Good morning, and welcome to Transaction Capital's 2023 full year results presentation. Also, welcome to the approximately 350 people that are joining us online via the webcast. My name is Jonathan Jawno, and together with Michael Mendelowitz and Rob Rossi, I'm a co-founder of Transaction Capital. Over the past few months, I've been actively involved in the restructuring and repositioning of Transaction Capital, and I will take over formally as CEO at the end of this month. Before we go further, I think it's appropriate that we recognize the loss of Eric Ellerine, who passed away yesterday. Eric was a giant in the South African business community, a close friend of many of ours, and an anchor shareholder and a long-time shareholder of Transaction Capital, a great friend of the firm.
So we will miss him, and we extend our condolences to the entire Ellerine family. This year has undoubtedly been the most difficult and disappointing in Transaction Capital's history. The dismal performance has led to a deep amount of introspection and reflection. The conclusion that we have come to is that while the macroeconomic environment continues to be extremely challenging, Transaction Capital has, to some extent, lost its way. And what I will be driving is a return to our roots, namely, to an entrepreneurially driven, results-oriented, no-nonsense approach. In essence, it's back to basics. I think the performance is such that it is necessary to apologize to all stakeholders. At the same time, I would like to express my thanks to our board, who have helped navigate this difficult situation.
Let me also take the opportunity to thank all the executives at the head office, as well as in the subsidiaries, who have managed to, despite all the noise, put their heads down and focus on running their businesses. This is inspiring and certainly bodes well for the future. I want to highlight the format of today's presentation, which will be different from previous presentations, given the significant changes at Transaction Capital. Accordingly, I do not intend to go into all the operating detail, but rather share the strategies of how we intend to move forward as a group. Having said that, all the detail relating to the individual metrics around the operating performance of the businesses is available for your information in the annual financial statements, the data sheet, and the appendix to this presentation.
In addition, I want to point out that I will be delivering today's presentation together with Mark Herskovits, our Chief Investment Officer. Mark and I will then be joined by Sahil Samjowan , our Chief Financial Officer, for the Q&A after the presentation. An important aspect of today's presentation is for us to deal with the burning issues or the elephants in the room that we feel are worrying stakeholders. These are the issues that we feel we need to address head-on for investors to form a view with visibility on both the risks and the upside of what the future could hold for Transaction Capital. How did management get SA Taxi so wrong? What is the contagion risk from SA Taxi? What is the funding status of SA Taxi, and will it require more capital from Transaction Capital? Will there be a rights issue?
Are WeBuyCars and Nutun still growth companies? And what does value unlock really mean? I do not believe that this list is exhaustive, but we will deal with any additional questions you may have in the Q&A session afterwards, as well as in the interactions over the coming weeks. The first issue to address is this notion of the group versus Transaction Capital as a company. Historically, the IFRS consolidated accounts of Transaction Capital have been presented. While most analysts and investors view our published IFRS audited accounts, and this is both correct and appropriate, from a management point of view, we do not manage the group in this way. We look at Transaction Capital in the following way, and focusing first on the balance sheet. We have preference shares of ZAR 489 million.
We have a DMTN program of ZAR 457 million, and we have a revolver of ZAR 1.1 billion. At year-end, we had cash and cash equivalents of ZAR 931 million against us. Subsequent to year-end, our cash has grown and now completely offsets the revolver. If you add our commitment to the Santaco partnership, which is a future financial commitment, but a financial commitment all the same, of ZAR 285 million, this brings our net debt, including the Santaco commitment, to ZAR 1.4 billion at the thirtieth of September, but subsequently, that has already been reduced to ZAR 1.2 billion. And this reflects the total liability side of our balance sheet. Against this, simplistically, we own four assets: 100% of Gomo, 75% of SA Taxi, 75% of WeBuyCars, and 100% of Nutun.
From a WeBuyCars perspective, we have call and put options to increase this holding in WeBuyCars from 75%-100% over the following 5 years in equal installments. Now, I'm not here to give you a view on what the value of these assets is, but it is quite easy for anyone to see that under any scenario, the net equity in Transaction Capital is substantial. The attributable NAV is almost ZAR 7 billion. Now, whether NAV is an appropriate valuation method for these assets is for each of you to decide. But whether you conclude that the true value is the net asset value or some other metric, it is clear that Transaction Capital, at a balance sheet level, is conservatively, conservatively geared and has substantial equity. Now, at an income statement level, it's also very simple.
The head office expenses are offset by the management fees received from our subsidiaries. So when you look at the profits of our subsidiaries, understand that they have already been reduced by the head office expenses. In addition, we receive dividends from each subsidiary. This year and going forward, we do not expect to receive any dividends from SA Taxi. However, we received dividends of ZAR 245 million from WeBuyCars and ZAR 220 million from Nutun, being 50% of their earnings attributable to the group. Simplistically, against this, we have an interest expense at the head office based on the net debt, which last year was approximately ZAR 150 million, and will reduce substantially as this debt reduces.
