There are broadly two types of investors in the Capitec* world: those who own the stock and love it, and the rest, who don’t own and either hate the stock (because of missed returns) or hate themselves (also because of missed returns).
It is said that the stock is expensive and always has been. An earnings multiple in the mid-20s and a price-to-book (PB) ratio of more than seven are crazy numbers, especially when compared with South Africa’s other large banks. Absa and Nedbank have PBs of less than one and earnings multiples of about six, Standard Bank has a PB of 1.4 and an earnings multiple of almost nine, while the other darling of local banking, FirstRand, sits on a PB of 1.8 and an earnings multiple of just more than 10.
But the reality is that Capitec deserves that premium to the other banks.
For one thing, Capitec is growing headline earnings by about 25%, whereas the others mostly sit at high single digits. This alone helps justify the rating. An earnings multiple at the same levels of headline earnings growth suggests fair value, not that it’s expensive. This is a p:e-to-growth (PEG) ratio exercise, which divides the earnings multiple by expected headline earnings growth, and a number below one suggests value.
I suggest it is fairly valued, and in times of weakness (such as we saw during the liberation tariff sell-off) it has great potential for your portfolio
Then there is the return on equity (ROE). Capitec sits on 31%, well ahead of its targeted 25%. Considering that the book value is essentially equity, and with the competing banks in the mid-teens (FirstRand is at 20.2%), the Capitec ROE is mostly double, so it explains the high PB measure. Capitec simply makes a lot (and I mean a lot) more money off its equity base, and investors reward it for that with the higher share price, as they get more bang for their buck.
Another metric I always look at is cost to income, which measures operating expenses against operating income. Here the other banks sit at about 50%, which is a good number that in most cases has been improving, as they manage costs very well. But Capitec’s cost to income is 40%, again well below the other four. This shows that Capitec turns a lot more of its income into profits, as we see from its superior ROE
So while the usual metrics of earnings multiples and PB show that Capitec is a lot more expensive than the others, the higher valuation is justified by the higher return profile.
One area in which Capitec does fall short is the dividend yield. It is under 2%, while the other banks are in the high single digits. But this is a factor of the higher valuation.
The point is that Capitec is not expensive. However, it is also not cheap — I suggest it is fairly valued, and in times of weakness (like we saw during the “liberation day” tariff sell-off) it has great potential for your portfolio.
A last word: yes, one day growth will slow, but for now that looks some way off, as Capitec has many more growth vectors to exploit.
* The writer holds shares in Capitec
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