Equity Analysis /

Letshego: Well-executed diversification should support growth

    Rahul Shah
    Rahul Shah

    Head of Financials Equity Research

    Tellimer Research
    2 May 2018
    Published byTellimer Research

    We initiate coverage of Letshego Holdings. Letshego provides consumer, microfinance and savings solutions to the financially under-served and has a broad geographical spread across Sub-Saharan Africa. At 1.0x 2017 BV and 5.6x 2017 PE, valuations do not appear challenging given our expectations for c20% average ROE over our forecast period. 

    Industry fundamentals are supportive of the volume growth story. Sub-Saharan Africa continues to lag global financial inclusion trends, with only 43% account penetration versus 95% in high-income economies and 63% in developing economies. As growth in Letshego’s core civil-servant lending portfolio stabilises in a competitive pricing environment, diversification to non-government lending should boost volumes. Improving accessibility provides clear opportunities for Letshego to grow its non-core loan portfolio of traditional microfinance lending (c10% of total) and informal short-term loans (1%) to 25% of the loan book.

    Changing funding profile is medium-term positive. A rapidly growing base of cheap and sticky deposits should support margins post-2019 as debt costs stabilise. On our forecasts, deposits will address c19% of funding needs in 2022 (from 3% as of 2017). Recent margin contraction has been the result of an increasingly expensive external debt load, partly obtained through acquisitions. However, 2018-19 could remain challenging as management switches the external debt profile from secured to senior unsecured funding. 

    Efficiency metrics should improve as recent acquisitions and technology investments drive fee growth. As the group concludes a phase of heavy investment, we believe expense growth will slow from 26% pa in the five years preceding 2017 to 12% pa over the next five years. We expect management’s focus on partnering with fintech and telecommunication companies will yield cost savings in the near to medium term. Combined with c14% pa average income growth, we see the cost/income ratio declining to c36% in 2022 from c40% in 2017. 

    Gearing could improve. 2017 reported leverage of 93% remains below the 100% internal target. We assume Letshego will reach its target by raising additional debt (cBWP2.2bn) and buying back 1% of shares outstanding each year over our forecast horizon. Management has reiterated its commitment to share buybacks and will seek shareholder approval to extend the buyback program at the May 2018 AGM (2.4% and 1% repurchased in 2016 and 2017). Sustained buybacks will help propel ROE towards the 21% range, still beneath management’s 25% target, and should translate to 10.9% effective dividend yield in 2018.

    Deteriorating asset quality represents a downside risk. Management has stated it will focus on augmenting its core portfolio of predominantly civil-servant-focused lending with more non-government and micro and small entrepreneurs (MSE) lending. Although the riskier borrower base should help prop up loan yields, it could also result in higher default rates and rising impairment costs. Our forecasts assume the cost of risk will rise to 4.5% in 2022 (from c3.0%).

    This report has been commissioned by Letshego Holdings and independently prepared and issued by Exotix Capital LLP for publication. All information used in the publication of this report has been compiled from 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 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.