As you can see, this leaves us with a net cash generation in excess of ZAR 300 million, and that we allocate appropriately and efficiently as we see fit. I think that given the above, it is clear that Transaction Capital is well-capitalized, and as a result, we have no intention of pursuing a rights issue. One of the biggest concerns is whether there is a risk of default at the Transaction Capital holding company level. Now, there are two scenarios under which a default can occur at the Transaction Capital holding company debt. The first scenario is where the performance of SA Taxi triggers a covenant breach on the debt at Transaction Capital holding company level.
It is important to note that if we exclude SA Taxi, the value of WeBuyCars and Nutun exceeds the debt by many multiples, and the dividend income exceeds the interest cost by many multiples. Given this, there's a comfort across the lender community that Transaction Capital is well-capitalized, and that it can more than meet its payment obligations at a holding company level. As such, funders have, to date, waived the covenants on this debt, although this may not necessarily be the case in the future. The second scenario under which a default could occur is the risk of a cross default from SA Taxi. Although there is a risk of a cross default, to date, the funders have waived the covenants that would give rise to that breach. Again, given that the group can more than meet all its payment obligations at the holding company level.
To reiterate, Transaction Capital has not guaranteed the debt of any of the four subsidiaries, and neither are there any cross defaults between any of its subsidiaries. Given the aforementioned, even if funders were in the future to withhold these waivers and a default were to occur, management is of the view that lenders would look at this commercially and subsequently would not accelerate the repayment of this debt. Notwithstanding this, we are actively looking at restructuring or reducing the debt at a holding company level. This slide reflects the overall financial performance of the four subsidiaries and highlights the consolidated performance of the group. Before I touch on the individual performance, it is important to highlight the DNA that underpins Transaction Capital.
Each of the individual subsidiaries operate businesses that are unique in the South African context, and that are able to leverage their respective competencies, affording them leading and defensive positions in their target market. Obviously, the huge disappointment revolves around SA Taxi and the significant losses that have been incurred this year, and the substantial increase in losses even from the March forecast. This will be the focus of our attention when we deal with SA Taxi's performance in more detail later. That said, it should be highlighted that the attributable earnings to the group from Nutun and WeBuyCars was ZAR 924 million for 2023, of which 50% was declared and paid in cash as dividends.... Now, let's move to the real discussion, which is SA Taxi. One of the questions we highlighted was: how did management get SA Taxi so wrong?
We continue to reflect on this and unpack this. I would like to say that we, as management, underestimated the impact of the severe macro changes in the country and the effect that this would have on the country's individual taxi operators. Post-COVID, we thought it was a V, and we were waiting for the proverbial bounce. With the benefit of hindsight, this turned out not to be just a blip. Over the past three years, sadly, the ability of the taxi industry to provide public transport to South Africa profitably has been severely eroded, and our mistake was not identifying the structural shift in the taxi industry earlier and reacting to it earlier. Over the past three years, we've effectively been on the back foot, trying to tread water, waiting for the market to come back to prior levels.
As painful as this has been, this has been a watershed year. We have tackled a harsh reality head-on and experienced all of the associated pain. Getting it wrong on the timing and cost of repositioning has resulted in massive one-off adjustments, totaling ZAR 3.1 billion. The only meaningful way to change the cash flows of the taxi operator is to significantly reduce the installment. In the absence of fare increases and government subsidies, the only way to do this is at a macro level, is to allow the fleet to age and create enough of a price differential between new and secondhand taxis to significantly change the cash flows of the taxi operator. Given the focus on only originating QRT and secondhand taxis, the auto business will no longer be sold. Additionally, this has necessitated additional repossessed vehicle stock write-downs.
However, we believe that the auto repair and refurbishment business uniquely positions and differentiates SA Taxi from the banks that provide finance for the minibus taxis. We are optimistic that the steps we have taken in SA Taxi to facilitate the new business model and allow for the balance sheet restructure are aligned to the new reality of South Africa's taxi industry. We are confident that all the decisions that we have made up to March, and continuing into the second half of this year, have been necessary. That said, had we been bolder, we could have achieved the same for far less.
As we continue to refine SA Taxi's business model and focus on deleveraging and cash flow generation over the next two to three years, we anticipate further volatility in SA Taxi's earnings as we reposition the business to achieve a sustainable base from which to grow into the future. This slide reflects the financial performance of SA Taxi. These traditional metrics are not so relevant this year because of all the adjustments linked to the rebasing of the business model. As I mentioned earlier, front and center is the ZAR 3.7 billion headline loss, primarily due to once-off adjustments resulting from the business model changes. Many of you have seen this slide before, and it highlights the key issues in the operational restructure and where we believe we are in terms of the progress that we are making.
A crucial point is that no amount of operational restructuring will secure the long-term viability of this business without a balance sheet restructure. Mark Herskovits has been working tirelessly with funders to execute on this, and rather than me talking about it, let me ask Mark to come and address this.
