Nu versus Capitec
Exceeding customers expectations
This started as an overview of Nu Holdings, an emerging quality company currently operating in South America. Whilst doing the analysis, it became clear that there are numerous similarities between this business and our own homegrown quality stalwart, Capitec Holdings. Operating on different continents, the similarities are striking:
Both are financial services platforms that utilises the billions of data points gathered real time through the interactions with clients, and digital clients behaviours, to offer best in class products and services. This provides them with the ability to expand their offerings in an intelligent manner for any rules based, financial, or other services.
Both are owner managed with more than 20% of the shares of each respective business being held by founders and current management. Owner managed businesses as a general rule, just perform better.
Both operate in developing economies where the economic growth rate should be higher than developed economies. Utilisation rates of basic financial services is also well below the rates in developed economies, providing further scope for growth.
Both are obsessed with their customers needs and ensure everything they do, meet and exceed customers expectations.
Both have exceptional growth rates, with the 24 year old Capitec being the more mature business in its South African market.
Both are focussed on increasing their monthly active customers and expanding their offering to existing customers.
One major difference between the current operations of the businesses is that Capitec has a branch network in South Africa of more than 800 branches. In a country with an extremely low numeracy percentage, a cost efficient branch network is a huge plus. Nu operates as a complete virtual services platform with no branches.
A brief comparison based on latest published information and share prices on 10 December 2024:
Source: Finchat.io , Respective company financials and investor presentations.
Valuation thoughts
In assessing whether a company is trading at a reasonable price, we calculate the implied 10 year growth rate, in earnings per share (EPS) for financial businesses, (free cash flow for other businesses), reflected in the current share price. Using a discount rate of 10% and a terminal growth rate of 3%, the following is the implied growth in EPS for the next 10 years at their current, 10 Dec 24, share-prices:
Nu Holdings Limited (USD) 15.64%
Capitec Holdings Limited (ZAR) 15.07%
Should the probability of management delivering these growth rates, over the next 10 years be high, we can expect an annual return of at least 10% per annum going forward.
Probability of EPS growth materialising
Capitec Holdings
Current management, part of the founding group that started Capitec 24 years ago, have delivered a compounded, annual growth rate to shareholders of 39% since it listed in 2002. This is only the increase in share-price and excludes dividends paid. ZAR 1.15 invested in 2002 would now be worth ZAR 3,328.91 - an outstanding achievement. The probability for future performance is evaluated on its South African business and its newly acquired European/Mexican business.
Capitec South Africa – The current core of the business has evolved over the last 10 years with the key drivers for growth:
Increase in active, digital and fully bank clients, specifically clients that use Capitec as their primary bank account and have their salaries paid into the Capitec account. Once clients realise they get real value for money at Capitec compared to the incumbents, their loyalty and trust of the brand increases and they tell their family and friends.
Growth in the number of Capitec products used by individual clients.
Growth in transactional revenue and management’s focus to cover all operating costs from transactional revenue, which has been exceeded.
Acquisition and integration of the business bank and its growth.
Establishing a fully owned insurance subsidiary and expanding the insurance product range.
The roll-out of value-added services such as pre-paid mobile, electricity, Lotto, car liceses and Capitec Connect offering the best rates for data and voice in South Africa.
Utilising data analytics to better cross sell products and having the quickest turnaround and informed credit decisions.
On its South African operations alone, I believe Capitec has a high probability to exceed 15% annual growth in earnings per share over the next 10 years.
Capitec International – In 2024, Capitec acquired 98% of AvaFin Holdings, a short term lender operating in Poland, Czechia, Spain Latvia and Mexico. Avafin currently has the classic Capitec operating model of 20 years ago of unsecured short term lending at high rates. One can only assume that management will apply the same gamebook as currently applied in SA with multiple new products being introduced and their highly efficient systems and back office being deployed. Growth would very much depend on when regulatory licenses for banking and insurance can be obtained, the amount of capital that will be deployed and the ability to scale is realised. As four of these operations are in the EU, regulatory passports may be obtained that will accelerate regulatory approvals. Given their track record, culture and incentives, the probability for succes is high.
Nu Holdings
Nu Holdings was founded by David Velez (CEO) and Cristina Junqueira (Chief Growth Officer) in 2013. David was an executive at Sequoia Capital responsible for South American investments and currently owns about 16% of the shares with Cristina owning approximately 5%. They control Nu Holdings Ltd via their investment vehicle, Rua California Ltd, that owns class B shares that have a controlling vote. Early investors included Sequoia Capital, Tencent and Berkshire Hathaway.
The current core business is based in Brazil, where 56% of the adult population have a Nu account. They expanded into Mexico in 2019 and Columbia in 2020 where they currently have low penetration rates. Total customers amount to 110 million of which 84% is active on a monthly basis.
They developed their offering differently to Capitec starting with a transactional account, later adding credit cards and secured and unsecured lending products. Recently they started adding Insurance products to their portfolio.
The key drivers for Nu’s growth is not dissimilar to Capitec’s and include:
Acquisition of new clients and contuned cross selling of additional products to existing clients. The CAGR in revenue generated from 2020 clients amounted to 124% for their Q3 2024 results demonstrating how clients who joined in 2020 continue to utilise more of Nu’s products over the years.
Growth in their business banking, insurance, saving solutions, investment products.
The use of NPS or Net Promotor Score that continuously monitors how satisfied their clients are and whether they would promote Nu to their family and friends.
Expansion in Mexico and Colombia where additional products and the services are only being rolled out now.
Given their existing geographic footprint and track record of management, I believe there is a high probability that they will continue to grow EPS at 15% pa as a minimum for the next 5 to 10 years.
Nu Holdings Ltd has applied to the NYSE to move their head office to London without publicly providing reasons. This coupled with the 10% minority interest they have taken Tyme Group as part of their series D funding round, indicates that Nu may have geographic expansion ambitions beyond South America. Tyme currently have a digital banking offering in South Africa and the Philippines, headquartered in Singapore with a development hub in Vietnam.
Interesting times ahead for these two well managed organisations, with Capitec acquiring operations in Mexico and Nu taking a minority stake in a South African based business.