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TRANSACTION CAPITAL LIMITED - Pre-close update and trading statement in respect of the 12 months ending 30 September 2020

Release Date: 15/09/2020 07:05
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Pre-close update and trading statement in respect of the 12 months ending 30 September 2020

Transaction Capital Limited                                     TransCapital Investments Limited
(Incorporated in the Republic of South Africa)                  (Incorporated in the Republic of South Africa)        
Registration number: 2002/031730/06                             (Registration No. 2016/130129/06)    
JSE share code: TCP                                             Bond Company code: TCII
ISIN: ZAE000167391                                  
("Transaction Capital" or the "Company" or the "group")  

PRE-CLOSE UPDATE AND TRADING STATEMENT IN RESPECT OF THE 12 MONTHS ENDING 30 SEPTEMBER 2020

PROSPECTS STATEMENT

Transaction Capital is an investor in and operator of alternative assets in credit related and specialised market
verticals, with a near 20-year track record for high-quality earnings growth and attractive risk-adjusted returns.
SA Taxi, WeBuyCars and Transaction Capital Risk Services (TCRS) have demonstrated resilience in their agile
responses to the volatile dynamics accompanying the COVID-19 pandemic. Their operational, financial and
strategic flexibility have allowed them to quickly align their operating models, financial structures and growth
plans to prevailing economic realities and emerging opportunities, with operational activity in most instances
nearing or exceeding pre-lockdown levels. It has also become clear that their business models will be more
relevant in a post COVID-19 environment.

COVID-19 has proven that the minibus taxi industry is indispensable to South Africa’s economic productivity.
The industry has recovered quickly and transitioned smoothly to near-normalised operational activity as
lockdown restrictions have been eased and the economy re-opens. SA Taxi’s strong market position, its track
record as a pioneer in the industry and its vertically integrated business model positions it well to serve clients
along the full minibus taxi value chain as South Africans go back to work.

Notwithstanding the heavy reliance most South Africans place on the minibus taxi industry, personal vehicles
remain a necessity and an aspiration for many South Africans, given long travel distances and limited public
transport options. New vehicle sales have contracted for seven years, impacted by adverse economic
conditions now amplified by COVID-19. As consumers’ disposable income has come under strain, and a
weakening rand has pushed up new vehicle prices, more consumers are opting to trade down from new to
used vehicles. Marked shifts in what consumers can afford and changes in consumer buying patterns are likely
to accelerate growth in the used vehicle segment. COVID-19 has also heightened consumers’ preference for
online channels, with experts estimating that e-commerce adoption in South Africa has leap-frogged some five
years into the future as the desire for contactless services has escalated. WeBuyCars’ uniquely composed
offering, high levels of trust, optionality, convenience and competitive pricing positions it well to benefit from
the current used vehicle market context, with its credible e-commerce platforms positioning it for further
growth.

TCRS supports its clients’ ability to continue extending credit to their customers, by freeing up their operational
infrastructure and balance sheet capacity, and rehabilitating indebted consumers. This facilitates the effective
functioning of the consumer credit market, which will be critical to South Africa’s economic recovery and
growth aspirations. As the credit health of consumers deteriorates, and more customers roll into default,
TCRS’s capital flexibility, extensive collections infrastructure and new work-from-home capabilities position it
well to win new agency collection mandates, and accelerate capital deployment in acquiring non-performing
consumer loan portfolios to be collected as principal (NPL Portfolios). The organic growth initiatives
articulated previously, specifically to acquire NPL Portfolios in South Africa, Australia and Europe, remain valid
and will be pursued.

Transaction Capital’s financial position is robust. The measures taken to strengthen our capital structure and
ensure adequate liquidity, and the long-term nature of our assets, provide ample financial capacity to fund
our organic growth initiatives even as recessionary conditions intensify. Ample liquidity is available in the form
of undrawn bank facilities at SA Taxi and TCRS, and Transaction Capital is in the process of increasing its
available holding company facilities by at least R680 million, to underpin accelerated organic growth
opportunities. SA Taxi’s access to liquidity remains unfettered, with more than R1.5 billion of new facilities
concluded since 1 April 2020, after the national lockdown was announced, such that its funding requirements
for loan origination into the 2022 financial year (FY22) are already secured.

