In a really interesting move, Afrimat has announced an accelerated bookbuild equivalent to around 5% of current market capitalisation (a raise of around R420 million). In this process, capital is raised from institutional investors based on their willingness to take shares and at what price. The “book is closed” once the raise has been achieved at pricing that is acceptable to Afrimat. The proceeds will be used for the Gravenhage manganese mining right and the Glenover project. The Gravenhage acquisition was announced in May 2021 and these things take a long time to conclude. Total project peak funding is estimated at R1.5 billion and earnings from this investment should come through in the 2024 financial year. The Glenover mine transaction was announced in December 2021 and has a total deal value of R550 million. This is a phosphate, rare earths and vermiculite mining right. Again, peak funding is estimated at R1.5 billion. Afrimat is trading well in the rest of the business and has a strong balance sheet, which is why this equity raise just needs to supplement current cash resources rather than cover the full cost of the projects.
Onelogix Group has renewed the cautionary announcement related to a potential take-private of the company. This has been going on since December 2021 and initial price guidance was R3.30 per share. The KZN floods caused a wobbly in the process and the latest renewal announcement doesn’t give any indication of pricing.
Despite the independent board of Silverbridge not recommending the offer from ROX Equity Partners to shareholders, another executive director of Silverbridge isn’t hanging around. With the top executives having accepted the offer, I’m really not sure that shareholders can afford not to accept the offer. It may be “unfair” but it is reasonable and this is how life goes in microcaps – nobody pays you what the shares are actually worth.
Financial updates
AECI Limited has released results for the six months to June 2022. Although revenue jumped by 31%, Headline Earnings Per Share (HEPS) only increased by a modest 8% to 573 cents. The interim dividend is also 8% higher at 194 cents per share. Of the R748 million invested in capex, 59% is for growth capex. This group is clearly trying to stay on a growth path, with the latest result representing record revenue and earnings. As we’ve seen across the market, working capital is putting pressure on the balance sheet, having increased from 17% to 22% of revenue. This is cash tied up in inventory and debtors, offset to some extent by creditors. There’s also pressure on margins in general, with EBITDA margin down from 12% to 10%. Despite all of this, cash conversion actually improved, with cash generated from operations up 9%. The share price has lost more than 11% this year and is down nearly 10% over 5 years, so there hasn’t been much to get excited about here. As you’ll note further down, there’s also a change in CEO coming in the next 12 months.
Gemfields has released a brief financial update for the six months ended June 2022. This emerald, ruby and jewellery business is one that I find interesting, as the traded multiples are low and the risks of operating in Africa are significant. Just recently, the company noted that violence in Northern Mozambique was uncomfortably close to the ruby mine. The operations themselves are flying though, with auction revenue breaking records over the past six months and 12 months. The cash balance is $111.4 million and there’s another $81.1 million still to be received from one of the auctions. Debt is just $29.7 million. Jewellery business Faberge only needed $1.5 million in cash from Gemfields over the past 12 months and didn’t draw any cash at all in the six months to June. Cash capital expenditure in the six-month period was $14.1 million. Interim results will be released on 22 September and investors will examine them closely, as the net cash balance seems to be around R2.75 billion and the market cap is only R3.4 billion.
AVI Limited has released a trading statement for the year ended June 2022. In a difficult period, the consumer goods business grew revenue by 4.3%. Revenue growth was achieved across all categories except for I&J (due to lower fish volumes and a stronger rand for most of the period, which impacted exports). Personal Care grew revenue by 17.7% in the second half of the year and Footwear and Apparel grew by 14% in that period. AVI managed to protect gross margins to a large extent with price increases and hedging strategies, though there was still a small drop in gross margin for the year. AVI responded to a tough environment by being even tougher on costs, with selling and administration costs up just 1.5% this year. Again, I&J is the smelly fish in this story, with a substantially higher fuel cost for the fishing fleet hitting profitability at a time when revenue was also under pressure. Consolidated HEPS will increase by between 5% and 7%, coming in at between 524.8 cents and 534.8 cents. With a closing price of R71.00 the share is trading on a Price/Earnings multiple of 13.4x.
British American Tobacco has released a half-year report to June 2022. The focus is on New Categories, as the cigarette business is seen to be ex-growth (combustible revenue only increased by 0.6% in this period). New Categories grew revenue by 45% in this period after growing 51% in FY21. Non-combustibles are now 14.6% of revenue. The target is £5 billion revenue by 2025, which would result in profitability for this currently loss-making segment. At group level, adjusted operating margin improved by 90 basis points, assisted greatly by another £275 million in savings under the Quantum efficiencies project. The group is aiming for £1.5 billion in annualised savings under this project by the end of the year. Reported results are way down (earnings per share (EPS) has fallen 42.9%) due to impairments in Russia, a charge related to historic breach of sanctions and once-off costs related to Quantum, like the exit from Egypt and a factory closure in Singapore. “Adjusted constant currency EPS” is up 5.7%, with management wanting you to see this as a more sustainable view of earnings growth. Over the next five years, the company is aiming to generate £40 billion of free cash flow. To drive further value for shareholders, the company is busy with share buybacks (as regular Ghost Bites readers will know), with £1.3 billion already repurchased as part of the £2 billion programme for 2022. The company has reiterated its full year 2022 guidance, which means constant currency revenue growth of 2% – 4% and mid-single digit constant currency adjusted EPS growth.
Anglo American has announced rough diamond sales for De Beers’ sixth sales cycle of 2022. Sales came in at $630 million, down from $657 million in the fifth cycle but higher than $514 million in the fourth cycle. Although the management team talks about a “watchful approach” based on “macroeconomic challenges” it seems as though there are still plenty of people with money for expensive jewellery.
Transnet is a debt issuer on the JSE rather than an equity issuer. The results for the year ended March 2022 are still relevant though, as Transnet’s financial health has a considerable knock-on impact on other industries like mining. Things are looking vastly better, with revenue up 1.8%, EBITDA up 20.5% and net profit finally swinging into a the green (R5 billion vs. a loss of R8.7 billion in the prior year). Of course, it could’ve been even better if the freight rail business was performing properly. The company is currently negotiating new contracts with the Coal Export Parties. Transnet is still dealing with theft and vandalism but at least there now seems to be money in the kitty to help fix the problems. In a major step forward, the Auditor-General of South Africa issued an unqualified audit opinion. This means there were no major issues, unlike in the four previous years where qualified opinions were issued based on irregular expenditure. Is the tide finally turning in our beautiful country?
Make a note: Capital & Regional will announce its interim results on 11th August.
