Hunting for BBBEE value in troubled African Bank

Some investors in the BBBEE space are looking past the storm that has engulfed African Bank Investments Limited (Abil) over the past year or so and are piling up Abil’s BBBEE shares, Eyomhlaba and Hlumisa.

Do you want to follow them? Here are some thoughts of why they are doing it.

The history of the investment game is littered with episodes of how certain people have made a killing when everybody else goes into panic selling.

Abil has gone through serious turbulence over the past few months which put its share price under severe pressure. A fall from grace, in the Abil share price began in 2012 when the share was flirting with R40 per share level.

In 2012 it was becoming apparent that the unsecured credit exuberance of the past few years would cause pain. Being at the forefront of South Africa’s micro lending market, Abil was going to be hurt. Consumers were borrowing from Peter to Pay Paul. Soon holes will emerge in lender’s books. And they did. Abil’s operating businesses African Bank and furniture retailer Ellerine Holdings were hit.

Thus Abil’s share price skidded from around R40 per share in 2012 to below R15 in 2014. Most of the slide took place in 2014 when major holes were emerging in Abil’s books. Multitudes of customers were now struggling to make repayment. New business dwindled.

Then came the massive write offs. There was a R4.6 billion write off in Ellerine. Abil had purchased Ellerine for R9.2 billion in 2007. Half the purchase value is gone. There were also heavy impairments (about R400 million in May last year) of African Bank non-performing loans.

Leon Kirkinis, Abil CEO, and his team had their backs against the wall. Financial history has lots of examples of how companies who found themselves in Abil’s situation, half way on the way down, try uncanny tricks to save the situation. One such trick is to tell half-truths, project unreasonable optimism, about the state of the loan book. They do this with a hope that the storm will pass and in time the leaks will mend. If the situation does not improve, that strategy backfires. As the situation worsens, panic moves in and people talk as the blame game kicks in. They crash!

Kirkinis and his team at Abil chose another path. It’s called: Bite the Bullet. As signs of stress in loan book gathered, Abil came forth with bundles of bad news, those heavy impairments of 2013. This did spook the market, hence the slide in the share price. Arguably this also earned them trust on the market, albeit after heavy punishment.

And so when they came begging for R5.5bn cash injection in December 2013, they received support. This came via a rights issue where shareholders were sold a right to buy more shares at a heavy discount. The offer was priced at R8 per share when Abil was trading around R15.  Investors, except for the BBBEE shares, followed their rights producing 64% over subscription. This then brings us to the core of the matter, the Eyomhlaba and Hlumisa BBBEE shares.

These shares have a more direct relationship with the share price movement of Abil on the JSE. This relationship is stronger than in other BBBEE shares, like Vodacom’s Yebo Yethu and Naspers’ Welkom Yizani and Phuthuma Nathi.

Eyomhlaba shares have a one is to one relationship with Abil shares while one Hlumisa share equals about 0.6 Abil share, using indicative intrinsic net asset value. However these shares do trade at a discount on their over-the-counter (OTC) trading platform.

A regular visit on the OTC platform will tell you that there is steady trade happening. Some investors are seeing value in the discount between Eyomhlaba and Hlumisa share prices and their net asset values.

On Friday, 28th of February 2014, Eyomhlaba shares were trading at R6.50 per share against NAV of R10.50. Hlumisa was trading at R4.00 per share against NAV of R7.10. The people who are buying these shares now must be watching redemption day, December 2015, for the eight years old (Eyomhlaba) and five years old (Hlumisa) BBBEE schemes. The key thing in this investment is the rate at which it pays down the remaining debt. This is the reason why the schemes did not follow their rights in the December 2013 Abil rights offer. They needed to raise debt to follow these rights which could have disturbed pay day. As things stand, the debt in the scheme is quoted around R177 million down from R510m at inception.

Obviously certain investors are convinced that Abil will bounce back and allow for a great pay day come December 2015.

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