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If you haven’t been participating in the whipsaw excitement of the mining and resources sectors over the past few months then the other sector that’s produced some incredible thrills and spills has been that of the listed micro-lenders. The sector fell out of favour over 2009/2010 as market darling Blue Financial Services [JSE:BFS] and African Dawn Capital [JSE:ADW] (AfDawn) fell over their own feet. But a look at share prices over the past nine months or so tells a fascinating story, particularly for those who enjoy a punt on smaller capitalisation stocks.
Blue Financial Services has seen its share price quadruple from 8c to 32c since October 2010, while AfDawn – which has been under a string of cautionary announcements relating to its restructuring – has seen its share price jump from 8c to 15c over the past two weeks.
Market darling Capitec Bank Holdings [JSE:CPI] has also refused to stop its stellar rise as it now eyes a R200 share price after starting the year off at R172. What makes that jump even more impressive is the rise has continued despite a rights issue finalised earlier in the year.
The one laggard has been African Bank Investments [JSE:ABL] (Abil), which traded down sharply ahead of the release of the group’s interim results. The share was off almost 4% and trading at around 3440c. The group turned in an interim headline earnings figure of R1bn – reflecting 20% growth – but maintained its dividend level.
The micro-lending sector merits a look from South African investors, as it’s one shielded operationally to some extent from fallout in the European debt markets. While share prices may suffer in line with the broader market over the near term it does present some opportunities for competitive lending for alternative players. With Italy, Spain and Greece again dominating headlines, there’s likely to be continued pressure on the bigger banks, with their international footprint and relationships having to maintain operational performance.
Analysts are somewhat wary to comment on the fortunes of the two smaller players – Blue and AfDawn – after many were suckered into the pre-2010 hype. Both shares were left in a fight for their lives as market conditions turned sour and the high-flyers were turned into penny stocks in less than a year, burning both professional and retail investors. With their diminished market capitalisations, both stocks have also fallen outside the mandates of many institutional investors.
Abil was picked by leading value manager John Biccard, of Investec Asset Management, last year as the primary financial services stock he wanted to hold in his fund; while Capitec continues to prove its detractors – including a sceptical Finweek – wrong that it’s run too far too fast.
As the table shows, the sector remains something of a mixed bag – although it’s hard to ignore the 5% dividend yield on offer by Abil. A one-year forward earnings multiple of 11 would suggest the stock isn’t as expensive as Capitec, which looks to be trading on a demanding 19 times forward multiple.
AfDawn is open to much speculation, having been under cautionary since September 2010. Former banking regulator Christo Wiese has recently changed from a non-executive to a lead executive, which would indicate some kind of moves are afoot. The best guess here is there will be some kind of assets injected into the business to bulk it up again. The real kicker is that AfDawn will need capital to rebuild its lending book; will there be the appetite from private shareholders to back any kind of recapitalisation plan?
Blue has already warned the market it’s still in a loss-making position. The group has told investors to expect a basic loss of between 8,9c and 42,9c/share and a headline loss of between 10,4c and 37,4c/share against the loss of 170,3c and headline loss 135c/share for the previous year.
There are signs private equity group Mayibuye has enacted some form of turnaround, but Finweek contends the group will be on the lookout for fresh capital to secure its growth. With credit markets tight it would be unfortunate if the group had to dilute the share price by going the equity route.
As the saying goes: the proof of the pudding is in the eating. And it would appear Mayibuye’s management have taken some corrective action to push the company back on to a stable footing. For that reason we pick Blue as our third choice stock in the sector.
To the credit of AfDawn’s management, it’s indicated it expects to deliver an earnings per share number of between 1,45c and 1,70c, which translates into headline earnings per share of between 0,95c and 1,10c. That’s a significant turnaround from its loss-making position over its previous year. Investors should remember much of that is due to the sales of property assets in its financial year and not because of strength in its underlying operations.
Therein lies the rub for punters contemplating an investment here. While Abil and Capitec have balance sheets from which to grow their lending activities, the same can’t be said of the two small caps. One factor investors should always remember is while both Blue and AfDawn made the headlines for multi-year share price appreciation on the back of triple digit growth, cash was never returned to investors in the form of dividends. The cash-hungry nature of both businesses should never be forgotten.
