SBC Limited & Subsidiaries releases 2020 Interim results

COMMENTARY

INTRODUCTION
The SBC Limited Group (“SBC”) continues to provide financial solutions to our customer base in both Lesotho, under the Lesana brand and Eswatini trading as Select. The value proposition targets potential customers, on a salary deduction basis that traditionally have not been supported by the local banking industry and are primarily employed by the state; typically this includes police, nurses and school teachers.

In Eswatini, the Malkerns Square project, a local housing and retail development, augments the business offering by providing residential rental and retail opportunities to prospective tenants. The second phase of the residential offering will be completed by end of September 2020, this incorporates an additional 93 apartments available for rental. The Retail centre, including a KFC fast food outlet opened in June 2020 with notable tenants that include a supermarket franchise (PnP), a liquor store and coffee shop which complement the residential offering.

OPERATIONAL REVIEW
SBC’s results for the six month period ending 30 June 2020 reflect that of a resilient well diversified underlying franchise, negatively impacted by a very difficult environment in the jurisdictions we operate in, namely Lesotho and Eswatini. The first half of 2020 was dominated by the Covid-19 pandemic and the distressing human and economic cost thereof.During this time SBC has remained steadfast in support of all our clients, our employees and the communities in the countries in which we operate.

With the group’s strong capital and liquidity positions going into this crisis we have ensured that we continue to maintain staff employment levels and in addition, continue to lend and provide loans to both existing and new clients. The consumer lending business, despite very challenging trading conditions posted a 10% increase in profits after tax, unfortunately with the increase in property costs and the challenge with new rental opportunities due to the Covid lockdown, profit after tax for the SBC Group declined to E15.8m.

Housing remains a key focus area for the Group and we expect to see an improvement in new rentals once Covid restrictions are lifted in the foreseeable future. The general sentiment from the market, prior to the lockdown was very positive and we expect the momentum of the uptake of these units to improve. The construction of the next 93 units will be completed by end September 2020 and the new retail offering opened in early June 2020.

FINANCIAL REVIEW
In a period significantly impacted by lock down restrictions necessitated by the Covid-19 pandemic, SBC’s disbursements amount to E135m (2019: E215m) for the six month period. In Eswatini disbursements amounted to E76m (2019: E127m). In Lesotho disbursements declined to M59m (2019: M89m) for the six month period including only M8m in the second quarter. The result was that the gross loan book grew by 3% over the period and was on average 10% larger than the equivalent prior year period.

Consumer lending revenue grew by 7% to E152m (2019: E142m). The lag against loan book growth is attributed to an under performance of the short term loan book in Eswatini which caused the yield to reduce by 0.8% to 26.9% and more aggressive pricing in Lesotho which caused yield to reduce by 2.1% to 31.3%. Overall yield reduced by 0.9% to 28.4% (2019: 29.3%) over the equivalent prior period. Revenue also includes an initial rental revenue of E1m on the Malkerns property. This was somewhat short of expectations but the Covid environment prevented the intended level of activity in this area.

Operating expenses increased by 7% to E58m (2019: 54m) which was in line with the revenue growth and absorbed an E0.9m escalation in Property related operating expenses as this business area migrates into a rental model. Within the consumer lending business, the Eswatini cost escalation was limited to 1% while the Lesotho cost escalation at 20% was aligned with the 27% revenue growth in this business segment. An improved collection performance, particularly in managing the distressed loan portfolio enabled the impairment cost to decline by 4% to E6m.

Other income is mainly interest earned on loans to group companies and cash available during the period. Strong cash levels as a result of a significant funding transaction closed early in the period coupled with the Covid environment where the collection performance maintained but disbursements declined combined to result in other income of E30m, a 27% increase on the prior year. This line also includes E1.5m being a recovery of the carrying cost of the guarantee provided to SMSK.

Finance costs at E97m (2019: E77m) increased by 25% compared to the prior period and predominately arose from interest on notes issued under the listed medium term note program and other promissory notes issued by subsidiary, Select Limited. E8m or 10% of this increase is attributed to the increase in funding cost of the Malkerns project which is typically offset by a fair value gain but the fair value gain is an annual event. The balance of this increase is attributed to growth in the consumer lending business coupled with the cost of carrying excess funding which is an offset to the other income line. As a percentage of revenue, consumer lending net interest paid amounts to 35.7% of revenue which is a slight increase on the prior equivalent period of 33.8% due to increased cash holding costs.

In spite of a 10% increase in profit after tax in the SBC consumer lending business to E26.7m (2019: E24.2m, profit before tax declined 21.4% to E21.1m (2019: E26.9m) as a result of the carrying costs of the Property segment which at this point is achieving fledgling rental revenues.

PROSPECTS
The events over the past six months have been unprecedented. Covid-19 has already had a profound impact globally and there remains much uncertainty as to the ultimate human and economic toll.

The world changed fundamentally and, to some extent, permanently, in a matter of weeks. While the pandemic has created distress and anxiety for many of our staff and clients, it has also created new opportunities, specifically the opportunity to accelerate change. At the time of writing this report, limited lockdowns in both Lesotho and Eswatini remain in place and a possible renewed threat of further outbreaks of the pandemic remain a risk. As a Group operating in sub-Saharan Africa, we need to adapt to remain relevant. While the remainder of the financial year remains uncertain given the extent of current lockdown measure and the associated risks, we remain committed to delivering a positive result for all our stakeholders.

In contrast to the current environment, we are very confident that lockdowns will eventually be rolled back, and economies will reopen. The International Monetary Fund is forecasting global real GDP to contract by 4.9%, sub-Saharan Africa by 3.2% and South Africa by 8.0% in 2020, followed by a recovery of 5.4%, 3.4% and 3.5% respectively, in 2021. With a focus on the 2021 recovery, management will continue to work with all our stakeholders, in a responsible manner, to ensure that we remain the primary lender in our market and to take advantage of the much needed recovery phase. The opening of the Eswatini economy will also provide the required impetus to drive our rental offering in Malkerns Square.

The safety and wellbeing of our customers and employees has been, and remains, of utmost importance. Despite the obvious risks, our employees have shown great fortitude and commitment as they have continued to support and service our customers under very difficult conditions.

With the current uncertainty, despite the consistent loan repayment collections in both countries, liquidity risk management remains a key priority for the Group. To this end we continue to maintain and ensure the Group has sufficient cash resources to meet all liquidity requirements for the foreseeable future.

FINANCIAL STATEMENTS
The white set of the condensed interim financial statements for the period ended 30 June 2020 have been reviewed by SNG Grant Thornton Chartered Accountants (Eswatini), who have expressed an unmodified review conclusion. A copy of the unreviewed auditor’s review report is available for inspection at the company’s registered office together with the condensed financial statements identified in the auditor’s report.

The auditor’s review report does not necessarily report on all of the information contained in this announcement. Shareholders are therefore advised that in order to obtain a full understanding of the nature of the auditor’s engagement they should obtain a copy of the auditor’s report together with the accompanying financial information from the company’s registered office.

CORPORATE GOVERNANCE
The directors and management of SBC Limited confirm their continued commitment to the principles of openness, integrity and accountability as advocated by sound principles of Corporate Governance contained in the King Reports.

By order of the Board
T Dladla, Chairperson

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