Litha’s cautionary boosts sentiment

THE market has recently grown immune to the charms of healthcare group Litha, but it seems the cautionary notice that accompanied yesterday’s trading update injected a dose of positive sentiment into the share.

At one point Litha was about 8% higher, on trading volumes that might be deemed encouraging for such a tightly held small-cap company. It’s unlikely punters took much heart from the downbeat trading statement covering the year to end June, even if Litha’s directors went out of their way to show that the second six-month trading performance was well ahead of the first half after cost-cutting and restructuring initiatives gained traction.

The cautionary without doubt provided the intrigue.

Litha’s last cautionary related to a black empowerment scheme that involved delisting the company, which has the government as a partner in its fledgling vaccine production plant in Pinelands.

This time it might be different, although another tilt at delisting should perhaps not be discounted. Might major shareholder Paladin Labs — now controlled by pharmaceuticals giant Endo (distributor of Voltaren) — be looking to buy out minority shareholders? Over the past year Paladin has increased its holding in Litha from 44.5% to 61.53%.

Considering Endo’s desire to shift into emerging markets, a move to consolidate the Southern African operation makes sense — and might be perfectly timed for Litha’s delayed vaccine production plant to start producing meaningful revenue.

THE ghost of Saambou is sending shivers through the market, with Capitec falling 5% in early morning trade yesterday. This followed the double-notch downgrading by rating agency Moody’s on Friday, which cited Capitec’s vulnerable position in the lending market.

But most analysts scoff at the thought of the Reserve Bank tolerating a run on Capitec, especially since it stepped in promptly to provide support for African Bank.

Capitec’s business model is undeniably different to that of African Bank, and so is its financial position. One analyst, who preferred not to be named, points out that Capitec has no nonperforming loans, only impairments, due to a policy of writing off defaults after three months because experience has shown that the cost of collecting on them exceeds the potential benefits. “By contrast, African Bank had R20bn of nonperforming loans.”

Concerns about wholesale funding persist, however. African Bank’s funders have taken a 10% haircut, thereby negatively affecting sentiment towards Capitec, whose funding is partially wholesale based.

With a capital adequacy level of 39%, however, Capitec is surely in a far stronger position than African Bank was. Then again, runs are usually caused by panic, not by rational concerns.

Dave Marrs edits Company Comment (marrsd@bdfm.co.za)