Operational updates
RECM and Calibre (RAC) released the prepared comments from its AGM over SENS. The main asset is alternative gaming business Goldrush, which the group notes is trading well and has achieved rolling 12-month EBITDA of over R380 million. The removal of mask mandates has been a win for the bingo operations, as nobody wants to sit there all night with a mask on. Limited Pay-Out machines are still being rolled out and retail sports betting continues to grow both in-store and online. RAC has distributed all the Astoria shares it still owned to shareholders, removing the cross-holding between the two investment holding companies. The group has also renegotiated its banking arrangements to reduce the cost of funding and achieve more flexibility with the balance sheet.
AECI Limited’s CEO Mark Dytor is retiring from the top job with effect from 31 July 2023, having been with the company for a whopping 39 years. He has been the CEO since 2013. That kind of institutional knowledge is tough to replace, with no successor named as yet. This would explain why a year’s notice has been given.
Rex Trueform has announced an interesting change of CEO. Catherine Lloyd is resigning as CEO and will still be involved as a legal and strategic advisor. Marcel Golding is moving from the Chairman role to the CEO role, thereby taking on executive responsibility for the group. Patrick Naylor has been appointed as Chairman.
Director dealings
An associate of the CEO of Invicta has bought shares in the company worth around R307.5k. The share price has been trading at 52-week lows, so this example of “buying the dip” by the CEO will send a welcome message to the market.
Unusual things
Sea Harvest Group wants to wind up the Viking Staff Share Scheme which matured in March 2022. To do this, there would need to be a specific repurchase of shares under JSE rules. A circular has been distributed to shareholders to meet the regulatory requirements for this transaction.
Vukile Property Fund’s credit rating has been upgraded by GCR. The upgrade is based on Vukile’s geographically diversified portfolio (Spain and South Africa), the anchor tenants being grocery or essential services businesses and the “commitment to maintaining balance sheet and liquidity strength” that GCR is happy with.
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The words “crypto” and “volatility” are synonymous. As these assets aren’t supported by underlying cash flows or a widely accepted valuation methodology, they tend to trade based on sentiment. Sentiment is just a function of human emotions, perhaps the most volatile natural phenomenon of all!
Note from The Finance Ghost:
Regular listeners to the Magic Markets podcast will recognise the Future Forex name. We’ve welcomed them to the show on a few occasions to explain the arbitrage process and how it works. You must always do your own research and always make your own decision. If it helps though, I know a number of people who have signed up with Future Forex and have smiles on their faces, particularly regarding the level of service.
Here’s the latest podcast with great information in addition to this sponsored article:
Future Forex’s crypto arbitrage offering typically delivers a net profit of 1% to 1.5% per trade regardless of whether crypto is in a bull market or a bear market, or even in a “crypto winter” as some have referred to the recent market troubles.
Earning 1% to 1.5% per trade isn’t exciting until you realise that due to the cyclical nature of the process allowing for multiple trades, you can earn between R100,000 and R150,000 per year with a starting capital of only R200,000. Using a realistic mid-point and based on many client examples, Future Forex clients are achieving annualised returns of 70% to 80% on initial capital.
Importantly, these indicative returns are net of all costs.
So how is it possible that such a volatile asset can be used to generate smooth, dependable returns that carry low risk?
The arbitrage advantage
An arbitrage is a strategy that takes advantage of pricing differences across markets. The idea is to simultaneously buy an asset where it is cheaper and sell it where it is more expensive. Such opportunities exist because of market inefficiencies that are often structural in nature.
In South Africa, these inefficiencies are caused by capital controls which result in a demand/supply imbalance in the local crypto market. These capital controls take the form of an R11 million Foreign Exchange Allowance which limits the amount of crypto you can purchase abroad and sell in South Africa each year. In an efficient market, higher returns come with higher risk. In this case, high returns are achieved with low risk. This is because returns are limited by your R11 million Foreign Exchange Allowance.
Don’t let your option expire worthless
Each year, you can take R11 million offshore. The first R1 million is a single discretionary allowance and the remaining R10 million is a foreign investment allowance. The R10 million can be unlocked through an application process that Future Forex’s in-house tax team and partner tax practitioner assist their clients with as a complimentary service.
You don’t need R11 million to take advantage of the full allowance. Future Forex recommend at least R200,000 starting capital to achieve the profit target. By performing the arbitrage 55 times, they achieve the return based on the full allowance rather than the starting capital.
If you don’t use this allowance, it expires at the end of the year and resets for the following year. This is effectively an annual option to earn a return on your allowance, one which expires worthless if you don’t take advantage of it.
The implicit usage of this asset which otherwise expires worthless, in combination with the inefficiencies of the local crypto market, is why the returns through arbitrage can be so lucrative despite the investment being exceptionally low risk.
There’s no such thing as “zero risk”
Future Forex are risk management experts. CEO Harry Scherzer’s background as a qualified actuary has allowed the team to hedge out the market risks and actively manage other risks through processes like detailed due diligence on counterparties. It’s also worth highlighting that Future Forex Arbitrage Services (Pty) Ltd is an authorised Financial Services Provider (FSP 51884) for currency remittance services.
The core market risks are crypto price fluctuation risk and forex risk, both of which are automatically hedged out by proprietary systems and use of floats. This locks in the arbitrage profit at the initiation of the trade, so they simply don’t trade on behalf of clients if the profit isn’t there. As a result, they never lose money on a trade.
The other critical risk is counterparty risk, as the very nature of a trade is that somebody needs to be on the other side of each step in the arbitrage process. It is impossible to hedge out this risk, as this is a business risk rather than a financial risk. Instead, Future Forex mitigate this risk to the greatest extent possible by only working with trusted partners that they have performed extensive due diligence on. In literally tens of thousands of trades, they have never suffered a default event on any obligation in the process.
Taking the pain out of the process
To take full advantage of the annual allowances, Future Forex has built systems that make the process as painless as possible, while hedging all of the market risks. Their relationship managers are highly trained and always contactable for clients to have peace of mind and a high-quality experience. To start your journey, complete a registration form at this link.
Alternatively, get in touch with Future Forex so that they can give you a call to answer any further questions you may have.
This article has been sponsored by Future Forex and reflects their views. This is not a recommendation from The Finance Ghost to engage in crypto arbitrage. At all times, you must do your own research and you are responsible for your own decisions.
The concept of a “defensive stock” comes up often, doesn’t it? What does it actually mean? Most importantly, can companies really be considered defensive when faced with such uncertain macroeconomic times?
Let’s go straight to the heart of the matter – defensive stocks tend to trade at high valuation multiples based on an assumption that the operations are bulletproof. This is dangerous for two reasons. Firstly, high valuation multiples create the risk of a nasty multiple unwind. Secondly, operations are never bulletproof.
“Consumers will always need xyz” is the frequent argument and there’s a great deal of truth in it when “xyz” means pharmaceuticals or basic groceries. This argument unfortunately misses some critical elements of the business models of these companies, leading to hard lessons for investors.
Defensive, in parts
It is absolutely correct that some products are defensive. It is absolutely false that an entire business model is defensive.