Thanks, Johnny, and good morning, everybody. So, as Johnny mentioned, there are two components to the SA Taxi restructure, a operational side and a balance sheet side. Most of the operational side has already been covered by Johnny, so I'm not going to repeat that on this slide, other than to say that on the right-hand side, you can see those bar charts, which is there to reflect how much progress the business has already made in achieving the various targets in the operational restructure. And you can clearly see that we've made enormous progress and are largely complete in most of these respects. The only item that I do want to touch on this slide is the very last one regarding the management team of SA Taxi.
At half year, the business had already made substantial changes to the executive team in the business. By the full year, we had completely revamped the executive team at SA Taxi. This team brings fresh thinking, energy, and a renewed commitment to guiding the business through this operational restructure and onto a path of long-term sustainability again. Although there are many new faces in the team, they haven't lost the benefit of the institutional knowledge, which is housed with the founders of Transaction Capital and many of the executives in TC. Led by Sean Doherty, this team has already achieved a huge amount in a short space of time, and I want to acknowledge them today for their invaluable contributions already made under very difficult circumstances. Turning to the balance sheet restructure.
I think given that all that has happened to SA Taxi and to the business, it's clear that the cash flows that it can now generate are no longer sufficient to sustain the current debt burden. In addition, the provisions and write-downs, which have been taken, have also meant that the business is now become over-geared. It's for these reasons that we have been engaging constructively with the lenders of SA Taxi over the last six months as we work together to craft a plan for balance sheet restructure that can put the business back onto a sustainable footing again. It might be obvious, but I think it's worth reiterating to say that the business can only get through its current difficulties with the ongoing support of its lenders.
I'm gonna talk more about the specifics of our current proposal to the lenders on the next slide, but moving to the second point on this slide, dealing with Transaction Capital support of SA Taxi, there are a few points I want to note here. One is that by March 2023, TC had already put in over ZAR 2.2 billion of additional capital into the business since the start of COVID. That is a very substantial amount for our balance sheet. That ZAR 2.2 billion, by the way, is still reflected as a subordinated interest-free loan, but we are still fully committed to capitalizing that loan in full, together with the final restructure of the business. It's also important to note that we have not put in any additional funding into the business since March 2023.
That ZAR 2.2 billion has stayed exactly the same since then, and also that our current proposal to lenders does not envisage that additional capital, cash capital, will be required from Transaction Capital into the future. But we should not forget about the contributions that TC has made historically and continues to make, and will do so under the new proposed restructure. You can see that on the next slide, you'll see that TC is proposing to contribute approximately half of what we believe will be an extremely valuable asset in Gomo to SA Taxi as part of the restructure. In addition, the work of Johnny, Chris Seabrooke, myself, and many other TC executives is clear evidence of the sweat equity that we continue to contribute to the business and will continue to do so for as long as is necessary.
I want to particularly acknowledge Chris for the leadership role he has played in chairing the mobilised Debt Sustainability Committee and through his intensive personal engagements with several of the lenders. The final point on this slide deals with the industry, Santaco. They're a key partner and stakeholder of the business. Not only are they a 25% shareholder in the business, but they are a critical business partner for us as SA Taxi and the industry both navigate these unprecedented times. Johnny mentioned earlier that, and I'm acknowledging it again, that we have a ZAR 285 million financial commitment towards assisting with the restructure of the Santaco equity transaction.
Although that restructure process is on hold until such time as the main SA Taxi restructure is in place, all parties are unanimous in the view that it is essential that Santaco will continue to be a partner and a shareholder in the business long into the future. Turning to what is our simplified view of our current proposal for the balance sheet restructure to lenders. Note that this is just a proposal. We have discussed this with certain key lender groups, and there is some traction behind the principles that we are putting forward here. But this is by no means a final or approved restructure proposal, and by the time we finish with this restructure next year, the final result may look quite different to what you're seeing here today.
We still think that it is worthwhile, us showing you this information, so that you can at least get some insights into the kind of thinking that we are applying in this process. One of the fundamental principles of the proposal that we've put forward is an acknowledgment that SA Taxi is unlikely to have access to external capital, be it debt or equity, until such time as it has proven that it is back on a profitable, sustainable path. Therefore, our proposal ensures that the business is self-funded for the next 24 months before once again gaining access to the capital markets. Another fundamental principle of the proposal is that the business should continue to operate normally throughout this period.
This means that there must not be a break in new originations during this period, as all stakeholders agree that this is likely to result in a very poor outcome for everyone. It's for this reason that we are focused on reaching a finality on the restructuring by March of 2024... because this coincides with when our current availability of cash for loan originations is likely to be depleted. So this slide shows a simplified view of the SA Taxi Group, with SA Taxi Holdings owning Taximart , which is the repair business, the dealership, 40% of GoBid, and our proposed contribution of 49.9% of Gomo into that, into that business.
