• Ashburton Morning Note 2019-06-21
    ANALYSTS: Chantal Marx, Pritu Makan, Thabiso Mamathuba, Tlamelo Mathakgane and Sithembile Bopela



    President Cyril Ramaphosa delivered his State of the Nation Address (SONA) last night. Typical to this type of address, it was perhaps a little light on detail but ambitious in spirit.

    The President attempted to introduce a social contract – which has been previously highlighted as key in addressing the trust deficit between society, government, and business, which has had a profoundly negative impact on confidence and investment. President Ramaphosa proposed five collective goals for the next five years, namely that no person in South Africa will go hungry; economic growth will exceed population growth; two million more young people will be in employment; every 10-year old will be able to read for meaning; and violent crime will be halved.

    Some of the key fundamental issues were addressed:

    • The President acknowledged that Eskom is in dire financial straits and may well create adverse implications for the fiscus. Accordingly, it was decided that a Special Appropriation Bill be tabled to allocate a sizeable portion of the R230 billion that will be needed to fund Eskom over the next decade. It was explicitly stated that further details will be provided from the Minister of Finance and we will keenly be awaiting clarification on this matter. Nevertheless, emphasis was placed on restoring Eskom’s financial health and the user-pay principle was heavily emphasised to support this endeavour.
    • Special mention was made of the independence of the South African Reserve Bank, and its constitutional mandate was reaffirmed.
    • In terms of land reform it was established that the Presidential Advisory Panel had completed its report, which will help guide the process of land reform. In the interim, the distribution of public land that is feasible and adequate for urban settlement and farming will be expedited.

    In terms of sectoral support, the President focused on policies and plans that will help reduce input costs, target new markets and achieve synergies within various value chains. Supporting small and medium enterprises, driving a “buy local” campaign, boosting tourism through the introduction of a reputable visa regime, improving the ease of doing business and lowering data costs were also highlighted as priorities. In fact, he noted that by the end of next month, clarity on the spectrum licensing process will be provided to help drive progress toward the latter.

    Emphasis was placed on addressing problems of poor governance, inefficiency and financial sustainability. The President noted that government is committed to “building an ethical state in which there is no place for corruption, patronage, rent-seeking and plundering of public money”. He highlighted that there was a need to build towards professionalism and morality in public service.

    While the SONA broadly covered some of the reformist measures that need to take place to reinvigorate the economy, any positive outcome will dependent on the effective and swift implementation thereof.

    Company Releases

    Growthpoint (GRT) released an investor update for the nine months ended 31 March 2019:

    • The South African market remains challenging. Vacancies increasing marginally to 6.6% (1H19: 6.5%) with vacancies in retail and office remaining below industry averages.
      • Arrears were higher with retail increasing as expected due to Edcon only paying 50% of its rentals due since February 2019. Office arrears came in at 4.9% of collectables, an improvement from 5.1% in 1H19. Industrial reported an increase in arrears to 12.3% of collections compared to 9.6% at 1H19.
      • The renewal success rate improved by 100bps to 68.7% (retail: -310bps to 81.9%, office: -40bps to 62.2%, industrial: +340bps to 67.1%).
      • The weighted average renewal growth rate came in at -3.9%, a slight improvement compared to 1H19 (-4.4%).
      • Renewal lease periods improved from 3.5 years at 1H19 to 3.9 years, with future escalation rates expected to be 7.5% for lease renewals.
    • The group continues to focus on the offshore business while making sure that the LTV remains at an acceptable level.
    • In terms of new revenue streams, the group is in the process of acquiring a portfolio of properties in Africa (mostly in Nigeria, Ghana and Zambia) with $212 million expected to be invested by the end of the year. The group is also planning to acquire another hospital with construction of the Pretoria Head and Neck Hospital on track for completion by August 2020.
    • The group continues to earn development fees from third parties (1H19 fees earned: R49.4 million) with trading profits and development fees for 2H19 expected to be similar to those of 1H19.
    • Asset sales in excess of R3.1 billion are in various stages of being concluded with some of these properties being part of the R5.8 billion portfolio that was put to market last year.
    • Management maintained distribution growth guidance of 4.5% for FY19.

