Puzzling out which institution offers better value
THE prevailing wisdom is that investors in African Bank and Capitec, which both provide unsecured loans, are making a big mistake.
But for those willing to take the risk, there could be big rewards. So which of the two provides the most compelling investment case?
This year, Capitec’s shares have climbed 1%, but African Bank’s have shed 54% — a massive divergence in fortunes.
But there are good reasons for this. Capitec’s stock has managed to avoid the wild market swings, in part because its parent company, PSG, owns 28.3% of the bank and the Government Employees’ Pension Fund holds 12.16%. Capitec chairman Michiel le Roux holds 12.85% of the shares; the bank’s empowerment partners — Coral Lagoon and Thembeka Capital — hold 4.9% and 3.5%, respectively; CEO Riaan Stassen and other executives hold 6.88%; and a number of PSG funds hold another 15%.
But African Bank has no dominant shareholder providing a buffer to the sell-off by hedgefund managers.
Instead, African Bank’s shares are held by 15 institutional investors, whose holdings range from 2.1% to 12.2%.
The bottom line is that African Bank, with a free float of 70%, is much more vulnerable to swings than Capitec, where the free float is less than 20%. A smaller free float leads to smaller trading volumes, and PSG has a vested interest in ensuring the bank’s share price remains stable — because Capitec accounts for 38% of PSG’s net asset value.
But it is hard to say whether African Bank is undervalued or whether Capitec has been unduly protected from the fallout from bad debts.
What is evident is that Capitec’s shares are expensive compared with African Bank’s.
In terms of their price-earnings ratio, Capitec’s shares are trading at 12.3 times its past earnings and African Bank is trading at a much cheaper 5.1.
Nonetheless, Absa Investments’ Chris Gilmour said he would still pick Capitec ahead of African Bank, which he believes faces tough times.
Capitec is much better value using other metrics too. Using a price-to-book measure, it trades at 0.8 times its book value, and Capitec trades at 2.6 multiple book value. This means the market believes that African Bank will not be able to earn profits above its cost-of-equity, whereas
The bottom line is that African Bank, with a free float of 70%, is much more vulnerable to swings than Capitec, where the free float is less than 20%
Capitec will continue to earn superior double-digit returns.
Vestact analyst Sasha Naryshkine says this also might show that “arguably” African Bank granted loans of much poorer quality than Capitec. “I say arguably, because Capitec has sailed through this period much better. Time, as ever, will be the judge,” he said.
Looking at their individual businesses, Capitec has almost 4.7 million customers — of which 1.2 million have loans from the bank — and African Bank had 2.6 million at last count. Both banks have been expanding their footprints, with African Bank planning a R4-billion rights issue.
Naryshkine says: “We will continue to stay the course, as painful as it may be in the short term.”
RE:CM portfolio manager Wilhelm Hertzog said he would be “extremely surprised” if Capitec offered a right issue this year. He does not hold any Capitec shares, but favours it over African Bank.
The sharp contrast in strategies between Capitec and African Bank makes for a fascinating study.
Capitec is issuing more credit, but African Bank’s credit disbursements in the past nine months fell 10%, even though gross loans grew 19%.
Naryshkine believes this means that although African Bank’s loan book has grown, the business has been more constrained recently “as a result of a more cautious approach by management”.
But, at the same time, there were fewer applications for credit, and a higher number of those who did apply were rejected.
African Bank’s non-performing loans as a percentage of gross loans and advances ticked up from 29.3% to 30.2%, yet Capitec reported its non-performing loans were only 5.8%.
The bottom line is that Capitec is still growing its loan book at double the pace of African Bank, a warning sign for analysts, who fear that more bad debts might emerge.
Gilmour said the bank that did its homework the best would come out on top.