abil_reiterate our sell_improving but lags our expectations
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8/8/2019 ABIL_Reiterate Our SELL_Improving but Lags Our Expectations
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ABIL
Earnings miss our forecast, FY11 PT
shows no upside; reiterate our SELL
Background: ABIL released its reviewed financial resultsfor the 12-month up to September 2010. While there are
improvements, we are disappointed overall and we reduce
our forecasts for FY11 and FY12. It looks (to us) as if
opportunities for ABIL are increasingly becoming difficult to
exploit and maybe dwindling. But again, management gives
a clear strategy as to what they will implement next year,
and we become, to an extent, caught in between the reality
as represented by the numbers and managements positive
outlook. What we missed and what was in line: Gross margin on
retail came out at R1.974bn (estimate: R2.2bn), a growth
of 10%. Net assurance income of R1.6bn underperformed
our forecast of R1.7bn. Interest income from advances was
in line with our forecasts at R5.950bn (estimate 5.949bn),
despite our lower estimate of the advances (R22.6bn vs.
actual of R25.4bn). Non-interest income also came in line at
R2.491bn versus our R2.501bn forecast. Interest expense
was slightly higher at R2.383bn against our forecast of
R2.149bn due to higher funding. Operating costs of
R4.481bn lagged our forecast of R4.878bn, thanks to
efficiency benefits and cost cutting. Profit from operationswas slightly lower at R2.828bn versus our expectations of
R2.880bn and the profit before tax compares favourably at
R2.862bn against our estimate of R2.880bn. Profit after tax
underperformed our projections by 3.8% at R1.942bn
versus R2.016bn.
African banks ROA decline but we are not surprised:Managements ROA target of 8% which we have highlighted
as an aggressive assumption, seems to move further out as
the ROA declined to 5.7% from 7.7% for FY09. In our view,
an ROA range between 4% and 6% would be more
achievable given 1) competition development in the sector
2) ABILs non-deposit taking strategy that reduces
opportunities of augmenting fee income from the liability
side of its balance sheet. As we had anticipated, leverage
increased to 7.8X to support ROE at >40%.
We maintain our SELL: There are immaterial changes toour price target, and at the current price, the risk return
profile is not attractive. SELL.
Peter MushangweLawrence Madzwara+27 11 551 3675
peterm@legae.co.za
November 22, 2010 Equity Report
FY11 PT R32.7
SELL
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We shall issue a more detailed report post discussions with ABILs
management. In this report we highlight salient features of the results
and reiterate our SELL recommendation.
African bank; yields falling faster: The flagship of the Groupwitnessed a more positive 2H10, but headline earnings were lower
by 1% to R1.541bn. Net assurance income declined by 20% to
R998mn while bad debts went up to R2.2bn from R1.93bn despite
a moderation in the bad debts/advances ratio. The banks ROE
declined to 5.7% against a management target of 8% (which we
believe is aggressive) while leverage increased to 7.8X to support
ROE at >40%. African banks yield continues to decline, losing a
further 3 percentage points to 35% (see Fig 1).
Ellerines; recovering but some way to go: The EllerinesHolding Limited business unit continue to show recovery as
earnings bounced by 35%. This is obviously a positive
performance, but in our view, the top line growth of 10% shows a
slower than anticipated recovery, especially provided the possible
once-off effect of the WC2010. This is not to downplay a 10%
revenue growth, but in light of the share price, it looks to us as if
the market expected more. (see valuation section for a discussion
on valuation).
The CAMEL analysis shows a mixed picture. Key issues are:
Capital: The Groups internal capital management model indicatesan optimal capital/Risk Weighted Assets (RWA) of 26.3% i.e.
R7.1bn in capital. The Group has a capital base of R8.7bn (32.2%
of RWA), thus providing it with room to further expand its loan
book without capital constraints at Group level. However, African
banks CAR is 28.9%, which provides a buffer of 4.4pp to the
SARBs minimum requirement of 24.5% for ABIL and African bank.
Management highlighted a transaction that would result in capital
of R300mn moving to African bank. Given the strategy to take
more risks, we believe it is necessary to increase the buffer
against the minimum required.
Asset growth and quality: The loan book expanded by 24% toR25.360bn, with number of loans written increasing by 3%. Thecredit card portfolio continues to show a pleasing growth rate of
49%, increasing to R1.467bn. The average loan size increases to
R8,224 from R6,719 while the average tenor lengthened to 42
months from 33 month last year. Short-term deposits and cash
declined slightly to R3.4bn. The cash raised is yet to be utilised.
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Asset quality improved on 1) the migration to lower risk client base
2) improved customer management and credit granting system
and 3) improving economic conditions and outlook. Baddebts/Advances ratio seems to be moderating, reducing to 9.4%
from 10.4% in FY09. Having said that, the ratio is still higher than
the pre-2007 level. NPL coverage ratio at 63% is reasonable in our
view, notwithstanding the deterioration. (see Fig 2).
Management/ Efficiency: Management has done well with costmanagement. Operating costs declined from R4.576bn to
R4.481bn. Ellerines registered a 5% reduction in operating costs
while African bank saw an increase in cost by 6%. The migration of
Ellerines Financial Services to African bank is improving asset
quality and offer rate which resulted in the approval rate
increasing to 72% from 66%. Sales for Ellerines are also improving
along with the gross profit which improved to 44.9% (vs. our
estimate of 43.5%). Productivity indicators, mainly sales per
employee show improvements as the 12month rolling
sales/employee ratio increased by 26.1% when compared to
August 2009 level. Managements FY11 targets are to 1) grow
merchandise sales by >8.5% 2) grow advances by >25% and 3)
record an ROE of >18.5%.
