MyBucks — Rapid expansion calls for new capitals

MBC’s gross loan book increased by €28.8m to €125.0m in H119, up by 29.9% vs end-FY18 (and 36.9% vs end-H118). This includes €5.9m attributable to the acquisition of Capfin (Spotco Holdings), an Australia-based lending institution taken over by MBC in July 2018. Net loan book stood at €111m, up by 29.5% vs €85.7m in FY18 and 50.7% y-o-y. When adjusted for the impact of the first-time adoption of IFRS 9, the sequential net loan book growth was even higher at 32.4% (according to our estimates).

The loan book expansion translated into a 23.7% y-o-y growth in the company’s sales to €37.4m (including c €3m from Capfin consolidation), especially in the individual lending segment (up by 19.7% y-o-y to €33.7m) and SME lending (up to €1.3m from €0.1m in H118). The banking segment’s revenues increased by an impressive 86.9% y-o-y to €17.8m, which was mostly organic and driven by all markets where MBC has a banking licence, with Mozambique in particular standing out. On the contrary, the overall non-banking lending segment delivered lower sales at €19.6m, down by 5.4% y-o-y due to the disposal of part of MBC’s loan book in South Africa and lower revenues in Malawi following the sale of the local loan book to its own banking operations. This was only partially offset by the consolidation of Capfin.

The growth in net loan book was accompanied by a decrease in loan impairment charges from last year’s €6.3m to €4.7m. The provisions to gross loan book ratio stood at 11.2% at end-December 2018 and was broadly comparable with the end-June 2018 figure of 10.9%. However, excluding the IFRS 9 adoption adjustment, the H119 value would have been 9.7%, according to our calculations. Moreover, the ratio improved significantly vs the ratio as at end-December 2017 of 19.4%, which was backed by a higher contribution of MBC’s banking business (63% of loan book at end-H119 vs 55% in H118), as the former is characterised by a higher loan book quality in comparison to MBC’s non-banking lending business. An additional positive driver was the launch of MAICA, an AI-based collection algorithm, which helped raise the share of collections to gross loan book from 89.3% in H118 to 92.0%. Interestingly, MyBucks was able to increase the average loan tenure to 20 months from 14 months a year ago on the back of banking operations expansion. This was facilitated by the execution of local bond programmes (tenors of two to three years).

However, the lower loan book impairment charges have been offset by increased operating expenses of €25.6m (up by 39.3% y-o-y) due to the expansion of MBC’s banking operations as well as integration of the companies acquired in FY18 (Capfin in Australia and Pride in Malawi). MBC anticipates a reduction of operating expenses in H219 as the integration process has been completed and the company has recently introduced certain cost-cutting measures that should translate into c €2m of savings pa. As a result of the above, MBC reported a loss after tax from continuing operations at €4.3m, compared with last year’s loss of €2.2m. Still, the company expects it will break even and start generating net cash surpluses in the medium term.

MBC’s expansion in the banking segment allows it to improve access to cheap funding in the form of customer deposits and the inter-bank market. In addition, the company has implemented local bond programmes and refinancing of its high-interest legacy debt. The above measures led to a reduction of MBC’s average annualised funding costs to 15.8% (vs end-December 2017 at 20.2%).

Having said that, it is also worth noting that MBC’s gearing level, as measured by net debt (including customer deposits) to the sum of equity and net debt increased to 91% from 84% at end-June 2018. This resulted from 1) banking segment expansion and the resulting increase of current deposits from customers (up by 68.8% during the period to €34.6m), 2) higher borrowings (€148.0m at end-December 2018 vs €119.9m at end-June 2018) raised to cover the negative operating and investing cash flow (c €10.6m each in H119) and 3) a reduction of total equity (down by 30.6% to €16.6m) due to accumulated losses. This has led to a number of debt covenant breaches, although MBC has already received waivers for the majority of the affected debt. As such, we believe that it is quite likely that MBC will obtain the remaining waivers. Moreover, given the growing importance of the company’s banking operations, MBC is in discussions with its debtholders (some of these negotiations have already been successful) to modify its covenants in order to reflect the higher gearing level applicable to the banking business. This would provide MBC with further balance sheet headroom.

Still, MBC’s continued growth is dependent on new capital. As part of the private placement announced in December 2018, MBC intends to issue new shares to existing shareholders for their debt to equity swaps to increase its equity capital by c €10m and thus improve its gearing ratio. The investors have already made an irrevocable offer for MBC shares and the agreement is pending regulatory approval (expected within the next several weeks). As part of the transaction, MBC has also raised €3m post the balance sheet date by issuing shares to a new investor. To further improve its gearing ratio, it plans to conduct further debt to equity conversions and also intends to execute further capital measures, including potentially (apart from a new share issue at the parent company) raising new capital in local markets as well as conducting initial public offerings of MBC’s existing operations in their primary markets.

MBC’s business profile is gradually shifting towards the banking segment. In the course of H119, it made an irrevocable offer to purchase the remaining 50% stake in NFB for €7.9m, which was provisionally accepted in January 2019 by the Central Bank of Malawi. The company is in the final stages of closing the transaction. Following the approval, MBC will have to dispose of at least 35% of NFB’s shares within three years. MBC also applied for a banking licence in Zambia last year and expects that it will be able to launch its banking operations there soon.

MBC is now entering a new growth phase that should not be exclusively based on acquisitions and organic growth through greenfield expansion, but will also be driven by product and technology outsourcing, including joint venture partnerships, a franchising model and a white-labelled technology offering. Based on our discussion with the company, we understand that MBC has already signed memorandums of understanding with a number of parties in both Sub-Saharan and North Africa, as well as the Middle East and Asia. MBC’s strategic focus is still on African countries and the company is currently examining new markets with strong economic potential (according to MBC), such as Cameroon, Ghana, Nigeria, Rwanda, Egypt and Sierra Leone.

Despite the overall good progress, there are certain economic and regulatory challenges in some of MBC’s existing markets. The official exchange rate of the Zimbabwean currency was recently subject to a 60% devaluation, which will affect the exchange rate conversion upon consolidation of MBC’s subsidiary. However, the company does not see any negative impact on trading. The Zimbabwean market made up 17% of MBC’s loan book in FY18. Another uncertainty factor is the debt relief bill passed in September 2018 in South Africa, introducing the option of debt cancellation for consumers earning less than ZAR7.5k per month with total debt of less than ZAR50k. It is difficult to assess at this stage what the exact impact on MBC will be. However, the company has stressed that there is a complex process that needs to be followed to deem a certain debt irrecoverable (and thus eligible for cancellation) and that the company’s bad debt policy with this respect is more conservative, which should minimise the impact of the new legislation. The South African market represents less than 8% of MBC’s current loan book which may decrease further as the contribution of the banking business grows (it does not plan to obtain a banking licence in South Africa).

The ramp-up of MBC’s banking segment together with the costs of integrating the recently acquired businesses translated into higher operating expenses and thus has kept the company beneath its break-even point at the net profit level (whereas its peers are already profitable). As there is no market consensus available for MBC, we have looked at the LTM EV/sales ratio, which currently stands at 3.2x and implies a c 3% discount to peers. MBC’s LTM EV/EBITDA stands at 12.4x vs 11.7x for Ferratum, also a German-listed, technology-led mobile consumer lender.