Stakeholders will be aware of the actions taken to enhance the group’s financial flexibility and strategic agility,
most recently the R560 million of new capital raised via an accelerated bookbuild in June 2020 (detailed in our
SENS announcement of 17 June 2020), and the specific issuance of R329 million of new share capital to fund
part of the investment into WeBuyCars (detailed in our SENS announcement of 8 September 2020). These two
share issues have bolstered our equity base by almost R1 billion.

As reported in the group’s interim results, we adopted a conservative approach regarding the anticipated
impact of COVID-19 on future cashflows and expect Transaction Capital to deliver subdued operational
performance for the 2020 financial year as a result. However, with our operational activity nearing or
exceeding pre-lockdown levels, and SA Taxi and TCRS well placed to build on their long-term track record of
growth, we see a return to the group’s trend of strong organic growth (compared to 2019 pre COVID-19 levels)
for the 2021 financial year (FY21) and beyond.

As detailed in our SENS announcement of 8 September 2020,Transaction Capital acquired a 49.9% interest in
WeBuyCars, establishing Transaction Capital’s third market vertical. This investment is immediately value
accretive to Transaction Capital, converting interest income on undeployed capital into operating earnings.
We are confident and excited about our investment into WeBuyCars, which will support an even higher growth
rate for Transaction Capital.

PRE-CLOSE UPDATE

Transaction Capital has achieved compound annual growth in core headline earnings per share of 20% over
the past five years to our 30 September 2019 financial year end (FY19). Prior to the effects of COVID-19, the
group was on track to deliver earnings growth in line with past performance and guidance given at the time
of our AGM in March 2020. But as with most businesses the world over, COVID-19 disrupted our operations
and interrupted our long-term growth trend. The non-cash COVID-19 related adjustments to SA Taxi’s credit
provisioning model and the valuation model for non-performing consumer loan portfolios (NPL Portfolios)
owned by TCRS, applied at half year 2020 (HY20), reflect our conservative approach in accounting for the
anticipated impact of COVID-19 on future cash flows based upon the available information at that time. This
conservatism has continued into the second half of the year, adjusted as we gain additional information as
the pandemic progresses.

However, unlike most businesses, our resilient divisions in highly defensive market sectors have been quick to
recover. As we near our 2020 financial year end (FY20), SA Taxi and TCRS remain operationally sound, highly
efficient and well capitalised. Both divisions continue to execute on their medium-term growth strategies (set
out in our announcement at the time of our HY20 results), while effectively managing the lingering operational
and financial impacts of the COVID-19 pandemic and related restrictions.

Despite COVID-19 related operational disruptions during the second half of FY20, the group’s core pre-
provision profit from continuing operations (being profit before tax prior to impairment provisions at SA Taxi,
and the amortisation of TCRS’s carrying value of purchased book debts), is expected to increase by more than
7% for FY20, supported by positive operational leverage.

SA TAXI

The minibus taxi industry’s return to normal activity can be seen in SA Taxi’s telematics data (tabled below),
which shows the recovery in average activity of its minibus taxi fleet as the national lockdown has been eased,
benchmarked against 2019 pre COVID-19 levels.

                            Lockdown Level 5        Lockdown Level 4         Lockdown Level 3       Lockdown Level 2
                          (27 Mar - 30 Apr 2020)    (1 - 31 May 2020)      (1 Jun – 17 Aug 2020)  (18 Aug – 6 Sep 2020)
 Vehicles operating                  68%                    90%                     100%                  100%
 Kilometres travelled                44%                    79%                      87%                   86%


Collections on SA Taxi’s gross loans and advances portfolio for the second half of the financial year have
recovered month-on-month, in line with the easing of restrictions and resulting increased fleet activity,
demonstrating the resilience of SA Taxi’s cashflows and assets. However, due to the extended lockdown the
minibus taxi industry remains under financial strain, and we expect collections to now only normalise to pre
COVID-19 levels early in the 2021 calendar year, being a longer period than disclosed in the half-year results.
This has been adequately provided for in the form of an increased COVID-19 adjustment in SA Taxi’s credit
provisioning model. Despite the price inelasticity of minibus taxi services, the industry had not materially
increased fares in the last two years, and minibus taxi operators have absorbed the financial impact of a
hostile environment over this period. Accordingly, fare increases were implemented in various associations
earlier this year, assisting minibus taxi operators to better afford their financial obligations.

