Flush Capprec still banking on growth

It was a very different first half for the two main operating units at fintech firm Capital Appreciation (Capprec).

In the six months to September 2024, overall revenue was up 10.4% to R612m. But this strong real growth was entirely driven by the payments division, in which the revenue increased by 18.5%. The revenue of the software division was up just 2.4% to R295.2m.

Overall operating profit fell 14% to R90.7m, and headline earnings 8.3% to 5.96c a share.

Payments is the more boring part of the business as the growth driver is renting out or selling payment terminals — those hand-held devices waitrons use in every restaurant and coffee shop. There are now 387,000 Capprec point-of-sale terminals in the hands of clients, up 13% year on year.

CEO Bradley Sacks says the main contributor to growth in the payments division was terminal rental income, up 70% to R38.5m, and terminal sales, up 26% to R138.6m. Sacks says the trend towards renting rather than buying terminals has led to enhanced annuity income from maintenance, support services and value-added transactions.

Largely because of the increase in the rental “fleet”, transaction-related income grew 11% to R44.5m, benefiting from increased software licence revenue and other fees. The rentals are subject to an annual escalation based on the consumer price index.

CFO Alan Salomon says operating expenses were well managed and aligned with business growth and inflation, leading to an 18% increase in payments earnings before interest, tax, depreciation and amortisation to R138.5m. Payments is expanding in a whole range of ancillary services, including vending machines for consumer-related products and parking-related products.

Sacks says there is an enormous opportunity for the business as 2G and 3G networks will disappear by 2027. “There will need to be significant reinvestment in the infrastructure around bank terminals, as many point-of-sale terminals currently in use in South Africa aren’t compatible with 4G or 5G networks.”

The environment for the software division, described by the Capprec management team as “challenging”, is a lot less benign.

Salomon says customers continued to focus on cost-cutting “and demonstrated a low commitment to innovation projects, especially in the financial services sector”.

A large international contract, executed from South Africa — to restructure the logistics software for the port of Singapore, the second-biggest port in the world — was not fully replaced with new work, and there was underemployed skilled labour on the payroll.

Salomon says the group has decided to retain highly skilled specialist staff, as it expects improved trading conditions.

“Since payroll accounts for 80% of the software division’s fixed costs, the decision not to rationalise the human capital base placed enormous pressure on the division’s financial performance.”

The division experienced its first operating loss of R5m, compared with a R32.2m operating profit in the six months to September 2023.

Software has a much wider geographical footprint than payments, with non-South African revenue making up 21% of sales while they account for less than 1% of payments revenue.

The managed services business has new clients in the UK and US and the intelligent data services acquired clients in the UK, the Netherlands and Kenya. The group also incubates several new projects in Amsterdam through its Synthesis business.

But Sacks says the domestic sales pipeline and activity levels have improved, even though “the conversion of leads into actual sales is gradual”. The Halo Dot software business, for example, increased its footprint with clients such as Pick n Pay, the Gautrain Management Agency and African Bank.

Capprec remains a strong cash generator; it paid out R71.5m in dividends in the first half but still has cash of R327m on the balance sheet out of R1.8bn total assets

Sacks describes the two main operating companies in the software cluster, Synthesis and Dariel, as “thought leaders” and “trusted advisers” in the software market. They have had some outside endorsements: Synthesis was recently awarded premier partner status by Amazon Web Services (AWS). AWS and Google Cloud both recognised Synthesis as the leader in generative AI in South Africa.

Sacks says Synthesis has partnered with AWS on large-scale cloud migration programs for several large banks. Other companies, including insurance companies, moved to Google Cloud.

There are few barriers to entry in software development, and Sacks is confident that Capprec has the skills, experience, track record and necessary infrastructure to retain a competitive advantage.

Capprec remains a strong cash generator; it paid out R71.5m in dividends in the first half but still has cash of R327m on the balance sheet out of R1.8bn total assets. And as an intellectual capital business, it’s perhaps not that surprising that almost half the assets (R840m) are made up of goodwill or intangible assets. Capprec trades on a handsome dividend yield of 6.5%.

In the business overall, Sacks says the three months to June 2024 were affected by low business confidence, with businesses postponing major capital expenditure. In the following quarter there was a marked improvement in sentiment, in the wake of the election and the formation of the government of national unity.

“Companies once again started investing in their businesses,” says Sacks.

Salomon, one of the founders of Capprec in 2015, retires at the end of December. He was previously CEO of Bidvest Bank. His successor is Sjoerd Douwenga, previously CFO and then CEO of Metair Investments.

Capprec is leveraged to economic turnaround, and particularly to improved business confidence. Though it has material international business, it can still be considered a South Africa Inc recovery play.