Together with the subordinated loans that you can see on the slide, which are provided to each of the underlying credit providers, as well as some brand new initiatives which management is currently working on, we believe that these sources of cash flow will be sufficient to be able to support the ZAR 670 million of debt over the medium term, support and repay. Turning to SA Taxi Development Finance, which has always been the main operating entity of the SA Taxi Group, consisting of both the loan portfolio, as well as the servicing operations of the business, as well as ownership of the insurance operations of the business.
For this entity, we are proposing the following: firstly, that the servicer will be split out as a separate 100% owned subsidiary of SA Taxi Development Finance, and this is to ensure that, that the servicer is financially insulated from any potential problems that may occur in the loan portfolio. This is crucial because, as you can see on the slide, the servicer actually provides services not only for SA Taxi Development Finance, but for all the other credit providers across the SA Taxi Group. We are also proposing that SATDF will revolve its asset portfolio for approximately 24 months by redirecting cash flows from that are coming off of the portfolio towards the repair of pre-owned vehicles and the subsequent loan originations against those vehicles.
This will allow SATDF to strengthen its portfolio over time by adding loans that have been originated under the new, much more conservative credit granting process. Once the revolving period comes to an end, capital payments will resume, and we'll be able to repay the debt in that structure over time and in alignment with the expected underlying cash flows of that portfolio. Together with the insurance flows and the flows from the servicer, we believe that SATDF will be able to generate excess equity in the structure over time, after servicing the interest on all of the debt in that entity. Some of this equity is proposed to be used to underpin new originations when the business is once again able to access the debt markets.
That's shown in the bottom part of the blue block, where we are proposing that a new ring-fenced entity will be set up to continue the originations of, for the business once the revolving period in SATDF comes to an end. And it will do so, in part, supported by some of the equity that is generated in development finance during the revolving period. We think that this is essential to make sure that the business will continue to originate new loans into the future, and that is something that will benefit not only the development finance lenders, but all lenders across the various credit providers. You can see here there's ZAR 11.4 billion of funding, which currently sits in various other ring-fenced SPV credit providers within the SA Taxi Group.
Our proposal to these lenders will be for them to make an election. Either they can continue to run down their portfolios in the way that they were originally designed, or they can elect to also enter into temporary revolving periods, where they will again redirect cash flows into new originations within their SPVs, before again reverting to a wind down of each of their structures. The last point I want to make on the slide is that although this proposal does not rely on any external equity being injected into the business, we are actively engaging with two potential equity investors at the moment, and it would obviously be to all stakeholders' benefit that these discussions were to be successful, but our proposal is not reliant on that outcome.
I'll leave you with this: that whether we ultimately do follow this proposal or something different, we continue to believe that there is a realistic and viable path to restructure SA Taxi with the support of our lenders. I'll hand back to Johnny.
Thanks, Mark. Gomo is one of the exciting future opportunities within Transaction Capital. The proof of concept phase has successfully completed, and from the first of June this year, no more business has been written onto our balance sheet. All new business is being written onto Standard Bank's balance sheet, leveraging the entire WeBuyCars distribution network. Accordingly, our book is being run down and will disappear over time... The new Gomo model, albeit in its infancy, is cash flow neutral and earnings accretive from day one. This business will build up slowly, and its growth is a function of its ability and to develop, to innovate and develop new products that are relevant to the WeBuyCars platform and that are differentiated from the traditional vehicle asset finance offerings. Moving on to WeBuyCars.
From a macro perspective, the secondhand car market continues to become increasingly relevant in South Africa, as the escalating price of new cars simply makes them unaffordable. In 2022, the secondhand car market rallied, underpinned by a number of favorable conditions all converging. Despite this trend reversing in 2023, I think it's fair to say that WeBuyCars has probably had one of the best years in its 20-year history. What I mean by this is that although it didn't make more money than it did last year, the business strategy, the innovative technology, and the operational enhancements have all come together in a trying economic environment to deliver huge strides in terms of further differentiating WeBuyCars in the secondhand vehicle market and entrenching the business as a market leader.
WeBuyCars earnings were down 22% in the first half of this year, primarily due to the changing environment and coming off the abnormally high base of 2022. That said, the drop in earnings for a relatively short period of time demonstrates the agility of the business to quickly identify and respond to changing market conditions. Over the last six months, the business has normalized its margins and repositioned its stock mix to end the second half only 4% down compared to the second half of 2022. This strong momentum is continuing into the new year. The commitment and investment in innovation and continued enhancement of the customer experience is part of the DNA of the business. WeBuyCars has delivered on key performance metrics, including increased volumes, growth in market share, and improved unit economics. The business is uniquely positioned in a large and extremely relevant market.
We believe that it has substantial growth potential. These achievements are testimony to the vision and the leadership of the founders and our partners, Faan and Dirk van der Walt, alongside their talented and dedicated management team. It is a privilege to be working with them. There's an ongoing comparison between the economics of WeBuyCars and other car sellers, including OEM dealerships, online platforms, and marketplaces. We do not believe that WeBuyCars can be compared to any other player in the market, given its scale, and that is that, and that it has absolutely no gatekeepers. It is not limited by geography. It buys and sell cars of all makes, ages, and mileage, and is able to accurately respond to market conditions. The trust and transparency that underpins WeBuyCars allows for price discovery between buyers, sellers, and financiers of secondhand cars.
