HomeChoice shaping up as financial-services company
HomeChoice, which markets mainly to lower-income customers through catalogue selling, might soon be better described as a financial services company with a retail sideline. HomeChoice’s most recent results to end-December show that FinChoice, HomeChoice’s specialist loans business, is still easily outstripping the growth registered by the traditional retail core.
If this trend continues it won’t be too long before the profits from HomeChoice’s lending operations surpass the retail component.
Such a development might well spook more conservative investors who have seen such aggressive diversification efforts go awry in the past. But right now HomeChoice seems undeterred in its effort to build up its financial-services segment, even though the broader consumer segment in SA is under immense pressure.
The latest report shows that FinChoice, which was initially anchored on lending to the retailer’s most creditworthy customers, represents more than 40% of group earnings before interest, tax, depreciation and amortisation (ebitda) and has been a meaningful margin enhancer over the last few years. FinChoice increased loan disbursements by a hefty 27% to R2.3 billion in the year to end-December, a level of growth well out of sync with prevailing business conditions.
But there are some signs of strain at FinChoice. A deeper look into the financial segment’s numbers show that revenue was up 17% to R871 million, but ebitda crept up only 1.4% to R362m as the margin was pressed down under 42% (from almost 48% the previous year) by higher debt costs (up 54%) and a 17.5% increase in bad debts written off.
HomeChoice disclosed that 84% of loan disbursements were made to existing customers, but also reports an increase in loans to externally sourced customers. The company said FinChoice had integrated with other external acquisition channels to acquire customers, mainly from digital sites.
HomeChoice argues that the initial risk of these externally sourced customers was mitigated with lower credit limits and shorter-term loans until their credit behaviour is proved. This strategy can be seen playing out in the loan book, with the average term decreasing from 19.7 months to 19.4 months and the average loan balance reducing from R9 474 to R8 628.
But any comfort investors take from those statistics is offset by the admission that the markedly higher number for bad debts written off (net of recoveries) was mainly caused by higher credit limits given to new MobiMoney and externally sourced customers.
HomeChoice admitted these customers were given credit limit increases too early in their life cycle. The company stresses corrective action has been taken to treat external customers’ limits “more conservatively for longer durations of demonstrating good payment behaviour before migrating them into the existing customer risk profiles”.
It will be intriguing to see evidence of whether FinChoice will temper its growth ambitions in the six months to end-June this year. With the retail segment — which finished 2019 with revenue up 4.5% to R2.6 billion and ebitda down 2.4% to R442 million — likely to face further pressure, HomeChoice could be in for a tough 2020.
But what is worth noting, though, is that HomeChoice’s stand-alone personal insurance business is sprinting ahead with premiums increasing 48% (admittedly off a low base) with 61 000 policies in force already. Two new products have been launched in the year and HomeChoice reported increased penetration of the existing client base as more customers elected to insure with the group.
This article first appeared on Business Live.