Let’s use a typical pharmacy business as an example. Behind the counter, the pharmacists are ready to sell you medicine that you probably can’t go without. Clearly, that’s a defensive product category. Inevitably, products that are “needs” rather than “wants” tend to achieve a much lower gross margin. A retailer makes far less by selling you bread or pills than by selling you an exciting pink kettle (a Mrs Ghost favourite).
If we move on to a supermarket example, then we see margin mix really come into play. Fresh foods and staple groceries achieve low margins and supermarkets compete viciously on price to attract customers to the store. The higher margins are achieved by seducing consumers with unusual or interesting products, or luxuries in the checkout aisle that tempt you into adding something to your basket.
Ever wondered why supermarkets sell things like toiletries, garden and pool products and even clothes? It all comes down to margin mix.
Margin isn’t defensive
We now arrive at the inconvenient truth in this honeymoon story about defensive stocks that somehow withstand any economic pain: margin mix.
The high valuation multiple is based on all the earnings, not just the earnings from defensive categories. If you’re paying a Price/Earnings multiple of 30x for a retailer, you’re also paying 30x for the net profit earned by selling organic yoghurt, not just bread and milk.
What happens when the organic yoghurt is no longer in the trolley? Even worse, how do you feel about paying 30x when the gross margin is a sitting duck in an economic downturn as consumers change their habits and stick to just the basics?
Walmart is down 14.6% this year. The share price was smashed in May after releasing results for the fourth quarter of the 2022 financial year. People bought the dip and those who sold soon thereafter made good money. Those who bought and held in the hopes of a steady recovery are back where they were in May.
Why is Walmart hurting investors? Because the mix isn’t defensive. Simple as that. In the latest quarter, sales grew by 2.4% and operating income fell by 23%. Walmart irritatingly doesn’t disclose gross profit as a separate line on the income statement, so we have to calculate it from this section of the financials:
Gross profit in the latest quarter is $33,441 (in millions, as per the excerpt above), a margin of 23.84% if we ignore membership and other income which doesn’t carry a “cost of sales” when being earned. In the comparable quarter, gross profit was $33,887 and gross margin was 24.7%.
A deterioration of 86 basis points at gross margin level is a disaster for a retailer. Remember, the margins are really thin by the time we reach net income. In the latest quarter, consolidated net income of $2,103 is a net margin of just 1.49%. Now you can see why a seemingly small change in gross margin has such a significant impact on net income.
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Ascendis Health has announced a fully underwritten non-renounceable rights offer to raise around R101.5 million. This means that shareholders cannot sell their rights, but they can apply for excess shares if they want to take up more than their allocation. The underwriter is Calibre Investment Holdings, with a fee of 2% (around R2 million) payable to that entity. Ascendis currently owes around R498 million to Austell Pharmaceuticals in a facility that expires in November 2022. Depending on which potential suitor the shareholders vote to dispose of the Ascendis Pharma business to, the outstanding debt with Austell will be between R129 million and R149 million. The proceeds of this rights offer will be used to fully settle that debt and recapitlise the business so that it can move forward with Ascendis Medical and the Consumer side of the business. The rights offer price is R0.71 per share and the current share price is around R0.64.
RCL Foods has made a voluntary announcement regarding the acquisition of Sunshine Bakery from AFGRI Group Holdings. This business is based in KZN and is one of the country’s largest independent bakeries. The deal will increase bread volumes in the RCL Foods’ baking network by 28%, so this is an important transaction as part of the ongoing strategy to focus on higher margin foods. When the business was originally built around poultry, anything has better margins – even bread!
Spear REIT has announced the disposal of 5 Fitzmaurice Avenue to Rex Trueform Group for R85 million. This price is a 2.4% premium to the latest book value, which is another good example of the group recycling capital at the valuations put forward in the financials. This was a non-core asset and the proceeds will be used to settle shorter term variable debt while the fund negotiates new opportunities that are in line with the stated strategy of investing in industrial and convenience retail assets. The loan-to-value will reduce by 118 basis points to 38.29% based on this disposal. Despite interest rate increases in South Africa, Spear has reiterated its guidance of 5% to 7% growth in distributable income per share. For Rex Trueform, this is part of a strategy to diversify and grow the existing property portfolio. The purchase price will be funded by R20 million of equity from Rex Trueform and R65 million of debt. The yield for the acquisition is 9.6%.
Jubilee Metals announced that two warrant holders have exercised their rights to subscribe for shares in the company at a price of R1.23 per share (vs. the current market price of around R2.80). This is an injection of R1.8 million into the company and represents a holding of 0.06% of the shares in issue post the exercise of the warrants.
Mantengu Mining’s acquisition of Langpan Mining Co has become unconditional, which means that all conditions precedent have been met. In other words, the transactions will now close. Mantengu will now send a request to the JSE to have its suspension on trading lifted.
Financial updates
Pick n Pay released a trading update for the 18 weeks ended 3rd July. There is renewed interest in the group, particularly with the new CEO making all the right noises about adapting the stores to suit customer preferences. 10 stores have been updated under the Ekuseni Strategic Plan and sales in the first five stores are already up 18% since launch. The idea is to upgrade 40 stores by the end of the interim period and 150 by February 2023. I’m also very pleased to see that Boxer will be disclosed as a separate segment in the next result, as Pick n Pay got away with poor segmental disclosure for years. In this 18-week period, sales increased 10.7% year-on-year with selling price inflation of just 5%, which is well below 7.1% CPI Food. Importantly, the base period included 18 days of trading restrictions on liquor, so it’s not a perfect comparison. Pick n Pay Clothing is still flying, with sales up 17.1% as that business continues to take market share. Impressively, Pick n Pay’s online sales across the various channels grew by 97.3%! As part of ongoing cost saving initiatives under Project Future, Pick n Pay will close its Johannesburg office and move to a more flexible support office structure. Later on in the announcement, the company sounds the alarm about inflationary pressures. It’s great to have strong sales growth but profits are what count. Sadly, the group expects an acceleration in CPI Food, which is frightening news for consumers. With inflationary pressures from rates, electricity, utility and fuel costs, Project Future’s cost savings are critical and Pick n Pay will need to operate as tightly as possible. Although the new strategic direction couldn’t have come at a better time, this excerpt from the announcement tells the story of what is really going on out there:
“Taking into account the FY23 operating cost pressures mentioned above, we reiterate our guidance that we expect Ekuseni to drive meaningful earnings growth from FY24 only (vs. the FY22 Pro forma Headline Earnings base).”
