ABL earnings 2012

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. Here is the full presentation if you want a closer look.

Headline earnings grew 18% to R2.8bn. This equated to 342.5c per share. Return on equity grew from 18.4% to 20% which is in line with First Rand (20.8%) but comfortably above ABSA (15.8%), Nedbank (15.7%) and Standard Bank of 14.5%. Capitec still leads the pack with 28%, it's share price certainly has this factored in however. African Banks banking unit produced a return on equity of 22.9%.

Gross advances increased by 33% to R53bn. Asset quality remained stable with non performing loans coverage at the same levels as last year. We will look at this in more detail later. The retail unit continued its turn around. Comparable sales increased 4.7% while headline earnings grew 35% to R257 million thanks to strong cost cuts, they have closed 57 stores while opening just 39. As you can see, this is still a very small part of the business with less than 10% of profits. But don't underestimate the value added to the bank from using Ellerines stores as kiosks. This is how they have managed to grow advances so fast.

The share trades at 3043c. That gives it an historic earnings multiple of 8.9. The dividend declared for the year is 195c giving the stock a yield of 6.5%, one of the best on the market. Fundamentally it looks extremely cheap. But why? Well we have discussed this extensively, I wrote this article titled African Bank update ahead of results explaining the dynamics of the Micro lending environment.

And there is no doubt that the growth in advances is slowing. They make a point in mentioning this in the presentation. How advances have slowed in the second half of the year and how credit rejections from their side had increased. This has been the norm across the industry as regulators and market participants have awoken to the potential of a bubble. None of this comes from demand however, it is the supply that is purposely being slowed. This confirms my thoughts that the industry is in control of the situation and although demand is still massive, supply needs to be controlled to keep this growth sustainable.

Like I have mentioned in my pieces leading up to these results, I feel that most of these negative scenarios are priced into the share price. The yield is great, the company is the market leader in a growing industry. Yes the industry is competitive but that is no reason to shy away. Abil have a good management team who have been in this game for decades. We continue to add to this stock, especially at these levels.