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Johannesburg - Having breached the R100 per share mark, analysts are divided on how to value low-cost banking and microlending group Capitec Bank Holdings, worth nearly R8.5bn.
In a note to clients, Imara SP Reid analyst Darren Coulter observed that Capitec's business model mimicked that of a niche retail company rather than a traditional bank.
Coulter was commenting on Capitec's price to earnings (PE) multiple - the price investors are willing to pay for each unit of the company's reported earnings - which he said indicated the company was overpriced, or expensive.
Capitec presently trades on a PE multiple of 21 times its earnings, compared to industry peer groups Standard Bank (15.7), Nedbank (13.4), Absa (12.7), FirstRand (15.2), Investec (12.2) and African Bank Investments Limited (Abil) trading at around 16 times.
In contrast, retailer Pick n Pay trades at around 21.7 times earnings, with MassMart around 21 times earnings while Spar and Shoprite come in at around 19.
A second metric by which to compare Capitec's share performance is its dividend yield, which is the dividend per share divided into its share price. This gives an indication of the cash-based returns of investing in the share.
Bearing in mind Capitec has been involved in an aggressive capital-intensive expansion drive - which means less cash would have been available for distribution - its dividend yield came in at aound 2%.
This is competitive against banking groups: Standard Bank returned 3.4% while Abil offered a 5% yield, but retailer Shoprite, also in an aggressive growth strategy, offered 2.6%, while MassMart trades at a dividend yield of 3.5%.
It could be argued that a stock which offers a higher dividend yield could be afforded a higher PE multiple, especially considering that Capitec has a return on equity (ROE) of 32% while the banking business within Abil last reported an ROE of 53.6%.
Sasha Naryshkine of asset manager Vestact said one cannot draw a direct comparison between Capitec and Abil because they are at different stages of development, but Abil had a lower cost of capital. In addition, Abil had been "aggressive" in its cost controls over the last few years, he said.
At the time of reporting, stockbrokerage Barnard Jacobs Mellet (BJM) advised clients as follows on Capitec: "We regard the share as fair value at current levels."
This view was echoed by Patrice Rassou, a portfolio manager at Sanlam Investment Management, who told Fin24.com the share was "fully valued".
Changing model
Certainly Capitec's strategic direction is being closely scrutinised by investment analysts.
Much of the firm's success has been based on its low-cost, no-frills banking while offering microloans which averaged R2 239 in 2009.
Capitec CEO Riaan Stassen told analysts there may be opportunities to chase business where loans averaged between R100 000 and R500 000, provided clients had credible track records and proven personal cash flows.
This, said Coulter, would move Capitec's lending structure in line with traditional banks, but could "prove a significant driver of growth going forward".
Rassou, however, said he expected many banking clients to remain loyal to their larger full-service banking offerings.
Entering this segment of the market will also be a test of Capitec's ability to manage its capital on its balance sheet if its depositor base and loan size changes.
As the economy has begun to emerge from the recession, Bureau for Economic Research findings and auditing firm Ernst & Young show that confidence has begun to return to the retail banking space.
While a Reuters poll of economists indicated that credit demand for 2010 was likely to contract over 2009, Emilio Pera, lead of banking and capital markets director at Ernst & Young, believed the momentum to be sustainable.
Said Pera: "Failing another globally influenced crisis, banks are poised to benefit from a lower interest rate environment, which will further stimulate a turnaround in credit demand.
"The local banks have sufficient capital reserves to favourably respond to growing credit needs, given their improving impairment ratios, and profit prospects."
Coulter said: "It is hard to believe that if the stock could have done so well in the recession, it will not do better in a recovery phase."
* The writer holds shares in Capitec, Standard Bank and Abil.
- Fin24.com