 SA TAXI                FY19       HY20        FY20 commentary and expectations
                        Reported   Reported
 Gross loans and        10 753     11 304      Gross loans and advances are expected to grow in the mid-teen percentages
 advances (Rm)                                 supported by higher vehicle retail prices, retention of market share and
 Number of loans        8 591      3 876       continued momentum in the sale and finance of SA Taxi’s fully refurbished
 originated                                    pre-owned minibus taxis.
 (Number)
                                               The growth in gross loans and advances has been positively impacted by
                                               Toyota vehicle price increases of 5.5% since 1 October 2019, with more
                                               increases still expected this calendar year.

                                               The number of loans originated however is expected to decrease by more
                                               than 20% from FY19 levels as the closure of Toyota’s manufacturing plant
                                               and SA Taxi Auto Repair’s facilities during the lockdown curbs the availability
                                               of new and pre-owned vehicle stock.

                                               Due to the slowdown in collection activity and disruption in repossession
                                               activity as a result of COVID-19, portfolio attrition was slower than historical
                                               levels where approximately 20% of SA Taxi’s book rolled off per year.

 Net interest           1 217      677         Mid-teen percentage growth in gross loans and advances has translated into
 income (NII) (Rm)                             low double digit percentage NII growth. The benefits from the settlement of
 Net interest           12.2       12.2        R1.0 billion of interest-bearing debt (utilising the proceeds received when
 margin (NIM) (%)                              SANTACO acquired 25% in SA Taxi in February 2019) will be offset by
 Average cost of        11.1       10.9        negative endowment impact resulting from progressive interest rate cuts.
 borrowing (%)                                 This has placed NIM under mild pressure, expected to be slightly below 12%,
                                               despite the average cost of borrowing expected to reduce to less than 10%.
                                               Historically, and over the medium term, SA Taxi targets a NIM of between
                                               11% and 12%.

 Credit loss ratio      3.2        6.1         The restrictions placed on the minibus taxi industry together with the
 (post COVID-19                                disruption to commuter movement resulting from the national lockdown,
 adjustment) (%)                               has impacted SA Taxi's clients’ ability to afford loan instalments during this
                                               period. Despite loan collections recovering well, they are now expected to
 Non-performing         17.9       19.1        normalise to pre COVID-19 levels early in the 2021 calendar year - a longer
 loan ratio (NPL                               period than anticipated in the half-year results. This has been adequately
 ratio) (%)                                    provided for in the form of an increased COVID-19 adjustment in SA Taxi’s
                                               credit provisioning model. SA Taxi has raised a forward-looking provision to
 Provision              4.8        5.4         account for this impact, increasing provision coverage to be between 6% and
 coverage post                                 7% for FY20, where after it should reduce to prior levels of approximately
 COVID-19                                      4.5 % to 5.5%.
 adjustment (%)
                                               Due to the COVID-19 impact mentioned above, SA Taxi's credit loss ratio is
 Total impairment      (322)      (338)        expected to increase above historically reported levels and the target range
 expense (Rm)                                  of 3% to 4%, to between 7% and 8%. By FY22 SA Taxi's credit loss ratio is
 Impairment of         (322)      (212)        expected to normalise around or slightly above the upper limit of the 3% to
 loans and                                     4% targeted range.
 advances (Rm)
                                               While loan collections are anticipated to be lower for the rest of the calendar
 COVID-19                                      year, the absolute value of cash collected over the full term of the loans is
 Adjustment (Rm)       (-)        (126)        not expected to decrease, rather it will be collected over an extended
                                               period. Cash flows will be protected as the useful life of a minibus taxi
                                               significantly exceeds SA Taxi’s average loan term of 71 months.

                                               Reduced origination of new loans and the disruption to collections has
                                               resulted in an increase in the NPL ratio, expected to be slightly above 30%.
                                               The NPL ratio is expected to improve to the mid 20% range in FY21 with
                                               continued improvements in FY22.

 Non-interest          584        321          SA Taxi’s insurance business is the main contributor to NIR. Gross written
 revenue (NIR)                                 premiums are expected to grow at rates lower than expectation (at mid-teen
 (Rm)                                          percentages), due to disruption in new and pre-owned vehicle supply. This,
                                               together with higher lapse rates, has negatively impacted new policy
                                               origination levels.

