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Sasfin back in profit

Expects further improvement as business volumes nearly normalise.
Coincidently, Sasfin's lease on its head office has just expired after 14 years, and it used the opportunity to opt for a hybrid work model. Image: Moneyweb

One can start to see a common trend in the results of different companies in diverse business sectors. Figures show that 2020 was a disaster, while 2021 showed strong recovery – dependent on whether management took decisive action.

Banking and asset management group Sasfin announced on Tuesday that it is back in profit after reporting a big loss in 2020. Headline earnings recovered to R141 million and headline earnings per share to R4.38 in the year to end June 2021 compared to a loss of R48.6 million (headline loss of R1.51 per share) in the previous year.

Strong recovery (Rm)

12m to June 2021 2020 % change
Revenue 1 303 1 167 11.7%
Operating profit  118 – 65 >100%
Earnings  78 – 43 >100%
Headline EPS R4.38 -R1.51 >100%
DPS R1.31 48.9c 167%
Share price R26.20
12m high R30.00
12m low R12.25
PE 6
DY 5%

Source: Sasfin annual results, JSE market data

Sasfin CEO Michael Sassoon says the main reason for the loss in 2020 was a big spike in credit impairments.

“There were two reasons for this. Firstly, arrears increased due to the first hard lockdown and, secondly, adjustments based on the forward-looking nature of provisions.

“Sasfin also revalued its private equity portfolio at the time to reflect the weaker economic outlook,” says Sassoon.

The situation has since improved significantly, despite the continued economic uncertainty and subsequent Covid-19 restrictions.

Improvements

Sasfin’s results show that most of its businesses performed better, especially the asset financing segment, with management noting that the global and South African economy has actually performed better than anticipated.

“Locally, this was due to the strong performance in the commodity sector coupled with some of the early interventions by the government, including the reduction in interest rates and fiscal stimulus,” according to the commentary to the results.

Read: How miners have come to the rescue of the fiscus – and shareholders

Management notes that operating conditions in the second half of the 2021 financial year were better than originally anticipated at the start of the Covid-19 pandemic. This is evidenced by the upward projections on GDP growth, with early interventions by government to stimulate growth and the increased rollout of vaccines across the country.

Sassoon says indisputable proof of recovery is that accounts that were in arrears were brought up to date. “The credit reality improved.”

A note to the balance sheet discloses that loans classified as non-performing decreased from R712 million a year ago to R611 million.

Sasfin mentions that the Land Bank recently repaid R41.4 million of the capital outstanding on Land Bank bills held by Sasfin, some 10% of what is due. The gross amount of Land Bank bills at year-end amounted to nearly R416 million, before Stage 3 impairment of more than R121 million.

Streamlining

A short interview with Sassoon created the impression that it took more than just waiting for things to normalise. Efforts were focused on reducing operating costs throughout the group, including restructuring and reassessing entire operating units.

“Sasfin simplified its business structure to match our view that the economy is still very fragile and that we expect the business environment to remain difficult,” says Sassoon.

During the year under review, Sasfin concluded several transactions to streamline the business and optimise the capital structure of the group, including:

  • Sasfin Wealth sold its 21% interest in Efficient Group for R146.2 million resulting in a post-tax profit of R12.2 million. The proceeds were distributed to Sasfin Holdings.
  • Sasfin closed its Hong Kong operation, Sasfin Asia Limited. The foreign trade finance operations were moved to South Africa, releasing $12 million of capital to Sasfin Bank Limited. A once-off cost of R30 million was incurred as a result of the unwinding of the hedging and foreign currency translation reserves.
  • Sasfin sold 100% of Sasfin Commercial Solutions, at a small loss, but it freed up R30 million of capital.

Preference shares

Sasfin recently finalised the repurchase of its preference shares. While the listed preference shares were very popular with investors when commercial banks and some other companies first listed them some 20 years ago, they have lost some of their allure.

Sassoon says Sasfin decided to repurchase its preference shares as it became a costly source of capital, while regulatory changes excluded preference shares from Tier 1 capital.

“The low share price offered an opportunity to offer shareholders a premium and to settle the expensive source of capital,” he says.

The repurchase reduced debt by some R145 million, less the costs to implement the transaction.

Outlook

Sassoon seems fairly optimistic about prospects for the next year or two, saying that the Covid-19 pandemic and work-from-home trend also presented opportunities. Coincidently, Sasfin’s lease on its head office has just expired after 14 years, and it used the opportunity to opt for a hybrid work model.

“We expect that no more than 60% of our staff will work from the office at any given time. This enabled us to reduce office space and ensure that the space is appropriately designed to support a hybrid work model.

“This will result in an improved employee value proposition while generating efficiencies,” says Sassoon.

On the business front, he says that new business volumes are nearing 2019 levels, while the investment and stockbroking segments also recovered, with assets under management and advice increasing by more than R5 billion to R53.9 billion.

Dividend

The improvement in earnings and optimism about the future translated into a sizeable dividend and the board declared a final dividend of R1.31 per share – equal to a dividend yield of 5% on the current share price of R26.20. Sasfin last paid a dividend (48 cents) in respect of the six months to December 2019.

Investors seemed happy with the results with the share ending the day nearly 9% stronger, and not far off its annual high of R30. It is significantly better than the low of below R13 just about a year ago.

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