    The result was well received by the market. The update points to a reasonable start to 2H19 amid tough market conditions. The group’s asset disposal programme continues to make progress, which will help to streamline the portfolio and provide additional funds. A key positive was the maintenance of full-year distribution guidance.

    Growthpoint is trading on a forward distribution yield of 9.4%. We continue to regard the counter’s diversified quality portfolio in a favourable light.

    Vivo Energy (VVO) announced the formation of a joint venture (JV) with Kuku Foods East Africa Holdings, the owner of KFC franchises in East Africa, to accelerate the growth its KFC franchise portfolio in East Africa:

    • The 50:50 JV will manage and operate the restaurants in the three markets on behalf of Kuku Foods, who will remain the local KFC franchisee.
    • The restaurants, 22 in Kenya and 8 in Uganda, are in shopping malls, city centre locations, and service stations. Kuku Foods plans to open its first KFC restaurant in Rwanda in 2019.
    • It is envisaged that many of the new restaurants will be opened at Vivo Energy’s network of service stations across Kenya, Uganda and Rwanda, which leverages Vivo Energy’s retail footprint, with more countries to be considered in the future based on market opportunities.
    • Completion of this transaction is subject to standard legal agreements and regulatory and competition authority approval.

    The announcement was positive and could drive growth within the non-fuel segment of the business – KFC could do well in fuel forecourts. The company trades on a forward PE of 13.2 times and a dividend yield of 2.3%, which seems fair.

    Other News

    • Swiss watch exports (read-across for Richemont) grew ahead of expectations for the month of May, increasing by 8.6% y/y compared to a fall of 0.1% in the prior month. This was mainly driven by high-end watches (> 3 000 francs), which grew by 12.9% y/y.
    • EOH Holdings (EOH) announced the appointments of Dr Anushka Bogdanov, Mr Andrew Mthembu and Mr Michael Bosman as independent non-executive directors with immediate effect. EOH’s board is now also compliant with the King Code of Corporate Governance when it comes to independence.

    Information Sources: Information contained in this note references The Federation of the Swiss Watch Industry, SENS, Bloomberg and ProfileData.


  • Ashburton Morning Note 2019-06-20
    ANALYSTS: Chantal Marx, Pritu Makan, Thabiso Mamathuba, Tlamelo Mathakgane and Sithembile Bopela



    As expected, the US Federal Reserve decided to keep the federal funds target range unchanged at 2.25% to 2.5%. However, one committee member preferred a 25bps rate cut. While the Federal Open Market Committee (FOMC) statement acknowledged that the labour market has been fairly resilient, it also pointed to weakness in business fixed investment. Moreover, committee members expressed their uncertainty regarding the inflation outlook amid subdued price pressures recently. In fact, median projections for personal consumer expenditure (PCE) prices were lowered to 1.5% and 1.9% in 2019 and 2020 respectively from 1.8% and 2% previously. Similarly, the range for federal funds rate projections were lowered throughout the forecast horizon. At this stage, federal funds futures are fully pricing in at least a 25bps rate cut at the July FOMC meeting. 

    South Africa’s headline CPI came in at 4.5% y/y in May, in line with our expectation and slightly higher than the 4.4% registered in April. On a monthly and seasonally adjusted basis, CPI slowed to 0.3% from 0.6% m/m previously. Core CPI stabilised at 4.1% y/y.

    Overall, contributions to the annual headline number were relatively stable across the CPI basket. Nevertheless, there were upticks emanating from some of the major categories. Housing and utilities CPI edged higher to 4.5% y/y in May (from 4.4% previously), which resulted in a contribution of 1.1 percentage points (ppt). CPI for food and non-alcoholic beverages also quickened to 3.2% y/y (2.9% previously), adding 0.5 ppt. Transport CPI (7.1% y/y) and CPI for miscellaneous goods (5.4%) added 1 ppt and 0.9 ppt, respectively, to annual headline CPI.