Pick n Pay Trading Update, 26 July 2022
Woolworths released a trading update for the 52 weeks ended 26th June. This can’t be compared to Pick n Pay, as the period is much longer and the base period is also very different, with Covid-related disruptions playing havoc on comparability. Turnover only increased by 1.4% as reported or 2.6% in constant currency terms. Online sales were a highlight, up by 16.4% and now contributing 12.4% to group turnover. The second half (H2) of the financial year was far better than the first half, with sales up 5.6% in constant currency. In the Fashion Beauty Home segment, H2 sales were up 6.5% and full-price sales were up 8.8%, which is supportive of gross margin. Despite trading space declining by 4.5% this year, sales grew by 5.4% and prices increased by 6%, so there was a small drop in volumes. Online sales contributed 4.4% of total sales, having grown by 13.2%. In Woolworths Food, sales in H2 could only manage 4.6% growth and prices only increased by just 3.5% despite underlying product inflation of 3.9%, so Woolworths isn’t managing to pass the full inflationary increases on to its affluent consumers who are clearly finding value in shopping at competitors. Full year growth was 4.2% and comparable stores were up 3.1% with price increases of 3.5%, suggesting a drop in volumes! Online was the highlight at Woolworths Food, up 45.4% and contributing 3.2% of sales. In David Jones, full year sales fell by 2.6% despite growth of 4.3% in H2. Trading space fell by 2.6%. Online sales were up 28.7% and contributed 22.8% to total sales, a reminder of how much higher online penetration is in markets like Australia. Country Road Group achieved a positive full-year sales number of 3.1% after knocking out 9% growth in H2, despite an 8.1% drop in trading space. Online grew by 4.6% and contributed 31.6% to total sales. It looks like the clothing businesses are making a comeback while the food business is really feeling the heat from competitors.
Shoprite Holdings also joined the frenzy of retailer announcements with an update for the 52 weeks ended 3rd July 2022. This makes it directly comparable to the Woolworths update. Total sales were up 11.9% on a 52-week comparable basis (the base period had an extra trading week) and they don’t bother with adjustments based on the civil unrest, a bit of a flex from a management team that is riding a wave of success at the moment. The Furniture segment lagged the rest, with growth of just 0.7% due to a poor first half that was hit badly by civil unrest. Supermarkets RSA achieved like-for-like growth of 8.5% with selling price inflation of 3.9%, an exceptionally strong result even if there was some benefit from fewer days of restrictions on liquor trading in this period. Full results will be released on 6th September. Shoprite has hammered Woolworths in the higher LSM market but it will need to watch its back with the strategic thrust we are seeing at Pick n Pay.
Truworths didn’t let the grocery retailers have all the limelight on Tuesday, with an update for the 53-week period ended 3rd July 2022. Again, because of the way retailers report (based on weeks rather than months), every few years sees a 53-week period. On a 52-week basis (which is correct when comparing to the prior year), sales were up 6.6%. The second half of the year saw a healthy acceleration in sales growth, up 12.7%. Account (i.e. credit) sales represent just over half of group sales and grew by 8.7% vs. 9.3% growth in cash sales. The South African business grew by 5% on a 52-week basis and credit sales contributed 69% of total sales, so the local business is highly dependent on customers buying on account. Product deflation was 0.6% (yes, you read that correctly) so there was significant volume growth here. The debtors book is noted as being in a “healthy position” based on management’s key metrics. The UK-based Office segment grew sales by 14.2% in GBP on a 52-week basis. The second half saw an acceleration like in South Africa, with growth of 23.1%. The contribution from online sales to Office’s turnover was 45% in this period, well down from 63% in the Covid-impacted base period. Truworths planned to reduce Office’s trading space by around 12% but the end result was a decrease of only 4.4% as trading was stronger than expected and negotiations with landlords went well. In the prior year, Office reduced trading space by 22%! Results will be released on 1st September and after a rally of over 9% based on this update, shareholders will be hoping for an enjoyable Spring Day once the full income statement is revealed.
After releasing an operational update earlier in the week, Cashbuild released a trading statement that confirms a drop in HEPS of at least 30% for the year ended 26th June 2022. A clearer range will be given once Cashbuild has a handle on what the final numbers might be. For now, all we know is that HEPS will be a maximum of R20.108 for the period. The share price fell by around 3.3% soon after the announcement to trade at R266 per share. Although the share price is largely flat over the past 12 months, the 52-week range of R223.55 to R311.89 gives an idea of the volatility along the way.
Merafe has released a production report and trading statement for the six months ended June 2022. Attributable ferrochrome production from the Glencore Merafe Chrome Venture increased by a modest 1.7% year-on-year. That’s a lot better than many of the other mining companies on the JSE recently achieved with their production numbers. Thanks to a consistent production result and strong chrome prices, headline earnings per share (HEPS) is expected to be between 49.5% and 69.5% higher, coming in at between 34.7 cents and 39.3 cents. Although there is no debt on the balance sheet, R194 million out of the current R1 billion in cash has been ring-fenced for rehabilitation obligations. Merafe continues to trade at a very low Price/Earnings ratio as the market remains nervous of how sustainable these commodity prices are.
Kumba Iron Ore released its interim results covering the six months to June 2022. Revenue fell by 32% in a strong reminder of how cyclical these mining businesses are. Basic HEPS fell by 50% in an even stronger reminder of how much operating leverage we find in these mines. In other words, the impact of a change in revenue is always amplified by the time we reach HEPS, due to the level of fixed costs in the business. Kumba’s production fell by 13%, with Sishen down 7% and Kolomela down 25%. Significantly higher seasonal rainfall played a role in the significant decrease at Kolomela. In terms of positives, the average realised FOB export price is 15% above the benchmark because of the quality of Kumba’s product. Importantly, EBITDA margin was still a meaty 54%. The business is sitting on net cash of R17.6 billion. If you would like to read the full report, you’ll find it here.
Alphamin has announced record quarterly tin production and a Q2’22 EBITDA result of $67 million. Ore processed increased by 7% vs. the preceding quarter but tin production only increased by 4%, so this was a less efficient quarter than Q1’22. Sales volume dropped by 3% and the average price achieved fell by 19% in a volatile environment for commodity prices, so the net impact was a 32% drop in EBITDA. The net cash position improved by 6% to $138 million. An interim dividend of around $30 million in total has been declared. The share price is down around 20% this year.
Curro has released a trading statement for the six months ended June 2022. Recurring HEPS, which is management’s way of giving the market a view on sustainable earnings, is expected to be 22.2% to 39.7% higher. The difference between recurring HEPS and HEPS is the subsidy income that was finally received by Curro Meridian from provincial government. Get your school diary out: results will be published on 18th August. The share price has recovered sharply in recent weeks to trade at around R11. That’s good news for me, as my in-price is R12.22 and it would be nice to see a green tick rather than a red cross next to Curro in my portfolio.
Reinet released a financial update for the quarter ended 30 June 2022. Although the net asset value (NAV) is down 3.1% since March, the company reminds the market that the NAV’s compound annual growth rate (CAGR) since March 2009 has been 9.3% (measured in euros). In the quarter, Reinet utilised €46 million for share buybacks and made commitments of €40 million for new and existing investments. The NAV per share at 30 June 2022 is €31.38 (R538) which means the share is trading at a discount of around 45%. This is typical for an investment holding company.
