Capital Appreciation, the smart payments specialist that started out as a special purpose acquisition company, recently released full-year results for the end of March 2025 that again presented two distinct narratives.
One might even liken Capital Appreciation’s performance to Charles Dickens’s classic novel A Tale of Two Cities — being a tale of two divisions in the group’s case. The payments division was once again the standout performer, with the software division continuing to underwhelm.
However, the payments division did enough heavy lifting, and an improved second half from the software division resulted in the business as a whole reporting a 7.6% increase in revenue, with headline earnings up 25.6% and the dividend raised 20%.
The growth in headline earnings came despite the earnings of the prior period being slightly higher than what was announced this time last year. A change in auditors led to some minor restatements of various items, resulting in a slight increase in the preceding year’s earnings figure. So, overall, investors should be happy.
Capital Appreciation also retains just over R400m in cash and has no debt, leaving the balance sheet looking more than comfortable. Cash flow from operations experienced a significant negative working capital swing, exceeding R100m. However, management expects this to unwind in future periods. The additional working capital was necessitated by strong growth in the payments divisions.
It’s worth delving deeper into both core divisions.
The software division must have shareholders wondering if the poor performance will equal the 18 years spent in the Bastille by Dr Alexandre Manette
The software division must have shareholders wondering if the poor performance will equal the 18 years spent in the Bastille by Dr Alexandre Manette, one of the protagonists in Dickens’s novel. Earnings before interest, tax, depreciation and amortisation (ebitda) margins have dropped every year since 2017, from 38.5% that year to a lowly 11.2% in 2025. Management has announced some voluntary redundancies and a restructuring of the software division, and an improved second half suggests things are looking better.
However, CEO Bradley Sacks has indicated that a sustainable ebitda margin for the software business is somewhere in the mid-teens, which is a considerable distance from what this division has historically earned. This suggests that the software division had been overearning in the past. Shareholders would do well to reset their already low expectations to something higher than what financial 2025 produced but much more muted than historical results. With a revenue base in this division exceeding R500m, even an ebitda margin of about 15% would significantly boost profitability for this division and contribute meaningfully to overall group profitability. Investors will be watching the turnaround in this division like hawks this financial year.
Moving on to the star of the group, the payments division, which goes from strength to strength with revenue up 21.5%, ebitda up 25.4% and a significant multiyear customer contract win in the period. Previously, Capital Appreciation provided most of its payment terminals to customers on an outright purchase basis, but now leasing and renting account for a larger portion of revenue. Capital Appreciation is agnostic about which option customers choose, as it earns its desired cost of capital either way. The leasing and rental option, however, does require additional working capital, which is reflected in the past financial year. However, with more than R400m in cash still sloshing around on its balance sheet, Capital Appreciation has been able to fund this.
The growing terminal estate now exceeds 424,000 terminals in the market. Capital Appreciation then layers on services and maintenance contracts, along with a host of value-added services, providing diversified revenue streams for this division. Significantly, Sacks remains upbeat about the growth prospects for this division for financial 2026.
Within Capital Appreciation, there are several other products and services, including Halo Dot, AssetPool and LayUp. These are at different stages of development and Capital Appreciation holds varying levels of ownership, with future options available through convertible loans or shareholder agreements to increase its ownership stake.
These are interesting investments and could become sizeable income-producing assets for the company in the future. The group is also open to divesting, in part or in full, its ownership in these assets as part of a value-unlock strategy should a suitable offer present itself. For now, the best way to view these initiatives is as venture capital-style options, which may or may not work out. A watching brief is the best option here, rather than assigning a particular present or future value to them.
Capital Appreciation is also considering changing its name to something more reflective of its current operations. Such a change might come up for approval at the AGM later this year.
Capital Appreciation trades on a forward p:e of about 10 and a dividend yield of just over 6% — complemented by a well-capitalised, debt-free balance sheet to fund its growth initiatives, organic or inorganic. Overall, the group remains one of the more attractively valued JSE small caps.
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