Company Analysis - Commissioned /

Letshego: Lower funding costs should support margin stability over the medium term

    Nkemdilim Nwadialor
    Nkemdilim Nwadialor

    Equity Research Analyst, Financials

    Ayodeji Dawodu
    Rahul Shah
    Tellimer Research
    9 September 2019
    Published byTellimer Research

    Letshego reported H1 19 net attributable profit of BWP328mn, down 1% yoy, which is line with its trading statement forecast. Higher operating expenses, increased loan impairment charges and a higher effective tax rate (up by 2.2ppts to 39.6%) drove the decrease in profits.

    Letshego has several key executive vacancies, including the CEO, COO, CFO and CRO roles. During its earnings call, it announced that the recruitment process for these roles has advanced considerably and should be concluded by Q4. Dumisani Ndebele serves as Interim CEO.

    Update on board composition. The company also announced on the earnings call that four new Independent Non-Executive Directors (INEDs) will join the Board, subject to NBFIRA approval. The new INEDs (whose names were not revealed, due to regulatory constraints) are specialists in the fields of fintech, financial services and risk management.

    Strategy update. The group remains committed to strengthening its risk management, increasing cost efficiencies, improving asset quality and reducing the effective tax rate in H2. Letshego has no appetite for new acquisitions and hinted at discontinuing services that are unprofitable.

    Changes to forecasts. After incorporating FY 18 and H1 19 figures into our models, we have lowered our loan growth forecast (down by c5% in 2021 and 2022) due to management’s emphasis on asset quality over asset growth. Falling interest rates in Botswana, Mozambique, Nigeria and Ghana necessitated a downward review of our asset yield forecasts (-3ppts in 2020 and -5ppts in 2022). We also forecast higher deposit growth (up by 10% yoy in 2020 and 2021) as Letshego attracts more retail deposits, which should support lower funding costs over the medium term.

    Valuation. Using a dividend discount model, we assume a 17% cost of equity and a 6% terminal growth rate; our mid-cycle ROTE estimate is 17%.

    Risks to our valuation. Downside: A faster-than-expected deterioration in asset quality; and/or lower-than-expected deposit growth (which could result in higher cost of funds). Upside: Quicker-than-expected growth in fee income from the diversification of non-funded income-generating activities.

    This report has been commissioned by Letshego Holdings and independently prepared and issued by Tellimer for publication. All information used in the publication of this report has been compiled from information provided to us by Letshego and publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Tellimer at the time of publication. The sponsor has had no editorial input into the content of the note, and Tellimer’s fees are not contingent on the sponsor’s approval of the research.