African Bank trading update comes inline with expectations

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.

Last year the company had a better second half, making 155c vs. the 136c in the first half. The company has been growing fast on a 6 month basis so we should expect the same. Let's say they make 180c in the second half and 350c for the year. The share is trading at 3888c and a forward PE of 11. Last year they had a very generous dividend cover of 1.57. Assuming they maintain this we should expect around 220c at a current yield of 5.7%. Those are some (very) favourable valuations and a great yield.

The two biggest risks for this company are increasing competition and a possible unsecured lending bubble which has been discussed by many analysts. Let's talk about competition first. Competition is always going to happen in a market where companies are making big profits. Capitec have done really well and now the big 4 are targeting this market because the return on equity is so strong. African Bank have also ramped up their book very aggressively using the Ellerines stores as kiosks. This has been their niche which has been very successful and finally showing some returns to that Ellerines purchase. Although competition is strong I think Abil are more than equipped to face up to this challenge whilst the SA economy still has ample room to provide clients.

So what about this so called bubble? I don't think there is an issue. According to Rene Van Wyk, the registrar of banks whose office is currently conducting a survey on the issue, there is no bubble being caused by the increase in unsecured lending. Unsecured lending only makes up 8% of total credit assets. I also believe that our informal sector is heavily underestimated and these people who earn reliable salaries have to use unsecured lending for credit. Wages are increasing fast in SA, way above inflation and if rates do increase, we are at 25 year lows, we can still handle an increase.

All credit to management for growing the book and therefore the earnings so well. We believe this can be maintained going forward and continue to add at these levels. More analysis will be done when the results are released.