Holy Crapitec

As Covid-19 cuts short an un­bro­ken 20year run, is it time to start rat­ing Capitec like any other bor­ing bank stock? R1,168.13 47.1%

Financial Mail - - MONEY&INVESTING - Garth The­unis­sen

ý Capitec started 2020 safely en­sconced as one of the rock star coun­ters on the JSE.

Its share price was hov­er­ing near a record high of around R1,500; it had just added busi­ness bank­ing to its reper­toire with the ac­qui­si­tion of Mer­can­tile Bank; and it was by far SA’S big­gest bank by client num­bers.

Fast-for­ward to July and you’d be for­given for won­der­ing if the Capitec growth story has run its course.

Be­sides Naspers, Capitec has been one of the best in­vest­ments in SA cor­po­rate his­tory — by Jan­uary 1, there had been a gain of more than 80,000% since list­ing in 2002.

But Capitec’s share price has al­most halved since the start of the year, trad­ing at R777.81 at the time of writ­ing, thanks to the Covid-19 pan­demic’s dev­as­tat­ing im­pact on the econ­omy.

Just how dev­as­tat­ing was re­vealed last week, when Capitec warned that earn­ings were ex­pected to plunge more than 70% in the first half. To say the mar­ket was dis­ap­pointed would be an un­der­state­ment.

The ques­tion now is whether it is time to start rat­ing Capitec more like other bank stocks. Capitec is more ex­pen­sive than the other bank shares. It trades on a for­ward p:e of 19.2, whereas ri­val Firstrand is priced at a p:e of about 9.9.

But, says Av­ior bank­ing an­a­lyst Harry Botha: “I don’t think it’s as sim­ple as say­ing the mar­ket is rerat­ing Capitec and it’s go­ing to trade more in line with the big four banks from here on in.

“A lot of [the ex­pected earn­ings drop] has to do with Capitec be­ing very proac­tive by rais­ing

Capitec

Tar­get price: Po­ten­tial up­side:

* Based on an­a­lysts’ con­sen­sus fore­cast

bad debt pro­vi­sions ag­gres­sively to deal with the im­pact of Covid-19. By tak­ing the pain up­front and pro­vi­sion­ing for credit im­pair­ments now, Capitec won’t have to deal with fu­ture im­pair­ments fur­ther down the line.”

Capitec’s to­tal credit im­pair­ment pro­vi­sions had in­creased by a huge R3.3bn as at May 31 com­pared to fig­ures for the end of Fe­bru­ary.

Most of that in­crease — R3.195bn — is in Capitec’s re­tail bank­ing unit, which is in­her­ently more ex­posed to cycli­cal eco­nomic fluc­tu­a­tions due to its large un­se­cured lend­ing book.

“The un­se­cured busi­ness is ob­vi­ously go­ing to be very badly [af­fected] in this en­vi­ron­ment, but it is made worse by the very ag­gres­sive pro­vi­sion­ing pol­icy and pay­ment hol­i­days in­tro­duced by Capitec,” says Pa­trice Ras­sou, chief in­vest­ment of­fi­cer of Ash­bur­ton In­vest­ments. “The next year or two is go­ing to be quite tough eco­nom­i­cally and that will af­fect Capitec.”

Ras­sou says the tim­ing of Capitec’s move into busi­ness bank­ing is also rather un­for­tu­nate given the im­pact of Covid-19 on small to medium-sized en­ter­prises (SMES).

Capitec made the fi­nal pay­ment of the to­tal R3.56bn it paid for Mer­can­tile Bank in Novem­ber, mean­ing it would still have been bed­ding down the op­er­a­tion when SA’S first Covid-19 case was re­ported in March.

In fact, with SMES fac­ing a grim fu­ture due to the con­straints placed on busi­ness ac­tiv­ity, the tim­ing could hardly have been worse for Capitec’s busi­ness bank­ing am­bi­tions.

