By Safs Narker, Port­fo­lio Man­ager at Vunani Fund Man­agers

Finweek English Edition - - COMPANIES & INVESTMENTS -

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.

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