An early sign investors might want to watch out for is an indication from funders that they’re again prepared to open funding lines here. The International Finance Corporation has over the past few years been an example of an offshore lender prepared to place cash with lenders on the African continent. By keeping a keen eye on the Stock Exchange News Service (Sens) and keeping ears open for announcements about new funding lines, investors may be able to get an idea whether professional investors see those smaller lenders bouncing back.
That leaves the two big players, which are increasingly being regarded as mainstream banking offerings rather than micro-lenders. Abil has used improved investor sentiment to continue its fundraising programme, which has given its balance sheet an almost R7bn boost. However, in an environment where asset managers are urging their investors to prepare for a low return environment, its dividend track record is hard to ignore. “I think when it comes to Abil its dividend yield is more important than its valuation,” says Sasha Naryshkine, an asset manager at Vestact. He says the stock is widely held by investors overseas looking for the consistent distributions.
But not everybody is impressed with Abil’s dividend staying flat. In a note to clients, BoE analyst Shaheeda Davids noted that since 2009 its payout ratio has dropped from 73% to 62%. In its 2010 annual report, Abil has guided a maximum of 67% will be applied over the medium term. However, Davids maintained a “buy” recommendation on the stock.
Naryshkine says he felt the recent share price sell-off was a reflection of investor expectations for the stock from a growth perspective and that some investors felt 20% growth was less than expected.
Abil CEO Leon Kirkinis has indicated further investment is on the cards for its Ellerine business, which is owned by Abil. Kirkinis told investors: “We’ve opened 122 kiosks and 12 carve-out branches to date, which generated R572m of additional non-furniture credit sales. The objective is to substantially increase the number of carve-outs and kiosks over the next two years. Significantly, the incremental costs related to this business are low, given the infrastructure and staff already in place at Ellerines.”
Capitec has surged over the past week, jumping from R175 to R195 in the past 10 days, prompting some speculation there’s corporate action afoot. However, the group isn’t trading under cautionary at the moment. It should also be remembered Capitec’s daily trade only averages around R8m, versus the R90m odd conducted by Abil. So a single sizeable investment from an institutional investor could move the price somewhat.
It should also be remembered that due to its size, Capitec was off the radar of many institutions keen on the growth story, but the rights issue and share price appreciation have changed that to some degree.
For now we’re sticking with Abil as our preferred pick in the sector. The small caps might be tempting for those with a stomach for risk, but while there might be some gnashing of teeth if you miss a run-up over the near term, the real value-add can be considered when those companies begin putting money back into shareholders’ pockets.
Ashton holds shares in Abil and Blue Financial Services.
Blue Financial Services has seen its share price quadruple from 8c to 32c since October 2010, while AfDawn – which has been under a string of cautionary announcements relating to its restructuring – has seen its share price jump from 8c to 15c over the past two weeks.
Market darling Capitec Bank Holdings [JSE:CPI] has also refused to stop its stellar rise as it now eyes a R200 share price after starting the year off at R172. What makes that jump even more impressive is the rise has continued despite a rights issue finalised earlier in the year.
The one laggard has been African Bank Investments [JSE:ABL] (Abil), which traded down sharply ahead of the release of the group’s interim results. The share was off almost 4% and trading at around 3440c. The group turned in an interim headline earnings figure of R1bn – reflecting 20% growth – but maintained its dividend level.
The micro-lending sector merits a look from South African investors, as it’s one shielded operationally to some extent from fallout in the European debt markets. While share prices may suffer in line with the broader market over the near term it does present some opportunities for competitive lending for alternative players. With Italy, Spain and Greece again dominating headlines, there’s likely to be continued pressure on the bigger banks, with their international footprint and relationships having to maintain operational performance.
Analysts are somewhat wary to comment on the fortunes of the two smaller players – Blue and AfDawn – after many were suckered into the pre-2010 hype. Both shares were left in a fight for their lives as market conditions turned sour and the high-flyers were turned into penny stocks in less than a year, burning both professional and retail investors. With their diminished market capitalisations, both stocks have also fallen outside the mandates of many institutional investors.
Abil was picked by leading value manager John Biccard, of Investec Asset Management, last year as the primary financial services stock he wanted to hold in his fund; while Capitec continues to prove its detractors – including a sceptical Finweek – wrong that it’s run too far too fast.
As the table shows, the sector remains something of a mixed bag – although it’s hard to ignore the 5% dividend yield on offer by Abil. A one-year forward earnings multiple of 11 would suggest the stock isn’t as expensive as Capitec, which looks to be trading on a demanding 19 times forward multiple.
