ARTICLES

WeBuyCars

8 April 2024 By PDSNET

In a few days’ time, Transaction Capital (TCP) will unbundle and separately list its second-hand car sales company, WeBuyCars (WBC). The main benefit of this is to release the value of WBC into the hands of its shareholders. When the listing is complete, on 11^th April 2024, WBC will have a total of 417,2m shares in issue which are expected to trade at a price of somewhere between R21 and R24 per share.

This will give the company a market capitalisation of between R8,76bn and R10bn – at a Price:Earnings ratio (P:E) of between 11 and 13 times the company’s most recent after-tax profit of R778m. This is not unreasonable given that the JSE’s average P:E is 13,12.

Existing shareholders of TCP will receive 0.32678 WBC shares for every TCP share that they hold at the close of trade on 10^th April 2024. In this way, TCP will distribute the 61,44% of WBC which it still holds after the bookbuild which saw the sale of 58,145m WBC shares for R18.75 each.

A company conducts a book build when it seeks to sell a large block of its shares, mainly to institutional shareholders and usually at a significant discount to their market value. In the case of WBC the bookbuild took place at a discount of between 12% and 28% - depending on where the share trades on the JSE when it is listed on 11^th April. Either way the company “left a lot of value on the table” for its institutional backers.

When a new company lists on the stock exchange, there is always a critical decision that must be made about the value at which it will be listed. An unlisted company is typically worth between 3 and 5 times its after-tax annual earnings. If it is a company with substantial working capital requirements, like a manufacturer, then its multiple will be closer to 3 and if it is a service company with minimal working capital its multiple will be closer to 5.

Once a share is listed on the JSE, its multiple generally jumps to between 10 and 12 times annual after-tax earnings – again depending on the risks associated with the type of business it is in. The increase in the multiple occurs because the share immediately becomes very tradable and liquid. It also become subject to the much more stringent reporting required by the listing requirements of the JSE. Unlisted company shares, public or private, are notoriously illiquid and difficult to sell.

The projected P:E of WBC is more than double that of the two other motor car sales companies currently listed on the JSE – Motus and CMH. This is because those two companies are very different businesses. They make most of their profits through dealerships where they sell, finance and insure new cars. They both do have divisions involved in selling used cars, but those make a very small contribution to their profits.

 

The new car business is much tougher than the used car business for a number of reasons:

1. The price of new cars is substantially determined by the manufacturers’ costs – to which the dealerships add a mark-up. This means that the new car business is very competitive on price, since all the new cars of a particular type are essentially identical.
   
   
2. Each individual used car is essentially unique and WBC has much more control over both the price paid for the vehicle and the price at which it is sold. This makes their profitability far more manageable.
   
   
3. WBC has a very good name which immediately communicates exactly what it does to all prospective sellers (and buyers). This is not true for either Motus or CMH. Most South Africans are not really aware that they are even in the used car business. The WBC name has enabled the company to market its business very effectively and to grow sales rapidly, especially on the internet.
   
   
4. WBC tends to benefit from the current economic environment which is characterised by low consumer spending and high interest rates. Tightened consumer disposable income has forced many consumers to down-size their motor car and to look for cheaper alternatives. Often this means selling an expensive and relatively new car and buying an older, smaller car which is cheaper to run.
   
   
5. Motus and CMH both reported lower headline earnings per share (HEPS) in their most recent financials while WBC has a track record of growing sales by 38% and earnings by 25% per annum.
   
   

For these reasons, WBC’s profits have been rising rapidly since it was founded in 2001 by Dirk and Faan van der Walt. The company now employs 2800 people and sells about 14000 vehicles each month. After the listing the founders will still hold 10% of the shares which should be worth close to R1bn.

In our view, WBC shares will certainly open somewhere between R21 and R24 and we expect them to continue to perform well. After the listing you should expect the price of TCP shares to fall – probably to around 200c – because the current price of 900c includes the right to get about one third of a WBC share worth at least one third of 2100c.

DISCLAIMER

All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.

Share this article:

PDSNET ARTICLES - OCTOBER 2018

S&P500 Earnings

Whether we like it or not, the progress of the JSE is determined to a considerable extent by what happens on Wall Street. If the New York Stock Exchange (NYSE) is in a bear trend then the high probability is that the JSE will also be heading south. So, private investors are always well-advised to keep their eye on American markets and to take a view on where they might be going. The best way to follow the NYSE is through the

Post Script - Mining

On 12 October 2018, we published an article on mining in South Africa. One of our clients very kindly corrected some of our mistakes in that article and added more value. He has agreed that we publish his contribution. Historically the economies of countries first depended on easily exploited resources on land and sea and, as technology developed on, mined minerals. South

Gambling Vs. Investing

GAMBLING

Gambling is associated with casinos and is epitomised on the roulette table. In roulette members of the public essentially bet against each other with the casino taking a small percentage for the cost of setting up and running the table. There are 37 numbers on a roulette table – three rows of twelve numbers plus the zero. If you place a R10 bet on every number you will have to outlay R370 – and then you

Speculating on Aveng

Aveng was once the largest construction company in South Africa and in August 2008 it traded for just under R70 per share. Since then it has been hammered by a host of problems beginning with the 2008 sub-prime crisis, to the dearth of construction work following the 2010 World Cup, the heavy fines imposed on the construction shares by the Competition Commission for collusion and several

Naspers Value

Naspers is something of an anomaly on the JSE because it accounts for roughly 20% of the JSE Top 40 index. This is because of an inspired decision by Koos Bekker to acquire a 33% stake for $32m in what was then a small internet/social media company called “Tencent” back in 2001. This investment has performed beyond even Bekker’s wildest expectations, exploiting the Chinese penchant for social media and gaming. On the 22^nd

Mining

It would be fair to say that the South African economy has been substantially built on mining – first diamonds, then gold and then platinum and a host of base metals and minerals. South Africa is home to two geological features which have endowed it with enormous mineral wealth. They are the Witwatersrand Basin and the Bushveld Igneous Complex. The Witwatersrand basin is an ancient sea bed which is buried under layers

Exploiting October Fear

Ever since the collapse of Wall Street in October 1929, October month has been a time of fear and nervousness for investors. That fear was compounded by the single day 23% drop in the S&P500 index in October 1987. So every October, investors, especially in America, worry about a possible melt-down in the share market. And, of course, some of them decide to sell out just in case there is such a crash. Those sell-outs tend