Operational updates
Bytes Technology Group held its AGM and released a (very) brief update with some operational commentary. It has made a “positive start” to the current year, with growth across key income lines in the double digits for the first four months of the year. Customer demand has “remained robust” and the group has seen growth from corporates and the public sector.
From 18th to 22nd July, Naspers repurchased shares worth R1.74 billion and Prosus repurchased shares worth $393 million.
Notable shuffling of (expensive) chairs
The CFO of Afristrat Investment Holdings (a disastrous corporate story if ever there was one) has resigned to pursue other endeavours.
Old Mutual announced the retirement from the board of Mr Marshall Rapiya, who has been with the group for more than four decades. An innings of that length deserves a mention!
Director dealings
To make us all feel poor today, Accelerate Property Fund announced that its CEO received shares worth over R64 million from the dividend reinvestment alternative that the company recently offered. Right, back to work we go.
Unusual things
DRA Global has reached a settlement with Fraser Alexander regarding the Elikhulu Gold Tailings Retreat Project. DRA will pay nearly R118.5 million vs. an original claim by Fraser Alexander of R502 million. This reduces litigation risk for DRA and the costs of an arbitration process, so the company considers this to be a favourable outcome. A R153 million provision was raised in the FY21 financial statements, so there will be a positive impact on this year’s financials as the eventually settlement is lower than the provision that was raised.
Go Life International obtained the approval of the Stock Exchange of Mauritius for a delay in the release of results for the year ended February 2022 and the quarter ended May 2022. Both will be released by the end of September.
The publication of the business rescue plan for Black Chrome Mine, a material subsidiary of suspended company Chrometco, has been extended to 31 August 2022.
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Ghost Grad Jordan Theron decided to focus on Citigroup among the US banks who recently released results. Unlike the flashier choices like JPMorgan or Goldman Sachs, Citigroup is a more traditional banking group that makes most of its money the old-fashioned way: by lending to people.
Citigroup has been around since 1812 when it was founded as City Bank of New York. Over 200 years later, this is a major US bank with a large global footprint of around 2,650 branches across 19 countries.
Americans are experts at going big or going home!
Jane Fraser took the reins at Citigroup in February 2021 and certainly hasn’t taken the top job at an easy time. The US banking sector has been a bloodbath this year, with the more “boring” banks like Citigroup and Wells Fargo proving to be more resilient than the investment banking shops:
This is a direct result of the pain being felt in public markets. Investment banking fees are highly cyclical, driving greater volatility in the earnings of Wall Street giants. It’s important to highlight that Citi also plays in the world of investment banking, so it certainly feels the pinch. The difference is that the group is less dependent on advisory fees than the likes of JPMorgan and especially Goldman Sachs.
Less retail, more institutional
Under Jane Fraser’s stewardship, Citigroup made a significant strategic decision to sell its retail banking operations in 13 countries. This is a clear move towards institutional banking. The bank sold its operations in developed markets (like Australia) and several developing markets (like Thailand). In other cases (like Mexico), only the retail operations were removed and the institutional operations have remained. Citigroup is currently in talks to dispose of its Russian operation, a strategic imperative that has taken on a new and unsavoury flavour this year based on the conflict in Ukraine.
The international focus is thus on centres of wealth like London and Singapore, which in theory creates a more focused and profitable operation. This is a bold move for a new CEO but this is typical of US corporates that tend to make and execute large decisions rather quickly.
Beating the (battered) street
At the time it reported latest quarterly earnings, Citigroup was the only major US bank that beat market expectations. The share price surged 13% on the day despite a fall in profit of 27%, which is another reminder that any investment is a function of price and fundamentals. It’s all about the expected result vs. the actual result.
Group revenue increased 11%, driven mainly by the Institutional Clients Group segment which grew revenue 20% year-on-year. This segment contributes over 58% of total net income. Global Consumer Banking contributes over 40% of total net income and was approximately flat in this quarter.
There are big dark clouds
Like other banks, Citigroup has suspended its share buyback programme to meet the latest capital adequacy requirements being put down by US regulators. These buybacks have been a useful source of shareholder returns in recent years, helping to drive earnings per share even when net earnings have been less impressive. Overall concerns about the economy and the threat of recession are putting banking shares under real pressure.
With US inflation running at over 9%, the cloud of a recession is looming large. This is never good news for banks, as the impact on consumers and businesses inevitably affects their ability to repay loans, driving larger impairments and provisions at banks.
Those provisions can drive sharp declines in profitability. As noted, Citigroup’s earnings fell by 27% in the latest quarter thanks to a major negative swing in provisions. In the comparable period, provisions were released (i.e. had a positive impact on earnings) as the world began to emerge from the pandemic.
Is this a conservative choice?
Of the major US banks, Citigroup is trading at the highest dividend yield (3.9%) which technically makes it the cheapest share among its peers. It is critically important to remember that a trailing dividend yield has limitations when companies are facing a change in economic circumstances. Simply, dividends achieved over the past year may not be achieved over the next year.
This applies to all the banks though, so comparing the relative yield is useful even if the absolute yield can be dangerous.
Currently trading at around $52, there’s still a long way to go in a recovery to pre-pandemic levels of around $80 per share. A recession (mild or otherwise) won’t do that recovery any favours. In the meantime, those looking for relative opportunities within a sector may want to do some deeper digging into the US banking market.
None of the major US banks are truly “conservative” but the risks do vary considerably across the big names. With a focus on traditional banking revenue and institutional clients, Citigroup is arguably a less risky choice than some of its peers. The current valuation also helps with some margin of safety, albeit not enough to get excited about.
For just R99/month or R990/year, you can have access to institutional-quality research that is guaranteed to expand your investment knowledge. Each week, The Finance Ghost and Mohammed Nalla release a detailed report and podcast on a global stock. Visit the Magic Markets website to subscribe.
Last week Friday, I joined Nastassia Arendse on the markets report on SABC News. I always enjoy hanging out with her and we end up having great conversations about the markets.
There was a solid mix of topics around local and international companies, with the backdrop being the risk of recession that everyone is focused on.
In this case, we talked about:
Major news of the week (Tongaat’s suspension and Anglo’s earnings updates)
Stocks I wouldn’t want to own in a recession
Where opportunities are emerging after months of turmoil
US banking regulations and how they are sucking liquidity out of the system
Tsogo Sun Hotels is in the process of separating from Tsogo Sun Gaming through the termination of a number of hotel management agreements. From the perspective of Tsogo Sun Gaming shareholders, this is a “small related party transaction” based on JSE Listings Requirements. This necessitated a fairness opinion, which has been provided by Valeo Capital. This is the first time I’ve heard of Valeo but a quick skim of their website suggests a highly competent and experienced team. Valeo has declared the terms to be fair to the shareholders of Tsogo Sun Gaming. If you fancy a trip to Montecasino, you can even go and inspect the opinion at Palazzo Towers East.
