Capricorn Investment Group HEPS fall

Capricorn Investment Group (CIP) released its FY18 results on the 22nd of February 2018 and the group’s Headline Earnings Per Share (HEPS) fell by 7.7% but EPS grew by 1.9% ahead of PSG Namibia’s forecast of 0.3%.

Profit after tax also grew by 6.4%, return on average equity was 17.8% and net interest margins came in at 4.9%, both higher than PSG’s FY18 forecasts.

Advances growth, normalised for the Capricorn Investment Holdings (Botswana) (CIHB) and Cavmont Capital Holdings Zambia (CCHZ) acquisitions was 7.7%, ahead of Private Sector Credit Extension (PSCE) at December of 5.2%.

PSG says the decline in HEPS growth is largely due to much higher than anticipated operating expenses growth of 44.5% (normalised 11.6%, forecasted 12.0%).

The firm says this is due to three new branches, including the private wealth suite, capacity building within digital channels, marketing and strategic customer capabilities; and technology costs increasing by 17.3% because of the continued investment in IT infrastructure.

“Non-interest income growth was higher than forecasted (26.1% vs 6.2% forecasted, 1.8% normalised) due to the Visa share sale. Net interest income increased by 19.6% (forecasted 16.6%) largely due to the acquisition?of Capricorn Investment Holdings (Botswana) (CIHB) and Cavmont Capital Holdings Zambia (CCHZ) which contributed 21.8% to the year-on-year growth,” says PSG.

The normalised net interest income shows a decrease of 0.7%, which is mainly due to the 25 basis points (pbs) interest rate cut in Namibia in August 2017, and 50 bps cut in Botswana in September 2017.

What were the most noteworthy areas in the results?

“Income from associates unexpectedly increased by 39.7% and contributed 10.6% to profit after tax. The year-on-year increase is due to an increase in profit reported by both Santam and Sanlam. Impairment charges were also much lower than forecasted. The cost- to-income ratio on a normalised basis at 59.9% is higher than our forecast of 56.2%,” says PSG.

As far as the company’s outlook/guidance change is concerned, PSG says there is a strong pivot to a focus on meeting customer needs through technology.

“This is the first time that mention is made of “disruptive” technologies, being innovative to continuously explore opportunities presented by new investments and new product and service offerings,” says PSG.

Given the tough economic ride, PSG expects investors to be satisfied with the results.

“The Return on Equity (ROE) of 17.8% is just below management’s target range of 18% - 22%, and the full year results will be eagerly awaited. At a P/E ratio of 10.4 the share still offers good value. Our new target price, forecasts and recommendation will be published shortly in our full earnings review report,” says PSG.

Meanwhile, Simonis Storm Securities analyst, Megameno Shetunyenga, has said they have adjusted their FY18/19/20 earnings forecasts by -0.5%, 1.4% and 1.8% to 175.0 cents, 185.8 cents and 191.6 cents, respectively.

“Our adjustments were mainly driven by a slight upward adjustment on advances growth, Non-Interest Revenue (NIR) once off items and upward adjustment on share of profit from associates and joint arrangements,” says the analyst.

The brokerage firm has also increased its FY18E impairment charge forecast by 2.2% to N$67.1 million, Net Interest Income (NII) by 0.4% to N$1,773 million and NIR by 2.4% to N$1,087 million.

Simonis Storm continues to maintain a sustainable RoE assumption at 18.0%.

“Our 3 year HEPS CAGR forecast is now 5.5%. On the back of these adjustments to our model we reduce our TP slightly to N$15.98 (from N$16.20) as we roll forward our valuations and maintain our rating at SELL,” says Shetunyenga.