In a board meeting yesterday, one of our directors, who's close to the WeBuyCars business, mentioned to me that whenever he engages with WeBuyCars, he feels it's more of a technology company than a motor car company. I think that is very true, because the technology that underpins this business is exceptional. Moving on to Nutun. Nutun is an exciting business, and without doubt, 2023 has been a transformative year on many levels. From a management point of view, the business was transformed from the leadership of Dave McAlpin, the business's longtime CEO, to John Watling, who took over in July 2023. In addition, to align with its growth objectives, the management team has been expanded to bring on board skills necessary to manage the forward-looking growth of this business.
Nutun has suffered from the fallout of SA Taxi, and its robust performance under these circumstances is a tribute to the management team, who have managed to stay focused and who've continued to deliver on the key objectives of this business in trying times. Nutun has evolved as a major player in the BPO space, which is one of the few growth opportunities in South Africa. Nutun CX today services blue-chip clients in USA, U.K., Australia, and South Africa, primarily fulfilled from call centers in South Africa. It is important to remember that Nutun was born out of the collections and recoveries industry in South Africa, and 25 years later, the business continues to enjoy a market-leading position in this market. You can see from the Nutun Consumer Credit Health Index that the South African consumer continues to remain under extreme pressure, making this business more and more relevant.
Nutun's leadership position is underpinned by its continued investment in data, technology, and telephony, as well as the continued training and upskilling of staff across the business. Nutun services almost every major credit provider in South Africa. One of the strengths of the Nutun management team is their disciplined approach to NPL portfolio acquisitions and their responsiveness to market conditions. This year, we saw a significant deterioration in consumer behavior and a lag between where the sellers of NPL portfolios were positioning and where we saw fundamental value. Nutun had the discipline to pull back on NPL portfolio buying, and as you can see, this year, we only deployed ZAR 1.1 billion in South Africa, ZAR 208 million less than in 2022, and significantly less than budgeted for.
Despite this, the carrying value of our NPL portfolio has reached an all-time high of ZAR 5 billion, with estimated future collections at ZAR 7.7 billion. The NPL portfolio business requires a funding model that supports it, and the unfortunate effect of the performance of SA Taxi has limited Nutun's access to funding in the CE services division. It is important to note that this only has an impact on the CE business and not the CX business. Despite the difficult year, Nutun still has access to funding with many funders, including our key banking partners, who continue to support Nutun as they have over many, many years. Nutun has always raised capital off its own balance sheet. However, it is unfortunate that some lenders have paused their support for Nutun, citing contagion from SA Taxi.
To date, no one has turned down funding on the back of the credit fundamentals of the Nutun business itself. We are confident that over time, full access to funding will be restored. However, in addition to product innovation, we continue to pursue traditional and new alternative sources of funding, as well as apply an additional layer of conservatism to our capital allocation until the situation reverses. In this slide, you will observe the changing mix in revenue from CX with CX revenue having gone from 40% to 58% and foreign currency revenue increasing from 31% to 47%. All these trends are continuing. Overall, 2024, 2024 will no doubt prove to be a very exciting year for Nutun, as it continues to build off the large business base established this year.
We believe that this business has unique opportunities as it builds global scale in its chosen markets. Drawing your attention back to where we started with the burning issues, we hope that we have adequately addressed these issues. Perhaps one question that we haven't answered is: how do we intend to unlock shareholder value, and what does this mean? We are allergic to buzzwords. So Transaction Capital will migrate from an operational group to an active investment holding company, with its holdings run on a fully decentralized basis and assessed against independent investment criteria. To this end, we have significantly reduced and augmented the group's head office. We are further considering various alternatives to reduce the net debt at a holding company level. At an individual company level, alongside many other initiatives, the following options are currently being explored.
As highlighted by Mark, SA Taxi will be restructured and stabilized with a view to introducing an appropriate equity partner. This can only be done once the restructuring has been complete. Transaction Capital, together with the WeBuyCars founders, is exploring the merits of unbundling Transaction Capital's shareholding in WeBuyCars, together with its subsequent listing on the main board of the Johannesburg Stock Exchange. Nutun is undergoing an intensive review of its operations, with a view to establishing whether certain non-core operations can be disposed of or repositioned. In addition, management is exploring options to raise traditional and alternative new methods of funding. In respect of all of the above, no decisions have been made at this point, okay?
