Net1 upbeat despite the avalanche of bad news

The Net1 share price has held up reasonably well, given the avalanche of bad news it has had to deal with over the past few months.

At R51, its share price is comfortably off its 12-month low of R38.60, touched in August.

Investors were presumably swayed by the board’s upbeat comment provided with recently released quarterly results.

News that Net1’s SA business has been stabilised and that the management is now focused on returning to growth and profitability appears to have countered the grim developments on the Cell C front.

Net1 took a $125.4m hit on the valuation of its Cell C investment during the June quarter, but it has not given up hope. It still thinks, it can “create a long-term sustainable business” with a bit more funding.

But Cell C is just part of Net1’s woes. The 41% slump in revenue was due largely to the expiration of the controversial contract to distribute social grants in SA. This knocked Net1’s EasyPayEverywhere banking product, which had been linked to the SA Social Security Agency (Sassa) accounts and had generated many high-margin transaction fees for Net1.

But while shareholders such as the World Bank’s IFC and Allan Gray might be encouraged to hear that Net1 will focus on services for the unbanked and underbanked, the Black Sash NGO may not be too thrilled.

Much of the Black Sash’s work over the past six years or so has been directed at fixing problems encountered by unbanked individuals, thanks to the ill-considered provision of finance to them, particularly unsecured finance linked to a social grant account.

On the subject of social grants, one item not included in the end-June results is the R316m Net1 was recently ordered to repay to Sassa. So recently, in fact, that Net1 has not had time to consider the effects on its financial statements, which is why it received a delinquency notice from Nasdaq.

Rory Mackey has been given a year to fix SA Corporate Real Estate, having returned to the role of MD in August after resigning in May, but this is optimistic at best.

To revive dividend growth, he has to sell the real estate investment trust’s weaker assets at a time of few buyers. Mackey wants to exit the office sector and focus on convenience retail and light industrial assets. He and his team must sell R913m worth of offices to listed or private entities while the country is experiencing high vacancies.

The SA Property Owners Association puts the national office vacancy rate at about 11.3%; about 7% would be healthy. Economic conditions are the worst in decades. Many listed property funds are beset with problems. Funds swim in debt, and the local market is reluctant to feed them capital except for assets offshore and management teams abroad. Each fund can finance only a few local acquisitions, if any.

SA Corporate may struggle to sell assets to private funds at premiums on what they paid for them. So it’s unlikely SA Corporate will sell its office portfolio in one go. Mackey & team must be patient and wait for economic uplift and a healthier market.

The board should expect no miracles in a year. Let Mackey beef up his team and take four or five years for the turnaround.

Dumping him and getting another chief in a few months will only cost time and money.