African Bank plays down its about-face on selling Ellerines
Management was not brutally honest about scope of the problems
THIS is one of the most remarkable about-turns in recent years, but African Bank is playing down the sale of troubled retailer Ellerines, which it bought only five years ago for R9.1-billion.
The bank’s financial head, Nithia Nalliah, confirmed to Business Times that there is no sale agreement yet for the furniture retailer, which includes brands like Dial-a-Bed and Wetherlys, though he said a number of suitors had knocked on the door.
Analysts believe the obvious buyers for Ellerines are Massmart, which is now owned by US chain Walmart, or Shoprite.
The sale of Ellerines was perhaps the key point to emerge this week, as African Bank out- lined its plan to recover after a woeful year in which bad debt piled up and its share price fell 53.4% from R32.20 to R15, while its non-performing loans spiked to 30.2% of its total advances.
Part of its recovery plan is to raise R4-billion through a rights issue, underwritten by Goldman Sachs.
Almost since the day it was bought, Ellerines has been an albatross for the bank.
In April, African Bank CEO Leon Kirkinis disputed rumours that Ellerines was on the block, telling Business Times he had no interest in selling Ellerines.
This week, however, he said the bank would like to “accelerate” the disposal.
This suggests that the bank has come under pressure from shareholders to cut loose the furniture retailer.
Though Nalliah said African Bank was “mindful” of selling it for less than it paid, analysts including RE:CM portfolio manager Wilhelm Hertzog suspect that Abil might just have to sell it at a loss.
JP Morgan analyst Nana Francois said in a research note this week that she did not see any imminent buyers for Ellerines either, partly because furniture was not a growth asset right now and partly because Ellerines had poor retail locations.
If Ellerines is sold, however, African Bank wants to remain the “preferred credit provider” to people who buy its furniture on credit.
Nalliah said: “We don’t want to walk away ... or then we would have wasted the years trying to get the credit and retailer to work together.”
In what sounded like a sales pitch during a conference call this week, Kirkinis tried to shatter the myth that Ellerines was a “troubled business”, describing it instead as a “premier retailer”.
“We think it’s a very, very valuable asset,” he said. But then why sell it? The fact is Ellerines has poor prospects. For the nine months to June, its sales dropped 13% to R3.2-billion and its gross margin fell 0.5%, dragging the bank down at a time when its core unsecured lending business is already under pressure.
An even more damning indictment of Ellerines is that while its sales are falling those of the overall retail sector have improved marginally.
Derek Engelbrecht, Ernst & Young’s retail and consumer sector leader, said the increase in retail sales may just reflect the fact that consumers are buying more now, pre-empting possible price hikes in goods because the rand has fallen against the dollar.
Rival Lewis reported a 4.4% increase in sales to R2.5-billion, while JD Group reported a 4.2% increase in revenue to R16.4billion.
Sanlam Private Investments’ Alwyn van der Merwe said African Bank’s reversal on Ellerines was “disappointing”.
“This does not reflect well on management. The company’s book value has come down from R3.7-billion to R2.1-billion since they bought it,” he said.
Ellerines’ dismal performance was one of the reasons why African Bank is the worst performer on the stock market this year.
Although Van der Merwe said African Bank might have suffered disproportionately over the unsecured lending panic, it still scored a number of own goals.
“I think management was not brutally honest enough in telling the markets the scope of the problems at [the bank] regarding loan growth and Ellerines. If you look at all banks, loan growth has been under pressure for a while now,” Van der Merwe said.