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MICROFINANCE

AFRICAN BANK INVESTMENTS LIMITED AN OVERVIEW OF THE BUSINESS UNITS

ABIL: Return Measures (%) 70 60 50 40 30 20 10 0 2002

2003

2004

2005

2006

2007

ROE

2008

2009

2010

ROA

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Gross Advances & NPLs 35,000

45 40

30,000

35 25,000 30 20,000

25

15,000

20 15

10,000 10 5,000

5

-

0 2002

2003

2004

Gross advances (ZARm)-LHS

2005

2006

2007

NPLs (ZARm)-LHS

2008

2009

2010

NPLs to gross advances (%)-RHS

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Retail Unit: Number of Stores Geen & Richards 75 7%

Wetherlys 30 3%

Dial-a-Bed 67 7%

Furniture City 35 3%

Ellerines 640

Beares 61%

202 19%

AFRICAN BANK LIMITED A dominant player in its market. African Bank is without doubt the “first mover” in offering finance products to the lower end of the South African market on a national scale. It has a fairly entrenched position in this sector. Until recently, African Bank had no peers in offering unsecured lending to the mass market in South Africa. New players are beginning to enter the market and competition is increasing from the likes of Capitec Bank. In addition, market players such as ABSA are making moves to attract lower income clients. FirstRand has made a major push with FNB's EasyPlan branches, and Postbank hopes to acquire a banking license next year. High return measures to remain a key characteristic. It is worth noting that African Bank’s business model is founded on the principle of taking credit risk, thereby generating an acceptable ROA (c10%), with moderate gearing of the balance sheet (6.0x). The ROE has also remained firmly in the double digits. While, the acquisition of the Ellerines Group, funded by a fresh issue of ABIL shares, has largely diluted the overall group’s ROE, we expect ROEs to recover as the re-invigoration of Ellerines business begins to take effect. Loan book growth coupled with improved quality. It is worth noting that African Bank’s loan book has been growing both in size and duration over the years. For example, in FY 2010, the average size of the loans was extended by 22% and the term of the loans by 27%. African Bank has taken a deliberate reduction in short term funding in favor of longer term funding as this ensures the Bank can achieve a lower average cost of funding. In addition, NPLs were flat as a percentage of gross advances at 31.8%. ELLERINES HOLDINGS LIMITED (EHL) Strategic fit. EHL is a furniture and appliances retailer which provides affordable products and offers credit facilities through African Bank, for the purchase of its goods. It began operating in 1950a and the business has also spread in Botswana, Lesotho, Namibia, Swaziland and Zambia. When ABIL took over the Ellerines operations, c50% of customers were using their own credit. Already, this has decreased to below 40% as African Bank has pushed its own credit facilities. We note that most furniture retailers do not make a lot of money by just selling furniture but profits accrue from the interest they are able to charge on credit provided to their customers. We believe the Ellerines acquisition; will in the long term assist ABIL in growing its customer base. We think that the two businesses are highly complementary yet sufficiently diverse to provide maximum benefit to shareholders.

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Retail Unit: Trading Area (m²) Wetherlys 52,786 7%

Dial-a-Bed 19,240 3%

Geen & Richards 58,092

8%

Furniture City 62,886

9%

Ellerines

360,513 52%

Beares 144,501 21%

Restructuring exercise to create value in the long term. ABIL continues to engage in restructuring activities aimed at re-invigorating the Ellerines business, through cost-cutting and better product selection. The aim is for the retail operation to also become profitable as a standalone business, rather than relying on profits from its credit offerings. In FY 2010, Ellerines increased headline earnings per share by 35.0%. Sales of merchandise increased by 7.0% to ZAR 4.48bn and the gross margin increased to 44.0% from 42.7% (FY 2009). Credit sales increased to 59.5% on the back of more favourable pricing and company initiated advertising campaigns. Furthermore, Ellerines was able to reduce their operating costs by 5.0%. We expect Ellerines to continue growing and we forecast revenue from the retail business in FY 2011 of 11%.

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

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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