I want to stress that, as I said earlier, we are trying to achieve an open, honest process, where investors are given insight into both the risks and the opportunities facing Transaction Capital, allowing them to make informed decisions on Transaction Capital's future. Overall, notwithstanding the challenges facing the group, a situation that none of us ever envisaged, I feel confident that with the committed management teams across our businesses and the support of our board and the funders, we will be successful in restoring credibility and unlocking much of the value that has been destroyed. Finally, how do I summarize my role at Transaction Capital? Well, at the moment, Transaction Capital is just subject to so much noise. No doubt that there's a lot of work to do, but I'm focused on simplifying and compartmentalizing the issues and eliminating the noise.
In order to do this, I'm driving a move back to basics so that we can deliver value for all stakeholders. With that, let me ask Mark and Sahil to join me on stage so that we can answer any additional questions that you may have.
Good morning. My name is Nomonde Xulu . I'm the Head of Investor Relations at Transaction Capital, and I will be your host for this morning's results presentation Q&A. We would like to, and we aim to, address all your burning questions, so please do keep sending your questions on the chat. Of course, we are live at the JSE this morning, so I will also be looking to take questions from our audience in the room. Now, in keeping with the spirit of addressing the elephants in the room head-on, Johnny, my first question is for you. Out of the three founders, why did you put your hand up to take up the CEO role? And having been in the business now for a couple of months, how do you feel about your decision? Would you put your hand up again?
Okay. So, thanks for that. I think, the obvious answer would be that I was just drew the short straw, but in fact, that's not the case. I think, the founders, we really work as a team, and the fact that that I've put my hand up or my hand was put up to assume this role, in no way diminishes the role that all the founders play and continue to play at Transaction Capital. So to some extent, the role of the other founders has not changed at all and continues to be invaluable. I think it was felt that maybe, and time will tell, that I have the skills necessary to fulfill kind of the public company aspect of managing these businesses.
Obviously, I have a deep insight into all the businesses. I started getting back involved in March, and that kind of scaled up, and I've been fully involved for the last few months. Your question was, knowing now what I know then, would I still do it? I think without a doubt, I would say that my only regret, knowing now what I...
Knowing.
What I know now is that if I had the time over again, I'd, the only change I would've made, I would've done it much earlier. So, yeah, that's my...
Thanks, Johnny.
Yeah.
Turning to you, Mark. Question from Rowan Reddy on the chat, and I'll add on a second piece to that question from Keamo. How confident is management that debt investors will provide additional funding to SA Taxi? And then the second piece to that question is: how would a downside scenario look, where debt funders don't agree to restructure the debts by March 2024? How does that play out over the next 12 months?
Sure. I think that, how confident? As confident as you can be in a situation like this. It is complicated. There are many different lenders. It's a complicated group structure. So you cannot, you know, say, take this for granted, that this is all going to work out perfectly according to plan. But what I can say is that there is a universal agreement, I would say, between all the lenders and the business itself, that it is in all of our interests that the business continues to operate as normally as possible. The best outcome for our lenders, and in fact, all of our stakeholders, is the continuation of the operation of SA Taxi, and I think that is honestly understood and acknowledged by all parties.
So I think that with that as kind of your underlying bonding principle, that is what is, I think, holding everybody together and pushing us on a constructive path of getting to a suitable outcome that can work for everyone. So, you know, that's as much as I can say about how confident I am. If it doesn't happen, I mean, I think it's really important to recognize that no finance business, not just SA Taxi, but no business that is in a finance industry, can survive without funders. It cannot be equity funded on its own. It's simply not possible.
Therefore, you know, the outcome, if we can't reach an agreement, and if the business does go into a wind down scenario, I think would be really suboptimal for all stakeholders, and then we're gonna try and do everything we can to avoid that.
I think if I could just add one point to that, Nomonde, is that important from Mark's presentation and to the people that asked it, is there's no expectation under the current restructuring plan for anybody to provide additional funding. In other words, so that we are only expecting to get access to additional funding in the, in the third year, so that would be 2027. For the current restructuring process that we are in, it simply revolves around funders-
... recommitting their existing funding. So we don't have an expectation of funders putting in additional funding. It merely goes around restructuring the existing funding, and that is another reason why we believe that it's highly achievable.
Thank you. Turning to you, Sahil, why has the SA Taxi loans and advances balance grown when volumes originated is down significantly? What is driving the growth in the loan book? And then there's a second part to that question, from Sandile Magagula from Umthombo: What rate of growth on loans and advances does the business believe it can achieve, focusing on higher quality credit?
Sure. Interesting question. So from a loans and advances perspective, we have previously noted a significant deterioration in the creditworthiness of the customer base within SA Taxi. If I could refer you back to the SENS, you would note that the staging between stage one, stage two, and stage three has materially shifted. This has meant that there's a greater level or number of non-payers across the SA Taxi asset base. That being said, that does mean that we've increased loans and advances quite a bit more than the 7% origination rate. I would, however, ask you to look at it as a net number, as we have taken materially more provisions, and net-net, year-on-year, the book has decreased in size. In terms of sustainable originations, the SA Taxi strategy is now to focus on both QRT originations as well as second-hand vehicle originations.
