Warning of profit cut knocks Abil shares

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Independent Newspapers

Jacob Mantsiu walks out of an African Bank branch in Midrand, Johannesburg. Photo: Leon Nicholas

Johannesburg - Shares in African Bank Investments Limited (Abil) recovered from the worst of losses suffered in early trade yesterday but still closed 4.77 percent weaker on the day after management’s warning of a “significant reduction in profitability” for the six months to March.

Management did hold out some hope for long-suffering Abil shareholders, saying it expected that the “overall credit quality of the book will improve into the second half”.

During the three months to December, Abil’s banking unit and its furniture retail unit, under the Ellerine brand name, continued to suffer from the lax credit granting systems in force at Abil in the period to June last year.

In that month, the group implemented what it said yesterday were “drastic new, tighter credit-granting measures”.

With regard to the banking unit, Abil said the effect of the business written before June “continues to negatively impact non-performing loan formation”.

Non-performing loans typically peak about eight to nine months after the granting of the loan, which means that the growth in non-performing loans should begin to taper off in the period after March.

The need to increase the bad debt charge on the large volumes of business written before June last year outweighed the benefits of the better-quality, lower-volume business written since then.

“The overall impact is likely to be a significant reduction in profitability for the first half compared to the restated first-half earnings of R604 million in the 2013 financial year, albeit a material improvement from the restated earnings for the second half of 2013.”

At Ellerines there was a 21 percent decline in merchandise sales to R1.18 billion in the quarter to December from R1.5bn in the December 2012 quarter. Management attributed this to the generally weaker trading conditions, exacerbated by the group’s stringent pullback in credit for retail customers.

“The pullback was implemented in order to stem credit losses, and has resulted in credit sales as a percentage of total sales decreasing to 57 percent from 67 percent on a year-on-year basis, while cash sales are marginally up at 2 percent.”

Management said the retail unit’s profitability was also expected to be considerably lower for the first half of 2014.

Abil said it would announce the appointment of a new chief executive at Ellerine within a few weeks. During the week Abil told Bloomberg news service that it was involved in “partnership” talks with regard to Ellerine’s future.

Last year Abil announced that it was reviewing Ellerine’s involvement in the group. Original plans involved selling the furniture retailer to another retail operator.

Abil took a R4.5 billion write-down on Ellerine last year and could be facing another R800m write-down this year. But Abil chief executive Leon Kirkinis told Bloomberg: “Access to Ellerines gives us one of the biggest distribution footprints in the country. We want to hang onto that.”

Analysts said the challenge for Abil was finding a buyer that was prepared to pay and that would be acceptable to the competition authorities.

On the JSE, Abil shares closed 53c weaker at R10.59 but off a low for the day of R10.38. - Business Report


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