Confidence in Abil
Momentum Asset Management has i ncreased its holding in struggling unsecured lender African Bank Investments Limited (Abil) to 5.5% from 4.96% previously on behalf of its clients. Interestingly, the asset manager only started accumulating the majority of its stake in Abil in the latter half of 2013 when the lender raised R5bn of new equity.
Known in the market as an astute contrarian investor, Sam Houlie, head of unconstrained investments at Momentum Asset Managers and portfolio manager of the Momentum Value Fund, says that now is not the time to be concerned about Abil. “The time to have worried about Abil was in early 2012 [when the share price was at peak levels and the quality of loans granted was weak]. Incidentally, very few worries were expressed by the market at that time,” he says.
These investors would have seen their investment decrease by over 60% by the end of May last year after Abil announced it had recorded a headline loss of R3.1bn for its interim period ended March 2013. The loss was underpinned by credit impairments and the write-off of remaining goodwill, trademarks and deferred assets.
Houlie says that the current situation is very different to 2012 for both Abil and the industry. “Management have a clearer grasp of the current reality and while the operational environment remains challenging, conditions are stabilising and the quality of loans granted is significantly better than in 2012.”
The market is now watching Sens like a hawk for any cautionary trading announcement by a peer retailer, as Abil recently announced it was in negotiations regarding the possible disposal of Ellerine Holdings, its loss-making furniture unit. Abil acquired Ellerines in 2007 for R10bn. Sadly, today that is the market capitalisation of the whole Abil business.
Speculation is rife in the market about the shape and form of the disposal. But commentators such as Vestact’s Sasha Naryshkine say what Abil is likely to realise from the sale would be very little.
The time pressure for Abil to sell Ellerines because it is a drag on capital could be a factor against it disposing the business on its own terms. Finweek understands that there are several players in the market who have been eyeing the retailer but want it on their own terms, to the extent of taking advantage of the urgency for Abil to sell the business. One market commentator has said that the reason why Abil has not been able to sell Ellerines over the past 11 months was because potential buyers “have been too demanding”. Houlie says that while as shareholders they cannot prescribe the terms of the disposal, ideally such
a deal would be able to extract value from the tax losses, the distribution network as well as the performing cash businesses in Ellerines.
Ellerines has accrued tax losses of at least R2bn, meaning future profits of the business until a certain point will not be taxed.
Clients of the Momentum Value Fund and the Momentum Small and Mid-cap Fund, which hold the Abil stock, will probably breathe a sigh of relief if the sale negotiations do go the way of Abil because then the business will have begun to succeed with its turnaround plan.
Selling Ellerines is part of the group’s five-point strategy, which also includes strengthening the core (unsecured banking) business as well as developing and building new growth opportunities.
The next 18 months will be fairly crucial in stabilising the business. New business volumes are not expected to grow significantly, but thereafter Houlie expects the various growth initiatives to start gaining traction. He says the earnings power of the business is currently under-appreciated and there is potential for an exponential improvement in earnings and return on equity.
Various other asset managers have also shown their confidence in the business by accumulating more ordinary shares. These include the PIC, which now holds about 15% of Abil, Coronation at 10% and Old Mutual Plc at 6.33% while JP Morgan Asset Management opted to reduce its holding from 5.04% to 3.75% instead.
Abil’s share is some 76% down from its 2012 highs.