That being said, they've tightened their credit ranges, and we believe that in our target of around 150-200 vehicles a month, does seem like a more optimal mix for the company to originate sustainably into the near future.
I think if I can add to that as well on the second part. There's no question that the focus of the business now is not on huge growth. The focus is on writing better credit, within the pre-owned market. That means that, you know, high origination targets are really not what we are looking at. And we think that our 180 or so a month current origination target is certainly achievable. And we could do more, but that's not where the strategy of the business is at right now. We're looking to strengthen the portfolio, not grow it for the sake of growth.
We have a few questions around the reversal of the decision around the sale of the auto business. Can you clarify why the business has reversed the decision to sell the auto business? Is it a question of there not being a buyer, maybe?
Yeah. No. It's definitely not the case. We absolutely had a buyer that we were working with and actually went down quite a long way in that process. However, during that process, what was going on in parallel was our management team was rationalizing that part of the business, was restructuring it, taking out huge amounts of costs, putting in a much more efficiencies in the business. And by the time we got to this stage, we actually recognized that this, together with the additional change in our strategy that we've put through in the second half of the year, to focus on only the second-hand vehicles and even fewer of them, that it was actually no longer really sensible to have to sell this business.
We had simplified the business operationally, which was really our main objective when we first decided to sell the business, and we had already simplified the business to such an extent that we felt that most of the benefits of what we thought would have come from the sale were already achieved. And I think the other thing to point out is that the sale of this asset was never going to be a big money spinner. The idea was this was not going to create some kind of a cash windfall that we've now missed out on because we didn't do the deal. Rather, the benefits were gonna be in the operational efficiencies that we could have gotten over time, which, as I've just said, I think we've managed to achieve most of those already.
Thanks, Mark. We've spent quite a bit of time talking about SA Taxi. We'll move on to a few questions on Nutun. Nutun's revenue split has evolved from 60/40 CE or Capital Enabled to CX. Is CX the new focus for Nutun, especially given the funding constraints?
Sorry, could you say that, the CX?
Is CX or... Yeah, the customer-
Yeah
Experience part of the Nutun business, the new focus for Nutun, especially given the funding constraints you've seen in CE?
Okay, so the reality is that there has always been a split in the business between the balance sheet, CE, Capital Enabled services and fee generation or revenue generation services, as in the contingency. We've always believed as a model, that it's a healthy balance to have this highly cash-generative component, and then to the extent you can deploy that cash into buying further annuity flows, it's a healthy model. And the split, if you would, those of you that have followed us over the last 10 years or so, you would see that that split has moved over time from 40/60, 60/40, 50/50, but it's kind of in that band. So we do not see that there's a change in our focus in saying we're pulling back because of the funding constraint.
Definitely what happened this year, as I mentioned, was that,
... book buying or the investment in NPL portfolios is not something you can just do oblivious to the market. There are cycles, and there are times where you have to be deploying more, and there are times when the market conditions are not appropriate and you have to pull back. So this year, as I mentioned, we started pulling back because we saw this massive deterioration in the consumer base, and there was still a mismatch of pricing. The impact of the funding, we weren't directly affected in the sense that we never had funding to buy books, but obviously, we never had the conviction that the funding markets would be open to us as they were in the past, and therefore, we did pull back. An element we pulled back just of concern around the future funding. The question...
So, so that business runs on its own dynamics. The question around CX is that CX is a major growth initiative for Nutun, not relating to CE, but independently of that, and that is because there is such a big TAM. You know that on the CX business, we are able to service clients from Australia, banks, not, but banks in Australia, banks in the U.S., big utilities in the U.K. So we are able to. We have unlocked the ability to service global clients, which means we are not constrained by the limitations of the growth in the economy in South Africa. And all the IP that has been built in this business over the years is being able to be redirected towards the running of those distribution centers.
That is a big initiative that John and the enlarged team will be driving because we feel that there's a massive growth opportunity there. We've done very well in it so far, but we would consider ourselves still in our infancy in terms of our aspirations.
Thanks, Johnny. Staying on Nutun, this one's probably for you, Sahil. A question from Jacques and Rudi at Peregrine. Margins in Nutun seem to have compressed somewhat in the CX division. Do you think those margins can recover again in the years ahead?
Absolutely. You know, the CX business, as Johnny's just mentioned, in its infancy in Nutun, and management are focusing heavily on growth, both in terms of diversifying the industries in which it services and operates, as well as the geographies, the regions in which its clients, originate from. Management has focused heavily on building out new infrastructure, increasing the number of sites, both in KZN and in Johannesburg, from where it operates, and ultimately ensuring that it's got the right levels of skills and quantum of staff to support the needs of its client base. So I do believe that as it matures, you will start to see margins improve.
Thanks, Sahil. A lot more questions coming through on SA Taxi, but before we move back to talking about SA Taxi, Gomo. Has Gomo been as big a success as envisaged? Mark, do you want to tackle that one?