“It calls into ques­tion the syn­er­gies and growth that Capitec can ex­tract from its busi­ness bank­ing unit,” says Ras­sou.

Nev­er­the­less, the credit im­pair­ment pro­vi­sion Capitec made for busi­ness bank­ing in the July 3 trad­ing state­ment was R406m, just R91m more than the R315m pro­vi­sion it had made based on its Fe­bru­ary 29 2020 num­bers.

Botha ac­knowl­edges this fig­ure may be on the op­ti­mistic side — es­pe­cially when com­pared to the large im­pair­ment pro­vi­sion for its re­tail busi­ness — but says it’s likely due to fewer than ex­pected SMES seek­ing gov­ern­ment as­sis­tance and the fact that busi­ness bank­ing still com­prises a rel­a­tively small part of Capitec’s earn­ings.

With its large un­se­cured lend­ing book and greater ex­po­sure to clients from lower eco­nomic ech­e­lons, Capitec clearly sees a greater risk of delin­quen­cies from its re­tail book.

An­other is­sue Capitec faces is that its re­tail arm’s rein­sur­ance agree­ments (which cover client in­sur­ance claims for re­trench­ment, death or dis­abil­ity) ex­pired on April 30.

That leaves Capitec li­able for any claims with an event date of

Jul

Jul

Jul

May 1 on­wards.

CEO Ger­rie Fourie first dis­closed this at Capitec’s AGM on

May 29, say­ing the group was in dis­cus­sions with “four or five” rein­sur­ers to trans­fer some of that risk away from its own balance sheet.

Thus far there is no of­fi­cial word on how th­ese talks are pro­gress­ing, but while Capitec would no doubt want to tran­si­tion to mul­ti­year rein­sur­ance con­tracts, it may be a chal­lenge. With so many peo­ple fac­ing lay­offs it is un­likely that rein­sur­ers will be fall­ing over them­selves to pro­vide re­trench­ment cover in the cur­rent eco­nomic cli­mate.

So what is the out­look for Capitec for in­vestors?

Botha be­lieves Capitec will con­tinue to trade at a pre­mium to the big four banks for some time, say­ing it still has a lot of sup­port­ing fac­tors.

“Man­age­ment are very highly rated and at their last AGM they in­di­cated that around 60% of their cus­tomers are re­garded as providers of es­sen­tial ser­vices, which ob­vi­ously gives some in­su­la­tion if there are fur­ther lock­downs,” he says.

“The re­ally im­por­tant ques­tion is whether they have enough cap­i­tal and at this stage it would ap­pear to be the case. If they have to raise fur­ther cap­i­tal then ob­vi­ously the share price would rerate fairly ag­gres­sively.”

Dur­ing Fourie’s pre­sen­ta­tion at the AGM he re­vealed that the bank’s cap­i­tal ad­e­quacy ra­tio is a ro­bust 31%.

Stan­dard Bank’s, by way of com­par­i­son, is 14%.

Yet with Capitec’s share price still hov­er­ing near the R800 mark, Ras­sou says he sees better value else­where on a rel­a­tive basis.

“The big com­mer­cial banks are all trad­ing at a big­ger dis­count to NAV,” he says. “At this stage of the eco­nomic cy­cle more de­fen­sive bank­ing coun­ters like Firstrand or Stan­dard Bank might be prefer­able.”

Tumi Loate, an in­vest­ment an­a­lyst at 36One As­set Man­age­ment, agrees. “Given that its fo­cus on re­tail bank­ing and un­se­cured lend­ing pro­vides less di­ver­si­fi­ca­tion than the tra­di­tional SA banks, we think the val­u­a­tion re­mains stretched and ex­pect some form of de­r­at­ing over time,” she says.

“Our view is that the mar­ket price is not war­ranted given the lack­lus­tre en­vi­ron­ment.”

Jul

Jul

Jul

The next year or two is go­ing to be quite tough eco­nom­i­cally and that will af­fect Capitec

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