Does the bull need to take a breath?

The bank’s busi­ness and con­se­quently its share price have per­formed re­mark­ably, but can traders ben­e­fit from a pos­si­ble cor­rec­tion?

Finweek English Edition - - MARKETPLACE - Edi­to­rial@fin­ Mox­ima Gama has been rated as one of the top five tech­ni­cal an­a­lysts in South Africa. She has been a tech­ni­cal an­a­lyst for 10 years, work­ing for BJM, Noah Fi­nan­cial In­no­va­tion and for Stan­dard Bank as part of the re­search team in t

with­more than 7.9m clients, the no-fuss, low-cost Capitec has been steadily in­creas­ing its mar­ket share. It now has 3.6m clients who use Capitec as its pri­mary bank, giv­ing it a mar­ket share of 22.4%, up from 14% at the end of De­cem­ber 2013.

Its share price has been on a sim­i­lar tra­jec­tory, gain­ing a mas­sive 290% since the start of 2014. The com­pany has re­turned 15.1% to in­vestors since the start of this year and 40.8% over the past 12 months, ac­cord­ing to Bloomberg data. But as an in­vestor, is Capitec’s cur­rent share price surge sus­tain­able or is it just hype?

While Capitec is con­tin­u­ously mak­ing in­roads into trans­ac­tional banking, un­se­cured lending re­mains a key pil­lar of its busi­ness and source of earn­ings.

Given the weak state of the econ­omy, high in­fla­tion, a high re­trench­ment rate and grow­ing un­em­ploy­ment, the lower end of the mar­ket in par­tic­u­lar has been un­der pres­sure. In its lat­est avail­able fi­nan­cial re­sults, for the six months to the end of Au­gust 2016, loans in ar­rears in­creased by nearly 44% yearon-year to R2.56bn, while pro­vi­sion for doubt­ful debts rose by 38% to R5.87bn. Gross loans and ad­vances to­talled R42.8bn at the end of Au­gust 2016, re­flect­ing a year-on-year in­crease of nearly 13%.

Scep­ti­cism is largely based on the bank’s val­u­a­tion, rather than its busi­ness model. The bank has re­cently launched a new credit card to ex­pand its prod­uct of­fer­ing, and also sees growth po­ten­tial in higher-in­come mar­ket seg­ments. It cur­rently only has a 2% mar­ket share among in­di­vid­u­als who earn more than R30 000 a month, and an 11% mar­ket share in the R10 000 to R30 000 a month seg­ment. The bank also en­joys a much lower cost struc­ture than its ma­jor ri­vals – its cost-to-in­come ra­tio stood at 34% at the end of Au­gust, com­pared with more than 50% for Stan­dard Bank, Bar­clays Africa, Ned­bank and FirstRand. (Also see page 26.)

Capitec’s re­turn on eq­uity is cur­rently at 26.26%, with a div­i­dend yield of 1.4% and a priceto-earn­ings ra­tio (P/E) of 26.4. Its com­peti­tors are trad­ing at far lower P/E mul­ti­ples and much higher div­i­dend yields. At this point, all eyes should be on Capitec’s in­creas­ing im­pair­ments, which are bound to curb fu­ture earn­ings, al­beit per­haps marginally. (Of eight an­a­lysts polled by IRESS, five rate the stock a sell, one a buy and two a hold.)

Capitec said in a trad­ing state­ment ear­lier this month that it ex­pects head­line earn­ings per share for the year to end Fe­bru­ary to be be­tween 16% and 19% higher than in the pre­vi­ous year. It is ex­pected to pub­lish its fi­nan­cial state­ments on 28 March, af­ter this is­sue of fin­week went to print.

Tech­ni­cal View:

Capitec has breached the up­per slope of its long-term bull chan­nel, thereby com­menc­ing a steeper, pos­si­bly new phase of its pri­mary bull chan­nel. With the three-week rel­a­tive strength in­dex (RSI) in over­bought ter­ri­tory, a pull-back is in the off­ing. If sup­port holds at 73 235c/share, the new bull phase could ex­tend to new highs.

How to trade it:

Go long: If the cor­rec­tion halts at 73 235c/share and up­side re­sumes, go long. The short-term tar­get would be at 90 200c/share. How­ever, this up­side may be the last bull leg of the pri­mary bull trend. In­vestors with long-term ag­gres­sive po­si­tions could re­duce po­si­tions at ev­ery uptick. Go short: A false break through the up­per slope would be sig­nalled at a re­ver­sal be­low 73 525c/share. Con­tin­ued down­side through 66 680c/share would end the bull trend (sus­tained by the blue dashed trend­line) – go short. A sell-off to 50 955c/share would be pos­si­ble.

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