                                               The gross revenue from SA Taxi’s retail dealerships in FY20 is also expected
                                               to be lower than FY19 due to the disruption in new and pre-owned vehicle
                                               supply, and the closure of SA Taxi’s dealerships during the lockdown.

 Core total           (796)      (412)         Containing operating expense growth remains a focus. SA Taxi’s core cost-
 expenses (Rm)                                 to-income ratio is expected to improve from the FY19 level of 44.2%.

 Capital adequacy     22.4       21.4          SA Taxi is well capitalised, with a Tier I capital adequacy ratio of more than
 ratio (%)                                     15% and more than R2 billion of equity.


TCRS

TCRS’s collection revenues in South Africa and Australia for April 2020 through to August 2020 have recovered
well, but are now projected to recover slower and over a longer period than disclosed in the half-year results.
This too has been adequately provided for in the form of a COVID-19 adjustment to our valuation model for
NPL Portfolios owned by TCRS.

TCRS’s successful transition of more than 1 300 call-centre agents to work-from-home, without compromising
data security or access to technology, is yielding higher productivity per agent due to more flexible working
hours, which will enable the division to reach higher levels of efficiency.

 TCRS                FY19       HY20       FY20 commentary and expectations
                     Reported   Reported
 Non-interest        2 018      1 108      TCRS’s collection revenue is expected to grow in the mid-to-high teen
 revenue (NIR)                             percentages, with collection revenues in South Africa and Australia for
 (Rm)                                      April 2020 to date remaining better than the anticipated 70% of pre
                                           COVID-19 levels disclosed in the HY20 results announcement.

                                           Despite the operational disruption caused by COVID-19, TCRS’s omni-
                                           channel and data analytics capability enables it to continue contacting
                                           consumers. The positive response of consumers to non-voice and digital
                                           channels, specifically in Australia, is contributing to higher levels of right
                                           party contact and online payments. The significant proportion of annuity-
                                           based collections via recurring payment arrangements has also supported
                                           current collection rates.

 Carrying value of   2 382      2 775      The carrying value of purchased book debts is expected to increase by low
 purchased book                            double-digit percentages for FY20 due to lower than expected levels of
 debts (Rm)                                NPL Portfolio acquisitions, and the COVID-19 adjustment to the carrying
                                           value of this asset.
 
 COVID-19            (-)         (65)
 adjustment (Rm)                           While collections from our NPL Portfolios performed better than initially
                                           expected the damage that COVID-19 has inflicted on the South African
 Cost price of       1 186       556       economy, reflected in "Transaction Capital’s latest Consumer Credit
 purchased book                            Rehabilitation Index", is severe. Unemployment is expected to increase
 debts acquired                            to more than 35% in the short term and economic recovery is expected to
 (Rm)                                      be slow. TCRS’s future collections are projected to recover slower and
                                           over a longer period than expected at the time of the half-year results
                                           announcement, in a "swoosh" like recovery. Over the medium to long-
                                           term, estimated remaining collections (ERC) applicable to the existing NPL
                                           Portfolios are expected to be in the region of 4% lower, necessitating a
                                           larger adjustment to the carrying value of purchased book debts. The
                                           adjustment for FY20 will be in the region of R250 million to R300 million.

                                           TCRS targets a collection multiple ranging from 1.6 to 2.2 times the
                                           amount invested in purchasing a portfolio, depending on the
                                           characteristics applicable to the portfolio being considered. Historically,
                                           TCRS has bought these portfolios well, with a healthy margin of safety, as
                                           can be seen with historical multiples exceeding these levels. TCRS expects
                                           a marginal impact to collection multiples going forward, with the most
                                           recently acquired vintages being impacted more severely.

                                           TCRS is able to adjust its pricing methodology to the prevailing
                                           environment, with future NPL Portfolios purchased being priced
                                           conservatively to achieve targeted returns and collection multiples.

                                           Over the last 2 years TCRS has spent approximately R600 million acquiring
                                           NPL Portfolios in the second half of the financial year. Due to the
                                           disruption of COVID-19, TCRS expects to spend approximately R300
                                           million in the second half of FY20, in addition to the R556 million spent up
                                           to HY20.

