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To best understand the challenges facing Blue Financial Services, investors need to perhaps remember some of the history of the company prior to its Mayibuye bailout. Investors need to perhaps separate the trading in Blue shares from the operational performance of the group.
If you first look at its share price, it’s obvious there was plenty of interest in the counter. In October 2006 Blue was trading at around R1/share and in the midst of a stock market boom it saw its share price rise to an all-time high of R6,90 on 14 August 2008. The counter was popular in the single stock future market, with a number of derivatives firms writing contracts on the high-flying micro-lender.
However, at year-end 2008 speculating in the share reached a crisis point when derivatives dealer Cortex Securities had a client default on its large open positions in the stock. This default – coupled with positions in IT firm ConvergeNet, Sekunjalo and Pinnacle Point Group – meant that banking group Absa took delivery of a 16% stake in the company. In June 2009 this stake was raised to 21% after Absa injected a loan of R120m into the micro-lender to try and shore up its balance sheet.
By mid-2010 its price had slumped into the early teens and without a “white knight” to bail it out Blue was headed for the door. The importance of that part of Blue’s history was that the exceptional stock performance was in many ways driven by speculators pushing the share price higher through highly geared instruments. Market commentators are loath to say it, but that phenomenal share price appreciation meant it found itself under pressure to roll out high growth numbers each year to justify the leveraged positions.
A fundamental change in the new Blue is that institutional shareholders now make up just less than 90% of its listed share capital, implying there’s likely to be highly geared positions taken on the stock in the market. Mayibuye and its institutional shareholder base are likely to focus on developing long-term sustainable gains to their underlying investment rather than pandering to short-term share price moves.
The second challenge facing Blue was at an operational level. Poor risk management became apparent when it reported interim results to August 2009. At that point the company had generated a net loss of R162,3m and Blue Financial Services SA’s total liabilities exceeded its assets by R121,2m, meaning it was technically bankrupt.
Over the three-year period the group had seen a variety of auditors and financial directors come and go and it was obvious to outsiders it was battling to try and manage its operations in 13 different countries throughout the continent.
“We’re going to make history this year,” jokes Blue CEO Johan Meiring, saying it was for the first time going to report the same set of auditors and financial director for the group, allowing some continuity in reporting.
Meiring is the first to acknowledge that with the restructuring of much of the debt and restated financials it’s hard for an outsider to get a clear picture of what’s happening at Blue. However, he sticks to his guns, saying by the time interim results roll around in this financial year it will already be simpler to understand.
“I see a very strong Blue in five years,” says Meiring, pointing out there were already early signs the turnaround was heading in the right direction. The company recently released a trading update, saying it expected the headline loss from the previous year to be at least 20% better than reported in the previous six-month period.
“The management actions aimed at stabilising the business have led to a decline in new loan advances to customers during the year, which should change with the market repositioning of the business and enhanced credit granting procedures,” the firm advised shareholders.
The obvious question is whether or not Mayibuye is likely to face the same challenges previous Blue management had to contend with from a reporting perspective. More importantly, could it deal with a renewed phase of growth?
Meiring believes so, saying the group has brought in the services of Investec as the group’s authorised dealer with the South African Reserve Bank and worked with tax authorities to make it less vulnerable to major swings in the various currencies in which the group transacts.
Meiring says those new will ultimately reduce some of the volatility in reporting and help the group more effectively manage its credit continent-wide.
Another key issue for Mayibuye is to standardise the corporate governance of the group, in line with the King Codes of reporting. “We’re taking compliance very seriously,” says Meiring, adding the group is rebranding this month and emphasising its credentials as a responsible and affordable micro-lender.
Asked about growth opportunities for Blue going forward, Meiring says its transactional banking and mortgage products were on the horizon, which will be driven in conjunction with the Integer business, which has a relationship with Bidvest Bank, a subsidiary of the JSE-listed Bidvest group.
This growth could be achieved without further investment into the Integer platform. “For us, Integer is a sunk cost and we can load more people on to the platform without increasing our costs,” says Meiring.
Through that integrated and customer centric process lending credit had also been simplified and in many cases clients could secure a loan inside 15 minutes should they meet pre-defined criteria.
Though market commentators say SA’s lending environment had become increasingly competitive they pointed out Blue had some advantage in the rest of Africa, in that it held an existing distribution channel.
The other ace up Meiring’s sleeve is the fact that during Blue’s early growth phase it had secured lucrative licences for salary deductions for its lending products. In other words, deductions can be made directly off a borrower’s salary rather than the company having to chase down individual debts.
Meiring compares those to cellphone licences on the African continent. Governments aren’t issuing those anymore and for this reason he believes Blue is in a fortunate position relative to new entrants into Africa.