Earnings: The Group ROE improved slightly to 15.6% from 15.2%for FY09. The economic profit calculated by management using a
CoE of 15% recovered to R78mn from a negative R95mn last year.
The key issue is that the yield for African Bank is falling, having
declined from 54.6% in FY05 to 34.5% in FY10. This is notsurprising given 1) the migration to lower risk segment (higher
loan value, longer tenors at lower yields); 2) the higher insurance
claims as the economy is yet to gain traction on employment; and
3) the NPLs that remain elevated as unemployment remain
stubborn. For us the key question is whether African bank, which
has been supportive of the Groups ROE can continue to lever its
balance sheet given the non-deposit taking strategy. We do not
see the banks ROA reaching the 8% target in the short term
despite managements ability to manage costs. Asset yield
contraction is going to continue to put pressure on ROA, and
opportunities to lever the balance sheet further look diminished.
Remember managements target leverage ratio was 5X!
Liquidity/ Funding: We had raised our concerns with the non-deposit taking strategy, but the Group is at no risk at this point as
the balance sheet is fairly liquid and funding has been raised
generally on a longer-term basis. Funding liabilities increased to
R23.9bn, mainly sourced from local asset managers and life
companies. According to management, 93% of the new funding
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Fig 2: Bad debts/ Advances ratio moderated; NPL coverage w orsened but still acceptable
7.9%
8.5%
8.9%
10.1%
10.4%
9.9%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
2005 2006 2007 2008 2009 2010
Baddebt/Advances
65%
63%
69%
66%
63%
55%
57%
59%
61%
63%
65%
67%
69%
71%
2006 2007 2008 2009 2010
NPLcoverage
Source: Company reports, Legae Calculations
Fig 3: ROE has been supported by rising leverage. How much leverage ABI L can sustain is themillion dollar question in our view
0%
2%
4%
6%
8%
10%
12%
14%
16%
0%
10%
20%
30%
40%
50%
60%
2005 2006 2007 2008 2009 2010
ROE
ROA,RHS3.4
3.7
4.7
6.7 6.8
7.8
0
1
2
3
4
5
6
7
8
9
2005 2006 2007 2008 2009 2010
Leverage
Source: Company reports, Legae Calculations
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Fig 4: Ellerines rising from the ashes, but we think it is priced in already
59.50%
40.50%
Creditsales
Other
25%
20%
15%
10%
5%
0%
5%
42%
42%
43%
43%
44%
44%
45%
2008 2009 2010
Grossprofit,
LHS
Operatingprofitmargin
Source: Company reports, Legae Calculations
Valuation and conclusion: We maintain our sustainable ROE at27.5% for African bank. The CoE reduces to 15.7% on account of
the reduced risk free rate (10-year bond yield declined to 7.8%
from 8.7% on initiation). We obtain a fair/justified PBVR of 4X,
which provides a FY11 value of R20.1bn for African bank.
For Ellerines, the justified PER increases to 10X, on account ofreduced CoE. We value Ellerines for FY11 at R6.12bn, being aproduct of our justified PER and our FY11 earnings estimates of
R615mn (+42%).
FY11 PT shows no upside: We highlight that our PT is now basedon our FY11 estimates. The Group value adds up to R26.3bn,
giving a per share value of R32.7. This is not withstanding our
optimistic view on Ellerines (earnings +42%), as well as African
bank (earnings +29%). The potential total return is -5.2%.
Remember the CoE is compressed by the lower 10-year
Government bond yield. In our view, the upside potential is
difficult to identify and we reiterate our SELL recommendation.
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Legae Securities (P ty) Ltd
Member of the JSE Securities Exchange
1st Floor, Building B, Riviera Road Office Park, 6-10 Riviera
Road, Houghton, Johannesburg, South Africa
P.O Box 10564, Johannesburg, 2000, South Africa
Tel +27 11 551 3601, Fax +27 11 551 3635
Web: www.legae.co.za, email: research@legae.co.za
Analyst Certification and Disclaimer
I/we the author (s) hereby certify that the views as expressed in this
document are an accurate of my/our personal views on the stock or sector
as covered and reported on by myself/each of us herein. I/we furthermore
certify that no part of my/our compensation was, is or will be related,
directly or indirectly, to the specific recommendations or views as expressed
in this document
This report has been issued by Legae Securities (Pty) Limited. It may not bereproduced or further distributed or published, in whole or in part, for any
purposes. Legae Securities (Pty) Ltd has based this document on information
obtained from sources it believes to be reliable but which it has not
independently verified; Legae Securities (Pty) Limited makes no guarantee,
representation or warranty and accepts no responsibility or liability as to its
accuracy or completeness. Expressions of opinion herein are those of the
author only and are subject to change without notice. This document is not
and should not be construed as an offer or the solicitation of an offer to
purchase or subscribe or sell any investment.
Important Disclosure
This disclosure outlines current conflicts that may unknowingly affect the
objectivity of the analyst(s) with respect to the stock under analysis in thisreport. The analyst(s) do not own any shares in the company under analysis.
Disclosure & Disclaimer
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