Home Choice dividend problem

How king is cash?

Home Choice looks to be doing well.

The Balance sheet appears liquid at first glance

On the income statement side:

• Retail sales have multiplied 6x since 2009 and

• Profits are growing nicely.

But

as we are about to see

Profits are not everything

The lifeblood of any business is cash

and

Home Choice is not generate sufficient cash flows to pay its dividends and repay borrowings.

A 13 year (2006 -2018) analysis of the cash flows shows of Home Choice reveals that

• The company had net cash inflows of R344 million prior to considering dividends paid and borrowings.

• R1.1 billion was paid in dividends.

• R2.1 billion borrowed and only repaid R1.3 billion over the 13 year period.

In essence,

Home Choice borrows to pay dividends.

Picture: Cash flows of Home Choice 2018-2006

How did we get here?

Home Choice started out as a mail-ordering retail and discovered the secret to increasing sales:

• Providing credit!

Credit opens a business to a new world of customers,

However,

Too much of it can leave the company with liquidity shortages in the short-term.

Home Choice debtors are provided up to 36 months to pay their debt and are unsecured.

The company is happy to grant anyone credit as long as their credit score is acceptable.

Risks of having too much debtors

At 31 December 2018 the company had R3.4 billion of debtors whom are mostly low-middle class.

Of this, the company expects R611 million to default.

There is a medium-high risk of default overall on the R3.4 billion considering that the debts are unsecured,

economy growth is sluggish and consumers are cash strapped.

In turn the company has opened itself to risks of defaulting on its own debt.

The Home Choice business model is to purchase from suppliers on credit, sell on credit, collect cash from customers and pay suppliers.

Because customers are taking long to pay,

The company runs the risk of having to pay suppliers before receiving cash from its customers. If Home Choice customers start taking longer to pay this could lead to the company entering business rescue proceedings.

The dividends issue...

On top of that is shareholders expecting the company to atleast maintain its dividend.

Home Choice does not make enough cash in a year to pay dividends.

For 2018, the company made R110 million after operations and investing in assets,

and paid dividends of R213 million.

The R113 million deficit was made up from borrowings

A drop in the dividend will be interpreted negatively.

And it is not going to get better for lenders like Home Choice.

The National Credit Act (NCA) Amendment Bill does not require customers to provide documentation as evidence of proof of income for affordability assessments.

The NCA Amendment Bill proposes debt relief for over-indebted consumers who earn less than R7 500 per month and have unsecured debt of less than R50 000.

Eligible consumers will be able to apply for debt intervention and could be allowed to rearrange their debts or suspend the credit agreements in part or in full for up to 24 months.

In severe cases the debt may have to be written off by the credit provider.

Home Choice is standing directly in the path of this new law.

• The company will soon have to accept not taking any document for affordability segments and risk granting credit to over-indebted customers, or

• turn away credit customers and lose the business.

We would suggest that the dividend be cut,

Much stricter credit terms (security for debt) and sales reduced

But,

That would possibly lead to shareholder rioting

Japhta Mamalema

27 Nov. 19