Analysts shrug off Capprec’s profit drop
Net profit dipped 12.8%, mostly due to a surge in operating expenses as the group expands the capacity of its subsidiaries
A fall in profit, which sent Capital Appreciation (Capprec) down the most in three months, could just be a blip as the company operates in one of the fastest-growing areas in the SA economy, say analysts.
On Monday the investment holding fintech group in which Patrice Motsepe’s investment vehicle African Rainbow Capital (ARC) owns a minority stake, reported that its net profit for the year ended in March dipped 12.8% to R124.6m, mostly due to a surge in operating expenses.
Like ARC, Capprec acquires companies with promising growth potential and after it bought two subsidiaries in 2017 it decided to increase their production capacity. This caused a 58% surge in the group’s operating expenses and saw net profit declining despite a 19.5% growth in revenue.
Analysts said even with the profit fall, Capprec has a lot of upside potential given its focus on providing digital capabilities needed by companies. The rise of digitally enabled banks in particular was a boon for Capprec which provides cloud-based services, designs digital user interface and a host of other software needed for digital banking.
“What they do is not an easy space to understand but they really have good people. Though the results are down, they are not necessarily bad results when you consider what caused the decline,” said Irnest Kaplan MD of Kaplan Equity Analysts.
Kaplan said Capprec’s cash earnings per share, which surged 49.8% to 10.93c, showed management understood what it was doing while independent investment analyst Mark Ingham said the company’s cash conversion rate was particularly striking and its level of disclosure made it easy to understand where it was headed.
Joint CEO Bradley Sacks said given the fact that most of the costs that Capprec incurred in the past year were nonrecurring and won’t affect future reporting periods since they were expensed upfront, profit growth should start recovering.
“Some of the costs incurred were step function costs. When we bought the payment business, for instance, it only had 49,000 payment terminals in the market. Now there are 140,000 terminals. But now we have enough infrastructure not only for current operation needs but also to accommodate growth in future,” said Sacks.
Capprec, which listed on the JSE in late 2015, runs a complicated business with a payments and payment infrastructure division on one side and the software unit on the other. The payments and payment infrastructure business, which sells and maintains point-of-sale terminals, accounts for the lion’s share of the group’s revenue at 77.2% in the year ended in March. It also made up 75% of the group’s profit.
However, Sacks anticipates more growth to start coming from the software and services business, Synthesis, which grew its revenue by 48% in the period under review and upped its contribution to the company’s operating profits before operating expenses to 24.5% from 17.6% in 2018.
Synthesis provides cloud and digital platforms to some of the biggest brands in the country, including four of the five big banks. It is also the highest-ranked partner of Amazon’s cloud computing business, Amazon Web Services, which means that all of the tech giant’s blue-chip clients in need of service in the Middle East and Africa region are referred to Capprec.
The Synthesis business is also benefiting from the fact it helps banks with designing web interfaces and products that can be delivered online. It provides the much-needed security for digital banking as well and software that helps banks comply with regulations like Financial Intelligence Centre Act.