African Dawn considers JSE

Since listing in August 2003 at a price of 5 cents per share, African Dawn has surged to a high of R5.79. In the process, the company has become a stalwart of the AltX, making up nearly 10% of the total exchange capitalisation. There are 83 companies listed on the AltX.

When the company reported its full-year results to the end of February 2008, it showed revenue of R258m and an after-tax profit of R103m. Headline earnings per share for the period were 57c, putting the company on an historic price-to-earnings multiple of under 10.

Negative perception

Despite this success, the company is battling to shake the image of being a "micro-lender" and CEO Marius van Tonder would like to see this change.

Despite increased regulation of lending at the lower end of the market, micro-lending has retained a negative stigma in financial sectors with a high risk profile being attached.

"Micro-lending activities make up only about 2% of our business," said van Tonder.

African Dawn is made up of two core revenue streams namely structured business finance and small-scale home improvement and personal finance loans.

The structured secured stream offers bridging finance and cash flow type deals for property developers and mid-sized businesses that are looking for short-term cash flow.

These funds are lent against secured assets providing a relatively low risk transaction over a short period of time. "The longest loan on our books is 18 months," said van Tonder.

Management at African Dawn believes that only 2% of the structured finance market has been reached in South Africa.

The home improvement and personal finance stream provides loans to families or individuals earning between R2 000 and R15 000 per month. Despite a perceived risk around this portion of the market, the African Dawn model is aimed at reducing the risk to their R80m home improvement loan book.

"We don't hand over cash to the individual," said van Tonder.

Instead, African Dawn will pay a supplier directly for a specific purchase such as a trip to the local hardware store for home improvements.

Non-core

The company has a third aspect of its business that shareholders may ultimately consider sundry to requirements.

Currently the business holds equity stakes in a variety of marketing channels including some Pam Golding franchises in high growth areas such as Attridgeville and Mamelodi.

These channels currently make up about 11% of the business and are providing deal flow for the financing operations.

Van Tonder believes that if African Dawn ultimately divested of these interests, the result would be earnings enhancing.

Appreciation but no dividends

When asked about dividends, van Tonder had a wry smile.

Despite rapid share price appreciation, African Dawn has failed to pay out a dividend, unlike many of its AltX counterparts.

"We're torn between two camps of shareholders," said van Tonder, who said that some would prefer to see cash stay within the business while others would be reassured by a distribution.

One analyst has calculated that African Dawn could be sitting on a forward dividend yield of around 6.4%.

Money on the table

With African Dawn trying to establish itself as a credible player in the financial market and the company talking up its prospects, the directors are putting their money where their mouths are.

Apart from a variety of single-stock futures (SSF) purchases in the first six months of the year, the directors have also been solid buyers of the company stock.

Van Tonder has led the charge, purchasing in excess of R50m of the company ordinary shares since the start of the year at an average price of R4.74.

The directors remain confident that the company will see continued earnings growth in excess of 50% going into 2009.

An analyst at Watermark Securities estimates that the company is on a forward price to earnings ratio of around 3.9 times earnings and they believe that a share price of R8 is achievable by the end of the year.

African Dawn traded up 1c on Thursday to close at R5.25.

- Fin24.com