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This disappointment is due to a deteriorating credit cycle in which bad debts tick upwards and credit growth slows down. However, we believe the share price of ABIL adequately reflects the risks and deteriorating environment. There is no denying that the credit cycle has deteriorated but, importantly, that is just what it is – a cycle, not a meltdown. The prudent investor values a company by looking through the cycle, while the market often extrapolates the current environment.

This creates opportunities. ABIL’s management tightened credit-granting criteria and repriced new loans upwards. These changes will benefit future financial results while ABIL is now bearing the full brunt of bad debts arising from strong loans growth in past periods. Other technical reasons for the decline bare a once-off impact on the results.

The environment for the furniture retail business, Ellerines, will remain tough but contributes only a small portion to ABIL’s valuation.

A lot of duplicate costs from moving to a new distribution system will be removed from next year, boosting profitability.

So while the environment is currently challenging for ABIL, it is not unlike previous down cycles. ABIL is priced as if the weak cycle will never improve, but it usually does. When that happens, patient investors will be rewarded.

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