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Capital Appreciation emerges stronger after the pandemic year

‘As the world evolves, cash is going to become more and more restricted … and our type of payment transactions are going to become more prevalent’: CFO Alan Solomon.

SIMON BROWN: I’m chatting with Alan Solomon, the CFO of [fintech company] Capital Appreciation on results for the year-end March. Revenue down 11.7%, headlines earnings per share off 3.1%, but dividend up 10%. Cash up 6.6%, sitting at R538 million. The market cap here is about R1.2 billion. So a big chunk of cash there.

Alan, I appreciate your time. Make no mistake, this has been a tough year. It started on April 1 last year in a very hard lockdown. My sense is, though, if we look at the year past, looking forward, the trends that have come out from the pandemic are probably really playing in the favour of Capital Appreciation for the years ahead.

ALAN SOLOMON: Morning, Simon. Thanks once again for your involvement in our group. The pandemic year of 2020/2021 has been unprecedented. It’s been absolutely a horrific experience for everybody – in South Africa and globally. 

However, I think the interesting part about the year that we reporting on is that, inter alia, it’s been a benefit for us. It’s been tough, it has had certain key features attributable to it. But I think Capital Appreciation has come out of this whole year unscathed, operationally efficient, operationally ready for the next opportunity to avail ourselves, and stronger than we’ve ever been before. 

SIMON BROWN: A lot of your business is cashless payments. One of the amazing stats that I picked up was that around two-thirds of transactions under R700 are cash transactions. That makes sense because, let’s go back five, 10 years ago, that would have been a credit card. Small transactions were cash, but we’ve come to the tap-to-pay. We are used to using electronic non-cash forms for payment these days. The pandemic has instilled that and it’s only going to accelerate going forward. I used to be a big fan of cash. I hardly use it anymore.

ALAN SOLOMON: Coming from a banking background where cash is a very expensive way of doing transactions, with all the natural risks attached to cash, it’s actually unbelievable that in South Africa 70 to 75% of all transactions are still driven by cash. The card was always an elitist way of payment, but now it’s becoming much more readily appreciated and used by consumers. 

But cash is still a very, very significant part of the business. As the world evolves, cash is going to become more and more restricted, more and more limited and our type of payment transactions are going to become more prevalent. 

SIMON BROWN: You mentioned some orders delayed during the year – we chatted a few times during the year. Are those orders coming back? Customers delayed them, but now we are sort of getting towards the end, more so in some markets than others. Are those orders returning to your order book?

ALAN SOLOMON: Oh, absolutely. I think one has to remember the old traditional way of business – that when you transacted with a particular supplier or a service provider, if you didn’t have the goods on the shelf or didn’t have the available resources to deliver the goods to a customer, that sale effectively was lost and lost forever. In our scenario, it’s only an element of cut-off. 

Unfortunately, the nature of our business is that [when] those big-ticket type transactions come and there are lead times on suppliers from overseas, the order is never, ever lost. It just gets reflected in a different timing period. And therefore you can never measure our group on one-timing period versus another or one financial year versus another. Those orders were never lost, and I’m proud to say that in the financial year that we’ve just finished and are reporting on, we never lost an order, we never lost the support, we never lost the confidence of our diversified customer base. It was just a question of an element, a deferment to a next period.

SIMON BROWN: I take that point. It’s sort of moved down the road. It’s still there. It might just pop up in a different reporting period. 

Are you seeing issues with chip shortages? Certainly, a number of folks are having struggles there. Is that hindering to a degree?

ALAN SOLOMON: There’s no question. Today in this whole digital world, you’re dealing in technology-type related activities. Even the motor cars that you’re driving, with all the electronics that are involved, have some form of an electronic component chip, inter alia. It’s in the public domain globally that chip manufacturers around the world are seeing unprecedented volume demand, and they are having difficulties delivering. They’ve got to get their own priorities right, and their own production lines in an order. That’s creating an element of delay, but not unnecessary delay. It’s just showing how the technology is driving the new world.

SIMON BROWN: You mentioned a moment ago how orders are never lost, they are moved into different reporting periods, which is really an accounting function more than an operational function. 

I also note your annuity income is really starting to pick up. I imagine, again, a couple of years down the line, it can become fairly significant and perhaps smooth out some of those orders getting moved to another period?

ALAN SOLOMON: Simon, we only acquired the subsidiary companies in May of 2017. We’ve seen the growth of the annuity-style type of income, which is effectively repetitive income, into the next and more than one, but two and three and five financial years going forward. Our annuity income reflected in this reporting period of 2021 is at 61% and growing – which is very, very encouraging.

SIMON BROWN: My last question. I mentioned upfront a large pile of cash. Plans for that? Buy-backs, dividends, maybe acquisitions?

ALAN SOLOMON: Well, I think that’s the most pleasing aspect of our entire business. The businesses are very well managed, governed. Expense and asset management has become very, very profiled – and excellence has been achieved in that regard. One thing is very, very clear: our businesses are asset-like, very, very strong cash generators, and therefore we have no pressures on our balance sheet. We’ve got an exceptional balance sheet. It’s a foundation, it’s a platform for us for future growth which, please God, will allow us to deliver sustainable earnings in the future without having to worry about dealing with banking and other types of covenants. 

It’s a very positive approach going forward. Not only is it strong, we’ve got cash resources and we’re going to be judicious in the type of acquisitions we make that will give us sustainable and long-term returns. 

SIMON BROWN: We’ll leave it there. Alan Solomon, CFO of Capital Appreciation, I appreciate your time today.

Listen to Wednesday’s full MoneywebNOW podcast here.

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