Research archive for ABL

Do bond holders do a better job than equity holders when doing their homework on a company? I mean, bond holders have the same objectives, maximum reward at the lowest possible risk. Of course that is how some banks in the US got into trouble during the last downturn as their triple A rated Mortgage Backed Security turned out to be nothing more than a collective bunch of wooden houses in swamps owned by people in string vests. No, that is not a fair reflection of what happened, but you get the picture, an uninformed investor and someone who fails to do their homework is dangerous. And I guess as a bond investor you could have placed a lot of faith and substance in the rating agencies research, but could have been really wrong. Everyone was to blame in that mess, it was far easier to point at banker though.

It's always difficult writing about a stock that you like which has done badly. It makes me feel like I am trying to put lipstick on a pig when absorbing bad news. But, if you just invested in stocks that were doing well you would be considered a momentum investor which is not always a good thing. Just ask those trying to ride the wave of the dot com rally. Sometimes, if you feel you are justified, you have to fight the crowd and take a contrarian view. That is often how the real money is made, when the situation is not what everyone from your hairdresser or in this case even Carte Blanche is telling you. And then the stock gets a massive rerating.

On Friday news hit the wire that the National Credit Regulator (NCR) lodged a complaint against African Bank for making reckless loans, predominantly in KwaZulu-Natal. The complaint states that Abil granted loans to at least 700 consumers who could not meet the instalment requirements and that the tribunal should impose a fine of R300 million.

This morning we received a very informative trading update from African Bank for the first quarter of their fiscal year ending 31 December 2012. As expected trading conditions in the furniture industry and unsecured lending market remained challenging. Credit disbursements were flat for the quarter due to risk reduction measures. Leon Kirkinis has been very vocal about pulling back on loans to avoid a bubble. They did this by reducing both the average size and duration of the loan.

This morning we got full year results from the much talked about African Bank. And as the trading update suggested, the growth was strong. Let's take a look at the numbers behind this stock and then see what management have to say, especially about the future prospects of this business.

African Bank have released a trading update this morning, and I am guessing that there will be a few relieved folks around. Consensus, at least the one that I can see, suggested that earnings were expected to show around 21 percent growth. ABIL advises "... that both headline earnings and earnings for the period are expected to increase by between 17% and 19% relative to the R2 339 million reported for the 2011 financial year. Similarly, headline earnings per share and earnings per share are expected to increase by between 17% and 19% relative to the 291,0 cents per share reported for the 2011 financial year." So, rough back of the matchbox calculations suggest that ABIL will make between 340 to 346 cents per share, let us call it 343 cents. That is almost an identical second half to the first half. I suspect that the full year dividend will be the same as last year, and the year before that, 185 cents.

Everyone is talking about African Bank, well in my world anyhow. Clients, along with ourselves have had to be very patient with this one. Yesterday the share price had another tough day falling to 2835c, touching on levels it reached during the financial crisis. We have written extensively about this one. If your memory sometimes eludes you or you just happened to miss your favourite daily read due to some extreme circumstances, click on the link below which will steer you towards a whole host of links.

There is still a lot of concern about the unsecured lending environment in South Africa. On Tuesday afternoon Capitec came out with a trading update which looked good but the company fell over 3% yesterday (it's down 2.8% again today) and African Bank fell 2.5%. There was also a meeting on Monday between Finance Minister Pravin Gordhan and the country's big bank chiefs to discuss banking in South Africa as well as this specific matter. The meeting looked at these banks surge into the unsecured market due to higher regulations in the secured lending space which is decreasing those margins and making unsecured more attractive.

So yesterday I went to the African Bank investor presentation. I covered the operational update yesterday but wanted to get some more insights into the macro environment and how African Bank, who are the industry leaders in South African micro-lending, saw the industry and how they were dealing with the so called bubble that so many people are talking about.

This morning we had a trading update for the third quarter ended 30 June for African Bank. On the face of it, it looks pretty good. The update is very informative going through the banking and retail units in detail.

African Bank have released results for the six months to end March 2012 this morning, as previously indicated to us. Remember a few weeks ago, we wrote up about the steer that the company gave us,African Bank trading update comes inline with expectations. We suggested that the middle of the range was 170 cents, and bang this morning we saw earnings per share clock 170.4 cents. The dividend was unchanged at 85 cents for the first half, at the top end of the dividend policy this is two times cover, perhaps not so much as in the past, but the commentary gives the following reasons: "We believe that the current cover will retain sufficient capital to support growth for the current year." AND "The group will continue to manage its dividend policy to support ABIL through the current growth phase as well as the anticipated Basel III impacts." But still, if you double the first half earnings (which you shouldn't, it is the better half) the stock trades at around 11 times forward earnings and a dividend yield (presuming unchanged for the year) of just over five percent. 5.2 percent. Sounds good to me.

Yesterday we had a trading statement from one of our recommended stocks which indicated a 24%-26% growth in earnings for the 6 month period ending 31 March 2012 compared to the corresponding 6 months last year. In that period the company made R1.095bn or 136.3c per share. Taking the middle of the range, 25%, that means we should expect around 170c for the 6 month period. Before we talk about the fundamentals let's look at the valuations.

Talking about a business that services a part of the market that was ignored in the past, unsecured lending, ABIL released a trading update this morning. This is for the first quarter to end December 2012. And they look good to me, but they have to be, the stock has been on a tear. The average sized loan increased to 11307 Rand, and the average loan period increased from 44 to 47 weeks. The loan book grew to 44.6 billion Rand. Wow. Starting to get big. Of that, the old Ellerines business (EHL) is 7.9 billion ZAR, which showed an increase of 14 percent. But interestingly "merchandise sales credit mix declined from 66,4% in 2011 to 65,9% in 2012" in EHL. Within the group they are looking to ratchet that higher. All in all for the quarter 196 thousand new customers were added. Wow. That is a lot.

>This morning African Bank released full year results ending September 2011. Remember that they released a trading update at the beginning of this month telling us that earnings would increase by between 23% and 25%. Well they came in with an increase of 24% which equated to R2.34bn or 291c per share. A dividend of 185c will be paid for the year yielding a very handsome 5.5% at current levels. The share trades at 3416c giving us a historic PE of 11.7, more on this later. The banking business grew 24% and was responsible for the majority of the earnings, R2.3bn. The retail business grew nicely, 46% in fact but is still only responsible for R190 million worth of earnings.

Yesterday we had a very positive trading update coming from our favourite bank, African Bank. The announcement stated that headline earnings per share will increase by between 23%-25% for the year ending 30 September 2011. Last year the company made 235,2c per share so for the full year 2011 we should expect around 292c a share. Nice.