Simon Fillmore told me off air that his clients have Capitec in their portolios. So I guess we should have expected him to put on a smile when discussing the micro-lending group’s financial results for the half year to June. What worries me is that loans advanced – the lifeblood of a business like this – were down 26%. And that even off this lower base past due, in other words debt that isn’t being serviced, surged 67%. And with bad debt writeoffs jumping 70% others might interpret the numbers are “good under the circumstances” but for me they’re frightening, Especially for a stock that hasn’t adjusted to the post Marikana reality where the Garnishee Order free ride has now ended. Over the past year Capitec’s share price has hardly moved. Direct competitor Abil is down over 50%. If I was forced (it would have to be kicking and screaming) to invest in the sector, there’s little question which of the two I’d pick. Best to stay well clear. – AH
To watch the video of the interview on CNBC Africa’s Power Lunch click here.
ALEC HOGG: Let’s pick up on that financial results from Capitec today. First-half numbers out just a few hours ago. Simon Fillmore is the Chief Executive of Independent Securities and he joins us just to give us some insights from his side. Simon, before we went on air it sounded to me as though you felt these weren’t too bad – these numbers.
SIMON FILLMORE: Yes, I think these were a very decent set of numbers given the prevailing economic circumstances. Certainly they could have fared a lot worse as we’ve seen with some of their competitors. But I think once all is said and done – a very satisfactory set of results from the business.
ALEC HOGG: Alright. I’m going to differ with you and I’m going to ask you to put me right. Value of loans advanced – down 26%, so business is shrinking. Provision for doubtful debt…in other words, what they have to write off – up 70%. So the business they’ve got is getting worse. How can you think these are good numbers?
SIMON FILLMORE: I think one just needs to understand a little bit about the business model itself and realise that at times like this there are going to be occasions where they need to write off more debts. And I think rather than a single snapshot, it’s about the processes in the business. I think essentially the risks in these types of businesses comes in firstly in terms of their funding – the credit rules that the business applies – and then lastly on the provisioning. And I think, in terms of the provisioning, we’ve seen that Capitec are quite aggressive in that regard. If they have debt that’s outstanding for longer than 90 days they write off the full balance. So as long as those aspects are in place then I think the integrity of the business remains sound. But I think it’s just to constantly apply that formula and realise that as the business moves through different cycles that you are going to see results like this where the loan impairment does increase quite significantly.
ALEC HOGG: This is a stock that is virtually unchanged in the past year. It’s down slightly. Able is down by more than 50%. If you were a trader, surely at this point in time – and looking at these numbers you can interpret them in different ways, I guess. You’re drinking the Kool-Aid from Capitec. I’m not so sure. But would you not then be thinking a switch – if you do like the sector – from Capitec to Abil would be in order?
SIMON FILLMORE: Ja, it’s a good question but I think generally we seem to see that in companies themselves, momentum does demonstrate itself; so that if a company is doing well and it’s got a particular business model or strategy that’s working, that that continues to carry on working for it. And I think maybe the same applies in this instance and I think there’s a very large differentiating factor between these two businesses and it relates to the transactional side of the business. And we’ve seen over the last two years that the transactional side has become a significant differentiator for Capitec and it’s so much so now, that it’s about 33% of their business. So it’s a significantly different business to African Bank. And I think you mentioned that the share has gone sideways for some time, but I think we’ve seen a lot of the risk taken out of the shares because if we went back 18 months ago or so, the PE of the company was closer to 20 times where at the moment the forward PE is probably around 11 times. So I think from an investment perspective, just the de-rating of the PE over the last 18 months has taken some risk off the table in terms of investors.
ALEC HOGG: Simon Fillmore is with Independent Securities. The thing that jumps out at me is its R4.6 billion in interest income, so in other words on the loans that Capitec had, they received interest of R4.6 billion. They wrote off bad debts of almost R2bn against that. You’ve got to have big capital and big cojones to be working in that kind of business.