In case you’ve forgotten, Impala Platinum’s offer to shareholders of Royal Bafokeng Platinum is still open. In the meantime, Impala has acquired another 0.1% in Royal Bafokeng. This takes the total current stake to 37.93%.
RMB Holdings has distributed the circular related to the proposed Category 1 transaction with Brightbridge Real Estate that would see the company sell RMH Property in Atterbury Europe to Brightbridge for R1.75 billion. Perhaps I’m just blind, but I couldn’t find it on the RMB Holdings website. As a reminder, this is effectively the remnants of the old RMB / FirstRand listed structure and is now just a property portfolio that is being sold off to return value to shareholders.
Vivo Energy’s scheme and delisting has become unconditional and trade was suspended on Tuesday morning. Another one bites the dust and disappears from our market.
Financial updates
Cashbuild has released a quarterly operational update but it is packed with financial information, so it lands up in this section. The business has been slow to recover from the impact of looting. A general slowdown in consumer spending doesn’t help. To add to this, the base period still included significant investment by consumers in their homes during lockdown. That was back when we weren’t spending all our money on petrol! Against that backdrop, a decline of 13% in revenue in the fourth quarter of the 2022 financial year is understandable. Without the impact of looted stores, revenue would’ve been down 11% for the quarter and 7% for the year (vs. a 12% drop for the year with that impact included). Inflation was up 7.2% year-on-year and transaction volumes fell by 16%. The P&L Hardware business is still underperforming, with sales down 20% for the year. This segment contributes 8% of group revenue. The share price is up around 6.5% this year.
Mr Price released a trading update for the 13 weeks ended 2nd July. This is effectively a quarterly update, as retailers report based on weeks rather than months. Retail sales grew by 6.4% and other income (debtors’ interest and fees) grew by a juicy 25.5% thanks to higher credit sales and interest rates, though that line is a small contributor overall (around 4% of total revenue). Online sales grew by 21.4% after skyrocketing 61% in FY22, a solid follow-through in the aftermath of the pandemic. This is a decent outcome when you consider the non-payment of Covid social grants, the high base against which this quarter is measured (visible in the Home category only growing by 1.6%), the joys of load shedding and of course inflationary pressures on consumers. Mr Price also implemented its new ERP system at the beginning of April, which inevitably has an impact on the operations (Shoprite suffered terribly when it introduced its ERP system a couple of years ago). The story is less favourable when you look at comparable stores for this period, which only grew by 1.9%. Importantly, the group remains highly cash generative and inventory has closed at “acceptable levels” including terminal winter stock. To give an idea of sales cadence, growth in June was a chunky 14.8% and the first three weeks of July saw growth of 18.4%, so things have definitely picked up vs. the first quarter of the 2023 financial year! Notably, Power Fashion was in the base for the full period and Yuppiechef was not, as that acquisition only became effective on 1 August 2021. The Studio 88 acquisition is waiting for regulatory approvals in Zambia and Namibia and is unlikely to close before the end of August. I have a small stake in Mr Price with an entry price of around R192, so the current price of R178 owes me some love as I’m down around 7%.
Anglo American Platinum has released interim results for the six months ended June 2022. The rand basket price per PGM ounce sold dropped by 1% and net revenue dropped by a nasty 20%, so that already tells you that production doesn’t look good year-on-year. This is partially due to the base period having high levels of built-up inventory which drove sales. Thanks to the impact of operating leverage, adjusted EBITDA fell by 32% and mining EBITDA margin deteriorated from 71% to 59%. By the time you get to headline earnings per share (HEPS) level, the drop was 43% to R101.40 vs. a current share price of around R1,185. Keep in mind that this is an interim HEPS number, though annualising it is always risky as revenue is so volatile because of underlying commodity prices. The group still has loads of net cash (R41.8 billion of it) and has declared a dividend per share of R81 (interim dividend of R41 and special dividend of R40), down 54% from last year’s interim dividend. In terms of outlook, unit cost of production guidance is R14,000 to R15,000 assuming an oil price of $100 per barrel and planned capital expenditure has been reduced to between R16 billion and R17.5 billion. Shareholders may not want to hear this given the year-on-year moves we’ve seen, but at least take this excerpt from the announcement into account in your decisions:
“Our performance in the first half of this year represents more normalised levels of sales volumes and resulting EBITDA”
Anglo American Platinum short-form SENS announcement, interim 2022
S&P Global Ratings has taken Transnet off credit watch based on an improved liquidity position. Let’s hope for the sake of our economy that the improved financials result in better infrastructure, especially when it comes to our railways and the negative impact they are having on coal and other exports!
Operational updates
Sasol has released its production and sales metrics for the year ended June 2022. There were great elements (like the obvious benefit of higher oil prices) and challenges (like operational issues at Secunda). Overall, the Energy business benefitted from a recovery in demand for fuels and the higher prices we are all suffering with. The Chemicals business grew revenue by 22%. After adjusting for the disposal of the European Wax Business though, Chemicals sales volumes were 10% lower for the year vs. guidance of 4% to 8% lower, with the flooding in KZN as the primary culprit for the missed guidance. The important news relates to the delays in crude oil shipments and the impact on Natref, which forced Sasol to declare force majeure on 15th July. This falls outside of the period covered by the latest report, with the announcement noting that a return to full production capacity is expected by the end of July. Full year financial results are expected to be released on 23rd August. In the meantime, you can read the full production and sales update here and you may enjoy this excerpt from the executive summary:
“Our FY22 financial performance benefitted from a favourable macroeconomic environment, with a higher crude oil price, refining margins and chemicals prices following heightened geopolitical tensions. This performance was further underpinned by strong cost and capital discipline as we continue to execute our Sasol 2.0 transformation programme.”
Sasol production update for year ended 30 June 2022
South32 has released a quarterly report for the three months ended June 2022, the final quarter of the FY22 financial year. Copper equivalent production was 99% of guidance and operating unit costs were in line with previously updated guidance. A solid operating performance helped the company take advantage of record commodity prices. Worsley Alumina achieved record annual production, Cannington beat zinc guidance by 2% and Cerro Matoso achieved a 22% increase in nickel production. South African Manganese achieved record production in the quarter (up 22%) but was down 3% for the year. Metallurgical coal production was 7% lower for the year. In terms of strategic moves, the acquisition of an additional stake in Mozal Aluminium closed in this quarter and first production was achieved from the 100% renewable powered smelter in Brazil. The acquisition of Sierra Gorda was also completed, with the venture paying a distribution to South32 of $68 million in June. The acquisition of an additional 18.2% in the bauxite operation in Brazil was concluded in April. Following the end of the period, South32 sold four non-core base metals royalties to Anglo Pacific Group Plc for up to $200 million. The report goes into enormous detail, including on certain financial measures, so read the entire thing at this link if you want a deeper understanding of South32.
