- 2021 H2 PBT expected to outpace that of the first half of 2021
- Digitisation journey to augment revenue generation on risk and non-risk products
- Imara’s relative valuation yields target price of P2.07
Experts argue that the lender has favourable repayment rates and it manages its cost of funding through funding and maturity diversification.
Letshego’s 6-2-5 strategic plan prioritises digitalisation as a key component of the group’s transformation, which is appropriate, given that the LetsGo App Mall has already reaped benefits in 10 of the 11 markets where it has been launched. According to Imara analysts Mogorosi Badisang and Kaone Ranko, a noteworthy testament to Letshego’s progress is the improvement of its Digital Quotient, a measure curated by McKinsey & Company which provides an objective, comprehensive measurement of a company’s digital maturity and capabilities from a pool of over 300 companies globally.
Letshego was given a score of 51 out of 100 points in August 2021 (June 2020: 25 points), placing it in the top quintile in the banking industry and outperforming the score of 41 points for traditional banking.
Letshego’s aggressive digitalisation strategy has propelled it to the top gainer of 2021, with a 94.44 percent gain to close the year at P1.40. “We expect the upward trajectory to be maintained as the group’s profit before tax for the second half of 2021 is expected to surpass that of the first half of 2021,” Malebogo Keleapere, Research Analyst at Stockbrokers Botswana, says. In achieving its long term target of +20 percent ROE by 2025, Badisang and Ranko add that the digitisation journey has the potential to further augment revenue generation on risk and non-risk products through lowering barriers to entry for consumers as well as managing cost control, thus decreasing the cost-to-income ratio over the long-term. Imara’s relative valuation yields a target price of P2.07 – representing an upside potential of 44.41 percent.
At its current price, Imara indicates that Letshego trades on a price-to-earnings ratio (PER) and a price-to-book value (PBV) of 4.38x and 0.59x against its local peer average of 15.68x and 1.14x, respectively. While credit quality is still a concern across the SSA, Badisang and Ranko observe that Letshego’s loan book remained healthy.
Having reported a loan loss ratio of 0.30 percent (H1 20: 1.34 percent) and Portfolio at Risk (PAR) 30 and PAR 90 (NPLs) ratios of 8.7 percent (H1 20: 11.2 percent) and 5.6 percent (H1 20: 7.9 percent), the analysts commend the company’s loan book quality.
Letshego’s Deduction at Source (DAS) model, which comprised 89.34 percent of the Group’s gross loan book, reported a 30 bps improvement in the loan to loss ratio to 0.6 percent (H1 20: 0.9 percent). Badisang and Ranko explain that this highlights the group’s asset quality and resistance to downturns in the economy. The company recorded strong deposit growth with a 48.84 percent increase in deposits to P988.9 million (FY 20: P664.4 million) and a 12.07 percent rise in deposit customers to 694,273 (FY 20: 619,481), driven by digital uptake on the company’s Lets Go platform and partnerships at institutional levels. Badisang and Ranko note that this acceleration of deposits has played a crucial role in the company’s cost of funding declining to 13.96 percent (H1 20: 16.97 percent).
Letshego is targeting to deliver its 10-minute loan solution in at least three markets by the end of the first quarter of 2022, an initiative that Keleapere anticipates will see transactional volumes increase in line with net fee income. “Balance sheet risks are well managed, with adequate capital and cash positions,” Keleapere notes, adding: “Letshego, the inclusive finance services business, will likely benefit from the expected recovery of sub-Saharan Africa in 2022 (SSA)”.
According to the World Bank, SSA will register a 3.3 percent growth in 2022. Absa Bank expects growth to soften in SSA’s two largest markets, South Africa and Nigeria, and East African markets to maintain a robust pace of expansion. Excluding South Africa, average growth in the region is likely to remain at an estimated 3.8 percent in 2022, as was the case in 2021, Absa’s Ridle Markus and Samantha Singh point out.
Sub-Saharan Africa’s economic growth in 2021 was overall stronger than expected and the focus in 2022 is likely to shift to broadening the recovery, ensuring greater resilience and sustainability after the pandemic, they wrote in a report. “Favourable base effects, accommodative policies, a stronger global backdrop that supported higher commodity prices and multilateral support have been key drivers behind the stronger growth trajectory seen in many markets.”
The two expect infrastructure investments, ongoing policy support (although some of that is likely to be gradually withdrawn), full reopening of economies, digitalisation, the Africa Continental Free Trade Agreement, growth in tourism, higher commodity prices and a still supportive global backdrop to continue to support SSA economies.