GovChat loan sinks Capital Appreciation's earnings

The loan advanced to citizen engagement platform GovChat has negatively impacted the earnings of JSE-listed fintech group Capital Appreciation.

This emerged when the company today announced its annual financial results for the year ending 31 March.

Capital Appreciation is a fintech enterprise with three business segments – payments, software and a newly-formed international division in the Netherlands.

Last week, the firm issued a trading update ahead of today’s results, telling its shareholders that various alternatives are being explored for GovChat.

This, after Capital Appreciation placed GovChat into business rescue in December 2022, over loans it advanced to it.

The fintech group initiated the rehabilitation of GovChat over R20 million (the initial loan) and R12 379 778 plus interest (the additional loan).

The company’s results show headline earnings declined by 44.1% to R91.5 million (2022: R163.7 million).

Headline earnings per share (HEPS) decreased by 44.5% to 7.44c per share and basic earnings per share (EPS) by 44.7% to 7.39c.

Capital Appreciation says the drop in EPS and HEPS was directly due to the expected credit loss provision raised, amounting to R70.8 million, for the GovChat loan.

No smooth sailing

Launched in 2018, GovChat is a platform that enables citizens to engage with government on service delivery matters. It can be accessed through WhatsApp, Facebook Messenger, SMS and USSD channels.

It was founded in 2016 by Eldrid Jordaan, who exited the company in November 2022, before it was placed in business rescue.

Earlier this year, Jordaan and his partners in K2018 made a R50 million public offer to Capital Appreciation and other creditors to take total control of GovChat.

The official communications platform for government has long experienced turbulence.

The start-up had over the past years been embroiled in a legal battle with Facebook parent company Meta, with the tech giant accusing it of violating its terms of service.

The controversial dispute caused a public outcry when Meta-owned WhatsApp sought to terminate GovChat and #LetsTalk, a technology start-up that connects government and citizens, from the WhatsApp Business application programming interface.

Capital Appreciation CEO Bradley Sacks.
Capital Appreciation CEO Bradley Sacks.

GovChat was eventually victorious when the Competition Commission referred Meta Platforms and its subsidiaries, WhatsApp and Facebook South Africa, to the Competition Tribunal for prosecution for abuse of dominance.

Besides the GovChat issue, Capital Appreciation says demand for its products and services has remained strong throughout the past financial year, despite the difficult economic climate.

It notes the group continued to attract new blue-chip domestic and international customers, and evolved its revenue mix with the introduction of new products, services and regions.

Revenue increased by 19.7% to R995.1 million, benefiting from good growth in annuity-based payments revenue and substantial growth in cloud-based and digital consulting services, security hardware sales and third-party software licence fees, says the firm.

According to the company, non-South African revenue grew by 177%, now comprising 15.2% of group revenue, up from 6.6% just 12 months ago.

Reinvestment for future growth initiatives totalling R108.8 million impacted earnings before interest, taxes, depreciation and amortisation (EBITDA), which decreased by 6.3% to R235.7 million.

Promising prospects

Capital Appreciation CEO Bradley Sacks says: “With a well-capitalised balance sheet, robust operating cash flow and significant cash resources, the group has the ability and appetite to take advantage of substantial organic growth opportunities, as well as to consider further complementary acquisition opportunities.

“Healthy pipelines and the continued diversification of revenue streams have created notable growth opportunities for the group. Ongoing investment in resources and research and development has positioned the group well to meet this demand. As a result, the prospects for the year ahead are promising.

“Capital Appreciation focuses on sustainable value creation for its shareholders. We are particularly proud of our unbroken dividend record over the past six years, returning R431 million, or 34.50c per share, to shareholders in the form of dividends.”

Meanwhile, Capital Appreciation notes its divisions remain highly cash-generative, which resulted in cash resources of R494.9 million at year-end.

“The group has maintained its unbroken, year-on-year growth in dividends for the sixth consecutive year. Acquisitive activity has increased, with Capital Appreciation successfully integrating the Responsive group acquired in March 2022, and in April 2023, announcing the acquisition of the Dariel Solutions Proprietary Limited,” it says.

The payments division delivered revenue of R524.8 million, only marginally (1.7%) down on a record prior year.

The software division increased revenue by 58.1% to R469.9 million and EBITDA by 28% to R89.7 million.

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