ABIL Q3 trading update and rights issue announcement

ABIL is out with a trading update this morning. But that will not be front and centre of shareholders minds. At the same time, the company has announced that they are raising up to 4 billion Rands by way of a rights issue at as of yet an undetermined price. And that is possibly the key to explaining the massive wild swings of the share price this morning. It has been down 10 percent, and it has been up 7 percent. The stock is currently trading a little higher now from the close Friday, up around three and a half percent. The volumes are enormous. Three times higher than the normal volume, which itself has been elevated significantly.


First, let us look at the business itself, before we get to any assumptions around the capital raising. I am presuming that a lot of care was put into communicating these third quarter results, more than usual because of the heightened interest in the company and the sector. And because the company let us know that they were paying more attention to communicating with the market, and in particular their shareholders.


Total advances over the comparable period grew 19 percent to 60.3 billion Rand, but credit disbursements over the last three quarters is ten percent lower, year on year at 17.7 billion Rand. That means that whilst the overall book has grown, more recently the business written has been a whole lot more constrained. As a result of a more cautious approach by management, having recognized nearly a year ago that there were early signs of stress. And also as a result of lower application and higher rejections, not exactly what you want to see. Non-performing loans as a percentage of total advances ticked up 100 basis points from 29.3 percent to 30.2 percent, reflective of a more stressful environment. And prudence, or perhaps both.

The trading environment explanation nails it: "The third quarter proved to be another challenging period with the trends of the first half of 2013 continuing through the quarter, albeit improving. Over the past 12 months the environment in which ABIL operates has changed considerably due to the rapid deterioration in the economy and the high levels of indebtedness amongst consumers, following a period of high growth in unsecured lending."


And then perhaps a smallish bombshell: "Review of EHL's strategic fit" Ellerines, a review of that business. And there is a little explanation further down, suggesting that the whole furniture retail business will be disposed of. I am guessing that the initial reaction will be that the management of ABIL made a mistake, when they acquired the business in the first place. Water under the bridge, in the same way that Sappi have to deal with mistakes made in the past, ABIL management have to deal with this now.


So as far as the business going forward, the cost of funding is still OK, that is in order to maintain extending credit, their core business. Interestingly, the cost of funding is expected to be lower than last year. That is probably one of the more critical things to look out for and possibly explains why the company has decided to embark on a capital raising, of as much as 4 billion Rand. Underwritten by Goldman Sachs, we have no way of knowing this, but I don't think that it will come cheap. But if you want cheap, I guess you go further down the feeding chain.


In order to raise money for capital adequacy requirements, ABIL have turned to their shareholders. The quantum is not clear, they say up to 4 billion Rands. And the price is not there. I guess the dilution impact remains to be seen, until we get more clarity. For the time being, we will continue to stay the course, as painful as it may be in the short term and we will continue to monitor the newsflow.