BROKERS’ NOTES: Buy Capitec, sell Diageo

Buy: Capitec

Capitec released its half-year results this week, and it was more of the same from the Stellenbosch bank. Profitability was well up; it continues to power ahead despite a South African economy that has remained moribund for a decade. The winner keeps winning. Many commentators say the bank is expensive, but the same could have been said five years ago, when the share price was R1,000. However, annualising the most recent half-year headline earnings to R140 for financial 2026 means the forward earnings multiple from October 2020 was seven — with the benefit of hindsight, of course. Capitec has a plethora of growth prospects, including business banking, AvaFin and value added services, all of which are still in their nascent stages. The most telling statistic from the results presentation was that growth of its 0-18-year-old clients was 20% compound annual growth rate. These are customers who will take up more and more Capitec products as they enter the 20-35 age bracket.

Sell: Diageo

The global drinks industry is facing a macroeconomic headwind that will be hard to overcome, namely that younger generations are drinking less. Combine that with cost inflation, tariff cost effects and general trade uncertainty — as well as cost-of-living pressures faced by customers worldwide, which is squeezing discretionary spending. The global drinks industry is not going anywhere in a hurry, but one wonders where volume growth will come from. It’s crucial in a business with a high fixed cost base. Price growth also appears constrained, given the current state of the consumer and the intense competition between major players. As both volume and price growth appear muted, it won’t be easy to increase the revenue line meaningfully. Below-the-line costs continue to rise due to inflation, so management will need to work diligently to maintain, let alone improve, margins in the current environment. The latest results were abysmal, and the outlook was far from promising.