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ECSPONENT LIMITED - Voluntary business update for the year ending 30 June 2019

Release Date: 28/06/2019 10:30
 
Wrap Text
Voluntary business update for the year ending 30 June 2019

ECSPONENT LIMITED
Incorporated in the Republic of South Africa
Registration number: 1998/013215/06
JSE Code: ECS - ISIN: ZAE000179594
Debt Issuer Codes: ECSP and ECSD
(“Ecsponent” or “the Company” or “the Group”)

VOLUNTARY BUSINESS UPDATE FOR THE YEAR ENDING 30 JUNE 2019

    SUMMARY
    •  Acquisitive growth continues to provide a platform for exponential growth
    •  Financial performance for the year is expected to be impacted by weak trading conditions in
       operational areas
    •  Overall business model remains resilient with continued investment in operations anticipated
       to contribute in the medium term
    •  Growth in the Wealth business through increased assets under management and product
       diversification
    •  Consolidation of Ecsponent’s interest in the listed MyBucks investment during the year below
       trading value at EUR 1.00 per share
    •  Increased exposure to hard currency assets providing a Rand hedge
    •  Ongoing debt diversification with term sheet from Afreximbank and debt facility from Norsad
       Finance

BUSINESS UPDATE
Despite a challenging trading year, Ecsponent’s business model has demonstrated its resilience in
this low-growth environment, solidifying the sound foundations for ongoing sustainable growth.
The Group continues to show sustained asset appreciation, with the bedding down of accretive
acquisitions during the current financial year expected to unlock value in the medium term.

Although not entirely immune to the greater economic and political environments, the Group’s
business model remains unchanged.

The business model is focused on three business areas: Credit and Investment Services, which
incorporates the Wealth division, to provide short-term liquidity and Equity Holdings to support
long-term capital growth. Combined, these business focus areas provide the Group with
opportunities for asset appreciation, while generating sufficient short-term liquidity to meet
operational needs.

Since 2018, the Group has announced and entered into transactions that support its objectives in
these business areas that increase its total assets, resulting in attractive yields for investors over
the medium to long term. These transactions involved, inter alia, the conversion of certain credit
assets into equity assets, which negatively impacts revenue from credit operations in the short
term, but which the board believes will provide the Group with medium to long term capital
appreciation.

EQUITY HOLDINGS
To generate sustainable long-term returns, the Group continues to invest in companies that
operate in growth segments in niche industries with high barriers to entry and are therefore likely
to produce significant returns.

Primary investment sectors include financial services, fintech, healthcare and renewable energy.
Diversification into additional sectors such as electric vehicles and cannabis farming for medicinal
and commercial purposes are at early stages of research and feasibility assessments.

During the year, Ecsponent acquired a Mauritian company for R185 million (see announcement
at: https://irhosted.profiledata.co.za/ecsponent/2017_feeds/SensPopUp.aspx?id=327986). The
transaction resulted in Ecsponent obtaining a further 1 953 874 MyBucks shares, increasing its
holding to 39.7% of MyBucks and 34.89% of GetBucks Microfinance Bank Limited in Zimbabwe
respectively.

In March 2019 Ecsponent announced a transaction whereby, subject to shareholders’ approval, it
will further increase its investment in Frankfurt-listed fintech company, MyBucks as well as its
intention to take a controlling interest in that company.

In terms of the agreement, which included a change in MyBucks’ management team, Ecsponent
will convert the loans it advanced to the MyBucks group, together with predetermined assets to
the value of R450 million or EUR27,829,312 (at an exchange rate of EUR16.17) into MyBucks
shares at a subscription price of EUR1.00 per MyBucks share. The resultant issue of 27,829,312
MyBucks shares to Ecsponent will increase the Ecsponent shareholding in MyBucks from 39,7% to
a controlling stake, and will result in a decrease in Ecsponent’s average cost price of MyBucks
shares to EUR2.89 per share.

Ecsponent’s equity portfolio provides a strong base for the next phase of exponential growth.

CREDIT
Demand for credit remains strong, particularly in the underserved SME sector across Africa,
producing liquidity, cashflow and profits in the shorter term for the Group. This business segment
remains Ecsponent’s largest revenue contributor, although the conversion of credit assets to
equity assets is likely to decrease the business unit’s short-term revenue and profitability.

The Group’s objective is to rebalance the asset split to approximately 50% of credit assets and
50% equity assets, which management expects to contribute to bolster revenue and profitability
in future financial periods.

Contributing to the growth of credit assets were new agreements the Group concluded with
several large corporate businesses to support their supplier development initiatives. In addition,
Ecsponent successfully concluded agreements where it will fund several regional vendors to
supply goods for construction including batteries, solar panels, inverters, mounting structures
and transformers for construction to various renewable energy projects in Southern Africa. The
impact of these agreements will be seen during the 2020 financial year.
Over the past two years Ecsponent has received a noteworthy number of orders through its
specialised procurement business. The business unit is focusing on increasing its business in the
rest of Africa through government, parastatal and corporate networks.

