H1 18: Setting the stage for future growth
Rahul Shah, Head of Financials Equity Research | Waseem Khan, Equity Research Analyst
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.
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