    In all, this month’s inflation outcome was in line with our expectations, which leaves our near-term outlook largely unchanged. We expect the underlying weakness in domestic demand to anchor inflation below the midpoint of 4.5% for this year. Nevertheless, higher administered prices pose some upside risk to our inflation outlook. The same can also be said regarding the volatility in the rand exchange rate; however, the increasingly dovish sentiment from major central banks continues to mitigate this risk. We still expect the SARB to strike a more dovish tone and foresee a 25bps cut in the repo rate at the next MPC meeting on 18 July.

    Company Releases

    KAP Industrial Holdings (KAP) released a trading statement for the year ended 30 June 2019:

    • Headline earnings per share (HEPS) are expected to be at least 20% (12 cents) lower y/y. This is mainly due to IFRS 2 share-based payment pertaining to a B-BBEE transaction in Unitrans equating to an impact of 7.3 cents per share.
    • Excluding the B-BBEE costs HEPS are expected to be at least 7.9% (4.7 cents) lower y/y. The market was looking for an 8% increase for the full year.

    This points to pronounced weakness in the second half of the financial year. For 1H19, the company delivered HEPS 6% higher y/y.

    KAP does not appear particularly demanding on a forward PE of 8.8 times and forward dividend yield of 4.3%. We remain positive on the longer-term investment case.

    Motus Holdings (MTH) released a voluntary pre-closed period update ahead of its financial year end (30 June 2019):

    • For the 11-month period to May, total vehicle sales in SA declined by 2.4%. The retail and rental operations are experiencing difficult trading conditions although this is being partially mitigated by cost containment and the elimination of unprofitable dealerships.
      • Entry level vehicle and small SUV sales in the dealership channel have assisted the importer segment.
      • Motor-related Financial Services remained stable.
      • The Aftermarket Parts business has been enhanced by the acquisition of a controlling shareholding in the Taiwanese wholesaler, ARCO, in March.
    • Operations in the UK have been impacted by Brexit uncertainties, however the DAF commercial and the Pentagon passenger dealerships remain profitable.
    • The Mercedes commercial dealerships were negatively impacted by the once-off restructuring of the business, carbon emission issues, and lower truck and van sales that resulted in a reduction of variable margin earned. Senior management changes were introduced to improve systems and the future profitability of the business.
    • The economic environment in Australia remains competitive. SWT (Melbourne) dealerships recorded an improvement while the Sydney business was negatively impacted by lower volumes amid over-exposure to certain underperforming brands.
    • Management expects challenging trading conditions to persist in the short and medium term in all geographies the company operates in. For FY19, management expects to maintain revenue (previously expecting an increase); maintain operating profit; improve working capital efficiency and reduce debt to achieve growth in normalised HEPS.

    This was a weaker update with operations in all geographies coming under pressure – which is not entirely unexpected given the challenges, particularly in SA and the UK. The downward revision for overall top-line growth was disappointing although continued cost efficiencies should mitigate against this. We do not expect earnings downgrades on the back of this update.

    Motus is currently trading on a forward PE of 7.5 times and forward dividend yield of 6.1%, which is regarded as attractive. While the company is a clear market leader in the South African vehicle ownership supply chain, there are inherently cyclical components to this business. This results in significant forecast risk.

    Other News

    • Capital & Counties (CCO) announced that Gary Yardley, Managing Director and Chief Investment Officer, will step down from the board and leave the company on 30 June 2019. The company’s Earl’s Court investments will be led by Mike Hood, Group Development Director, as preparations advance for a possible demerger.

    Information Sources: Information contained in this note references Stats SA, US Federal Reserve, SENS, Bloomberg and ProfileData.


