ABIL trading update

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.

Risks, that is always key when looking at the future of this business and asking "Am I paying the right price, right now?" "Asset quality was steady. Non-performing loans ("NPLs") as a percentage of advances continued to decline modestly on the back of the faster growth in performing loans. NPL coverage increased slightly. ABIL continues to note declining payment profiles and increasing debt burdens in specific customer segments and has been pro-active in adjusting for this in its underwriting models. The group has implemented a range of measures over the past few months to moderate its risk exposure, including price adjustments, stricter affordability criteria, shorter loan terms, smaller loan sizes and reduced exposure to the highest risk groups."

The outlook is cautiously positive. We always say, if you are worried about wage settlements being much higher than inflation (the overall basket), perhaps in a middle class context the settlements are right. But this is one sector that benefits from rising wages, the more people earn, the more they tend to borrow. The quality of the book is important. Management are great. We regard them highly, hands on business folks who are big shareholders. That means that their interests are aligned with yours.

We continue to like this company, they certainly have grown from the little company that I knew them when we first started buying them all those years back. We added the stock in October 2003, and today the reasons are still relevant: "Firstly, it is obvious that South Africa is undergoing a massive demographic shift as its urban population grows and people enter the mainstream economy. The middle class is growing rapidly as people obtain salaried employment. By virtue of earning a regular salary, these people become credit worthy and then establish credit records." The stock is around a percent higher this morning.