                                           In South Africa, the market for NPL Portfolio acquisitions is
                                           underdeveloped and growing. As the impact of COVID-19 plays out over
                                           the medium-term, we expect this market’s growth rate to accelerate.
                                           COVID-19 has caused operational disruption in our clients’ and
                                           competitors’ call centre operations, leaving our clients with larger levels
                                           of NPL Portfolios to manage.  

                                           As consumer-facing entities seek to reduce fixed costs and shift to variable
                                           cost structures, we expect their appetite for outsourcing collections or
                                           selling NPL Portfolios to increase significantly. TCRS is well positioned to
                                           service the higher levels of activity and has almost 20 years of experience
                                           in South Africa in acquiring NPL Portfolios at attractive risk-adjusted
                                           returns.

                                           In FY21 TCRS expects to invest less than the R1.2 billion reported for FY19
                                           on a "business as usual basis". However, as market dynamics in the
                                           aftermath of COVID-19 become clearer, this may provide an
                                           unprecedented opportunity to accelerate capital deployment. Should this
                                           materialise, TCRS’s investment could exceed FY19 levels. Similarly,
                                           management expect investment in excess of R1 billion for FY22.

 Total expenses      (1 353)     (729)     For FY20 TCRS expects double digit cost growth, as we implemented work-
 excluding                                 from-home capability and incurred costs in reducing the staff
 amortisation (Rm)                         complement. These initiatives will benefit the business into FY21.


TRADING STATEMENT

In accordance with section 3.4(b) of the Listings Requirements of the JSE Limited shareholders are advised that
Transaction Capital is satisfied that a reasonable degree of certainty exists with regards to the group’s financial
results for the year ending 30 September 2020. Transaction Capital will deviate from its historical earnings
growth track record, as a result of increased impairment provisions at SA Taxi, and a downward revaluation of
TCRS’s purchased NPL Portfolios. The group has adopted a conservative approach regarding the impact of
COVID-19 on cashflows during the period from 27 March 2020 to date, and the anticipated impact of COVID-
19 on future cash flows emanating from assets to be held at 30 September 2020.

The table that follows provides guidance for the expected decreases in the group's earnings for the 12 months
ending 30 September 2020.

                            12 months ended         Guidance 12 months ending      Guidance 12 months ending
                            30 September 2019       30 September 2020              30 September 2020
                            (Actual reported)       (Expected number range)        (Expected percentage range)
 Continuing Earnings
 Basic Earnings             R713m                   R213.9m to R285.2m             -70% to -60%
 Basic EPS                  116.5 cents             35.0 cents to 46.6 cents       -70% to -60%
 Headline Earnings          R705m                   R211.5m to R282.0m             -70% to -60%
 Headline EPS               115.2 cents             34.6 cents to 46.1 cents       -70% to -60%
 Core Headline Earnings     R789m                   R236.7m to R315.6m             -70% to -60%
 Core HEPS                  129 cents               38.7 cents to 51.6 cents       -70% to -60%

 Total Earnings
 Basic Earnings             R727m                   R145.4m to R218.1m             -80% to -70%
 Basic EPS                  118.8 cents             23.8 cents to 35.6 cents       -80% to -70%
 Headline Earnings          R719m                   R143.8m to R215.7m             -80% to -70%
 Headline EPS               117.5 cents             23.5 cents to 35.3 cents       -80% to -70%
 Core Headline Earnings     R803m                   R160.6m to R240.9m             -80% to -70%
 Core HEPS                  131.3 cents             26.3 cents to 39.4 cents       -80% to -70%

The difference between core headline earnings from continuing operations and total operations can be
attributed to the accounting of Transaction Capital Business Solutions, Company Unique Finance and Principa
Decisions as discontinued operations, as reported on SENS on 13 May 2020 in Transaction Capital’s interim
results for the half year ended 31 March 2020. Due to the effect of these discontinued operations, which
became effective in the first half of the 2020 financial year, it is management’s view that the most appropriate
metric to measure performance for FY20 is core HEPS and EPS from continuing operations.

Shareholders are advised that the information contained in this announcement has not been reviewed or
reported on by the group’s auditors.

Hyde Park
15 September 2020

Transaction Capital Limited
Investor Relations – Phillipe Welthagen +27 (0) 84 512 5393

Company Sponsor
Rand Merchant Bank (A division of FirstRand Bank Limited)

Date: 15-09-2020 07:05:00
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