Capital Appreciation (Capprec) is a really strange case, even by the standards of the JSE’s small-cap twilight zone.
The business is backed, in part, by a couple of ex-Bidvest big hitters and is managing its growth prudently. Directors took their time in settling on the acquisition of fintech assets that include payment systems — African Resonance and Dashpay — as well as allied software business Synthesis. That delay may have set the tone for lacklustre investor sentiment.
The company, with robust operating assets under its belt, has been cash generative, maintained a stout margin and created shareholder value with share buybacks and consistent dividends. Cash conversion of trading profit in the past financial year was 108%. The cash balance of close to R540m equates to around 41c a share.
Yet the business trades at a small premium to net asset value (111c a share at last count). This is crazy, considering the services-type nature of Capprec’s main businesses. The earnings multiple is well below what the market accords the JSE’s "other" specialist financial services businesses Transaction Capital and Capitec Bank.
While Capprec has not yet hit the growth trajectory achieved by Transaction Capital and Capitec, it appears to be tapping a sweet spot in the financial services market.
In short, African Resonance and Dashpay provide payment infrastructure and payment technology solutions (mainly card payment devices) to financial institutions and emerging payment service providers, as well as corporate customers in the retail, fuel, restaurant, hospitality and health-care sectors. Synthesis is a specialised software development and consulting company that creates strategic solutions and drives digital journeys for banking, financial services, retail and health-care institutions in SA, Mauritius, elsewhere in Africa and the Asia-Pacific regions.
On the payments side, which accounts for 64% of revenue and more than 70% of earnings before interest, tax, depreciation and amortisation (ebitda), Capprec’s offering has broadly been spurred by the "digitalisation" trend. Directors note the addressable market for digital payment solutions increased materially as customers increasingly grasped the strategic importance and competitive positioning associated with digitalisation.
Underlining this comment is Capprec’s disclosure that it had more than 217,000 payment terminals in the hands of its clients at the end of March — up 17% over the 2020 number. Perhaps more important was the admission that "annuity based estate management revenue" was up 20%.
While not tapping the same card-vending market(s), it is worth noting that Cape Town-based payment specialist Yoco recently secured $83m (R1.2bn) in fresh capital from investors. So far Yoco, which focuses its payment device services on smaller, entrepreneurial businesses, had raised $107m. This is not much less than the total market value of Capprec on the JSE. As a reference point, Yoco processed more than R28bn in card payments over the past six years, and has a presence among 150,0000 small and micro merchants across SA.
IM could go on about the potential of the digital payments infrastructure in SA and Africa, but it might be better to focus on Capprec’s fundamentals. There might, in some quarters, have been some disappointment about the 10c a share posted in earnings in the past financial year. Yet one should note that substantial terminal orders were placed in February and March, but delivered only after the close of the financial. Capprec directors, who tend to avoid enthusiastic pronouncements, indicated these orders generated "substantial revenue, profit and cash" in the first quarter of the 2022 financial year. No doubt the trading statement for the interim period ending September will be revealing.
Over and above this carryover, Capprec directors report a continued strong demand for Android platform devices and that retail sales activity is returning with strong interest in value-added services.
At present 70% of transactions in SA are cash, with 60-billion cash transactions a year. Only about 3% of total card transactions are e-commerce-related. Clearly there is still substantial opportunity for Capprec over the longer term, from its existing clients growing and from grabbing additional market share without sacrificing margins (too much).
On the Synthesis side, no projects were cancelled in the Covid disruptions, with increased demand for the software subsidiary’s offerings and hints at breaking into new markets. Synthesis’s partnership with Amazon Web Services should be watched.
At this juncture, it seems Capprec is content to grab the surfeit of growth opportunities available to its existing businesses. But the group did say there were organic as well as acquisitive growth opportunities available … though these would depend on strategic fit as well as valuations.
Capprec’s dismal valuation could make it a target for a larger fintech predator, and possibly a global player looking for an African platform.
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