INVESTMENT SERVICES
Ecsponent provides advisory services that include stable investment options such as life
insurance, retirement funding and short-term investment products from a variety of providers
including household name insurers such as Sanlam, Momentum, Brightrock, Prescient and FMI.
Fund solutions include retirement annuities, preservation funds and living annuity funds.

Ecsponent’s assets under management increased to over R2.2 billion during the financial year
and income and dividend payments to investors of approximately R200 million during this period.
Ecsponent’s Aggressive Equity Fund of Funds outperformed its peer group based on a one-year
performance to 30 April 2019, delivering a return of 8.23%. On a similar basis, the Group’s
Moderate Equity Fund and Low Equity Funds performed in the upper quartile of its peer group
benchmark, delivering yields of 8.91% and 7.09% respectively. The low fee structure provided
our investors with a higher return relative to competitor products.

Notwithstanding this stellar performance relative to peers, these funds’ performance on a like-
for-like basis has been constrained during the reporting year as a result of macro-economic
conditions.

Ecsponent registered a R10 billion Domestic Medium Term Note programme with the following
salient characteristics (refer to full Memorandum for details
https://www.ecsponentlimited.com/wp-content/uploads/2018/12/20181209_Ecsponent-
Domestic-Med-Term-Note-Programme-Memorandum.pdf):

    -   Fixed rate notes paying monthly interest at rates of up to 12% per annum, with the
        capital redeemable after three years;
    -   Floating rate notes paying monthly interest at a rate of prime plus 1.5% per annum, with
        the capital redeemable after three years; and
    -   Zero-coupon notes issued at an initial issue price of R100 with capital redeemable at
        R137.49 after three years, providing an implied yield of 10.66% per annum.

In Eswatini, Ecsponent has been licensed to act as a Collective Investment Scheme (CIS)
Manager by the Financial Services Regulatory Authority (FSRA).

Ecsponent has a professional and well-established distribution network in place in Eswatini, which
is being enhanced and expanded with the introduction of new products to the market under the
guidance of an experienced local management team.

Along with the approval of the CIS Manager licence, Ecsponent’s initial portfolios, the Ecsponent
Swaziland Income Generator Fund and Ecsponent Swaziland Growth Fund, were also approved.
As in other territories where the Group is represented, the products are highly competitive and
Ecsponent anticipates a healthy subscription rate, contributing to growth in the Investment
Services business unit.
DEBT DIVERSIFICATION
The Group deployed funding from international sources to expand its African operations and
international asset base. Current loan funding and investments funded remain denominated in US
dollar or Euro to avoid exposure to emerging market exchange rate risk, thereby providing
additional foreign currency assets.

Ecsponent concluded debt funding agreements with Norsad Finance Limited as well as a term
sheet with Afreximbank. The debt facilities will be deployed in the Company’s credit business.

COST MANAGEMENT AND CAPITAL ALLOCATION
Cost management remains a priority area, with overhead costs being carefully monitored. Cash
management and capital allocation are key focus areas and management strives to improve the
cost-to-income ratios. Cash management and cash utilisation remains a further focus area for
management. Management view these elements as crucial considering the anticipated continued
margin pressure in the market.

OUTLOOK
The 2020 financial year represents a transition phase for Ecsponent with the impact of various
transactions expected to positively contribute to the balance sheet growth trajectory over the
medium term.

Unfortunately, the upswing reflected in international and local markets during the first quarter of
the 2019 calendar year has not been sustained and South Africa is likely to continue to reflect
negative real growth. While rising valuations are good news, the likelihood of market volatility or
perhaps even a correction is an increased possibility. Additionally, due to the Group’s cross
border business activities, currency volatility remains a risk to be monitored and managed
closely.

Notwithstanding ongoing sluggish economic growth expected in South Africa, the Group will
continue to focus on its core business segments, the consolidation of MyBucks, debt and sectoral
diversification as well as cost management and capital allocation.

FINANCIAL RESULTS
It is expected that Ecsponent will release its results for the year ending 30 June 2019 on or about
30 September 2019.

The information contained in this business update has not been reviewed or reported on by the
Group’s auditors.

Pretoria
28 June 2019

Investor relations contacts:
Ecsponent Limited:
Pumelele Sibisi    E-mail: investor.relations@ecsponent.com Tel: +27 (0) 87 808 0100
Articulate Capital Partners:
Morne Reinders     E-mail: morne@articulatepartners.com Tel: +27 (0) 82 480 4541

Sponsor to Ecsponent
Questco Corporate Advisory (Pty) Ltd

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