Letshego hits road to recovery
Mbongeni Mguni | Friday February 28, 2020 17:38
On Monday, Letshego Holdings will unveil full year 2019 results showing an increase of up to P157 million in pretax profits, continuing a long standing track record of delivering returns to investors.
However, the 21-year old homegrown microlender, which boasts a loan book of P9 billion in 11 African countries, had a nightmarish 2019. Its share price fell 56%, the worst performance for both the Domestic and Foreign indices on the Botswana Stock Exchange (BSE).
Having begun 2019 at P1.65, investors, including biggest stakeholder Botswana Insurance Holdings Limited (BIHL), witnessed carnage from mid-July onwards as Letshego collapsed to end the year at 71 thebe.
The numbers were not the problem. In fact, Letshego continued posting robust earnings, a pretax profit of P1.02 billion for 2018 unveiled in March and interim 2019 pretax profits of P600.1 million announced in September.
The trouble, apparently, was an executive exodus, with five top officials, including the group managing director, group financial officer and others, leaving in rapid succession. The departure of the CEO, Smit Crouse, in March 2019, barely six months into his contract, set off speculation in the market that Letshego was seized with deep differences over strategy.
The group closed ranks, an official curtain of silence descending even as key shareholder, BIHL released results showing it had incurred hundreds of millions of Pula in impairments due to revaluations of its stake in Letshego. The group fought against the troubles, bringing back a familiar face, 17-year Letshego veteran Dumisani Ndebele, to steady the boat as interim CEO. However, by the end of the year, shareholders were counting their losses, about P2 billion wiped away in value in a textbook annus horribilis.
“There was a time when we felt that the market did not recognise or understand what we were doing,” says Enos Banda, Letshego group chair.
A lawyer by profession and ex-investment banker, Banda adopts a philosophical approach as he talks about the microlender, often interspersing his comments with life observations and lessons.
The interview on Monday evening at Letshego’s headquarters is the first official glimpse into the goings-on at the microlender, after a year of market speculation and rumours.
“There are certain things you can’t say to the market because the regulators say you can’t say them,” explains Banda.
“You can’t say tomorrow is going to be really nice because they say you have sent a signal into the market on which people can trade.
“So we were compelled into regulatory silence even though our aspirations and plans were very clear.
“Also we were so consumed with decisively and absolutely, appropriately and responsibly dealing with this issue that we forgot the simple courtesy of communicating what we were doing.
“We were in the trenches and as I said, all I can do is apologise that we did not speak to our community and market in a consistent and clear manner but absolutely have no doubt that this was probably one of the most intense and pivotal times in terms of this board’s engagement.”
Even though Banda appears eager to talk freely, he is deliberate when he speaks, choosing his words carefully. It is not entirely clear what shook the stock last year, but it is evident the chair is a now picture of relief.
And he has reason to be positive. Since January, Letshego’s share price has gained 19 thebe, or nearly 27%, making the group the biggest gainer on the BSE thus far.
The improvement has been anchored by several positive developments including the appointment of Andrew Okai, a former top executive with Standard Chartered at global level, as Letshego group CEO mid-January.
Also in mid-January, BIHL announced it had increased its stake in Letshego from 26.17% to 27.95%, a strong vote of confidence and loud rallying call to other investors. The cherry on top, however, is the projected increase in pretax profits that Banda, Okai and other directors will unveil to analysts and investors on Monday.
The management and board have also been bolstered with new additions to plug governance gaps.
Following on from a bruising year and with positive signs of recovery, the chair has the comfort of speaking in hindsight, looking in the rearview mirror like a motorist who just narrowly avoided disaster.
But what caused that disaster? Digging deeper into the corporate speak, it would appear Crouse’s shock departure triggered troubles at Letshego, with the departure of other executives forcing the board to nearly take on an executive role.
“There are times when you are busy thinking about something else and life happens,” says Banda.
“Over the last two years, we had a CEO where we had an orderly exit and separation of the ways and then we had a new CEO and he separated, left the company on his own. “And so you are busy whistling, walking on the street and get a call, ‘the CEO is gone’. Organisations must be nimble and deep enough to deal with those things.” The board, faced with the market and organisational shock caused by the Crouse’s departure as well as the rising vacancies in top management, scrambled to keep the ship from the rocks.
“I demanded the utmost best and most from our board members. I said to each one of them, ‘those of you who are here recognise your responsibility has quadrupled. This is not what you signed up for. This is not what we anticipated. You are either in or you’re not. And if you are, you must fold your sleeve shirts and we go to work.’
“I’m confident that work has paid off.”
From the average eight days or so a year that non-executive board members engage with management, Banda’s directors found themselves far beyond that.
However a corner has clearly been turned and today, the chair can even speak quite coolly about the loss of value in Letshego’s share price.
In previous years, Letshego was a near constant presence in the BSE’s top five gainers of each year, a fact that made the swing to the bottom last year even more disturbing.
“There’s always tension between stock prices and the performance of a business,” explains Banda.
“A board or CEO that focuses too much on that question, runs the risk of beginning to become involved in a sort of beauty contest in the negative sense of the word where you are interested in how you look to the market rather than what your substance is.
“The most important thing from a board perspective is the resilience and embedded value of Letshego then you allow the markets to price it accordingly.”
He continues: “The good signal of the fact that the embedded value of Letshego is understood by the market, not its share price, is the fact that the shareholders who were suffering with these shares, hung on to them for dear life.
“If the share price was a true reflection of what shareholders thought of the company’s embedded value, Letshego would have changed hands.
“It would have been the best buy under the sun, a bargain. Why didn’t it change hands? What is that those who own it see?
“This is exactly our focal point which is to have a resilient, substantive and sustainable business. “The market seems to agree, not by virtue of the price it attaches, but the fact that those who hold continue to hold in a material way.”
Okai’s appointment, for Banda, has eased a lot of worries the board were having. The former Standard Chartered global executive has his work cut out for him however, although the board has ensured a sound management structure and additional board support for him.
One of the new CEO’s priorities is to find solutions around Letshego’s strategy to protect its base while diversifying from product and geographical concentration. For Botswana, one route to diversification of product would be to revisit the commercial banking licence application Letshego withdrew last year. Had it been awarded, the microlender would have become the country’s first indigenous bank, while also reducing its funding costs by moving from loans to deposits.
Okai is not expected to have answers around the banking licence, but it could emerge down the line as a solution for board consideration. Banda says the board is not dogmatic and is open to solutions around the strategy. However, Okai has his work cut out for him.
“Our standards as we go along and learn the hard lessons and looking at the historical performance in terms of what it means to convince the board, these standards are rising. “This is a board that compared to two years ago will ask more of its CEO than it did two years ago.
“The simple reason is that we understand the consequences of some of the decisions that we made,” the chair says.
Banda does add however, that the new CEO is not expected to be a miracle worker. For now the chair is pleased to return to the primary role of the board; directing strategy and output.
“I’m relaxed. Remember when I started speaking, I said the board is supposed to engage management about two days every quarter or eight days a year?
“I’m looking forward to those eight days and I can actually afford to because we have set the stage very clearly.”