JSE-listed financial services group Ecsponent is on the verge of bringing institutional investors on board in an effort to reduce its cost of capital.
The group, which invests in companies that offer a range of financial services in South Africa, Botswana, Swaziland and Zambia, has previously registered a R5 billion preference share programme that issues multiple tranches of preference shares. The preference share programme is its primary method of raising capital. The funds are deployed to grow and expand the business.
Depending on the country of issue, the gross rates of return on these preference shares vary between roughly 10% and 15%. While these returns are very attractive in a low-return environment, the yields have raised questions about whether the company would be able to generate sufficient cash from its operations to sustainably service payments to its preference shareholders in the long run.
Speaking to Moneyweb following the release of its results for the 15 months ending March 31, its CEO, Terence Gregory, said the group was basically in a position where it would take on debt funding from institutions in the new financial year. This would reduce its cost of capital, which is quite high as a result of the preference share structure.
When pressed for detail, Gregory said the information was price sensitive.
“We haven’t yet signed a term sheet or got to the level of finalising the final numbers but we are expecting to do that in the very near future.”
Asked how significant he expected the reduction in the cost of funding to be, Gregory said the group had various targets.
“Our initial target is to try to bring the cost of funding down by effectively about a 15% margin.”
Other measures to address the high cost of funding also include the expansion of its product offering to clients in its Investment Services division through products from other providers on which it would earn a commission, margin or placement fee.
“What that does is it lowers our contribution that the pref[erence] share structure makes to our overheads and therefore reduces our cost of capital.”
It is also looking at debt funding from different geographies to address the cost of funding locally and in its African operations.
In the review period, preference shares issued under the preference share programme increased by 136% from R230 million in 2015 to R807.8 million in 2017. R70.7 million was raised in Swaziland through a similar linked-loan units programme. R127.3 million was paid or accrued to preference shareholders as dividends during the period.
Asked how the group was ensuring that it didn’t raise funds too aggressively and that it would be able service dividend payments sustainably, Gregory said it only raised the capital required by its Business Credit and Equity divisions.
“We don’t raise additional capital because… if we had capital not adequately deployed that would cost us money.”
Generating sufficient cash flow to pay dividends was part of the normal management of the business, Gregory said.
Its infrastructure was set up to ensure returns were managed on an on-going basis and that there was a balance between investments in capital growth assets and the deployment of cash into its Business Credit division which generated a month-to-month return, he added.
In the 15-month period under review, its revenue from continuing operations increased by 122% to R321.8 million (compared to the previous 12 months), while operating profits from continuing operations grew by 416% to R229.2 million. Earnings per share improved by 223% to 8.38 cents.
As a number of transactions were still in progress at the end of twelve months, the most recent review period was extended by three months to provide a more accurate reflection of trading, Gregory said.
Growing the business would remain a key focus during the next 12 to 18 months, he added.
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