Brighter day­breaks

But big­gest chal­lenge is cost of cap­i­tal and avail­abil­ity of fund­ing

Finweek English Edition - - Companies & Markets - MICHAEL COUL­SON

IT’S TEMPT­ING TO THINK that all mi­crolen­ders are ho­mo­ge­neous. But that’s no truer than in any busi­ness sec­tor. In­deed, African Dawn – though it started out as ABC Cash Plus, un­ques­tion­ably a mi­crolen­der – no longer re­gards it­self as such. It calls it­self a “spe­cialised fi­nance and fi­nan­cial ser­vices group po­si­tioned be­tween the banks and mi­crolen­ders”.

At a re­cent brief­ing, fi­nance di­rec­tor Con­nie van Nieuwk­erk said tra­di­tional mi­croloans are now less than 2% of its book and ex­tended only to home im­prove­ment clients.

No less than 88% of rev­enue comes from struc­tured se­cured fi­nance ac­tiv­i­ties, mainly bridg­ing fi­nance to hous­ing de­vel­op­ers and com­pa­nies. Last year’s Na­tional Credit Act doesn’t gov­ern those. In fact, Van Nieuwk­erk says African Dawn has been a ma­jor ben­e­fi­ciary of that Act, which forced weaker play­ers out of the mar­ket.

At a re­cent brief­ing it was said the av­er­age loan was for R3m and the 270 loans out­stand­ing gave a to­tal loan book of R800m. The du­ra­tion of those loans was be­tween three and 18 months and they were more than twice backed by se­cu­rity of R1,79bn.

African Dawn fo­cuses on prop­er­ties cost­ing up to R700 000, which sug­gests its typ­i­cal client is a small de­vel­oper work­ing on four to six homes at a time. Home im­prove­ment loans, which are NCA-com­pli­ant, are held at most to R20 000 for bor­row­ers with monthly in­comes be­tween R2 000 and R15 000. That com­po­nent of its loan book stands at around R80m.

Fi­nally, on the loan side African Dawn will fi­nance 24-month pre­paid cell­phone con­tracts for in­di­vid­u­als turned down by MTN. How­ever, that busi­ness is in its in­fancy and avail­able at only a hand­ful of MTN’s 600 out­lets. Other ac­tiv­i­ties in­clude cell­phone bank­ing mar­ket­ing so­lu­tions, es­tate agen­cies (a few Pam Gold­ing fran­chises in Tsh­wane, but that’s not con­sid­ered a long-term hold­ing) a call cen­tre and – some­thing CEO Jan van Ton­der seems par­tic­u­larly proud of – fi­nan­cial lit­er­acy ed­u­ca­tion.

Cour­ses have been de­vised un­der the aus­pices of the Fi­nan­cial Ser­vices Board to meet the

preva­lent low in­come/low fi­nan­cial lit­er­acy en­vi­ron­ment. That’s in part mo­ti­vated by prac­ti­cal con­sid­er­a­tions – Van Ton­der says a client’s abil­ity to bud­get re­duces risks – but he be­lieves it could be­come a profit con­trib­u­tor, scent­ing mar­ket op­por­tu­ni­ties in both the pub­lic and pri­vate sec­tors.

At the brief­ing, a SWOT anal­y­sis ar­gued African Dawn’s strengths in­clude cash gen­er­a­tion, prompt re­port­ing and strin­gent credit ap­proval pro­cesses. Op­por­tu­ni­ties in­clude the post-NCA dis­ap­pear­ance of small play­ers, growth of an­nu­ity in­come, in­creased mar­ket share and ex­pan­sion into Africa – par­tic­u­larly East Africa, which is fast be­com­ing a favourite hunt­ing ground for SA com­pa­nies want­ing to spread their ge­o­graphic foot­print.

On the down­side, the big­gest chal­lenge is the cost of cap­i­tal and avail­abil­ity of fund­ing. How­ever, at the beginning of Oc­to­ber the com­pany an­nounced it had se­cured R168m ad­di­tional fund­ing for short-term se­cured fi­nance at prime-linked over­draft rates and R68m for the home im­prove­ment divi­sion at no more than the prime rate. It also in­tends to lift its black empowerment lev­els (now 22%, held by sev­eral con­sor­tiums) above 30%, which will pro­vide op­por­tu­ni­ties to se­cure ad­di­tional fund­ing.

The big­gest threat is an in­crease in bad debts. That hasn’t hap­pened yet and its re­cent in­terim re­port (to Au­gust) doesn’t ex­pect it to. Ap­proval rates for con­sumer fi­nance have been trimmed to 62%.

While hous­ing de­vel­op­ment ac­tiv­ity has slack­ened, more de­vel­op­ers need bridg­ing fi­nance, so de­mand here has more than dou­bled. But credit stan­dards re­main strin­gent: only 45% of applications are ap­proved.

From R1,2m in 2004, net profit leapt ex­po­nen­tially to R103,3m in the year to Fe­bru­ary 2008. In the six months to Au­gust, growth was from R25,3m to R88,3m, six-month head­line earn­ings per share at 43c (15,6c) tak­ing its rolling 12-month re­turn to 84,4c.

The in­terim re­port makes no spe­cific fore­cast but re­mains broadly pos­i­tive. If we as­sume only 25% growth in the sec­ond half, we’re looking at HEPS for the year to Fe­bru­ary 2009 of around 95c/share, though the de­sire to re­tain funds to fi­nance ex­pan­sion will prob­a­bly still pre­clude a div­i­dend.

Back in 2004, ABC Cash Plus was quoted at 7c. As African Dawn it peaked at 580c in late 2007, fell back to about 340c in Fe­bru­ary, ral­lied above 500c and has now again fallen back to 320c. That’s a prospec­tive mul­ti­ple of less than 3,5 – yet an­other share that would surely be cheap in a ra­tio­nal mar­ket.

Ma­jor ben­e­fi­ciary of Credit Act. Con­nie van Nieuwk­erk

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