So, recently, I wrote about Cambist and the good times that it’s having with garnishee orders on microcredit. On the topic of business in the micro-lending industry, here’s another…

African Bank Investments (which also goes by the name “ABIL” and “ABL:SJ”, depending on who you’re quoting), issued a rather awkward SENS announcement yesterday. The main (and somewhat euphemistic*) summary:
*but seriously

The Group continues to face tough trading conditions, against a deteriorating economic environment negatively impacted by lowered GDP growth expectations, increasing inflation, and loss of customer income through strike action and increased unemployment at 25.5% for the quarter ended June 2014, as reported by Stats SA. ABIL customers‘ disposable income and their ability to service debt continues to be under pressure, driven by a combination of above inflationary cost of living increases, higher relative debt servicing costs and lower growth in their gross income.

So, basically:

• Our main revenue-generating source is South Africa’s lower income groups.
• They’re not doing well.
• So we’re not doing well.
• Call us a proxy for all that is wrong in South Africa.

The highlights (lowlights?):

• ABIL is now more risk averse so it’s doing less lending. But also, its customers want less credit, so that too.
• Also the loans that they are making are both smaller and for shorter durations.
• And those loans are now being repaid less (collection rates are down from 69% to 65%).
• Credit sales through Ellerines, their retail arm, are bad. Down by 25% from last year (and last year wasn’t exactly rosy). So Ellerines: still loss-making.
• Group CEO Leon Kirkinis, one of the ABIL founders, has resigned (after declaring just months ago that he would, like, never).
• ABIL will now attempt to do more restructuring.
• It has appointed PwC to help with that.
• A quote: “Shareholders are advised to continue to exercise caution when dealing in the Company’s securities.”
• Expect a new rights offer – because ABIL needs to raise a minimum of R8.5 billion from shareholders in the coming weeks.
• They’re expecting to make a R7.6 billion loss for the 2014 financial year.
• So, shareholders must pay them for the loss and then some?

Unsurprisingly, the JSE responded with this:

Which followed the last six months of this:

And to put that into historic perspective:

Fail fail fail.

So I went to go have a look at some ratios:

And it’s all horribly bad – until you reach the price-to-book ratio.

What is the price-to-book ratio?

A company is made up of assets (being the things it owns – like cash in the bank, or the right to receive money back from people to whom it has lent cash). How did it get those assets? Two places:

1. From its shareholders (“equity”); and
2. By borrowing money from people (“liabilities).

And if you look at the assets, and you take away the borrowings/liabilities, you’re left with what the shareholders are due right now, at this moment. So if the company was going to close itself today, every shareholder would take their share of the equity, and you’d expect the share price to match the value of their share of the equity (ie. a price-to-book ratio of 1).

When a company is doing well, you get much bigger Price-to-Book ratios because the company’s value is not found in the accounting records – it’s found in what those accounting records are expected to look like in the coming years.

But ratios of less than one tell you that you are buying your share of the equity at a discount to what it is worth right now. There are only two ways that happens:

1. People think that the ratio is wrong; or
2. People think that it will take a really long time to get that money, so they price in a discount to get the cash sooner.

There is a third alternative (that people can be crazy), but let’s not work with that just yet.

In ABIL’s case…

The price-to-book ratio is clearly wrong. And here is why: the “book” value in the ratio is referencing the last published set of financials. Going forward, ABIL expects to make a $7.6 billion loss. That’s going to change the book value.

So allow me to price in some adjustments:

1. Market Cap: R4 billion.
2. Price to Book Ratio: 0.36.
3. Implied Book Value: R11 billion.
4. Implied Book Value less Expected Loss: R3.5 billion.
5. Price to Book Ratio (recalculated):0.87

What that means: the market is willing to pay 87 cents for every R1 of ABIL’s expected book value.

That’s kind of a “We expect this to liquidate” scenario.

My Own Thoughts

Some factors in ABIL’s favour:

1. Of course it would be doing badly. There have been strikes. A large segment of their target market have not been earning money. That is not good for business.
2. However, the strike season is reaching its conclusion. Most of the big-ticket negotiations are now concluded.
3. I think there is a timing issue at play – and ABIL just needs to be tided over.
4. The SARB and the government are hardly about to allow a bank to keel over and liquidate. There’s just too much systemic risk at play: that would be madness.
5. I suspect that the SARB will step in with some emergency funding, there might be some punitive measures initially for shareholders, but then it will start to ease up.
6. And I reckon that Ellerines will be sold pretty quickly at this point – so the bank will go back to its primary business of being a bank.
7. Also, you never know – maybe they’ll securitise some of their garnishee orders with Cambist!

I reckon that, if you’re up to it, ABIL might just be worth a little risky investment. I expect that the bad news isn’t over – so we’ll get more devastation to the stock price over the next couple of days. But after that, things will go quiet, and then suddenly, it’ll be like Naspers all over again: back to all-time highs.

But I’m contrarian by nature. And I quite like risk. So take that opinion with a great many pinches of salt.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.