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?
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.
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.