Price at 25/10/2013
Imara Holdings take on Abil
…. As Warren Buffett might have said, you could see who was not wearing the kind of protective clothing that Abil’s peer Capitec had when the tide of incoming payments from borrowers receded somewhat. In what has to be the last dose of unpleasant news before results for FY09/13 are finally announced (probably around 1 – 4 November) Abil advised that it was recognising an incremental loan impairment provision of R1.3bn, a decrease of R0.8bn in the value of the written down book and an increase in the incurred but not reported (IBNR) provision for credit risk of R0.3bn.
It was also increasing the rights issue from R4.0bn to R5.5bn underwritten by Goldman Sachs International which would leave Tier 1 and Total Capital ratios at between 25% to 26% and 33% to 34% respectively.
In addition there will be a goodwill impairment of R4.6bn which presumably will pave the way for the disposal of Ellerines the loss on which turned out to be slightly more than was expected on 18th September.
These would be non-cash entries and the core operating business was stable through to the September year end with the risk reduction measures and focus on collections beginning to improve asset quality. In the conference call after the announcement on 25thOctober no questions were taken but management raised the issue of its own credibility from which it appears it retains confidence in its his own ability to resume a growth path from now onwards and that this is shared by the board and Goldman Sachs. It also mentioned that normal profits were down 35% but what exactly this means will only become clear when the results are announced.
We presume this will be accompanied by guidance as to what capital adequacy ratios will have to be maintained, dividend policy (any constraints?) and the earnings outlook. As regards dilution a one for two rights offer at around 1358cps, at a 22% discount to the 1735cps closing price on 25 October, would raise R5.5bn but Goldman Sachs is likely to insist on a bigger discount.
The question is whether these are desperate measures to save a sinking ship or belts-and-braces conservativism to right a sound one. We believe it is the latter. HOLD recommendation maintained.