Valuation factors Letshego’s long-term strategy and industry outlook
Product diversification, investment in technology to maximise shareholder value
Risk/reward trade-offs continue to look attractive
Price is currently trading at 6.2x its earnings
A report by Stockbrokers Botswana (SBB) has issued a long-term BUY recommendation on Letshego Holdings, setting a target price of P1.50.
SBB’s analysis indicates a promising 19% upside from the last closing price of P1.26 as of November 3, 2023. The target price is derived from SBB’s discounted cash flow model, taking into account Letshego’s long-term strategy and industry outlook across all operational markets. SBB’s evaluation reveals that Letshego’s current share price is trading at 6.2 times its earnings on a 12-month rolling basis.
Bongani Mabhena the Research Analyst at SBB emphasised that the 12-month rolling price-to-book value ratio is 0.5 times, explaining that a price-to-book value lower than 1 would indicate that the stock is undervalued in relation to its assets.
Letshego continues to pursue its 6-2-5 strategy, currently advancing through Plan 5 to meet performance targets by 2025. Mabhena emphasises the importance of product diversification and technological investment in achieving these goals, aiming to maximise shareholder value. Noteworthy points include the success of platforms like the Digital Mall, attracting 60% of core customers, and the growth of insurance product revenue to P145 million in the first half of 2023, alongside offerings in education and health insurance in Uganda.
Mabhena suggests that Letshego’s diverse product range offers a chance to mitigate cash flow risks by establishing multiple revenue streams across different geographical segments. However, the company faces challenges in turnaround markets such as Tanzania, Ghana, Nigeria, Rwanda, and Kenya, resulting in downward pressure on margins and growth.
Despite the emphasis on regional diversification, the first half of 2023 brought challenges such as exchange rate volatility, inflation, and rising interest rates. Although progress is evident in interim results from Rwanda, Ghana, and Tanzania, these hurdles persist.
SBB acknowledges a lag in implementing Letshego’s strategy and impacting the bottom line in the short term. However, they find the long-term risk/reward trade-offs attractive in the aforementioned markets.
“Although margins were at their highest in 2021 and have been on a downward trajectory, we believe improvement in key revenue streams will continue during our forecast horizon and beyond.”
Letshego’s commitment to seeking new markets aligns with its vision, despite suggestions from Botswana Insurance Holdings Limited (BIHL), which holds a 27.61% stake, to exit underperforming markets.
BIHL CEO Catherine Lesetedi recently argued that Letshego’s performance “still doesn’t meet expectations” disclosing that the insurer has tried to encourage Letshego to exit underperforming markets.
Letshego’s CEO Aupa Monyatsi remains optimistic about Letshego’s resilience, noting that turnaround plans are taking shape. He addressed concerns about the pace of change, describing Letshego as a “titanic” rather than a speedboat, highlighting the complexity of operating in 11 markets. In fact, Letshego’s position is that its markets are profitable before accounting for exchange movements given that the company reports in Pulas. Monyatsi urged optimism but cautions against macro-environment volatility.
“We see that sometimes people want the turnaround to be much faster than what it is,” he said reminding his audience through a Zoom call that “When it (titanic) starts to turn, it’s difficult for it not to turn and now we are seeing signs of it turning”.
SBB shows that Letshego has seen a decrease in sustainable growth rate from a 5-year peak of 8.48% in 2020. Mabhena says the sustainable growth rate for the half-year 2023 results was 2.96% comprising a dividend payout ratio of 59.38% and a return on equity of 7.28%.
Although this may represent operational inefficiencies and diminishing profit margins, the analyst believes that although negative macroeconomic headwinds will persist, they have reached their peak bringing a new sense of relief to the overall growth rate.
“With subsiding inflation and the pause in interest rate hikes in developed countries and most markets, sustainable growth should rebound and bring positive sentiment with it.”
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