African Bank has seen significant spikes in its share price based on its announcement to shareholders that it was looking to sell its interest in struggling furniture company, Ellerines. Kokkie Kooyman of Sanlam Investment Management Global has recently made headlines with his statements about the bank, “African Bank has lost control of their own destiny… The market has lost confidence in them with the recent downgrading of their debt to junk status.” In today’s interview, Kokkie gives a thorough analysis of where Abil stands, and what can be expected from the scenario currently being played out. What the future holds for Abil is impossible to predict with certainty, it could hold strong gains or huge losses, if there is anyone well-versed enough to give us their expert opinion, it’s definitely Kokkie. -LF
ALEC HOGG: Joining us now from Oslo in Norway on the line to discuss Abil’s massive increase in share price yesterday (and its decline again today,) – this roller-coaster ride for African Bank – is Kokkie Kooyman from Sanlam Investment Managemrnt Global. Kokkie, there was a really good piece that you spoke to Bloomberg about, saying that Abil’s future is now out of its own hands, that the control of its destiny has now departed, given that it got itself into so much trouble. Before we go into more detail regarding what you meant by that with the share price retracing again today, do you have some buy orders in at maybe R7.50, R7.25, or even lower than that?
KOKKIE KOOYMAN: One is very tempted to start buying African Bank at this level. If you look two or three years out, profitability should be back to where it was in 2012. It’s actually fascinating. In 2012, Abil’s net income was R3bn. This year, it could still be a loss of R4bn, but in 2014 a possible profit of R1bn, and in 2015 a possible profit of R3bn. In 2015, they’ll finally be back to where they were in 2012, but in 2015… At that stage, it would be trading on a PE of four-point-four, so that’s 18 months out and the return on the equity should come back to 25 percent. A lot depends on two things, such as whether they need further provision for bad debt, which is unlikely. I think they should provide it unless the economy really deteriorates with the further strikes that we might be having. In addition, what bondholders do – in terms of whether we’re now at junk status – what international bondholders or anybody who holds the bonds now…whether they will roll over the bonds when they mature?
That’s why I said African Bank has lost control of its destiny. If its bondholders force it or don’t renew then they have to come for a rights issue. It’s not in their hands anymore. That’s why the sale of Ellerines could possibly be a help, because it does take away a big drag on the profit.
ALEC HOGG: What kind of debt is outstanding to bondholders?
KOKKIE KOOYMAN: Alec, the total debt outstanding now… I don’t usually carry that in my head, but the current interest payment is about R4.5bn and your total long-term funding is about R42/R43bn, so you’re talking about quite a large amount that needs to be funded. One of the things Leon Kirkinis said he’s going to try to do with the management is to slow down the loan growth because as they slow down loan growth… Remember, they have a very short book in terms of the maturity of the loans that they write. It’s fairly short dated, so as they collect the old book, they get more cash in than they pay out, so there are a lot of levers that they are trying to pull. Remember, if you decrease your loan book, you’re also decreasing your future profitability so there are a lot of variables at play in terms of trying to reduce the amount of debt they’d need.
ALEC HOGG: Just take us through the whole potential sale of Ellerines. How much might they realise from this and who could the buyer be?
KOKKIE KOOYMAN: Many press commentators have been speculating on a buy-up with a furniture store. JD Group was mentioned quite a while ago. I just can’t see that the Competition Board would easily allow that. There’s also been talk of another retailer, potentially, but furniture has historically been a very volatile business or very cyclical. In other words, it does well when the economy does well, but it does very poorly when the economy deteriorates. I don’t think a normal retailer will try to complicate its business further. I see a recent rumour has linked it now to Old Mutual. Old Mutual has managed – in its life over the last 20 years – to do amazing, stupid acquisitions, so this might be another one. The previous management of Old Mutual might look at this. I think and hope the current management of Old Mutual will think twice about it. However, it is appealing because it is the mass market. They are big in the mass markets.
They do have a lot of outlets, so there are a lot of synergies. Whether Old Mutual would do it as a standalone from Nedbank, or whether they would buy it within Nedbank, I don’t know and I also don’t know what the Bank Regulator would say, because I don’t think it would want one insurer holding two banks. I think a lot of it is still speculation. If it were to sell Ellerines, it’s unlikely to have much of an effect on the balance sheet because it’s not likely to be able to sell it at a profit. However, where it does help… The Ellerines operating loss is about R400m per year, so that at least means that African Bank’s income statement starts improving from here on – that drag on the earnings just falls away.
ALEC HOGG: So it could be one of those ‘Whitey Basson – R1.00 for O.K. Bazaars’ deals potentially, Kokkie.
KOKKIE KOOYMAN: If it goes, it will go fairly cheaply but I think you need a Whitey Basson with strong management skills who can get in there. Remember, it’s not that Leon Kirkinis and his team haven’t tried to turn this around from when they bought it from Eric and Larine, so you had a lot of brands running. Admittedly, when African Bank bought Ellerines it was almost at the end of the last economic cycle. Since then, the economy has deteriorate. Let’s bear in mind that it’s not as though they haven’t tried to turn this business around to bring costs down. It’s not an easy business.
ALEC HOGG: I’d fancy the chances of Marcus Jooste, Klaus Down and the undertakers. They’ve done a good job of getting bombed out business. Kokkie, before we let you go, give us your insights into Alexander Forbes – a listing that’s coming back to the market. It is strange that they’ve gone off and then come back again. Is it one that you’ll be looking at closely?
KOKKIE KOOYMAN: Charlie Munger or Warren Buffet always says ‘be careful of IPO’s when management come to the market, because it means management think they can get a good price for their business’. They’ve been delisted for so long. It’s not a business that really needs capital so the only reason I can see for them coming to the market now, is that they think they can get a good price, which means that the buyers should beware. It’s not one that we’ll be jumping up and down about, but conceptually, it’s a very good business because it’s advisory. It doesn’t need a lot of capital. It grows with the market. The South African market though, where the JSE is very expensive and there’s not a lot of growth going forward – it’s not as exciting as it would have been 10/15 years ago, when they had a relatively small market share. You’re therefore buying it at a fairly mature and most probably, at a fairly good price.
ALEC HOGG: Not jumping out at Kokkie Kooyman, that Alexander Forbes. That’s the second time we’ve heard Charlie Munger’s name being mentioned here. If you’ve never heard of him before, he is the Vice-Chairman of Berkshire Hathaway. Warren Buffett is very well known, as the Chairman and they’ve been business partners for the last 54 years, so if you have a partner maybe there’s lesson in that for you as well. Kokkie Kooyman is with SIM Global.
