Blue Mon­day ahead

In­vestors unim­pressed by the way busi­ness is go­ing

Finweek English Edition - - Companies & Markets - VIC DE KLERK vicd@fin­week.co.za

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

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