JOHANNESBURG – The sale of Stangen, African Bank Limited’s credit life insurer, to a consortium of banks and the Public Investment Corporation (PIC), could prove a boon for shareholders of the failed lender if regulatory change doesn’t reduce the insurer’s price tag.
Stangen (the Standard General Insurance Company) is held by African Bank Investments Limited (Abil), which was placed into business rescue last month.
Abil is also the holding company of African Bank Limited (ABL), currently under curatorship, and furniture retailer Ellerine Holdings, which is under business rescue.
It recently announced that it had received an offer from a consortium comprising six large South African banks and the PIC to buy the entire issued share capital of Stangen.
The same consortium underwrote a R10 billion capital raise for African Bank after it collapsed in August last year under a mountain of bad debt. Shares in Abil were suspended days later at 31c a share, leaving ordinary and preference shareholders in the lurch.
They have little hope of getting anything from Ellerines, which remains in business rescue, or African Bank, which must first satisfy the claims of unsecured debt holders and may only relist in two years time.
Stangen, which African Bank curator Tom Winterboer hopes will eventually be a part of the restructured Good Bank, could make all the difference to shareholders.
The insurer’s interim financials indicate that at the end of March 2015 it held cash on its balance sheet of R1.65 billion and reported profit before tax of R786 million.
These numbers suggest that around R1.7 billion would be the minimum offer price for Stangen.
Assuming it reports a profit of R1.6 billion for the full-year (R786 million x 2), Stangen could fetch anywhere between R3.1 billion on a price/earnings (PE) multiple of only two or R15 billion on a PE multiple of ten.
The banks index PE ratio is 14.5, according to market data from IRESS.
At this stage, Abil’s only apparent liabilities (around R1 billion) are a R550 million guarantee to banks that granted banking facilities to Ellerines, and a loan from African Bank of about R447 million.
Any money left over after liabilities have been paid should go to Abil shareholders, first the preference shareholders and then the ordinary shareholders.
According to a money manager who preferred to remain anonymous, the face value of Abil preference shares (about 13.5 million pref shares were suspended at R7.80 in August 2014) is R1.1 billion.
Assuming there is a another R1 billion left from a R3.1 billion Stangen sale (a conservative valuation), there should be a distribution dividend to ordinary Abil shareholders too. At more normalised levels, the valuation could be well above Abil’s suspended August share price of 31c.
Regulatory clouds loom large
Bronwyn Blood, portfolio manager at Cadiz Asset Management, said there could be some value in Stangen for shareholders but it was “too soon to tell”.
“There is a significant amount of regulatory change in terms of the NCA [National Credit Act], which has created further complications for the Good Bank. Stangen’s future and sale price very much depends on its ability to act as a credit life insurer for the Good Bank. There is bound to be further regulatory changes on the credit life front, which could significantly impact the sale price of Stangen,” Blood explained.
It is anticipated that the National Credit Regulator (NCR) will cap credit life insurance this year, while proposed reductions to interest charges on loans and moves to tighten the debt collection process pose further challenges to the profitability of unsecured lenders’ books.
“It is positive that Stangen is still trading and profitable in a very difficult environment, taking into account that African Bank is writing fewer new loans than it used to,” Jeleze Hattingh, portfolio manager at Element Investment Managers, said via phone from Cape Town.
However, Hattingh said that an independent valuation of Stangen, as well as clarity regarding the offer price made by the consortium, are needed before comments can be made on the potential recovery that shareholders might enjoy.
Element, a preference shareholder, awaits clarity from Abil’s business rescue practitioners, Hattingh said.