Share buybacks and dividends
The Accelerate Property Fund scrip dividend alternative seems to have been a success. The company retained nearly R177 million in cash by issuing shares instead of paying a cash dividend to those shareholders who elected the scrip dividend. Those who elected cash received R36.7 million in aggregate.
Due to ill health, the CEO of Wesizwe Platinum (Mr Wang Honglie) has unfortunately had to step down from the role. The current deputy CEO (Mr Zhimin Li) will serve as interim CEO until a permanent replacement is found.
Director dealings
An associate of Spear REIT CEO Quintin Rossi has acquired shares in the property fund worth just over R50k.
Unusual things
None – let’s see what the next day holds!
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Ghost Global is a weekly segment brought to you by the Ghost Grads on a rotational basis. This week, Sinawo Bikitsha updates us on news from some of the biggest names on the US market.
Amazon and One Medical
Amazon announced an agreement to buy US healthcare provider One Medical for $3.9 billion in cash, yet another push from the eCommerce giant into the medical industry. This was particularly good news for One Medical shareholders, as the share price was trading at around $10 before the announcement and the Amazon offer is $18 per share!
Amazon plays in many verticals and healthcare is one of them, with strategies around online pharmacy and telehealth services. Amazon’s reputation doesn’t always work in its favour, with some commentators expressing concern about Amazon having access to medical records. Leaving that aside, the strategy here is clearly to make healthcare and the purchase of related products more convenient for customers.
Not everyone believes in the dream, as Amazon’s public policy and communications executive Jay Carney has been snatched up by Airbnb. Amazon previously lost its Amazon Web Services executive Charlie Bell to Microsoft. The company has lost at least four executives since Jeff Bezos stepped down as CEO in 2021 to go off and live the playboy lifestyle (literally).
Amazon will release its second quarter results on 28th July. The first quarter wasn’t great, with just a 7% increase in sales and a net loss of $3.8 billion after writing down the investment in EV business Rivian by $7.6 billion. The market will be anxious about new numbers.
Twitter blames everyone else
Twitter didn’t take long in its announcement to blame Elon Musk’s cold feet for its poor results in the quarter. Twitter is pursuing legal action against Elon Musk to force him to perform – a legal way of saying that Twitter wants him to stick to the contracts.
Twitter shareholders would love it if the company would perform as well, especially after a revenue decrease of 1% year-on-year and a net loss of $270 million. Only $33 million in costs can be attributed to the negotiations with Musk, so there are many other problems in the Twitter business model.
The biggest issue is its expenses, which jumped by a rather shocking 31% year-on-year.
Tesla margins under pressure
Tesla’s second quarter automotive revenues were lower than the preceding two quarters. On a year-on-year basis, automotive revenue was up 43%. A bigger concern and one that we are seeing across the market is pressure on gross margin, which came in at 27.9%. This is way down from 32.9% in Q1’22. In fact, this is lower than any quarter in the past year!
Operating margin of 14.6% was a decent outcome when you consider the pressures further up the income statement. This is down from 19.2% in Q1’22 but is in line with the second half of 2021.
The market is highly focused on free cash flow and Tesla had a tough quarter in that regard, with free cash flow of $621 million. Although this is in line with Q2’21, it is way down from the levels seen in the past few quarters.
The crypto fans won’t be impressed with the latest result, as Tesla has converted 75% of its bitcoin holdings into fiat currency (i.e. good old fashioned dollars and other currencies).
Tesla is facing much stiffer competition these days, not least of all from fellow American manufacturer Ford. Tesla sold over 1.1 million cars in the past 12 months and Ford is aiming for 600,000 electric vehicle unit sales in 2023.
Tesla is a favourite for short sellers because the valuation is so divorced from reality. This is a dangerous game, as a rally of over 11% in the past month has demonstrated once more. This year though, Tesla is down 32%.
Verizon and AT&T – tough times for telecoms
Verizon and AT&T did some synchronised swimming with their share prices and not in the right direction:
Verizon reported a drop in service revenue by 3.9% and in net income by 10.7%. Operating margins fell from 31.9% to 27.9%. These aren’t pretty numbers and they were driven by a loss in retail customers, which did nothing to encourage the market. The company noted tight competition and inflationary challenges as part of the drivers of this result. The CFO talked about remaining “confident in our long-term strategy” with perhaps the only highlight being decent gains in the number of business customers.
AT&T reported better results than Verizon, yet the share price still took a knock. Revenue grew by 2.2% and there were positive net additions to subscriber numbers. The troubles came in the operating margin, which fell from 21.2% to 16.7%.
Even the telecoms businesses aren’t immune to the effects of inflation.
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Having spent several weeks tackling the retailers on the JSE, Chris Gilmour now turns his attention to Africa. Some years ago, South African companies simply had to have an Africa growth strategy. Today, many have come home and decided to focus on the core local market. Africa offers great potential and challenges, as Chris explores in part 1 of this series.
Africa is the last great outpost; the one part of the world where globalisation has had little if any impact. And in the new order, where Pax Americana has broken down and individual trade links are being re-established all around the world, how will Africa fare?
What is the impact of globalization on Africa’s economy today? In short, while globalization has made some contribution to economic growth in Africa, it has not yet facilitated the process of structural transformation required for African countries to reach the take-off stage and accelerate economic development and poverty alleviation. There have been sporadic bursts of growth in Africa in recent decades but nothing that could be regarded as being sustainable, mainly because Africa does not yet have a tradition of manufacturing very much.
Rising incomes elsewhere in the world have increased demand for African commodities and natural resources, boosting national economies. Globalization has also supported knowledge transfer, enabling African countries to improve living standards by “leapfrogging” to new technologies, most evident in the widespread use of cellphone technology on the continent.
But manufacturing (and especially high-tech manufacturing) is conspicuous by its absence in Africa. There are a number of Special Economic Zones (SEZs) all over Africa but few of them have been very effective. Without a large and growing industrial base, Africa’s current spurt in economic activity may not be sustainable. No meaningful country or region in the past couple of hundred years has made the transition from relative poverty to high income development without having a well-developed manufacturing base – for example Japan, China, Malaysia, India, Hong Kong, Taiwan and Mauritius to name but a few.
For Africa observers, the continent offers seemingly limitless potential coupled with a unique ability to squash optimism dead in its tracks. Africa’s advantages are glaringly obvious and yet its “leadership” over the decades has been marked by unbelievable levels of corruption coupled with a relatively forgiving population that doesn’t criticize its “leaders” in public.
The positives
Theoretically at least, the continent should prosper during this century, as it contains more than 60% of the world’s uncultivated arable land. This factor should become increasingly important as the effects of climate change, supply chain disruption and the war in Ukraine take their collective toll. And yet, Africa remains a net importer of food as it has struggled to meet the demands of a rapidly burgeoning population.
