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MICROFINANCE

AFRICAN BANK INVESTMENTS LIMITED

If the consumer lending market in South Africa can be compared to a game of soccer then the last five to eight years consisted of a session of frenzied kicking in the sixyard box …

INVESTMENT HIGHLIGHTS A new level of consumer lending in the South African market. As opposed to other developing nations in SSA, South Africa has experienced a rapid growth in consumer lending. Consumer debt more than tripled between 2003 and 2008, lifting household debt to income from 55% at the start of 2003 to a record 82% at the end of 2008. The aggressive expansion in credit was also been marked by an explosion in mortgage lending. For Africa’s youthful aspirants, the ability to access finance for vehicle and home loans, to start or expand entrepreneurial ventures, or to fund further tertiary education has become immensely supportive in driving the next phase of the continent’s growth. Although there is risk in micro lending, it appears that account holders have immense pride in their new found status and regard default as being dishonourable. One of the key players in this space has been African Bank Investments Limited (ABIL). We believe the company provides investors an opportunity to gain direct exposure in SSA’s micro finance industry.

Given the potential upside from turnaround situations which are executed well, we think investors should hold …

TN Holdings is Zimbabwe has replicated a similar business model. In January 2008, ABIL acquired Ellerines Holdings Limited (EHL), an established credit and cash retail furniture and appliance business. ABIL therefore consists of two underlying operations; the African Bank business unit, and the Ellerines Holdings Limited business unit. While the group has in recent years been working towards re-aligning the operations, we are confident in the business model. TN Holdings, a Zimbabwe Stock Exchange (ZSE) listed company has used a similar model in Zimbabwe by merging its banking unit (TN Bank) with its newly acquired furniture business (TedCo). Just like ABIL, TN Holdings has registered impressive growth in advances and customer numbers. Moreover, its share price on the ZSE has gained some 312% y-t-d.

The issue at hand is not the CV of the current management but rather what they can do for the company going forward…

Restructuring to yield positive results. Management expects the Ellerines acquisition to pay off as the restructuring is completed. ABIL has been striving for a low-cost model so as to stay “ahead of the pack”. Processes are constantly being reviewed to remove complexity, offer appropriately priced products and fend off competition. While we are far from regarding new management at Ellerines as proven, there are enough green shoots in recent data to show that the group has turned around. We think that a refocused management team coupled with an improving external environment will be the major reason for the strong growth, going forward.

Now heading into positive territory…

We like the adaptive business model. Management continues to actively engage with its staff and customers through workshops and information exchange events. This initiative appears to have been a success as both an illustration of management caring about the needs of staff and customers, but also in allowing management to gather information and ideas for where the business needs improvement and for new products and opportunities for growth. Furthermore, on 06 May 2011, ABIL announced that Moody’s had updated its credit opinion on African Bank and maintained its national scale ratings of A1.za (long-term) and P1.za (short-term), and its foreign currency deposit ratings of Baa2 (long-term) and P-2 (short-term). The rating reflects African Bank's niche franchise as South Africa's largest specialized unsecured credit provider as well as its historically good profitability, efficiency and capitalisation metrics.

Joab’s Technologies and Research.

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Equity Research in Africa, Like an Electric Train Africa is picking up, a True Emerging Market  

Economic analysis of Africa as a whole, as well as of particular countries and sectors, with special regard to their potential as investment...

Equity Research in Africa, Like an Electric Train Africa is picking up, a True Emerging Market  

Economic analysis of Africa as a whole, as well as of particular countries and sectors, with special regard to their potential as investment...

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