An interesting mix of reactions has followed the initial market shock over the release of the Viceroy report into Capitec on Tuesday morning. It increasingly appears that Viceroy’s methods have caused sentiment to turn against its approach, even if not entirely dismissing its findings.
After the Steinhoff scandal and Viceroy’s highly-publicised entry into that story, the research firm took on near-mythical status. When rumours began to circulate that it was finalising a report into another South African company, this was enough to negatively impact a number of stocks, even though there was no evidence at all that any of them were being investigated.
It therefore became something of a self-fulfilling prophecy that as soon as Viceroy released its new report, shares in the company it named sold off dramatically. This happened so quickly that it must be assumed that the sellers had not yet even read what the report contained. Its release alone was enough to stir panic.
It didn’t, however, take long for doubts about it to be raised.
The South African Reserve Bank (Sarb) did what it is obligated to do by quickly issuing a statement with the comforting view that “Capitec is solvent, well-capitalised and has adequate liquidity”. As the defender of the country’s banking system, it had no option but to step in and reassure depositors, but it also countered the most shocking arguments in the Viceroy report.
As the head of Wits University’s School of Economic and Business Sciences noted: “I have full trust in the Sarb, whereas I have very little trust in Viceroy.”
Within hours, analysts who had looked over Viceroy’s analysis began to raise questions about how it was put together. Overwhelmingly they criticised its approach, particularly given Viceroy’s own public acknowledgement that it was short the share.
Among the report’s most obvious flaws are that the researchers did not engage Capitec; that they ignored certain publicly-available information; that they made flawed comparisons with other lenders; and that they made statements that can only be classified as ‘extreme’.
The opening paragraph states the belief that the Sarb “should immediately place Capitec into curatorship”. The first page then concludes with the claim that “we believe Capitec is simply uninvestable and accordingly have not assigned a target price”. In other words, Viceroy suggested that it is worth nothing.
These statements have been widely condemned as irresponsible at best, and deliberately malicious at worst.
“It is ironic that Viceroy pretends to fight for the plight of suffering SA borrowers who are being abused by the so-called predatory behaviour of a ‘loan shark’, while they themselves seek to profit by falsely attempting to create panic in a bank with systemic importance to the SA financial system,” noted Renier de Bruyn, an investment analyst at Sanlam Private Wealth. “This is irresponsible in the simple pursuit of profit.”
Even given these rather severe shortcomings in the report, however, there are those who have cautioned against dismissing it in its entirety too quickly.
It is worth remembering that when questions were raised about Steinhoff’s accounting practices by Manager Magazin, Christo Wiese immediately called them “devoid of any truth”. Those are words he is unlikely to ever live down.
Therefore when PSG reacts within hours to say that the Viceroy report “is on the face of it filled with factual errors and misleading information” and Capitec’s chief financial officer, Andre du Plessis, tells Bloomberg that the allegations are “totally unfounded” and that he is not worried about them, one has to hope that they too won’t live to regret speaking too hastily.
As Benguela Fund Manager’s meticulous analysis shows, there may well be reason to be concerned about Capitec’s rescheduling of arrears loans. Even though Benguela has noted that even with worst case assumptions it “cannot arrive at the Viceroy impairment provision of R11 billion”, this is not an issue that the market should ignore just because of Viceroy’s questionable motives and approach.
As Viceroy notes “South Africa’s microfinancing sector has been the graveyard of numerous Capitec competitors”. It is an incredibly fraught industry for a number of reasons.
So far, Capitec has survived the minefield, but it’s not inevitable that it will continue to do so. On the contrary, history is very much against it, so when potentially material issues are raised, they deserve proper scrutiny.
That does not justify Viceroy’s approach or even all of its findings. It is simply good sense.
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