sheet (currently there is an agreement in place with Standard Bank) and primarily leverages the WeBuyCars distribution network. The book on TCP's balance sheet is being run down and will disappear over time. Gomo is now positioned as a capital-light loan servicer and earns a portion of net interest margin and also receives revenue from fees.
Gomo posted a loss of R43 million in FY23 from a R26 million loss in FY22. These losses were driven by operating costs and provisions as the business grew. The business is expected to achieve break-even in FY24.
SA Taxi
SA Taxi essentially provides financial solutions for small and medium-sized taxi operators, including credit extension, vehicle sales, and insurance.
This business has been the main drag on TCP over the last couple of years. A post-Covid-19 recovery in the minibus tax industry was severely derailed by high interest rates, rising vehicle prices, a high fuel price, lower commuter movement and the impact of load-shedding. This had a major impact on the business and necessitated action on management's behalf to rightsize and restructure the business to adjust to what now seems to be more permanent market conditions.
Net interest income was impacted by lower originations, targeting higher quality clients, and higher funding costs, while non-interest revenue declined due to lower originations, lower margins on vehicle sales, and lower insurance income. The business repositioning included additional expenses, among them raising an additional R1.5 billion provision, R1.2 million in stock write-downs, and restructuring costs of R107 million. This resulted in a FY23 headline loss of R3.7 billion.
Going forward, SA Taxi will originate only refurbished and second-hand minibus taxi loans, it will continue to focus (as was the case in FY23) on maintaining lower loan originations with materially tighter credit risk appetite and continue to look at alternative disposal mechanisms when it comes to repossessed vehicles. The business is targeting annualised cost savings of ~R480 million.
The Balance Sheet
On the balance sheet, based on the 30 September 2023 proforma figures provided by TCP, the main impacts of the deconsolidation of WBC will be:
Valuation Considerations
Valuation of WBC
WBC views Carmax in the US and Webuyanycar.com in the UK as following business models most like itself. Carmax trades on a forward PE of 20 times (compared to CMH and Motus trading on forward PEs in the mid-single digits). Webuyanycar.com was taken private recently on a price-to-sales ratio of 1.9 times - this is exceptionally lofty compared to Carmax' 0.4 times.
We think that WBC will command a higher valuation than the locally listed car retailers because of its strong growth profile and focus on the used vehicle market, and lack of exposure to interest rate risk and distribution. As such, we attach an exit PE on the business of between 12 and 15 times, with our models at the more conservative end.
We used a variety of valuation techniques to calculate a fair value range upon listing of R10 billion. This is towards the upper end of management's provided R8.7 billion to R10 billion range.
We have written a separate piece on WeBuyCars. It is available on the FNB SPM Website and the FNB Investment Insights Portal.
Valuation of TCP after the unbundling and capital activities
We value TCP on a Sum-of-the-Parts basis. Nutun makes up most of the valuation at a fair value of ~R6.86, including a 20% holding company discount, and we value SA Taxi at 19 cents currently although a successful turnaround could see this change very quickly.
For now, we don't attach any value to Gomo as it is still in its infancy.
This translates to a post-unbundling valuation of R7.00. Based on the current market price and assuming our WBC valuation is correct, TCP (ex-WBC) is trading at ~R2.37.
Value accruing to TCP shareholders (including the unbundling of WBC)
Removing a 20% holding company discount from WBC and incorporating the provided distribution ratio to our valuation for WBC, we find a current fair value for TCP of R14.39. This represents upside of ~48%. It is questionable, however, whether TCP will trade at fair value post-unbundling given the continuing concerns surrounding SA Taxi and generally negative sentiment towards the company and its management team.
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