Blue Monday ahead
Investors unimpressed by the way business is going
HOW DOES a lending rate of 50%+ tie up with the motto of ethical, innovative and affordable credit services?
In the past financial year, Blue Financial Services earned R531m in interest on its advances of about R1 100m to microlenders in 14 African countries. In addition to this interest income, Blue also charged R201m for administration and insurance on these advances. The annual cost of a loan from Blue is definitely more than 50%/year, the latest financial survey of the company shows. The cost of its capital is somewhere in the region of 12% to 15%/year. Blue’s net interest margin is more than 35%, that’s 10 times the 3,5% standard interest margin of our leading banks. SA Reserve Bank Governor Tito Mboweni has in fact indicated his dissatisfaction at the banks’ large margin. Blue can consider itself lucky that it doesn’t have a banking licence.
Despite this very large interest margin, Blue announced a fairly disappointing financial performance for the year to 31 March 2009. Headline earnings for the year were marginally up to 12,96c/share, and, as usual, no dividend was declared. Return on equity for the past year was a somewhat disappointing 6,8%, compared with an equally unimpressive 9,8% in the previous financial year. Our leading banks usually aim for a return on equity of between 20% and 25%, and they often reach this figure. Internationally, return on equity is generally regarded as the best benchmark for measuring the efficiency of management.
These few figures and Blue’s decision to consolidate its business for the present rather than pursue further growth are an early warning that the shares are not worth much more than 50c each at the moment. And even 50c isn’t an invitation to invest in them just because they were worth more than 600c each about a year ago.
Blue is a microlender with 300 branches in 14 African countries. According to the company’s own description, it offers its clients ethical, innovative and affordable credit services. In most African countries, the group is in the fortunate position that deductions are allowed directly from its clients’ pay slips. As many as 78% of its clients work in the public service. There isn’t much bad debt. In SA, where deductions by employers are not allowed, the group has difficulty showing a profit on its business after providing for bad debt.
Last year, Blue took over Credit U, a local microlender, by issuing new shares. Blue executive chairman Dave van Niekerk himself underwrote 25,7m of the new shares at 540c/share.
To obtain the funding for this, Van Niekerk exchanged 31m of his ordinary shares in Blue for 31 000 single stock futures (SSFs) at an agreed price of 668c/share. After costs and the initial margin, this gave Van Niekerk enough capital to meet his commitments in terms of the underwriting agreement.
This very large outstanding SSF on a relatively small – and illiquid – share like Blue, whose share price then fell sharply, was one of the reasons why Safex broker Cortex could not meet its commitments to clearing member Absa. Absa had no choice and then landed up with 95,9m shares in Blue – at a cost of R389,9m. That is 406c per Blue share, which is now trading at 150c. Absa has indicated it’s keen to sell its interest in Blue. (See Finweek of 12 February 2009 for the full story of Cortex and Absa.)
Besides these uncomfortably close to 100m shares that Absa would like to sell, Blue is now also stuck with R270m of debt in new loans to shareholders. R234m of this is due to former Credit U shareholders, while a new debt of R36,785m to Dave van Niekerk has arisen. The origin of this is not quite clear. Blue’s new financial director, G Chittenden, assures Finweek that it was a new cash deposit that Dave van Niekerk made in Blue “because he has so much confidence in Blue”. But Finweek still finds this strange, because Blue did not experience any shortage of cash during the year. In fact, the company closed the year with R88,7m in the bank.
It is to be hoped that Blue’s audited financial statements, which were issued last week within three months after the reviewed provisional condensed results, will throw more light on this.
Ironic, don’t you think? Dave van Niekerk