The Finance Ghost: Capitec’s share price cracks

The Finance Ghost: Capitec’s share price cracks
A Capitec branch in Cape Town. (Photo: Gallo Images / Jacques Stander)

The year is 2022. The UK is behaving more like an emerging market every day and Capitec is the worst performing major bank on the JSE. These are interesting times.

To be honest, though, it’s been a long time coming for Capitec. There’s nothing wrong with the underlying bank. The problem is entirely the valuation.

Once upon a time, the market put a valuation on Curro that was completely daft. Another example of an excellent company that was incubated by PSG, punters somehow backed Curro to grow at an extraordinary pace, dominating the South African schooling market within a matter of years.

From peak craziness in 2016, Curro has lost a whopping 85% of its value. That’s no reflection whatsoever on the business, which has continued to grow steadily.

Will the same happen to Capitec?

The recipe is similar enough. For ages, Capitec has traded on a nosebleed valuation multiple. The key multiple is price/book, as banks recognise assets and liabilities at market value. The difference between the two (the book value or equity value) is a reasonable approximation for what shareholders would own if all assets were sold today and all liabilities settled.

You would only pay a premium to book value if the bank is either growing quickly or generating above-average returns from that equity. A “high” price/book value would be as much as 2x, which would make me nervous. Despite losing more than 20% this year, Capitec’s multiple is still 5.2x.

A case study in failed succession

A key principle in corporate governance is succession planning. As investors are putting their money in a company rather than a specific executive, it is critical to ensure that there is sufficient bench strength to achieve an orderly passing of the baton.

Poor CEO Michael Mark is trying hard to leave the boardroom, but Truworths just won’t let him go. Not only has he been asked to extend his tenure beyond the 2022 AGM (the planned retirement date), but Truworths has appointed two deputy CEOs.

Clearly, the board just doesn’t know what it wants. Apart from wanting Michael Mark, that is.

Hospitals are recovering

In one of the ironies of the pandemic, hospitals didn’t perform well. Elective surgeries were cancelled and wards were filled with Covid patients. Aside from the many horrible outcomes of the pandemic, hospital earnings took a knock.

In a pre-close update on its performance, Netcare has indicated that the case mix is normalising. This means higher patient growth and lower revenue per patient.

There’s some way to go, though, as elective surgeries are 24.1% of total admissions versus the pre-pandemic average of 28.5%.

Revenue is only 2% to 3% higher than in the prior year. Encouragingly, the earnings before interest, taxes, depreciation and amortisation margin is between 60 and 150 basis points higher than the comparable period (16%).

Personally, my greatest concern with this update is that I noticed that mental health patient days continue to grow quickly, showing that, although Covid’s immediate symptoms may be behind us, its legacy isn’t.

Easy, Tiger

In the past week, Tiger’s price leapt at the news of headline earnings per share growth of between 35% and 45%.

It’s as though people read the headline then stopped, rushing off to buy shares.

Further down in the announcement, Tiger reminded the market that the base period included the civil unrest costs and that the current period has insurance recoveries worth R157-million. Although there is evidence of Tiger being able to pass on inflationary increases in the second half of the year, I would wait for the full results release before getting too excited. DM168

After years in investment banking by The Finance Ghost, his mother’s dire predictions came true: he became a ghost.

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R25.


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