  • Ashburton Morning Note 2019-06-19
    ANALYSTS: Chantal Marx, Pritu Makan, Thabiso Mamathuba, Tlamelo Mathakgane and Sithembile Bopela

    Making Headlines

    Steinhoff (SNH) released results for the year ended 30 September 2018 after market close last night:

    • The company took further impairments of €27 million in Goodwill, Intangibles, and Property Plant and Equipment, and €42 million in Financial Assets (related to a loan to Fulcrum UK linked to the value of Brait shares and an unsecured loan to “Top Global”).
    • The company reported net debt of €8.8 billion at period end (up 17% y/y), bringing total liabilities to €15.4 billion.
    • The company’s intangible assets were stated as €6.3 billion at period end, bringing total asset value to €16.4 billion.
    • The equity value was stated as €641 million, translating to a rand per share value of R2.42, and tangible NAV remains negative.
    • While the company remained a going concern at the reporting date, management noted that significant doubt remains on this front.
    • From an operational perspective, revenue from continuing operations grew 3% to €12.8 billion. The company delivered “segmental” EBITDA from continuing operations (which excludes abnormal items and restatements) of €770 million (up 12.7% y/y).
    • Revenue accelerated from the nine-month trading update (+2%) and, as was the case at the time, was driven by Pepkor Europe and the Africa operations. Conforama sales deteriorated in 4Q18 (-2%). Mattress Firm improved from the nine-month mark (-11% versus -14%), but has been classified as a discontinued operation.
    • EBITDA was also supported by Pepkor Europe and Africa. Conforama EBITDA fell 78% y/y. The loss in Mattress Firm widened by 71%.
    • FY19 is expected to be impacted by disposals, a weaker global economy and stronger competition, compounded by reputational damage that has dragged on liquidity.


      While the operational performance improved, the balance sheet remained severely constrained. Asset sales to fund working capital has diminished the NAV of the company. The tangible NAV remains deeply negative. Again, Steinhoff did not raise any provisions for legal action and claims against it, which would further diminish this number should the company decide to adjust its position on this in future.

      The long-term prospects for this company in its current form remain poor and uncertain and we continue to regard the share as un-investable.

      Company Releases

      MultiChoice (MCG) released results for the year ended 31 March 2019:

    • Core headline earnings per share increased by 10% to 410 cents, in line with recent trading guidance.
    • Revenue grew 6% y/y (organic: +6%), with subscription revenue up 7% (organic: +8%). Growth accelerated following success in its value strategy in the Rest of Africa (RoA) and a healthy contribution from local operations.
    • Ahead of expectations, the South African business recorded revenue growth of 3% (organic: +4%), bolstered by healthy subscriber growth (+8% y/y) despite absorbing a 1% increase in VAT. Average revenue per user fell by 3.9% due to changes in the subscriber mix. Trading profit was in line with the prior year with a stable margin.
    • RoA achieved revenue growth of 13% (organic: +13%), supported by subscriber growth of 17% with the Fifa World Cup boosting the uptake of products. Average revenue per user stabilised at R159 (FY18: R160). Trading losses reduced by 19%. This result was also better than expected.
    • The Technology segment delivered steady results and contributed R1.6 billion in revenues (-5%). Despite the impact of non-recurring projects, which generated revenues in the prior year, tight cost controls resulted in trading profits increasing by 18% y/y (organic: +21%).
    • The subscriber base increased 12% y/y to 15.1 million with this being the first time that the RoA base of 7.7 million exceeded the 7.4 million subscribers in South Africa.
    • Trading profit rose by 11% (organic: +27%), supported by the narrower loss in RoA. A further R1.3 billion in costs were removed from the base as part of the group’s cost optimisation programme.
    • Consolidated free cash flow of R3.3 billion was up 96% y/y following an improvement in the trading results from the RoA, the non-recurrence of once-off content pre-payments and remittances of cash from Angola.
    • The balance sheet remained strong with R9.8 billion in net assets, including R6.7 billion of cash and cash equivalents and R3.5 billion in undrawn facilities providing R10.2 billion in financial flexibility to fund business plans.
    • The group did not declare a dividend for FY19, in line with pre-listing guidance, and remains on track to declare a dividend of R2.5 billion (569 cents per share) for FY20.
    • The group will continue to scale its video entertainment services across the continent, mainly in the middle and mass markets. A combination of top-line growth and inflationary price increases, as well as cost containment, is expected to deliver a continued reduction in trading losses in the Rest of Africa and stable margins in South Africa and the Technology segment.