Africa is the only continent where the absolute number of undernourished and malnourished people has increased over the past 30 years. One must also bear in mind that much of that uncultivated arable land is not available for farming for a number of reasons and will remain so for the foreseeable future. Reasons include unreachability (too remote) and geographical issues like conflict zones and conservation zones.
Currently, the total African population is approximately 1.4 billion people, or roughly the same size as China or India. That number is likely to increase to 2 billion by 2050 and feeding such a huge number of people will be of critical importance. As things stand, excluding South Africa (and what is left of the Zimbabwean farming industry), the great bulk of Africa’s food is grown by small, inefficient subsistence farmers. The type of large-scale mechanised farming that is so apparent in many parts of South Africa is largely absent in Africa.
A coherent approach to agricultural transformation on the continent is critical if Africa is to become not only self-sufficient in food but hopefully over time a net exporter of food.
But there’s far more to Africa than food, as important as it undoubtedly is. In a rapidly de-populating world, Africa’s population is growing rapidly. As people move from the rural to urban areas of the continent, economic growth follows. Already, there are more than 65 cities in Africa with a population of 1 million people or more and at 40% of the entire population, Africa is more urbanised than India (30%) and almost as urbanised as China (45%), according to McKinsey. The number of cities that exceed a million inhabitants is similar to Europe and higher than North America or India. Unlike the ageing populations of Europe and Asia, Africa’s population is youthful, which is another big advantage.
Urban spending in Africa is increasing twice as fast as rural spending. Highly fragmented informal retailing accounts for the bulk of all retailing in the rest of Africa, in stark contrast to SA, where most retailing is highly concentrated in the hands of a few large retailers.
Most uninitiated observers intuitively think of Africa as being predominantly a resources-based continent. And while resources and commodities constitute a very high proportion of the GDP of countries such as Nigeria and Angola, it comes as a big surprise to most people to learn that 45% of Africa’s GDP arises from consumer-facing industries. For example, a hefty chunk of Kenya’s GDP is accounted for by its money-transfer service called MPesa.
The African population is young and growing: more than 50% of the African population is younger than 20. In China, the figure is only 28%. African growth is predicated upon consumer facing industries (45% of total African GDP) with resources only contributing 23% according to McKinsey.
The negatives
One of the biggest problems that companies and investors face in deciding whether or not to invest in Africa is the sheer size and diversity of the continent, coupled with exceptionally poor or often non-existent transport links. It is often quicker and more cost-effective to fly via the Middle East or Europe when planning a trip within Africa, rather than attempting to fly directly between two points on the continent. Far better road and rail networks are urgently required in Africa, as are vast improvements in airlift capacity.
Better infrastructure and especially massively improved electrical generating and distribution capacity is vital in ensuring Africa’s sustained economic growth. The 48 countries that comprise sub-Saharan Africa (SSA) have a combined electrical generating capacity roughly equal to that of Spain’s capacity. The whole of Africa’s capacity is roughly equal to that of Germany. Two-thirds of Africa’s total electrical generating capacity is produced in South Africa. Less than 25% of the population of SSA has access to electricity, compared with 50% in South Asia and 80% in Latin America.
Often, people forget just how diverse Africa is. It comprises 54 countries with 2,000 different languages and dialects. Now compare that with the South American continent, where there are only 13 countries, most of which speak Spanish, the exception being Brazil, which is Portuguese-speaking.
There are some wonderful plans for clean sustainable energy on the continent, notably the much talked about Grand Inga project on the Congo River in the DRC. Although a couple of small hydro plants have been built nearby the envisaged site of Grand Inga, nothing comes close to the scale of this mega project itself. Eskom was looking to get involved in this project as far back as the late 1970s, which just underlines how long this thing has taken and it’s still nowhere near the start.
When completed, Grand Inga would consist of seven dams that would generate at least 40 gigawatts of electricity. That would be the largest hydro plant ever built on earth and its output would be roughly the same size as Eskom’s entire installed capacity. Financing this project is estimated to cost around $80 billion but one of the big drawbacks is the physical location; it’s in the middle of nowhere and connecting power lines across thousands of miles to where the power is needed is costly and inefficient. So unless some form of highly imaginative funding can be brought about, Grand Inga is destined to remain an African dream.
But unless African leaders can change from being interested only in short-term extortion possibilities to having true long-term vision, this potential will remain theoretical. The type of extortion that is endemic in Africa varies from paying bribes to minor officials at border posts to allow goods to pass through all the way up to bribing senior government officials for tenders for large infrastructure projects
Another big negative is the serious mismatch between physical size and GDP size. There can be no doubt that Africa is a vast land area but in terms of GDP, it is tiny.
While SA is a reasonably sized economy-ranking about 26 in global GDP terms, Africa’s highly fragmented economy of 54 countries makes it difficult for manufacturers and retailers to formulate strategies to enter the continent. For example, the 20 countries that comprise geographical east Africa have a combined GDP similar to that of Switzerland. Total African GDP is approximately $2.6 trillion, or roughly the same size as the UK. Remove the Arab countries of North Africa and SSA GDP including SA is approximately $1.8 trillion, or roughly the size of Italy.
In summary: a SWOT analysis of Africa
Strengths
– Huge, young population – Massive mineral and agricultural wealth
Weaknesses
– Over-reliance on unbeneficiated commodity exports – Poor governance – Low skills base
Opportunities
– Using existing infrastructure better – Consolidation of informal sector – Tourism / open skies policy
Threats
– Political impasse regarding regional co-operation – Inability to absorb people in the formal sector
This series will continue next week. For more from Chris Gilmour, you could for example read his series on discretionary retailers on the JSE. You can find part 1 of that series here.
Unlock the Stock is a platform designed to let retail investors experience life as a sell-side analyst. Corporate management teams give a presentation and then we open the floor to an interactive Q&A session, facilitated by the hosts.
With several of these events under our belts, we are thrilled with the corporate access that we are bringing to retail investors in association with our sponsor Kuda, a specialist insurance and forex services provider.
I co-host these events with Mark Tobin, a highly experienced markets analyst who has worked in several global markets, as well as the team from Keyter Rech Investor Solutions who help numerous JSE-listed companies with investor relations services. The South African team from Lumi Global looks after the webinar technology for us.
You can find all the previous events on the YouTube channel at this link.
The latest event saw popular technology business PBT Group present its strategy and exciting prospects. Buzzwords like “big data” and “cloud computing” are always thrown around in the context of global companies, yet few South African investors realise that there are ways to invest in these themes right here on the JSE. PBT Group is one such way!
To make that even easier, the company has partnered with EasyEquities to offer zero brokerage on any purchases of PBT Group shares. It’s wonderful to see the ecosystem coming together in favour of retail investors!
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