ABIL results shock the market

Whoa! African Bank has been pummelled today. There is no better word to describe it. Down over 20% as I write this. Results were released this morning which has clearly not provided any more clarity and has encouraged the shorts to only add instead of cover.


But I haven't seen anything new from what they alluded to a few weeks back. Here are the numbers. Headline earnings declined 26% to R1 015 million or 125,7c per share. R1bn of that came from the banking unit which declined 20% while only R18 million came from the furniture division which declined heavily from the R191 million made during the comparative period. The stock is now trading at R16.90 and even if they made no money at all in the second half, it would trade on forward earnings of 13.5.


I think this statement from the group is key:


"An elevated charge for bad and doubtful advances resulting from higher NPL formation in the first few months of the year, exacerbated by ABIL's decision to write off an additional R445 million of non-performing loans in March. This increased write-off coupled with the group's communicated intent to reduce the value of the previously written off book had the effect of reducing coverage, and accordingly NPL coverage was increased to recent norms post the write-off. These actions were taken to improve the quality of the loan book over the long term but in the short term, it affected the income statement particularly negatively."

Taking a charge of R445 million is huge and if it weren't the case they would have grown earnings this period. Of course they have taken this charge, we cannot avoid that and according to management it is certainly necessary for the long term certainty of the group. And as management have said in the release, the negative impact is twofold. Bad debts from the previous high growth period are now flowing through. Because of this, future growth is hampered because the bank has to be more conservative with loans extension.


I have chatted to people close to the matter and from what I gather this has been a bad performance of investor relations from management. The dividend was cut from 85c last year to 35c for this period. If the company is in no financial discomfort as they say they are, then why are they cutting the div? Big international investors have been promised a good yield from this and now they are panicking. It is also herd mentality. Get out now before it is too late, the bubble is about to pop. If you read my piece last week about the unsecured market in SA titled Unsecured Lending Market, you will see that I firmly believe we are not seeing a bubble here.


Having looked at the results and what the share price has done we need to forget about the politics of the share price. Whether it is bad investor relations or individual investors panicking. Because we buy companies, and not share prices and if the earnings come through in the long term, the share price will eventually follow suit. We are going to ride the volatility with this one.