“If you think there are a lot of unbanked people in SA then you can imagine the opportunities in the rest of Africa,” says Meiring.
If you first look at its share price, it’s obvious there was plenty of interest in the counter. In October 2006 Blue was trading at around R1/share and in the midst of a stock market boom it saw its share price rise to an all-time high of R6,90 on 14 August 2008. The counter was popular in the single stock future market, with a number of derivatives firms writing contracts on the high-flying micro-lender.
However, at year-end 2008 speculating in the share reached a crisis point when derivatives dealer Cortex Securities had a client default on its large open positions in the stock. This default – coupled with positions in IT firm ConvergeNet, Sekunjalo and Pinnacle Point Group – meant that banking group Absa took delivery of a 16% stake in the company. In June 2009 this stake was raised to 21% after Absa injected a loan of R120m into the micro-lender to try and shore up its balance sheet.
By mid-2010 its price had slumped into the early teens and without a “white knight” to bail it out Blue was headed for the door. The importance of that part of Blue’s history was that the exceptional stock performance was in many ways driven by speculators pushing the share price higher through highly geared instruments. Market commentators are loath to say it, but that phenomenal share price appreciation meant it found itself under pressure to roll out high growth numbers each year to justify the leveraged positions.
A fundamental change in the new Blue is that institutional shareholders now make up just less than 90% of its listed share capital, implying there’s likely to be highly geared positions taken on the stock in the market. Mayibuye and its institutional shareholder base are likely to focus on developing long-term sustainable gains to their underlying investment rather than pandering to short-term share price moves.
The second challenge facing Blue was at an operational level. Poor risk management became apparent when it reported interim results to August 2009. At that point the company had generated a net loss of R162,3m and Blue Financial Services SA’s total liabilities exceeded its assets by R121,2m, meaning it was technically bankrupt.
Over the three-year period the group had seen a variety of auditors and financial directors come and go and it was obvious to outsiders it was battling to try and manage its operations in 13 different countries throughout the continent.
“We’re going to make history this year,” jokes Blue CEO Johan Meiring, saying it was for the first time going to report the same set of auditors and financial director for the group, allowing some continuity in reporting.
Meiring is the first to acknowledge that with the restructuring of much of the debt and restated financials it’s hard for an outsider to get a clear picture of what’s happening at Blue. However, he sticks to his guns, saying by the time interim results roll around in this financial year it will already be simpler to understand.
“I see a very strong Blue in five years,” says Meiring, pointing out there were already early signs the turnaround was heading in the right direction. The company recently released a trading update, saying it expected the headline loss from the previous year to be at least 20% better than reported in the previous six-month period.
“The management actions aimed at stabilising the business have led to a decline in new loan advances to customers during the year, which should change with the market repositioning of the business and enhanced credit granting procedures,” the firm advised shareholders.
The obvious question is whether or not Mayibuye is likely to face the same challenges previous Blue management had to contend with from a reporting perspective. More importantly, could it deal with a renewed phase of growth?
Meiring believes so, saying the group has brought in the services of Investec as the group’s authorised dealer with the South African Reserve Bank and worked with tax authorities to make it less vulnerable to major swings in the various currencies in which the group transacts.
Meiring says those new will ultimately reduce some of the volatility in reporting and help the group more effectively manage its credit continent-wide.
Another key issue for Mayibuye is to standardise the corporate governance of the group, in line with the King Codes of reporting. “We’re taking compliance very seriously,” says Meiring, adding the group is rebranding this month and emphasising its credentials as a responsible and affordable micro-lender.
Asked about growth opportunities for Blue going forward, Meiring says its transactional banking and mortgage products were on the horizon, which will be driven in conjunction with the Integer business, which has a relationship with Bidvest Bank, a subsidiary of the JSE-listed Bidvest group.
This growth could be achieved without further investment into the Integer platform. “For us, Integer is a sunk cost and we can load more people on to the platform without increasing our costs,” says Meiring.
Through that integrated and customer centric process lending credit had also been simplified and in many cases clients could secure a loan inside 15 minutes should they meet pre-defined criteria.
Though market commentators say SA’s lending environment had become increasingly competitive they pointed out Blue had some advantage in the rest of Africa, in that it held an existing distribution channel.
The other ace up Meiring’s sleeve is the fact that during Blue’s early growth phase it had secured lucrative licences for salary deductions for its lending products. In other words, deductions can be made directly off a borrower’s salary rather than the company having to chase down individual debts.
Meiring compares those to cellphone licences on the African continent. Governments aren’t issuing those anymore and for this reason he believes Blue is in a fortunate position relative to new entrants into Africa.
“If you think there are a lot of unbanked people in SA then you can imagine the opportunities in the rest of Africa,” says Meiring.
