The October 2021 edition of the IMF’s World Economic Outlook revised growth forecasts for sub-Saharan Africa (SSA) to 3.7 percent and 3.8 percent for 2021 and 2022 respectively, from 3.2 percent and 3.9 percent in the January 2021 edition.
While credit quality still remains a concern across the SSA, Imara’s analyst Mogorosi Badisang says Letshego Holdings’s loan book remained healthy. “Having reported a loan loss ratio of 0.30 percent (H1 20: 1.34 percent) and 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 company’s loan book quality remains commendable,” Badisang wrote in a score card this week.
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 loss ratio to 0.6 percent (H1 20: 0.9 percent), according to the expert who argues that this highlights the group’s asset quality and resistance to downturns in the economy. The stability of the counter’s core operations remains in place and Moody’s has affirmed this, maintaining its credit rating at Ba3 (stable) outlook pursuant to the terms and conditions of Letshego’s P2.5 billion and R2.5 billion Medium Term Note Programme.
Savings deposits represent an important complement to microloans and are an attractive source of financing, hence, says Badisang, Letshego has thus intensified its savings mobilisation. The company currently has deposit taking licences in six of its 11 markets and intends to be fully licensed to take deposits across all of its geographies in the long-term. The company recorded strong deposit growth with a 48.84 percent increase in deposits to P 988.9 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 Let’s Go platform and partnerships at institutional levels.
Badisang says 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). Although the interest rate environment is currently dovish across sub-Saharan Africa, she expects the counter to continue to register high margins, asset yields and fundamentals due to it being a microlender and thus having favourable repayment rates while managing its cost of funds through funding and maturity diversification.
In terms of product development, the company’s Let’s Go platform is now live in 10 countries and Letshego plans to service lending (DAS, Non-DAS and Programmatic Loans), savings (Deposits), payments (Wallets, Cards and Remittances) and insurance (Life and Short-term Insurance) products on the platform. The group has made stellar progress in the second phase of its “6-2-5 execution roadmap”, having improved digital adoption to 74 percent (FY 20: 69 percent, H1 20: 30 percent).
A noteworthy testament pointed out by Badisang with repect 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 traditional banking score of 41 points.
In achieving its long term target of +20 percent ROE by 2025, the Imara expert says 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.
Letshego is the most liquid counter on the bourse and tends to dominate market activity, having accounted for 35.40 percent and 19.98 percent of volumes and value traded y-t-d after filtering out corporate actions (BancABC takeover and Afinitas Delisting). Having appreciated by 80.56 percent y-t-d (31 Dec 2020: P0.72), Letshego’s current share price of P1.30 puts it on Price Earning Ratio (PER) and Price Book Value (PBV) ratios of 3.98x and 0.54x versus its peer averages of 8.11x and 0.83x, respectively, according to Imara.
The researchers conclude that currently at P1.30, the counter offers a dividend yield of 11.10 percent vs. the market average of 5.23 percent. Taking into account the uncertainty in the context of the pace of COVID-19 vaccinations, Badisang remains positive of Letshego’s operational resilience factoring its prudent credit risk management and technological advancement initiatives. “We are also positive in the counter’s growth and diversification story, given its pan-African strategy which gives the counter exposure to emerging markets and broadening product offering,” she wrote. Imara’s valuation yields a target price of P1.98, representing an upside potential of 52.31 percent. The analysts therefore maintained BUY recommendation.
