Capitec rage: kicking yourself for lost chances
Analysts offer ideas on how not to miss another opportunity like the bank’s listing in 2002
SKILL, luck and patience. That’s what it would have taken an investor in 2002 to decide to buy and hold a large amount of Capitec’s stock.
That is the view of Simon Brown, founder of Just One Lap, which describes itself as “an independent source of investment education”.
At listing, Capitec’s share price was R2. Today, the stock is valued at more than R700 a share.
One cannot fault any investor who doubted the stability and endurance of the stock 15 years ago. At the time, South Africa’s banks were in a sticky situation.
Standard Bank was clawing back from poor performance that almost saw the lender being taken over by Nedbank in 1999. Saambou was placed under curatorship on February 8 2002.
Capitec listed nine days later but by the last day of February, the bank’s share had tanked over 40%.
At the time, Capitec’s market cap was R80-million with a free float of less than R30-million. The stock was priced for disaster at a price-to-earnings ratio of 1.45, said Bradley Preston, chief investment officer at Mergence Investment Managers. “Headline earnings per share dropped by 43% in 2003,” he said.
Anyone who had been watching the stock for an opportunity would have had to be willing “to buy a small unloved stock that the market was telling you was going to go bust”.
For Brown, what Capitec did was not so much about disrupting; rather it was about offering different and better products in an already established market. “Launching a new idea is hard,” said Brown, “but improving an existing idea less so.”
Capitec came in with an offering priced well below those of its peers. It also tapped a largely unbanked population, bringing them into mainstream financial services when other banks did not see much value in low-income customers.
Apart from rooting for an underdog, which Capitec was in 2002, an investor would have had to have the foresight to see that Capitec would disrupt a large market, said Preston. “The final thing you would have needed to do was to hold on to the position and not sell for 15 years, all exceptionally difficult to do.”
Another company that has had a great run on the JSE is Capitec’s parent company, PSG. Between January 1 2006 and December 31 2016, PSG’s annualised return was 28.18% while the share price grew by 1 429.09%.
Naspers, the rock star on the JSE, listed at R17.50 in 1994. It has since grown exponentially and, even when everyone insisted the stock was too expensive, it continued to grow beyond most expectations. Last year the share breached R2 500.
Peter Takaendesa, an analyst at Mergence, said Naspers’s future success was not immediately predictable, but its foray into China was a good time to buy the stock.
Once a stock has hit the big time, it becomes expensive. Yet, if the company has a solid growth strategy and the prospects look rosy — as is the case with Capitec, Naspers and PSG — how would an investor know whether they were paying “too much” for the stock?
While the PE ratio is a good indicator, because it shows what the market is valuing the company at in relation to its earnings, the actual price of the stock can be a limiting factor. But taking a holistic view of the stock — management, growth prospects and broad market conditions — can give an investor a fair idea.
For instance, Capitec, with a PE of 23.88, could be considered expensive in relation to other banking stocks. But the bank still plans to broaden its product offering, diversifying its income stream and possibly paving the way for better returns.
Brown said if a stock appeared too expensive on a PE basis, investors could look beyond this at the company’s future prospects. “If the company is great and growth looks good, it may hurt if you’re looking for short-term results, but as a long-term investor you’ll do great,” said Brown.
In the case of Naspers, which has a PE of 78.45, is there still room for growth?
Takaendesa believes so. “There is still more fuel in the tank on the Naspers story for the next five to 10 years, driven by continuing strong growth of Tencent, as well as by clear early signs they are winning in their new e-commerce investments,” he said.
Brown said it was still quite possible for Naspers to breach the R3 000 a share mark because the Naspers share price was reflecting the Tencent holdings.
Naspers owns a 34% stake in Tencent, which is one of the largest mobile and media companies in China.
“All the other assets, such as DStv, are essentially free to investors. That said, it seldom trades much above the Tencent value and will more likely track that, but Tencent is growing fast and has solid revenue,” Brown said.
But the billion-dollar question remains: how do you spot a Capitec, Naspers or PSG before it becomes a rock-star stock?
For Naspers, Takaendesa said, the indicator an investor could have used to pick it as a big winner was the persistency of strong profit margins and earnings growth at Tencent, its key investment.
But as for finding another Capitec, Preston concedes that was a unique opportunity, especially considering that it was initially priced for failure.
“It was a company that turned out to be exceptional, generating and compounding at a very attractive return on capital with a high-quality focused management team that won significant market share in a large market,” Preston said.
You would have needed to hold on to the position and not sell for 15 years