[TOP STORY] Capital appreciation provides impressive numbers for the year

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

Alan, I appreciate the time I have this morning. Lots of impressive numbers here. Perhaps the one that stands out, which you are bragging about at the top of the results, is the increase in terminal sales by an additional 51%. You’re making significant progress in getting terminals into the hands of customers, and of course that then generates some sort of annuity income for the group.

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ALAIN SOLOMON: Hello Simon. Thank you for allowing me to be on your show this morning. Yes, we are very pleased with the results for 2022, which we believe come after the significant impact of the Covid pandemic over the past two years. We have also experienced substantial growth in our sales of terminals in a growing market, which is very encouraging.

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

SIMON BROWN: As we came out of Covid – we were talking about probably a year and a half ago, maybe even two years ago when we were still in the middle of Covid – it was really, really difficult. It was hard for everyone. But are you starting to see spending habits return to normal?

ALAIN SOLOMON: Yes, I think consumers are starting to spend. I think they may be starting to not overspend on luxury items, but they are definitely spending. I think retail is improving.

People are starting to travel again and all these [things] need payment terminals and similar means of making payments. So we are definitely seeing a boost in retail activity and all is well for us now and hopefully in the future.

SIMON BROWN: Your operating margins improve. I imagine a lot of it has to do with the scale advantage and some of the operational efficiencies of the business as well. But obviously, as you increase those margins, they will increase.

ALAIN SOLOMON: The scale obviously emanates from the increased volume of activity.

But I think what we as leaders of Capital Appreciation decided five or six years ago was that at the expense of overall profits, we were going to improve and expand our capacity. We were going to invest in people, we were going to invest in premises, in infrastructure, to be ready to take advantage of any upturn in market activity; and we have done so continuously for the past five years.

We may have been criticized for being anomalous in spending over the five-year period, but it certainly gave us the ability to meet demand as it arose.

SIMON BROWN: To quickly approach the offshore, in June of last year, you opened an office in Amsterdam, if I remember correctly. When we chatted six months ago, it was barely open. He now has some activity behind him. How’s it going?

Listen: Capital Appreciation at All-Time Highs on Strong Earnings (December 2021)

ALAIN SOLOMON: Very encouraging signs. The reason we opened up in Europe – because Amsterdam is a tech hub in Europe – was the fact that we wanted to be close to European best practices in the tech world. Additionally, we see opportunities in the number of products and technologies we have developed internally that we could export beyond our borders. Additionally, we have yet to see any revenue emerging from the opening of our Amsterdam office, but the activity we have generated is most encouraging.

Related to this, we just bought the Responsive Group in South Africa, which has an already profitable offshore operation, and we invested in 20% of their shares. We gave them working capital loans to enable 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 a positive exposure now beyond our borders.

SIMON BROWN: Many people watch South African tech startups head to international markets and think, oh, woe to us. But honestly, we have some of the best technology out there. We can compete on a global playing field. We have all the skills.

ALAIN SOLOMON: Absolutely. Unfortunately, we have taken one or two of our fine people to South Africa who are handling our European operations. Just like you said, Simon, [with] tech today, you can operate from any part of the world and be active. Luckily for us, Europe is on a similar time zone, which makes it much easier for us to work, rather than in obviously time-varying places that are different from us.

SIMON BROWN: The balance sheet. No debt, net cash over half a billion, over 500 million rand in there. You’ve brought in money through dividends and that’s been a consistent part of the return for shareholders. But I imagine that you are also considering potential acquisitions with this money.

ALAIN SOLOMON: Yes. I think one of the main characteristics of our businesses is that they are asset light. We don’t pay for the big traditional working capital items like inventory and accounts receivable. Although there was a backlog of receivables at the end of the year, which was collected in early April, we are comfortable [with] the growth of our activities on the one hand – they are very strong generators of cash – will manifest itself in two forms. One is in healthy dividends.

We are proud of the fact that in the five years since acquiring our business in 2017, we have generated R990 million in operating cash flow and have paid out R373 million to deserving shareholders.

Our arsenal of cash is growing and we will combine the use of this cash to continue to invest more in our current businesses to generate organic growth.

But we are looking to create opportunities in the form of acquisitions, which was evident with the recent synergistic acquisition of the Responsive Group in South Africa.

SIMON BROWN: Yes. And a few others. Lab Technologies is a sort of relay for the store, but also for e-commerce, which is a small stake there. But again, as you say, these are low-capital businesses.

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

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