Yeah. I think that Gomo is also completely in its infancy. You know, that is a very exciting opportunity, but one that has only just gotten going. We only started originating off of Standard Bank's balance sheet from around June of this year, so only for about three months. And I think rightly so, this is a lending business, and people will go slowly. We will go slowly. We'll make sure that all of our systems and our criteria are settled and are right before we kind of grow. So I think that for where we are and for the time that has passed, we're very satisfied with where Gomo is.
We're very excited about the future of it, but I think this is a medium-term opportunity, not one that you're gonna see enormous hockey stick growth from in the next 12 months.
Thanks, Mark. Back to SA Taxi. Question from Douglas Turnbull: How is the cost of funding evolving in SA Taxi right now, let alone what the future states will look like?
How is the?
Cost of funding.
Look, the cost of funding is stagnant, actually, because we are not taking on any new funding at the moment. So the funding costs that were always in our portfolio and the existing loans, those remain the funding costs. It's possible that as part of a restructure, terms of those loans might change, which could incorporate the interest rates as well. But at the time, for the time being, we're exactly on the same costs that we had prior to half year, you could say.
But I think it's fair to just add to Mark, is to say that part of the reaching a level with future funders on the sustainability of this business will also... You know, the cost of funding will also be a part of that. In other words, you know, given the pressure in the market, the cost of funding has to remain affordable for the operator and hence for us. So there are kind of natural caps.
Second question from Douglas: How have collections in SA Taxi evolved in the second half of the year? Have there been any improvements or deterioration?
I think that it's really important for me what is probably the most encouraging sort of aspect of SA Taxi's business over the last 6 months, or in fact, 8 months, really, is to differentiate between the loans that have been originated since we made our strategic changes in around February, March, and the loans that are that predate that. And you can. There are various metrics which all show the same thing, that our collection rates, our vintage curves, our first payment defaults, these are all significantly improving relative to the legacy portfolio. So I think that clearly, we're still having a lot of challenges in the legacy portfolio, which is still the bulk of the portfolio.
I mean, we've only started originating, as I said, for the last eight months on the new, on the new basis, and we've got a R17 billion portfolio that's pre-existing. So, it's gonna take a while before you see the, the full benefits of, of the, of the new originations filtering into the overall portfolio. But when you separate them and you evaluate them side by side, it's really chalk and cheese, and, and you can see that we're doing, we're doing a better job now, even with market conditions not having improved.
Thank you. Question from Chris Steward at Ninety One: Do you believe that the funding model for the balance of the business is sustainable in the event of a suboptimal outcome for the funders of SA Taxi? Let's say that's a scenario that plays out, especially in light of the highly concentrated nature of the institutional funding market in South Africa.
Yeah, I mean, I think that's obviously... That's a, it's one, it's one of the big questions, and I think Johnny addressed it in his, in his presentation. Our view is that, A, we are working constructively with, with the lenders in SA Taxi to get to a, a positive outcome that would hopefully, negate, you know, this eventuality that Chris is, is raising. But even, even, even in this, in this extremely tough year that we've already just had, when we were kind of in the, the eye of the storm of, of the taxi, situation, it's not that we've suddenly lost all access to the funding markets in, in Nutun. We've, we've simply dialed back, and we've had a slightly lower year in terms of book buying.
But the fundamentals of the Nutun business are unquestionably strong. Never mind that we've also got strong cash flows that are generated from the book itself, which obviously supports reinvestment in the book. But also we've got the CX business, which we've already discussed, is a hard growth business, where cashflow generation will be very significant for Nutun as well. And we are looking at other innovations in the way we fund ourselves, particularly with regards to how we structure purchases of new books, which can allow us an element of funding from those innovations as well. So our bottom line is that we continue to be confident and optimistic that we can avoid a kind of a downside scenario that Chris is maybe alluding to.
I don't know if you would-
Yeah.
- add to that.
I think, you know, a fact is that Transaction Capital, from its inception, has never had a group balance sheet, and all the debt that we've raised, billions and billions over the many years, has always been fully ring-fenced. Investors have always understood this is not a retail investor base. Our investor base are smart fund managers, banks, et cetera. They've always understood the compartmentalized nature of the different businesses, and within those businesses, the compartmentalized nature of the debt for which it's been priced. You know, so in many cases, for many years, we've paid premiums because Nutun, for example, had to stand on its own feet and couldn't leverage off the broader group. So, we do believe that there could be some short-term turbulence, maybe as we have experienced a little bit this year, but long term, absolutely not.
Okay, we seem to be having sort of repetition of questions we've already asked, and I think our management team here has been on the hot seat long enough this morning. Given that we are also having a couple of days of investor engagements, I will, at this point, let you go. And I'd just like to thank Johnny, Mark, and Sahil for their time. I'd also like to thank all our participants online for dialing in. And of course, thank you to everybody who has been able to join us here this morning in person. With that, I'd like to close Transaction Capital's results presentation for the year ended 30 September 2023. Thank you.
Thank you.