Is it time to divest from Turnall?

Linda Tsarwe
After the so called “lost decade” banks found it difficult to rebuild public confidence in a dollarised economy. It was difficult for the public to trust the banking system after they lost their Zimbabwe dollars balances following adoption of multi-currencies. Although a number of challenges still affect the sector to date, banks have turned around and are profitable.

However, it is not unusual to find that some of these bank holding companies have maintained significant shareholding in non-core operations.

This could have been an investment during hyperinflation as a survival measure, or probably a conversion of debt to equity after the company failed to repay a loan.

Whatever the reason might have been, it is currently proving to be difficult to sustain such structures due to the liquidity challenges.
One good example is that of FBCH’s investment in Turnall. FBCH acquired a 58 percent stake in Turnall after FBC converted the former’s loan into equity.

From 2009, Turnall has been a salient contributor to FBCH’s revenue and profit. In 2009, its income contribution was 20 percent of total income, which increased to 29 percent the following year.

However, over the last few years, the contribution has been narrowing. Results released recently showed a decline in income contribution for 2013 to 19 percent of total income from 22 percent recorded the previous year.

In addition, Turnall was the only loss making subsidiary of the group with a $3,1 million loss from a $1,2 million profit before tax recorded in 2012.

This weighed down on the group’s profitability. The group had managed to generate a cumulative $19,9 million in profit before tax from the financial services.

After accounting for Turnall loss, the group’s profit before tax was down 4 percent at $16,2million from $16,8 million obtained in 2012.
Judging by the results alone, Turnall is no longer adding value to FBCH. Of course during the times of hardships for banks, it played a significant role in supporting the group’s bottom line.

However, over the years the banking sector has managed to regain some edge as confidence levels are slowly creeping up.
Both interest and non-interest income have been on the rise and increasing its dominance as the core revenue earner for the FBCH group.
In 2009, interest and fees income combined contributed only 29 percent to revenue. In 2013, the two made up 56 percent of the group’s total income.

Turnall, on the other hand, is facing dwindling revenue and lower margins which further narrows its value addition to the group.
Furthermore, the financial services subsidiaries seem to have a lot more to offer in the near future.

FBC Building Society has been active in property development and extending mortgages. Demand for property in the market is high and if financing is made available, then full uptake is almost guaranteed.

From 2012 to 2013, the building society grew its profit before tax by 29 percent and made a profit of just above $7 million which is equivalent to what the bank generated.

Housing projects are ongoing and the group has enough capital and credit lines to continue issuing mortgages.
Their current housing projects are targeted mainly for the middle and upper class, with a few projects for low income earners.

This means there is scope for them to tap into the low income market, where demand is even higher. CABS can testify that the low income projects can turn out to be quite a success story.

However, although Turnall is seemingly weighing down the group, it would be unfair to heap the blame on management without also looking at the role that shareholders have played in its declining performance.

As at December 31, 2013, the company had short-term debt of US$9,5 million of which 36 percent came from FBC Bank.
This accounted for 82 percent of the company’s liquid capital as at December 31, 2013. Total finance costs remain high at $3,2 million from $3,1million in 2012.

If debt was at least half this level, the company would have managed to break even. However, the company is facing liquidity challenges due to a slow moving debtors’ book.

As a result operations are funded from short-term borrowings which are expensive and chewing into its profit.
Ideally, FBCH as the major shareholder should inject equity capital through undertaking a rights issue for instance to ease the liquidity pressure.

This would remove the reliance on debt and chances are the business would make a profit.
Alternatively, FBCH can provide shareholder support loans of a longer duration and at a cheaper cost.

However, taking a back seat and leaving their subsidiary to rely on short-term debt from its bank, FBCH is probably either showing a vote of no confidence in the business or just disinterest in that investment.

Furthermore, with previous pressures to capitalise banking institutions, all focus was turned to raising funding to capitalise the bank.
This was done at the expense of Turnall, which has been somewhat let down by lack of adequate shareholder support.
Clearly the relationship between the two is benefiting neither.

Turnall’s under-performance will continually weigh on FBCH as a group; while on the other hand, lack of capital support will drag Turnall into more debt which will eat into profits through finance costs.
Arguably, it is time that FBCH divested from Turnall so that it can focus on financial services.

Turnall would benefit by having a new investor who will inject capital into the business and focus primarily on the company. FBCH will relieve itself from having to invest their time and money on an investment that is non-core.

This recommendation is, however, not new as analysts have from as way back as 2011 pointed out that it was time to exit.
Then, Turnall was putting on a sterling performance and it would not have been as hard to find a buyer.

With its current performance and coupled with liquidity shortages, FBCH will struggle to find a suitor for their stake in Turnall.
If they do, they will most likely not be able to get as much value as they would have had some two years back.

Regardless of this, the long term benefits will spill to both parties involved and selling the stake might be the right move for FBCH.

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