AFRICAN BANK INVESTMENTS LIMITED
By Safs Narker, Portfolio Manager at Vunani Fund Managers
We have all read about the phenomenal growth in unsecured lending and some of the practices within the sector that have been questioned by the National Credit Regulator (NCR). The mining strikes and labour disruptions in 2012 have not helped sentiment towards unsecured lending. Against this backdrop, market participants have taken a very negative view of Abil. The share currently trades at 1.7 times price to book value, p:e of 9 times and historic dividend yield of 6.4%. When viewed against other banks trading at average 1.94 times price to book and historic dividend yield of 3.4% and Abil’s closest competitor is Capitec Bank, which trades at 2.8 times price to book at a historic yield of 2.3%.
The market is pricing in a significant slowdown in earnings from African Bank, which is driven by a combination of lower loan growth, lower yields or significantly higher impairments. Market participants have indicated that loan growth in the unsecured space will slow down, however bear in mind these rates were over the last few years around 30% per annum, so a slowdown in this case would equate to low to mid-teen growth numbers. Lower yields should be viewed against some of the recent bond issues that have been done at reasonable rates when compared to some of the historic bonds, which are due for maturity in 2013 and 2014. Some of these have coupons are as high as inflation plus 8% or fix rates of 11.85% and 13%. Therefore issuing inflation plus 3.4% has positive impacts on interest expense and hence supportive of yields. Considering the amount of scrutiny that has been placed on unsecured lenders from the NCR, SARB and management, we are comforted that management and the regulators have a handle on the risk residing in each of these portfolios. What gives us further comfort is that Abil impairments are already at elevated levels of 10.6%, which we expect to decrease over the next few reporting periods.
The 2012 financial results for Abil show that the bank generated R2.6bn of earnings (3.26/share) with Ellerines contributing R257m (31.9c/share), thus even if the bank has flat earnings for 2013 and Ellerines produces nil earnings ie earnings go from R257m to nil, Abil will trade at below 10 times p:e. We would contend that earnings would grow at a real rate of 5%-10%. In conclusion, the market seems to have priced Abil for most of the risk in unsecured lending and labour unrest, which we believe provides investors with an opportunity to buy value.