In essence the core business of the Group
entails it acting as a conduit for providers of capital, (both equity and debt)
to access exposure to asset classes, which are generally considered to have
higher risk and return profiles. By utilising the Group’s unique skills-set to
reduce the impact of the risk associated with these asset classes, the group can
consequently deliver superior risk-adjusted return on investment to its
stakeholders. The asset classes in which the Group currently invests are the
following:
Unsecured personal credit to middle and low income
earners throughout Sub-Saharan Africa.
Distressed debt in South Africa.
Residential property situated in middle to lower income areas in South Africa
In conducting its main business the Group has also naturally diversified into
other areas of business, which are complimentary and value adding to its main
business. These include the cellular, assurance and education divisions.
Whilst the Group is well aware of the risks associated with a business model
that is too diversified, it follows a philosophy of “controlled diversification”
in terms of which the following principles are adhered to:
Limiting diversification to the executive capacity available to manage the
various divisions
Taking advantage of long-term trends in the various markets in which the Group
operates.
Developing businesses that act as a “natural hedge” to each other during
different macro-economic cycles, (an example of this is the contrarian cyclical
growth experienced in the unsecured personal credit and distressed debt
businesses in South Africa).
The group consists of the following business units:
The main factors determining Group profitability remain:
Cost of distribution
Asset yield and operational effiency
Cost of capital
Cost of distribution
Cost of distribution is largely managed at business unit level as each business
unit has its own unique distribution model, market and competitive environment
in which it operates. These are dealt with in greater detail in the various
divisional overviews. At Group level the cost of distribution per Rand of
unsecured credit finance granted decreased from 22c in 2007 to 15c in 2008.
However, the average distribution cost per loan increased from R610 to R685.
This is mainly as a result of the increased exposure to loans carrying longer
terms, which caused the average loan value disbursed to increase and the number
of loans originated to decrease.
Asset yield and operational effiency
Asset yield and operational efficiency is managed within the Credit Management
business unit in its capacity as an (internal) outsourced provider of credit
management services to other business units in the Group and is dealt with in
greater detail in the divisional overview. At Group level the annual management
cost per performing contract decreased from R808 to R543.
Cost of capital
Cost of capital is managed at Group level. In this regard the past year has
seen significant improvements being made in the reduction of the Group’s
weighted average cost of capital (WACC). Assuming a 25% after tax required
return on equity, the Group’s WACC has reduced from 21.4% at 2007 financial
year end to 19.4% at 2008 financial year end. This has mainly been achieved
through the increased leveraging of the Group balance sheet using various debt
instruments provided by third parties. In this regard total funding facilities
raised by the Group during the 2008 financial year was R1 071 million (compared
to R127 million in the 2007 financial year end). Between the 2008 financial
year end and the date of this report, the Group has raised a further R750
million in funding facilities.
Major funding providers of the Group include:
Old Mutual Life Assurance Company (South Africa) Limited via Old Mutual
Investment Group (South Africa) Limited, (OMIGSA).
Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden N. V. (FMO).
Cordiant Capital Inc. via FMO.
Standard Chartered Bank LLC.
Sociéte de Promotion et de Participation Pour la Coopération Économique S.A.
(PROPARCO).
Industrial Development Corporation of South Africa Limited.
Standard Bank of South Africa Limited.
National Housing Finance Corporation Limited.
Rural Housing Loan Fund.
Deutsche Bank.
The Group was assigned a Baa3.za/P-3.za national scale issuer rating by Moody’s
Investors Service in March 2008. The investment grade rating assigned to the
Group bodes well, for its continued ability to access the capital required to
grow the business as well as achieving further reductions in the Group’s
weighted average cost of capital (WACC).
Strategy overview
Each of the Group’s divisions faces challenges and opportunities unique to its
specific market, and consequently a great deal of the strategic planning and
implementation happens at divisional level. Additional information in this
regard is provided in the divisional review.
At Group level, the main themes dominating the formulation and execution of
strategy are:
The global economic outlook
The global economic outlook and its effect on the markets within which the
Group operates, specifically:
The availability and cost of capital
In this regard the Group has been fortunate thus far, in that it has received
significant support from existing funding partners. The Group is confident of
its ability to fund expected business growth for the 2009 financial year.
However, the fact that to date the Group has not yet accessed the formal debt
capital markets has been identified as a deficiency in its funding strategy and
it will be addressed in the 2009 financial year.
