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The bogeyman strikes again

… but is the iron still hot?

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Renier de Bruyn

Head of Asset Allocation

Following the damning report on Steinhoff by Viceroy Research in December last year, the until-then little-known research firm struck again at the end of January – taking many by surprise by targeting Capitec Bank. Although the response by the bank’s management was swift and thorough, and it was easier for analysts to pick holes in the research group’s report this time around, Viceroy hasn’t necessarily lost all credibility – the ‘bogeyman’ may yet return to our shores to cast doubt on companies’ finances and stir up investor sentiment.

Many have rightly asked how a small research outfit headed up by a former UK social worker and two 23-year-olds can influence investor sentiment to such an extent that an incriminating report by them – whether factually correct or not – can cause the market to panic and ditch the share. Here’s my (satirical) take on how to sink a multibillion-rand company, in six steps:

  1. Find a vulnerable target. The business must be loaded with debt, which makes a bank particularly useful, since even a false report can cause permanent damage if its funders withdraw their money in panic. Look for a share that has performed well over a long period. Rational investors won’t hurry to stop your devious plan if the share was expensive.
  2. Dig up as much dirt as possible on the company. Anecdotal evidence is enough – investors generally struggle to view negative publicity in the right context.
  3. Make sure you draw extreme conclusions based on your selective evidence, and write a report that sounds sincere.
  4. Sell the share short before releasing your report to the world.
  5. For enhanced profit, sell pre-releases of the document to a few friends, who can also sell the share short before it’s made public.
  6. Release the report and enjoy the market panic and your ensuing profit.

Note: On your first attempt, you may need some luck in order to gain the trust of the market. But if you’re successful, subsequent rounds should become much easier once everyone believes you’re the guru. Over time, your influence may fizzle out, so you need to keep striking while the iron is hot.


On a more serious note: Following their Steinhoff exposé in December, Viceroy Research released a report on another South African company on 30 January this year. The market had anticipated that the likely candidates for Viceroy’s second project would be either Aspen or the Resilient property ‘stable’, so investors were taken completely by surprise when Capitec Bank was named as Viceroy’s new target.

The research group accused Capitec of being a reckless lender that hides its bad debts by rolling delinquent loans into new loans. According to Viceroy, Capitec will need to write off R11 billion in loans to adequately reflect the quality of its loan book, and will be facing and losing a class action suit valued at R12.7 billion to refund predatory origination fees. This will make Capitec insolvent.

In contrast to Steinhoff, whose remaining executives weren’t in a position to respond to the Viceroy allegations without audited financial results, Capitec’s management team was much better prepared and can’t be faulted for its swift and detailed responses to the report.


There are good reasons why the market never added Capitec to the suspect list in anticipation of the bogeyman’s second strike. The bank’s accounting practices are widely known to be highly conservative, an important factor given the history of unsecured lender failures in South Africa. Capitec’s strong capital position and high cash balances make it reasonably resilient against attacks on investor confidence. While the bank is bound to attract further negative publicity as Viceroy reveals new evidence, in our view this is unlikely to derail the bank into curatorship.

Given the lack of trustworthy information, it has so far not been possible to either confirm or disprove the conclusions in Viceroy’s report on Steinhoff. But with Capitec’s transparency, higher level of financial disclosure and simpler structure, it was much easier for analysts to find the holes in the research group’s report.

Has Viceroy therefore lost its credibility after releasing the Capitec report? Not necessarily. Fortunately for Viceroy, Capitec was trading at a lofty valuation before the report was made public, so many investors who may disagree with Viceroy’s findings wouldn’t have found the bank’s share price attractive enough to capitalise on the opportunity and support the share price.

So the market may be looking at Capitec’s 25% share price decline thus far and continue to trust Viceroy, despite the best efforts of the bank’s management to reassure investors that the research group’s claims are unfounded. We may yet be seeing more of the Viceroy bogeyman in the future.


Meanwhile, with the market particularly attentive to stories of artificially inflated JSE-listed companies, separate reports from two other entities focusing on the intra-group trading of shares in the Resilient property ‘stable’ have been doing the rounds. This has caused large share price declines for Resilient-related companies. In contrast to the allegations in Viceroy’s Capitec report, we have for some time now shared some of the reservations raised in the reports related to the valuation of the Resilient ‘stable’.

As mentioned in our previous article, we don’t blindly react to every ‘bogeyman’ report circulating in the market. At Sanlam Private Wealth, we thoroughly analyse all new information as it becomes available and test it against our understanding of the companies in question. We’ve built a solid investment case and in-depth valuation model for each company we invest in, and we act only if either previously unknown information emerges that changes our investment case materially, or the share price has moved above our estimated fair value. We also take a conservative approach to valuation, to provide a margin of safety in the event of negative unforeseen events.

We don’t have exposure to either Capitec or Resilient in our house view equity portfolio, but this is based on valuation considerations after taking all available information on these companies into account. In both these instances, none of the reports mentioned contained any new information that affected the valuation we place on these companies.

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