    This was a solid result against constrained economic conditions with bottom-line growth being in line with earlier trading guidance. While upside potential in the local market was limited by the current consumer environment, revenue growth did exceed our modest assumptions. The Rest of Africa business delivered robust double-digit growth with a solid improvement in the trading loss. Management’s outlook statement was relatively upbeat and points towards further earnings growth in the upcoming period.

    The recent announcement regarding Showmax trialling live sport streaming and adding pre-recorded sports events could add a new dimension going forward given that the group has an inherent competitive advantage within the segment.

    MultiChoice is trading on a forward PE of 19.1 times, which still seems fair given this company’s competitive position, an expected recovery in Africa ex-SA, and its annuity-type income profile.

    Brait SE (BAT) released results for the year ended 31 March 2019:

    • Net asset value (NAV) per share declined 25.2% to R41.80, in line with guidance. Per the trading statement, the decline was mainly due to the lower valuation multiples applied (as peer group average multiples have reduced). At unchanged valuation multiples, NAV per share would have been R51.32 (-8% y/y).
    • Virgin Active’s revenue for FY18 was up 1% while EBITDA declined 4% due to investments in new clubs, upfront recognition of new member acquisition costs and forex losses. Excluding these costs, EBITDA was up 7% y/y in constant currencies. For 1Q19, revenue grew 6% (constant currencies) and EBITDA was up 7% y/y (constant currencies). Strong volume growth continued, setting a solid platform to deliver good revenue and mid-upper single-digit EBITDA growth for 2019.
    • Premier Foods reported a 5% decline in revenue, impacted by lower commodity prices. While gross profit remained flat, EBITDA fell 9% due to higher costs on the back of a weaker rand, higher fuel prices and labour costs. The result was also impacted by industrial action at the Cape Town Millbake site and continued weakness in the Mozambique economy.
    • Iceland Foods grew sales by 4.5%, while EBITDA declined 8.5% y/y (improvement from 1H19: -22%). The result was impacted by investments in sales-driving initiatives and inflationary costs, partly offset by cost savings.
    • New Look’s balance sheet restructuring was completed, resulting in its long-term debt significantly reducing from £1.3 billion to £350 million. Brait’s investment in New Look comprises an 18.2% holding of senior secured notes (SSNs), however its equity investment and shareholder loans in New Look are valued at nil. New Look's FY19 results will be announced on 25 June
    • Brait remains focused on materially reducing debt on and increasing cash flow to its portfolio, enhancing organic growth in Virgin, Premier and Iceland, and execution of New Look's turnaround strategy.

    The underlying performances of the investee companies was reasonable amid challenging trading conditions. While Premier came under significant pressure in 2H19 (1H19 EBITDA: +10%), both Virgin Active and Iceland Foods posted improved bottom-line numbers compared to the interim period. The decline in NAV was largely due to a reduction in valuation multiples, amid strike action. Management wrote back the value for New Look based on the senior secured notes it now owns, which mitigated this somewhat.

    The convertible bond redemption in September 2020 is now front of mind. Between cash and its revolving facility, the company had total liquidity of R2.8 billion (£154 million) at 31 March with a further £33.46 million to come from the Virgin active restructuring (total £187.5 million). Should none of the bond holders take up the shares, the company will have a shortfall. It will then have about 18 months to find the cash and management have also mentioned that they could pursue a further bond issue as a funding option.

    Brait is trading on a discount to NAV of ~56%, which has expanded significantly since the interim (31%) as the share price weakened 46% over the period.