The rising cost of food and energy
The Group is acutely aware of the impact of these factors on the financial
circumstances of its clients, and the potential increase in delinquent debts
that could result from this. Although it is generally found that annual wage
increases cater for these inflationary pressures, there is a “lag effect” to
these wage increases and it is found that clients do come under pressure in the
short term.
Particularly in South Africa, these pressures, combined with the less than
positive short to medium term economic outlook, and the fact that most
instalments in this market are collected from the client’s bank account, where
there is intense competition amongst creditors for funds available to meet
obligations, has resulted in Group adopting a more cautious growth strategy
with regard to its unsecured lending activities in this market.
Conversely, these economic pressures bode well for the Group’s Distressed Debt
business in South Africa. An increase in the number and size of distressed debt
portfolios for sale is being experienced. The Group has increased its capital
allocation to this asset class for the 2009 financial year.
A comparable negative impact of these pressures on the Group’s unsecured
lending businesses in the rest of Africa is not expected, and consequently the
Group is maintaining its aggressive growth strategy in these markets. The
reasons for the insignificant impact of the negative pressures on these markets
are:
The fact that availability of personal credit in these markets is coming off a
very low base with significantly less competitor activity being experienced in
these markets when compared to South Africa.
In these markets the Group lends exclusively to civil servants and loan
repayments are collected from the employer who deducts the instalment due
before paying the client’s wage. This leads to much greater control of client
credit exposure, less competition amongst creditors and a significantly higher
collection rate when compared to collections from client bank accounts as is
the practise in South Africa.
The ongoing global demand for commodities continues to stimulate economic
growth and infrastructure capacity development in all of the jurisdictions in
which the Group operates. These circumstances present the Group with strong
growth prospects. In South Africa this is compensated to a degree by a
combination of high levels of household debt as a result of an over-supply of
credit (particularly in the period immediately prior to the implementation of
the NCA), an increasing inflation and interest rate environment and general
negative market sentiment as a result of infrastructure capacity constraints
and recent political uncertainty.
However, none of these circumstances give cause for undue concern as long as it
does not result in a significant contraction of the South African economy and a
significant rise in unemployment levels. Ultimately the Group’s unsecured loans
are advanced against the client’s future income from employment, which means
that as long as employment levels remain stable no material deterioration of
the Group’s business in this sector is expected.
In many respects, quite the opposite is true for the Group’s other operating
sectors. Generally these countries are benefiting from high economic growth
coming off a low base and with relatively low levels of competition amongst
personal credit providers.
Management capacity
The creation and deepening of the management capacity required to effectively
and responsibly manage the high rate of growth in the business of the Group
remains a high priority. Various management capacity development projects and
staff training programmes are implemented on an ongoing basis. In addition, as
management at business unit level matures there is a continual and deliberate
increase in the level of management empowerment and decision making as well as
execution ability at business unit level within the context of a clear
authority framework. The successes achieved with these efforts bode well for
the Group’s succession planning.
Improving the predictability and analysis of Group and divisional performance.
The broad categories of assets which determine the Group’s performance are the
following:
Unsecured credit in South Africa.
Middle and low income residential property in South Africa.
Unsecured credit in other jurisdictions in the Rest of Africa.
The performance of these asset classes are determined by a complex and
interdependent mix of global, regional and country specific factors.
In addition, operational challenges and competitor activity within the various
divisions of the business contribute additional complexity to the management
and forecasting of the performance of the business.
Collectively these factors have in the past lead to volatility of earnings at
business unit level, although Group performance has traditionally met
forecasts. Significant progress has been made and continues to be made in terms
of improving the accuracy and utility of management information, budgeting and
forecasting, at both divisional and Group level.
New opportunities
The Group is continuously investigating opportunities in existing and new
markets, whilst simultaneously re-enforcing focus on current performance
drivers.
Traditionally the Group has followed a growth strategy that has focussed on
organic rather than acquisitive growth and the benefits flowing from this
approach have been significant. This approach to growth is not expected to
change in the coming year, although the Group would explore opportunities for
acquisitive growth should the right opportunity present itself.
Established in 2001
Group holding Company: Real People Investments Holdings (Pty) Ltd: Registration
number: 1999/020093/07
Real People (Pty) Ltd is registered with the National Credit Regulator:
NCRCP103
Financial Services Providers:
Real People (Pty) Ltd: FSP 9945
Real People Assurance Company Limited: FSP 26634
Real People Financial Services (Pty) Ltd: FSP 19113
Insurance license obtained December 2005
Member of the Life Offices’ Association of Southern Africa (LOA)
Operates in South Africa, Lesotho, Swaziland, Kenya, Tanzania and Malawi.
