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Capitec Bank (CPI) will be the stock in focus: (Price at time of writing: R590) - Date: 6 April 2016
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Background and overview of Capitec (CPI)
Capitec Bank is a retail bank in South Africa, that started life out as a micro-lender. The loans they advanced were unsecured (I.e not backed by a vehicle or property or asset being bought). Over the years Capitec has expanded at a tremendous pace and is currently the 5th largest retail bank in South Africa, the other four being, FNB, ABSA, Standard Bank and Nedbank.
Capitec has 7.3million clients, 668 branches and 11 440 employees. Over the last 12 months (end 2015 financial year to end 2016 financial year), Capitec opened 52 new branches, added around 1 050 000 new clients
Capitec has 7.3million clients, 668 branches and 11 440 employees. Over the last 12 months (end 2015 financial year to end 2016 financial year), Capitec opened 52 new branches, added around 1 050 000 new clients
Scroll over or click on the funnel chart to get more details of CPI's latest financial results
Financial review:
Capitec as mentioned above is the fastest growing retail bank in South Africa, with them adding on average around 1 000 000 new clients in the last year. Their growth has been astronomical. Their no thrills no fuss approach seems to resonate with clients. They have a policy of clearly informing clients upfront about the costs they will be incurring when taking out a certain product. The application process of their is simple and efficient too and they seem to be able to get things done at a much faster rate than the other banks. Their slogan "Simplicity is the ultimate sophistication" does seem to run through the whole group's operations. No fancy furniture and gimmicks in their branches. Just quick and efficient service.
The graphic below shows the contribution of Capitec's main income streams to their total income, What is clear from the graphic is that most of Capitec's money is made from interest charged on the loans they advance. It made up 76.9% of total income earned (in their intern results ending August 2015), it now makes up just over 71%. As we mentioned in our previous review of Capitec, their focus should be on extracting more money from transactions fees. This seems to be happening pretty rapidly as income earned from transactions fees increased from 18% of total income earned to 22,4% . We are sure that Capitec's continued focus over the long run would be to have a lessor dependence on interest income earned and a greater percentage of income earned from transaction fees. These fees would include monthly admin fees, ATM withdrawal costs, statement requests etc.
Capitec should however remain mindful of the fact that interest rates are in an up cycle and bad debts will increase, and their riskier clients will soon start defaulting. In their year end results for 29 February 2016, they mention that they impair roughly 11.4% of loans issued. Basically writing this money off saying there is no chance of collecting these outstanding money. As we mentioned in our earlier review of Capitec, they should keep an eye on this number, especially considering the rising interest rate cycles the South African economy is in. More and more clients will start struggling to pay back their loans, and these interest rate hikes will probably only start affecting people severely this year (as electricity prices rise, food prices rise etc), all factors eating into the disposable income of consumers.
Their earnings/profit per share came in at R27.87 per share, and cash generated per share came in at R61 a share (R7.1billion and 116million shares in issue). Showing Capitec is an extremely strong cash generator. And this is part of what we like about the share.
Their earnings/profit per share came in at R27.87 per share, and cash generated per share came in at R61 a share (R7.1billion and 116million shares in issue). Showing Capitec is an extremely strong cash generator. And this is part of what we like about the share.
Valuation:
While the consumers in South Africa are under pressure, there seems to be little stopping them from taking on more and more debt. While it is a good thing for Capitec, rising interest rates will put a damper on future earnings as bad debts are sure to start climbing steadily. Based on Capitec's current financial results, its brands and the market they operate it, we value them at between R596.70 and R599.00 (putting them on a PE ratio of over 21, but one has to put it into context in terms of their strong growth path and potential future earnings growth).
We therefore feel at its current price (R590), Capitec is close to being fully priced especially considering the fact that higher interest rates might be curbing future earnings.
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.
We therefore feel at its current price (R590), Capitec is close to being fully priced especially considering the fact that higher interest rates might be curbing future earnings.
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.