    Alexander Forbes (AFH) released results for the year ended 31 March 2019:

    • Headline earnings per share (HEPS) fell 1% to 44 cents, in line with recent guidance but significantly behind pre-guidance market expectations (Bloomberg: +10%). HEPS from continuing operations declined 6% to 32.5 cents, also in line with guidance.
    • Total operating income grew 6% to R3.9 billion, while operating income from continuing operations was up 4% to R3.1 billion. Growth from Investments (+7%), Consulting and Retirements (+6%) and Wealth and Investments (+4%) supported the result.
    • Total profit from operations declined 7% to R915 million, with the trading margin down 330bps to 23.7%. Profit from continuing operations fell 19% to R678 million.
    • Corporate and Employee Benefits was down 40% to R130 million due to higher operating expenses in the consulting and retirements space, partially offset by a strong performance from group risk (discontinued).
    • Retail grew 13% to R575 million, with Retail Insurance (+66%) contributing positively due to better underwriting results, offset by a 2% decline in Wealth & Investments due to higher expenses aimed at driving future growth.
    • Emerging Markets grew 3% to R32 million supported by a strong performance in Botswana’s retirement business, but offset by a poor performance from Namibia.
    • The cost to income ratio increased 610bps to 78.4% as operating expenses grew 13% to R2.5 billion. The rise in costs was mainly due to several non-recurring items such as the termination penalty on the IT contract and various consulting expenses.
    • In line with lower operating profit, cash generated from operations declined 4.6% to R821 million.
    • Finance costs declined 7.3% to R89 million due to lower hedging costs.
    • A total dividend of 30 cents per share was declared, down 28.6% y/y. The company also declared a special dividend of 30 cents per share.
    • Management expects a stable year, although profit growth may be hampered while the company corrects inefficiencies and invests to grow. Any surplus capital generated as a result of the disposal of the insurance business and other restructuring activities will be returned to shareholders if appropriate.

    The weakness in HEPS and generally soft operational performance was well guided for. The declaration of the special dividend was a positive, along with guidance of potential future additional distributions from surplus capital generation and the sale of the short-term insurance division.

    Alexander Forbes is trading on a forward PE of 9.3 times and forward dividend yield of 8.4%. While the company seems reasonably priced, we lack conviction on the name due to volatility in earnings, the frequency of management changes and general uncertainty surrounding the direction of this company.

    Old Mutual (OMU) said that its CEO, Mr Peter Moyo, had been given notice of the termination of his employment:

    • Mr Moyo’s conflicting interest in the NMT group of companies was declared upon his employment, with processes to manage these conflicts included in his employment terms.
    • During 2H18, the Old Mutual Related Party Transaction Committee (RPTC) requested a report on Mr Moyo’s related party transactions and confirmation that the terms of his employment contract had been adhered to.
    • Several concerns were raised by the RPTC including two ordinary dividend declarations by NMT (R115 million in total, R30.6 million to the benefit of Mr Moyo) while arrear preference dividends were unpaid at the time and, at the time of the second dividend declaration, the preference share capital was redeemable. Old Mutual is a preference shareholder in NMT capital and Mr Moyo chaired the board meeting of NMT Capital at which the second ordinary dividend was declared.
    • The preference share capital remains unpaid and no acceptable explanation was provided as to why ordinary dividends were declared while preference share capital and dividends were left unpaid.
    • The board determined that a material breakdown in trust had occurred between the company and Mr Moyo. The board unsuccessfully engaged him on the possibility of an agreed separation.
    • Iain Williamson will continue to act as CEO for Old Mutual, until further announcements are made.

    This step brings the board closer to removing a material overhang for Old Mutual. There has been a question mark around leadership for some time. For now, the overhang remains at least until a new CEO is appointed. The company has a very strong second layer of management and an internal candidate will be preferred from our perspective.

    Old Mutual is trading on a forward PE of 8.8 times and forward dividend yield of 8.7%, which seems attractive. The company trades on a premium to embedded value (excluding Nedbank) of 20%. The valuation seems more demanding on this basis. We continue to prefer Sanlam in the sector.

    Other News

    • Alexander Forbes (AFH) announced that African Rainbow Capital (AIL) has increased its stake in the company from 8.9% to 13.11%. In addition to the direct listed equity stake, AIL also owns 10% of the South African subsidiary (Alexander Forbes Limited) which could be, subject to shareholder approval, flipped up for listed AFH shares from October 2019.
    • Cashbuild (CSB) announced that clients of Allan Gray have acquired an interest in the ordinary share of the group, which has resulted in Allan Gray clients holding a total interest of 5.6123%. This is up from 0.4% from the last filing on record (Bloomberg).

