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Capitec is a wonderful example of a company where the valuation has moved into a different solar system from the rest of the market. The company has been one of the single greatest success stories of modern times on the JSE and continues to grow. It needs to, as the valuation is beyond demanding.

There’s been a lot of noise in the market around Capitec and there are still those who simply don’t believe the numbers. In the absence of concrete proof to the contrary (whether from Viceroy or elsewhere), I will rely on the audited numbers released by the company.

Those numbers tell quite a story.

Before getting into the details, I’ll prepare you by noting that headline earnings per share (HEPS) increased by 84% in the year ended February 2022 to R73 per share. I know what you’re thinking – “this was a recovery year vs. Covid” – and you are right, when it comes to most companies. For the year ended February 2020, HEPS was R54.28 per share. Earnings are 34.5% higher over a two-year period that included the largest economic shock of our lifetimes.

The dividend story is even stronger, up 128% to R36.40 per share. To top it off, there’s a special dividend of R15 per share. Ignoring the special dividend, Capitec is only on a dividend yield of 1.6%. This is a result of the enormous valuation placed on the company by the market.

If we look deeper, we find a year that boasted 14% growth in active clients to 18.1 million and 17% growth in clients using digital channels to 10.1 million. Such high growth numbers mean that Capitec continues to win market share.

The financials tell an interesting story around the strategy.

Total interest income (the bread and butter) only increased by 6%. Net loan fee income, which is related to this, also increased 6%. This is nothing to get excited about, obviously. The magic is happening on other income lines like net insurance income (up 60%) and net transaction income (up 21%). Don’t ignore funeral plan income, up 39%.

These ancillary services are aggregated into what banks refer to as “non-interest revenue” – a key driver of return on equity as this income is not directly related to assets or liabilities on the balance sheet.

A huge 55% decrease in credit impairments (a R4.3 billion favourable swing) gave the result a strong boost. After impairments, net income increased by 55%.

Expenses grew substantially in this period, up 33%. The narrative in the result suggests that the main driver is employee costs (up 57%). This has caused the cost-to-income ratio to jump to 47% from 42%, of which 300bps is directly attributable to employee cost growth. Although that’s still a much better cost-to-income ratio than competitors, investors will keep an eye on this.

Thanks to such positive JAWS (the net income growth rate minus the expenses growth rate), profit after tax shot up by 91% and headline earnings increased by 84%.

Return on equity (ROE) has improved from 17% to 26% and the net asset value per share (a key concept in banks) increased by 20% to R308.88.

Here’s the kicker: Capitec closed 1.5% lower yesterday at just under R2,270 per share. That’s a price/book multiple of 7.35x (price divided by net asset value per share). The effective ROE (which combines ROE as reported and the value the market is placing on the equity) is thus just 3.5%.

I know from my work on Magic Markets Premium that some of the best companies in the world (like Microsoft) trade at these levels of effective ROE.

The valuation just doesn’t seem to matter with Capitec, as the share price is up nearly 64% over the past twelve months and is 11.5% higher this year.

The market is pricing in a great deal of growth and to Capitec’s credit, they keep on delivering it. After dominating in consumer banking, even the business banking efforts are looking really good (accounts up 31% and a contribution of R174.5 million to group earnings). Capitec has acquired Mercantile Bank to give its business banking strategy a boost.

Notably, Capitec is lagging the share price performances of other major banks this year. The valuation has taken a small breather. But with a result like this, the growth story is still in good shape.

Any earnings release by Purple Group is guaranteed to get people excited on Twitter. As the controlling shareholder in Easy Equities, Purple is largely responsible for creating an entire cohort of new retail investors in South Africa.

For that, I will always admire them. In a country with a terrible savings culture, this is exactly what was needed. Based on their love for the product, that army of investors has also piled into Purple’s shares over the past couple of years. This has driven the market cap into the stratosphere, leaving big shoes for the profitability of the group to fill.

The latest news is the release of results for the six months to February 2022.

I’ll start with the unit economics, as this is a growth stock after all. The group needs clients who trade and invest, not clients who sit with small balances and don’t do anything. It helps that the cost to acquire a client is low at R80 per client, down 24.7% vs. the comparable period. The ability to build a large user base at a low cost is core to the bull thesis around Purple.

Despite the improvement in unit economics, group costs increased by 39.7%, ahead of revenue growth of 36%. Still, profit increased by 114.2% to R17.7 million from R8.3 million in the prior period.

If we delve into the segmentals, we see that the much-loved EasyEquities business grew revenue by 27.9% to R108.7 million. The company points out that portfolio turnover has returned to pre-Covid levels, which is to be expected in a more “normal” equity market.

Funded retail accounts increased by a gigantic 85.9% to 966,299 accounts and platform assets increased by 36% to R36.5 billion.

Without losing sleep over the rounding, this implies average assets per funded account of around R38,000. At a 0.25% brokerage fee, this implies revenue of R95 on this account assuming it is fully invested and there is no churn. In other words, assuming it is invested in full and then left alone to grow. This means that EasyEquities is in the green vs. the cost to acquire a client even if there is no churn on the portfolio.

This is a measure of risk of course (e.g. break-even on a new client) rather than revenue growth, but it’s still interesting.

Speaking of growth, I’m afraid that there isn’t much of it at net profit level. Profit after tax of R23.3 million is just 4.3% higher than the comparable period. I suspect that my matchbox calculation above (which reflects a thin profitability layer per new client) and a period of subdued market activity for all clients is to blame. Although revenue grew sharply, so did overall costs despite efficiencies achieved per new client.

If you split out RISE (profit up 601.5% to R3.4 million) then it looks like the core EasyEquities business went backwards in terms of profitability.

EasyCrypto contributed R4.5 million in profit to the EasyEquities Group, representing over 19% of profit. Purple Group has acquired the remaining 49% of EasyCrypto with an effective date of 1 March 2022. This has proven to be an excellent deal for the group, demonstrating the value of building distribution for financial products.

EasyProperties is coming off a small base but is still growing quickly, with revenue up 146.4% and invested clients up 255.89% to 59,330.

Moving on to GT247.com, there’s been a pleasing improvement there. Revenue increased by 98% to R25.9 million and profit after tax was R4.9 million vs. a loss of R3.3 million in the prior period. This swing of R8.2 million explains nearly the entire improvement in group profitability.

Going forward, the company is going to focus on what it does really well: bringing in new clients at a low cost. There are partnerships with Discovery Bank and Telkom launching later this year. The group is also expanding internationally, with operations being rolled out in Kenya and the Philippines.

The share price closed 3.8% lower yesterday. It is up more than 160% in the past 12 months and down 7% this year.

With HEPS in this period of 1.63 cents, then an annualised price/earnings multiple would be over 85x. This makes no sense at all based on current earnings growth rates, so those with a long view on Purple at this price are believing strongly in Purple’s ability to monetise the user base with other financial products.

This is a powerful thesis based on Purple’s low cost to acquire a client, but it is effectively “pricing in” some rather flattering assumptions about how the business might develop.

The bear case is built around the unit economics, as Purple doesn’t make money unless clients are actively trading and investing. When markets are volatile, that’s positive for revenue. In “normalised” markets where a 15% annual return is a solid year, the fear is that many inexperienced investors may run out of patience and disappear.

I am a very happy EasyEquities client. I am not a shareholder in Purple.