AfDawn is open to much speculation, having been under cautionary since September 2010. Former banking regulator Christo Wiese has recently changed from a non-executive to a lead executive, which would indicate some kind of moves are afoot. The best guess here is there will be some kind of assets injected into the business to bulk it up again. The real kicker is that AfDawn will need capital to rebuild its lending book; will there be the appetite from private shareholders to back any kind of recapitalisation plan?
Blue has already warned the market it’s still in a loss-making position. The group has told investors to expect a basic loss of between 8,9c and 42,9c/share and a headline loss of between 10,4c and 37,4c/share against the loss of 170,3c and headline loss 135c/share for the previous year.
There are signs private equity group Mayibuye has enacted some form of turnaround, but Finweek contends the group will be on the lookout for fresh capital to secure its growth. With credit markets tight it would be unfortunate if the group had to dilute the share price by going the equity route.
As the saying goes: the proof of the pudding is in the eating. And it would appear Mayibuye’s management have taken some corrective action to push the company back on to a stable footing. For that reason we pick Blue as our third choice stock in the sector.
To the credit of AfDawn’s management, it’s indicated it expects to deliver an earnings per share number of between 1,45c and 1,70c, which translates into headline earnings per share of between 0,95c and 1,10c. That’s a significant turnaround from its loss-making position over its previous year. Investors should remember much of that is due to the sales of property assets in its financial year and not because of strength in its underlying operations.
Therein lies the rub for punters contemplating an investment here. While Abil and Capitec have balance sheets from which to grow their lending activities, the same can’t be said of the two small caps. One factor investors should always remember is while both Blue and AfDawn made the headlines for multi-year share price appreciation on the back of triple digit growth, cash was never returned to investors in the form of dividends. The cash-hungry nature of both businesses should never be forgotten.
An early sign investors might want to watch out for is an indication from funders that they’re again prepared to open funding lines here. The International Finance Corporation has over the past few years been an example of an offshore lender prepared to place cash with lenders on the African continent. By keeping a keen eye on the Stock Exchange News Service (Sens) and keeping ears open for announcements about new funding lines, investors may be able to get an idea whether professional investors see those smaller lenders bouncing back.
That leaves the two big players, which are increasingly being regarded as mainstream banking offerings rather than micro-lenders. Abil has used improved investor sentiment to continue its fundraising programme, which has given its balance sheet an almost R7bn boost. However, in an environment where asset managers are urging their investors to prepare for a low return environment, its dividend track record is hard to ignore. “I think when it comes to Abil its dividend yield is more important than its valuation,” says Sasha Naryshkine, an asset manager at Vestact. He says the stock is widely held by investors overseas looking for the consistent distributions.
But not everybody is impressed with Abil’s dividend staying flat. In a note to clients, BoE analyst Shaheeda Davids noted that since 2009 its payout ratio has dropped from 73% to 62%. In its 2010 annual report, Abil has guided a maximum of 67% will be applied over the medium term. However, Davids maintained a “buy” recommendation on the stock.
Naryshkine says he felt the recent share price sell-off was a reflection of investor expectations for the stock from a growth perspective and that some investors felt 20% growth was less than expected.
Abil CEO Leon Kirkinis has indicated further investment is on the cards for its Ellerine business, which is owned by Abil. Kirkinis told investors: “We’ve opened 122 kiosks and 12 carve-out branches to date, which generated R572m of additional non-furniture credit sales. The objective is to substantially increase the number of carve-outs and kiosks over the next two years. Significantly, the incremental costs related to this business are low, given the infrastructure and staff already in place at Ellerines.”
Capitec has surged over the past week, jumping from R175 to R195 in the past 10 days, prompting some speculation there’s corporate action afoot. However, the group isn’t trading under cautionary at the moment. It should also be remembered Capitec’s daily trade only averages around R8m, versus the R90m odd conducted by Abil. So a single sizeable investment from an institutional investor could move the price somewhat.
It should also be remembered that due to its size, Capitec was off the radar of many institutions keen on the growth story, but the rights issue and share price appreciation have changed that to some degree.
For now we’re sticking with Abil as our preferred pick in the sector. The small caps might be tempting for those with a stomach for risk, but while there might be some gnashing of teeth if you miss a run-up over the near term, the real value-add can be considered when those companies begin putting money back into shareholders’ pockets.
Ashton holds shares in Abil and Blue Financial Services.