    Information Sources: Information contained in this note references SENS, Bloomberg and ProfileData.



  • Ashburton Morning Note 2019-06-18
    ANALYSTS: Chantal Marx, Pritu Makan, Thabiso Mamathuba, Tlamelo Mathakgane and Sithembile Bopela

    SA Economics Week Ahead

    This shortened week will be fairly light on first-tier economic data releases, with the consumer price index (CPI) for May being the focus. Other second-tier data that Stats SA will be releasing include tourism accommodation, the land transport survey, as well as statistics for income in the food and beverages sector and civil cases for debt.

    For headline CPI we have pencilled in an outcome of 4.5% y/y in May, from a print of 4.4% in April, mainly against the backdrop of higher food and fuel prices. We expect some upside price pressure to come from food prices given higher grain prices during the month. Domestic fuel prices also remained elevated in May, after the price of 95 unleaded petrol increased by 54 c/l resulting in monthly and yearly increases of 3.4% and 11.4% respectively. In all, the underlying weakness in domestic demand continues to pose a downside risk to our inflation outlook.

    Company Releases

    Omnia (OMN) released a further trading statement for the year ended 31 March 2019:

    • The diluted headline loss per share is expected to be between 59 cents and 139 cents, down 106% to 115%, compared to earnings of 933 cents in the prior period. This is ahead of expectations (Bloomberg: -412 cents).
    • Profitability was adversely impacted by a further impairment of a problematic debtor in Angola, restructuring costs, a provision for a non-cash share based payments, transaction costs linked to the acquisition of Oro Agri, the Emerging Farmers programme (which continues to struggle) and both businesses in Zimbabwe being impacted by an intentional slowdown in business due to the liquidity constraints in the country. There was also a significant currency translation impact related to that are.

    While the revised loss was not as large as expected, the performance remained extremely weak. The company is currently trading under cautionary. On 30 May, the company said that it intends to undertake a rights offer of R2 billion (52% of market cap prior to the announcement). No price was provided and the company said that it would update shareholders when FY19 results are published on or about 25 June 2019.

    We will avoid the counter at least until more clarity is provided on the equity raise.

    Other News

    • The Association of Mineworkers and Construction Union (AMCU) tabled a minimum wage of R17 000 per month as wage negotiations in the platinum sector get underway. The minimum wage demand has increased from R12 500 per month.

    Information Sources: Information contained in this note references BDlive, Bloomberg, SENS, and ProfileData.





















  • Ashburton Morning Note 2019-06-14
    ANALYSTS: Chantal Marx, Pritu Makan, Thabiso Mamathuba, Tlamelo Mathakgane and Sithembile Bopela

    SA Economics 

    Mining production fell further in April by 1.5% y/y, from -0.7% in March. This marked the sixth consecutive month that mining production has been in contractionary territory. The outcome was worse than the market’s expectation of a 0.1% contraction (Bloomberg consensus). On a monthly and seasonally adjusted basis, mining output dropped by 2.3%, following an increase of 4.2% m/m in March.

    The biggest drag on annual mining output was gold mining production, which contracted by 19.5% y/y and deducted 2.7 percentage points (ppt) from the total. Iron ore also dropped significantly by 11.9%, taking off 1.7 ppt from overall production. The 7.2% y/y decline in chromium ore production subtracted 0.3 ppt from the total.

    Nevertheless, there were several pockets of strength in other mining categories. The production of “other” metallic minerals surged by 82.8% y/y and added 1.3 ppt to overall mining production. Diamond production also quickened by 20.6%, contributing 0.7 ppt. Recoveries were also noted in PGMs and several other industrial commodities.

    Although this outcome spells a weak start to mining production for 2Q19, we expect to see an improvement in the remainder of the quarter. Factors that are likely to support recovery include improved electricity supply compared to Q1, as well as some normalisation in gold mining production following the end of the protracted strike at Sibanye-Stillwater. Nevertheless, the backdrop of cooling global activity and ongoing trade tensions presents downside risks to this potential recovery.

