Capitec Analysts Defy Viceroy’s ‘Predatory’ Attack on Its Shares

Updated on
  • Treasury has called for international probe into Viceroy
  • Short-seller condemns ‘shoddy’ work of some of its critics
Capitec CEO Says Viceroy Report ‘Very Inaccurate’

Short-seller Viceroy Research’s damning report on Capitec Bank Holdings Ltd. may have been the talk of South Africa’s markets this week, but its devastating impact on the firm’s shares is already waning.

Several analysts have increased their ratings on Capitec since Viceroy issued a report questioning the state of the company’s finances Jan. 30. The report hastened a drop in the firm’s shares, which plunged 25 percent in the four days through Wednesday. The stock rose for a second day on Friday in its biggest two-day gain since 2004, retracing more than half its losses.

The rebound came after Capitec said customers are sticking with the bank and the National Treasury called for a probe into the “reckless” way in which Viceroy criticized the company’s lending practices, only to profit from bets against the stock.

A roundup of the analyst calls:

  • UBS Group’s Stephan Potgieter changed his sell rating, in place for two years, to neutral on Feb. 2. He kept his 920-rand, 12-month target price (versus a closing price of 924 rand)
  • Arqaam Capital Ltd. analyst Jaap Meijer kept his buy rating, while upping his target price to 1,074 rand
  • Elan Levy at Morgan Stanley held his equal-weight / in-line recommendation and price target of 875 rand
  • JPMorgan Chase & Co.’s John Storey stuck to his overweight rating with a 950-rand target
  • Avior Capital Markets analyst Harry Botha maintained his underperform rating, while saying the decline is a buying opportunity. His target price is 1,008.62 rand

Some analysts were scathing about Viceroy’s motives in publishing the report.

“Viceroy is not an independent and credible research firm,” said Iraj Abedian, head of Pan-African Investments and Research Services, an associate of New York-based Global Source Partners Inc., who has advised the South African government on economic policy. “Short-selling is not illegal, but pretending to be a research house while they’re a hedge-fund operator, making money in a predatory style, is breaching the codes of ethics.”

‘Shoddy’ Analysis

Viceroy founder Fraser Perring responded to the criticism from the Treasury late on Friday, saying in a phone interview that it was “ironic that they would prefer to take the company’s stance without checking if the information is accurate.”

MORE: Criticized by South Africa’s Treasury, Short-Seller Defends Work

Capitec’s shares rose 9.4 percent Friday in Johannesburg, extending their gains over the past two days to about 15 percent. Short interest in the stock increased to 1.28 percent of the shares outstanding on Jan. 31 from 1.16 percent on Jan. 26, when Capitec started falling, according to IHS Markit data.

“After covering the stock for almost a decade, we have found Capitec’s accounting practices generally to be conservative and the loan book more than adequately provided through various credit and economic cycles,” JPMorgan’s Storey and analyst Behrin Naidoo said in a note to clients dated Jan. 30. “None of the allegations leveled against Capitec is new news, and investors that have followed the name for a while would recognize that.”

In its report on Tuesday, Viceroy, led by a former U.K. social worker and two Australians, accused Capitec of refinancing defaulted loans with new debt. It said the state should place the finance company into curatorship. Capitec described the analysis as one-sided and inaccurate in press conferences, interviews and statements and responded fully to each of the allegations on its website.

‘No Basis’

The central bank and National Treasury didn’t see the same risks as Viceroy. The central bank issued a statement Tuesday saying that it had no evidence to suggest the lender’s stability was in question, while two days later, the Treasury said “the Viceroy report provides no basis to put any bank under curatorship.”

South Africa’s Financial Services Board is investigating potential market abuse and breaches of the Financial Markets Act regarding Viceroy’s report into Capitec, Solly Keetse, a spokesman for the Pretoria-based regulator said in an email on Friday. The Johannesburg Stock Exchange hasn’t yet handed over any report on Capitec to the FSB, he said.

The intention of short-sellers “is not to do good,” said Abedian, who is also chairman of Fortress REIT Ltd., the country’s worst-performing property stock this year. The real-estate industry has been battered by concerns they may be targeted by short sellers. “They cause instability and they abuse fault lines within the regulatory market to cause instability and serious financial harm to the retail investors.”

— With assistance by Nishant Kumar

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