Capital Appreciation (JSE code: CTA) started life as a special purpose acquisition company (Spac) run by Bradley Sacks, son of the Netcare hospital group founder Michael “Motty” Sacks.
It had no assets when it listed in 2015, but built up a portfolio in the fintech sector over time.
Sacks describes it as an operating business and not a private equity company, though many assume because of its origins as a Spac that it is in the private equity sector.
Sacks says CTA has two main lines of business: payments, with revenues of R562m and staff of 226; and software, with revenues of R618m and 522 staff. Software also has a fledgling international business, with five staff and revenues of R137m.
He says that there are “promising” international opportunities. In the year to March 2024, foreign sales were primarily in the Asia-Pacific region with meaningful contributions from the rest of Africa and the US.
The core software operation is Synthesis, which has Amazon Web Services advanced consulting partner status — key to its role in helping businesses to move from mainframes into the cloud.
In the year to March 2024 overall revenues at CTA increased by 19% to R1.18bn and cash flow from operations was up 75% to R320m. The group now has a cash pile of R467m.
“We have been criticised for sitting on cash but we certainly avoided buying a few poor businesses. We want to focus on high-quality investments,” says Sacks.
Profit after tax for the period was up 86% to R171m. Excluding the expected credit loss from the GovChat venture — one of the group’s social responsibility investments — headline earnings were up 83%. Even with the credit loss provision, earnings were up 11% to 14.6c a share.
The dividend was hiked 21% to 10c a share.
We have been criticised for sitting on cash but we certainly avoided buying a few poor businesses. We want to focus on high-quality investments
— Bradley Sacks
Sacks says GovChat has exited business rescue and is not a going concern. It was set up as a way to apply for grants online during Covid but never proved commercially viable.
Sacks hopes to recoup at least some of the losses through the Competition Commission’s case against Meta Platforms, as Facebook and WhatsApp were key distribution channels for GovChat. CTA has a preferred position in the damages award distribution, he says. He is confident that there is a good prospect of recovery from Meta.
Sacks says CTA has an uncomplicated balance sheet with no debt and its businesses are asset-light. There was a 70% increase in property, plant and equipment due to a substantial increase in rental assets, mainly mobile payment terminals leased to banks. These terminals now number 357,000, up 9% year on year.
Nedbank, FNB, Standard Bank and Absa are all clients of the payments division, and are subject to contractual arrangements of between three and five years.
Sacks says there is a significant opportunity from the decommissioning of the 2G and 3G networks to make way for 5G. The legacy networks are expected to be discontinued by December 2027, and the process is set to start in June 2025, Sacks says. “The majority of point-of-sale terminals are not 5G compatible and a terminal replacement strategy is already under way.”
There was strong revenue growth from the software division, Sacks says, with service and consultancy fees up 44%, and licence and subscription fees up 20%. Security hardware fees were constant.
“Unfortunately, the deferral of projects and cost-cutting by clients created bench overcapacity and reduced margins.”
The software margin on earnings before interest, tax, depreciation and amortisation (ebitda) fell from 19% to 13%.
In contrast, the payments division ebitda margin was up from 39% to 44%. Sacks says sales of terminals account for the biggest slice of payments revenue (39%), followed by maintenance and support service fees for the terminals (33%) and transaction-related fees from the terminals (18%).
“The terminal rental income is still just 10% of the total, but it is annuity income and it should be the primary source of income growth in the payments division.”
Revenue from sales of terminals fell 14% to R218m while terminal rental income increased by 95% to R56m.
Sacks says the group has made R123m of investments in growth, including R40m for the acquisition of “bespoke software architecture” company Dariel, R28m for software development, R32m for rental assets and R24m for loans to associate companies.
As an example of Dariel’s work, Sacks says it has worked to streamline the operations of Life Healthcare.
“Many health-care services are hamstrung by older technologies that are poorly supported and expensive to maintain. Dariel designed and implemented new cloud-ready systems, replacing legacy systems and ensuring a secure and smooth transition process.
“Life Healthcare has better control over patient and hospital visits including case management, ward management, pharmacy activities and billing. The result is enhanced patient care, better health outcomes and improved profitability.”
Veteran hedge fund manager James Gubb describes CTA as a good business in a growth industry. He says valuations are compelling.
Gubb, who was in the investment team at the now defunct Southern Life, says South Africa’s macroeconomic data shows it is an uninvestable country. “Hence the price is likely to remain moribund despite excellent fundamentals.”
His point is well made. CTA, in spite of its strong growth prospects and lack of cyclicality, trades on a modest p:e of 8.6 and a dividend yield of 8.5%, a rating more appropriate to a mature cash cow than a high-growth technology company.
At 118c, CTA is trading close to the bottom of its 12-month range, which has been between 95c and 160c. CTA is clearly a leading player in South African fintech with strong underlying companies, but there needs to be a catalyst before the share price starts to shine.
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