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[TOP STORY] Capital Appreciation delivers impressive FY numbers

‘One of the key features of our businesses is they are asset-light. We don’t pay traditional big working-capital items like inventory and receivables’: CFO Alan Salomon.

SIMON BROWN: I’m chatting now with Alan Salomon – he is CFO at Capital Appreciation. Results out for the year ending March: revenue up 34.1%, headline earnings per share up 29.6%. The dividend of 3.75 cents makes for 7.5 cents for the full year.

Alan, I appreciate the time this morning. A lot of impressive numbers here. The one that perhaps stands out, which you tout at the top of the results, is terminal sales up another 51%. You are making significant strides in getting terminals into the hands of clients, and of course this then earns an annuity income of sorts going forward for the group.

Read: Capital Appreciation rides the digitalisation wave at home and abroad

ALAN SALOMON: Good morning, Simon. Thank you for allowing me to join your show this morning. Yes, we are very pleased with the results for the year 2022, which we believe come after the significant impact of the Covid pandemic over the past two years. We’ve seen substantial growth, for that matter, in our terminal sales in a growing market, which is very encouraging.

We’ve seen more competition emerge in the payment-device space in South Africa and we believe that competition is very healthy. It’s the lifeline of the free-enterprise system, and it’s made the market a bigger place – and we’ve been able to capitalise on growing market share and through the efforts of our teams deliver very strong terminal sales.

SIMON BROWN: As we move out of Covid – we were chatting probably a year-and-a-half ago, maybe even two years ago when we were still in deep Covid – it was really, really tough. It was tough for everyone. But are you starting to see spending patterns returning to normal?

ALAN SALOMON: Yes, I think consumers are starting to spend. I think they’re starting to maybe not spend excessively on luxury items, but they definitely are spending. I think retail is improving.

People are starting to travel again and all these [things] need payment-related terminals and similar ways of making payments. So we are definitely seeing a kick in retail activity and all is well for us currently, and hopefully going forward.

SIMON BROWN: Your operating margins are improving. I imagine this is in large part around the benefit of scale, and some operating efficiencies from the business as well. But obviously as you scale up those margins will tick higher.

ALAN SALOMON: Scale obviously emanates from increased volume of activity.

But I think what we as executives at Capital Appreciation decided five, six years ago was that at the expense of headline earnings we were going to improve and extend our capacity. We were going to invest in people, we were going to invest in premises, in infrastructure, so that we would be ready to take advantage of any uptick in market activity; and we’ve done that continuously over the past five years.

We might have been criticised that our expenses were abnormal over the five-year period, but that has definitely given us the capacity to meet demand as it arose.

SIMON BROWN: To touch on offshore quickly, back in June of last year you opened an office in Amsterdam, if I recall. When we chatted six months ago it was only just, just open. It now has some activity behind it. How’s that going?

Listen: Capital Appreciation at all-time highs on strong results (Dec 2021)

ALAN SALOMON: Very encouraging signs. The reason for us to open in Europe – because Amsterdam is a tech hub in Europe – was the fact that we wanted to be close to best European practice in the technology world. Also, we see opportunity in the number of the products and technology that we’ve developed in-house that we could export outside our borders. On top of it we haven’t seen revenues yet emerge from the opening of our Amsterdam office, but the activity that we have generated is most encouraging.

Linked to that we’ve just recently bought the Responsive Group in South Africa which has an offshore operation which is already profitable, and we’ve invested in 20% of their shares. We’ve provided them with working-capital loans to allow them to export the opportunities [to] Europe. The synergy between our software division and our acquisition with Responsive, both in South Africa and this acquisition in The Netherlands, augurs well for some positive exposure now outside our borders.

SIMON BROWN: A lot of folks look at South African tech startups heading into the international markets and think, oh, woe is us. But truthfully we have some of the best tech out there. We can compete on a global playing field. We have the skill set.

ALAN SALOMON: Oh, absolutely. Unfortunately we’ve taken one or two of our good people in South Africa who are manning our European operation. Exactly as you said, Simon, [with] tech today you can operate from any part of the world and be active. Fortunately Europe for us is on a similar time zone, so it makes it much easier for us to operate, rather than in locations which are obviously time-varied and different from us.

SIMON BROWN: The balance sheet. No debt, net cash over half a billion, over R500 million in there. You’ve been returning money via dividends and that’s been a steady part of the return for shareholders. But I imagine you are also looking at potential acquisitions with that cash.

ALAN SALOMON: Yes. I think one of the key features of our businesses is they are asset-light. We don’t pay traditional big working-capital items like inventory and receivables. Even though there was a build-up of receivables at our year end, which was collected in early April, we are comfortable [with] the growth in our businesses on the one hand – they are very strongly cash-generative – will manifest itself in two forms. One is in healthy dividends.

We are proud of the fact that in five years since we acquired our business in 2017, we’ve generated R990 million worth of operating cash flows and we’ve paid R373 million to deserving shareholders.

Our cash arsenal is growing and we’re going to do a combination of utilising that cash to continue to put more investment into our current businesses to generate organic growth.

But we are staring to create opportunities in the form of acquisitions, which has obviously manifested itself with the recent synergistic acquisition of the Responsive Group in South Africa.

SIMON BROWN: Yes. And some others. Lab Technologies is a sort of a lay-by for in-store, but also for e-commerce, which is a small shareholding there. But again, as you say, these are asset-light businesses.

We’ll leave it there. Alan Salomon, CFO at Capital Appreciation, I always appreciate the early morning, sir.

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