    The 2Q19 RMB/BER Business Confidence Index (BCI) remained unchanged at 28 points – close to the 2009 recession level. Confidence improved in building, retail and wholesale trade. On the other hand, the collapse in confidence for new vehicle dealers was meaningful, while manufacturing confidence also continued to deteriorate.

    Overall domestic sales volumes are deteriorating from already depressed levels. While costs continue to rise among the various sectors surveyed, it is becoming increasingly difficult to pass these through to consumers. Indeed, insufficient demand was highlighted even more as a key constraint to business activity across the board.

    The BER commentary also stated that there were notable weaknesses in the business services results that they track over and above the BCI. Against this backdrop, the BER assesses that the risk for another technical recession in the first half of 2019 is rising.

    Company Releases

    Novus (NVS) released results for the year ended 31 March 2019:

    • Headline earnings per share decreased 41.3% to 60.4 cents, in line with recent trading guidance.
    • Revenue grew 0.6% to R4.331 billion while operating profit declined 41.4% to R294 million, mainly due to lower print revenues following the renegotiation of the Media24 contracts, reduced margins on retained print work and a poor contribution from ITB Flexible Packaging Solutions.
    • Print revenue decreased 7.9%, weighed on by reduced pricing and volumes, and the renegotiated Media24 contracts coupled with a declining market and local economy. Going forward, this will be partly mitigated by the awarding of a material printing contract from a large South African publishing house and ballot print tenders for the Democratic Republic of Congo and Nigerian elections during the year.
    • The packaging segment includes ITB and Labels. ITB revenue improved to 91%, however operating profit fell by 57.5% y/y amid industrial action. Labels revenue was up by 16.2%, supported by the gravure labels (wet-glue labels) operation, while the self-adhesive labels’ sales volumes were stable.
    • Tissue revenue improved 33.3% with additional mill capacity coming online. It ended the year breaking even although management has decided to dispose of this business, which is expected to have a positive impact on cash generation in the year ahead.
    • Cash generated from operations fell by 66.2% to R231 million. The decrease in the cash conversion ratio from 108.6% to 42.2% was caused by a temporary delay in payments from debtors and increased stockholding.
    • The dividend came in at 30 cents per share, down 42.3%.
    • In terms of board changes, Neil Birch transitioned from the position of executive chairman to chief executive officer on 19 June 2018.
    • Looking ahead, the cash conversion rate should revert to normal levels in the coming year, and the book and education markets are showing a positive resurgence with the local education market presenting opportunities as a new curriculum is finalised. Packaging is expected to deliver appropriate returns, and ITB is expected to contribute more strongly to the group going forward. The group entered into a sales agreement (post year-end) for the disposal of its UV Flexible labels division for R49 million.

    The large fall in earnings was well guided for by management. Not surprisingly, Print (77.5% of total revenue) remained under significant pressure due to contract downgrades and tough market conditions. Some pressure should be alleviated given that the division has secured a few material printing contracts. Management’s outlook statement was positive; however, revenue remains highly dependent on the group’s ability to secure long-term meaningful contracts. The potential sale of the tissue business will also allow the group to focus on core operations.

    Novus does not appear particularly demanding on a historic PE of 5.8 times with a relatively attractive historic dividend yield of ~8.5%. We remain structurally negative on the printing sector.

    Other News

    • NEPI Rockcastle (NRP) announced that the Financial Services Conduct Authority in South Africa (FSCA) has closed the last pending investigation related to trading in shares of NEPI Rockcastle. The FSCA decided that based on evidence obtained there is no substance in the allegations made that directors, related parties and other parties believed to be related to NEPI Rockcastle or to Resilient, Fortress and Lighthouse Capital, were supporting the group’s share price during the period under investigation.
    • Embattled schools operator Pembury Lifestyle Group (PEM) announced that it will be evaluating various options to dispose of its retirement villages portfolio. The segment’s results will be reflected as discontinued operations.

    Information Sources: Information contained in this note references Stats SA, Bloomberg, SENS, and ProfileData.