But biggest challenge is cost of capital and availability of funding
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