Underlying performance stronger than headline results suggest. Despite 19% yoy pre-tax profit growth, Letshego Holdings reported H1 18 net profit to shareholders of BWP331mn, up just 3% yoy, reflecting higher deductions for tax and non-controlling interests. We think this is a respectable result and see the strong growth in access points and active clients as underpinning future franchise growth. The shares are trading at 6.0x 2017 PE, 1.0x PB and 9.5% DY.
Operating income advanced 15% yoy. Margins were broadly stable. Although small, fee income showed good (28% yoy) growth, while insurance income also rose by a healthy 28% yoy.
Cost/ income ratio broadly stable, at 39.6% (versus 38.8% in H1 17). Although salaries rose 21%, flat incentive payments limited overall employee cost growth to 8%, Other expenses rose more sharply; however, stripping out a BWP10mn writedown of redundant IT equipment resulted in an underlying growth rate of 22% yoy (versus 26% as reported), leading to an adjusted cost/ income ratio in line with H1 17.
Credit risk costs and provisions coverage both improved. The credit impairment charge fell 8% yoy, with the cost of risk declining by 57bps to 2.5% of gross loans. Provisions coverage rose to 95% from 70% at end-17, largely due to a BWP150mn day-one provision (taken straight to equity) upon implementation of IFRS9 at the beginning of the year.
Balance sheet trends should support higher margins. Customer lending grew 10% in net terms (+12% gross, +14% in local currency). Letshego is shifting its focus from government employees to the informal sector (BWP350mn such loans were written in Ghana alone, with good growth also in Tanzania), which should support margins (but also requires tighter vigilance). Loans to micro and small businesses have also grown.
Underlying business drivers showing strong momentum. Over the past year, the number of access points has increased from 307 to 858, largely driven by expansion in Mozambique. The number of borrowers increased from 345k to 546k during H1, and the number of savers from 120k to 167k. In addition, the product suite has been increased and deployed more widely across the network. All these factors embed the franchise with strong growth potential, in our view.
Conference call later today: 08.30 NYC, 13.30 London, 14.30 JHB, 16.30 UAE. We are hosting Letshego’s H1 18 results call, click here to register your interest.
This report has been commissioned by Letshego Holdings and independently prepared and issued by Exotix Capital for publication. Opinions contained in this report represent those of the research department of Exotix Capital at the time of publication. The sponsor has had no editorial input into the content of the note, and Exotix Capital’s fees are not contingent on the sponsor’s approval of the research.