You have to admit that Bill Gates is no fool.
Having made absolute fortunes out of identifying and then developing Microsoft, with his wife he started to use part of their joint wealth to help the world’s needy.
Way back in 2007, the Bill and Melinda Gates Foundation made a $20m loan to the thennewly formed ASA International Group (LON:ASAI).
Today that company is one of the world’s largest international microfinance institutions, with a strong commitment to financial inclusion and socio-economic progress.
Towards the end of this month, on Friday 27th September, it will be declaring its Interim Results for the period to end-June, which I believe will show a useful advance in the group’s activities.
What Is Microfinance?
Microfinance is the provision of financial services to the poor.
This involves small amounts of savings, credit, insurance and money transfer services.
There is significant net demand for such financial services in many areas of the developing world, especially in rural areas.
The Business
Through its heritage and close association with ASA, the Association of Social Advancement, based in Bangladesh, the group has a long heritage in the microfinance industry.
From inception, it benefited from early access to ASA NGO Bangladesh’s know-how, industry technical expertise and experts.
The company was founded to adapt the ASA Model to fit the diverse countries in Asia and Africa in which it has established its microfinance institutions.
The ASA operating (lending) model is focused on six distinctive features, emphasising the group’s social responsibility commitment to clients and staff:
- Loans with market-based interest rates.
- Group selection without joint liability.
- Collateral-free loans with a moratorium on loan repayments in emergency situations.
- Loans for income-generating activity only.
- Full repayment before qualifying for new loans and repeat loan cycles with set limits.
- Training and development of operating staff in-house and no bonus incentive.
The company provides small, socially responsible loans to low-income, financially underserved entrepreneurs, predominantly women, across South Asia, Southeast Asia, West and East Africa.
It provides small socially responsible loans, bank accounts, savings and other financial services to start or grow businesses.
Managing credit risk is an integral part of the group’s operating model.
Its loan officers foster close client relationships, quickly identifying repayment or other issues, as well as disbursing new, higher loans to qualified clients.
The client assessment and admission process takes up to 14 days for a first cycle loan, ensuring only clients committed and able to grow their businesses are accepted and protecting clients from being over-leveraged.
The credit methodology results in low credit costs, which in combination with the low cost of operations, leads to attractive financial returns.
The company maintains a favourable maturity profile with the average tenor of all funding from third parties being substantially longer than the average tenor at issuance of loans to customers, which ranges from 6-12 months.
Today it has over 2,016 branches, across 13 countries, handling its 2.3m clients.
It operates in Pakistan, India, Sri Lanka, The Philippines, Myanmar, Ghana, Nigeria, Sierra Leone, Tanzania, Kenya, Uganda, Rwanda and Zambia.
The impact of principal risks on its business is different from country-to-country, which benefits the group.
The group’s risk profile is diversified across those thirteen markets in Asia and Africa.
Addressable Market
According to the World Bank, the addressable market is estimated at 378m prospects in existing countries of operation.
The group is well placed to capture this significant breadth of market opportunity by continuing to increase its penetration in current as well as in future markets in Asia and Africa.
Latest Trading Update
On Wednesday 17th July the company updated investors that it had seen sustained momentum in its business performance in its first half year, along with continued improvement in its operating environment, and that it expects that momentum to continue in H2 2024.
The outlook for 2024 remains positive with continued improved business performance expected for its operations on the back of the momentum and from the continuing high demand for loans from its clients.
It is now expected to result in an improved trading performance for 2024, which should be ahead of the current market consensus for the current financial year.
Analyst Views
At Stifel Nicolaus Europe, analyst Hugo Cruz has 106p Price Objective out on the group’s shares.
While Nidhesh Jain and Sri Karthik Velamakanni at Investec Bank rate the shares as a Buy, with a 116p Price Objective, estimating the year to end-December will show revenues of $159.0m ($148.2m) and pre-tax profits of $41.9m ($38.0m), lifting earnings up to 19.3c (15.0c) per share.
For 2025 they see $181.7m revenues, $50.3m profits and 25.6c per share earnings.
Stephen Barrett at Cavendish Capital Markets looks for $161.2m revenues this year, with $46.4m in adjusted pre-tax profits, earnings of 18.2c or 14.3p per share, and a 3.6p (nil) dividend.
For the coming year he goes for $180.8m revenues, $54.9m profits,24.8c or 19.4p earnings and a 5.4p dividend per share.
Barrett has a Price Objective of 136p on the shares.
In My View
This is a massively scalable business that offers significant growth potential.
In addition to its branch model, the group is looking to introduce a digital channel via mobile devices, market-by-market over the coming years.
Furthermore, in due course the group aims to offer deposits more widely and other digital financial services in all operations, on a country-by-country basis, depending on local demand and starting in the operations with deposit-taking licenses.
At the current 87p, this £87m capitalised group’s shares are a ‘giveaway’ trading on 6 times current year and just 4.5 times prospective earnings.
I see at least a 50% appreciation in the near-term.