• 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.



  • Ashburton Morning Note 2019-06-12
    ANALYSTS: Chantal Marx, Pritu Makan, Thabiso Mamathuba, Tlamelo Mathakgane and Sithembile Bopela


    SA Economics 

    April 2019 manufacturing production jumped 4.6% y/y – the largest annual increase since June 2016. This was higher than the mild upwardly revised 1.3% y/y growth reported in March and overshot market projections for a 1% increase. Increases were noted in eight of the ten surveyed subsectors. On a monthly and seasonally adjusted basis, factory output increased by 2.8% in April m/m, from 0.9% previously.

    The largest contributor to annual growth was basic iron & steel, non-ferrous metal products, and metal products & machinery production, which increased by 9.4% y/y and contributed 1.8 percentage points (ppt). It was followed by the production of motor vehicles, parts & accessories & other transport equipment, which surged by 18.6% and added 1.3 ppt, and manufactured food and beverages which increased by 3.3% (+0.9 ppt).

    This outcome in manufacturing production has helped reverse some of the losses sustained during the first quarter, which is encouraging. The jump is in line with the business activity subindex of the Absa PMI, which tends to give a better indication of manufacturing production. It is highly unlikely that we will see a repeat of this for the remainder of 2Q19. Nevertheless, we expect an improvement relative to Q1 mainly because of a lack of load-shedding.

    Company Releases

    Naspers (NPN) subsidiary PayU agreed to buy Turkish digital payments company Iyzico for $165 million:

    • Iyzico was founded in 2013 and is used by small and medium-sized companies in Turkey as well as larger multinationals.
    • PayU views this as a good opportunity to gain exposure to Turkey’s e-commerce market, which is growing at more than 10% a year.
    • The acquisition must still be approved by regulators and is expected to close in the next few months.

    The company ended 1H19 in a US$8.7 billion net cash position – meaning that it has ample internal resources to fund this acquisition.

    Tencent remains the key value driver for Naspers (and currently makes up over 100% of market capitalisation). We maintain our positive stance on Tencent, and we believe that the market should attach value to the rump in Naspers. Management remains focused on narrowing the discount at which the company trades to its net asset value. We maintain our long-term favourable view of Naspers.

    Stor-age (SSS) released results for the year ended 31 March 2019:

    • The group declared a dividend of 106.68 cents per share, up 9.1%, in line with management guidance.
    • Rental income grew 63.2% and net property income increased 65.2%.
    • Like-for-like SA rental income and property income improved by 7.5% and 7.3% respectively, supported by a 0.5% increase in average occupancy levels and a 7% increase in the average rental rate.
    • The UK portfolio performed in line with expectations, achieving like-for-like net operating income growth of 6.3%.
    • The overall occupancy rate was slightly lower at 83.5% (FY18: 85.3%) in SA, with closing rental rates up 9.3%. UK occupancies rose to 80.3% (FY18: 78.2%) with the average rental rate increasing marginally by 0.8%.
    • Net debt stood at R1.5 billion (FY18: R619.7 million) at year end with a gearing ratio (LTV) of 24.6% (FY18: 16.1%).
    • The net asset value per share came in at R11.70, flat compared to 1H19.
    • Management will continue to focus on achieving real and sustainable growth with a strong emphasis on active, hands-on management and a disciplined operational focus at an individual property level.
    • The board guided for dividend growth of between 7% and 9% for FY20.

    This was a solid result with distribution growth being in line with guidance. Like-for-like growth was pleasing given the overall performance of the local economy with management being optimistic about the resilience of the Stor-Age business model.

    We like the quality of the portfolio, management and the operation, as well as the accretive pipeline. The market remains highly fragmented, which does provide future consolidation opportunities for the group, provided it meets their quality criteria.

    Stor-Age is trading on a forward distribution yield of around 9.2%, which appears attractive.

    Other News

    • Super Group (SPG) appointed Mr David Ian Cathrall to its board as an Independent Non-Executive Director with effect from 1 June 2019. Mr Cathrall is a member of the South Africa Institute of Chartered Accountants (CA(SA)) and was a Senior Partner at EY until his retirement in 2018.


    Information Sources: Information contained in this note references StatsSA, Fin24, Bloomberg, SENS, and ProfileData.



  • Ashburton Morning Note 2019-06-11
    ANALYSTS: Chantal Marx, Pritu Makan, Thabiso Mamathuba, Tlamelo Mathakgane and Sithembile Bopela

    Making Headlines 

    Tongaat Hulett (TON) announced that the company’s listing has been suspended on the JSE. This was due to the announced delay in the publishing of the group’s financial statements and the continuing review into past financial practices.

    • The share price has been under pressure for some time, with weak market conditions in the sugar industry having weighed on sentiment and profitability for at least the last five years.
    • After a spat with a sell-side analyst and another poor set of results released in September, the CEO indicated that he would step down in April 2019.
    • The share price came under intense pressure in February this year when the company said it would record a headline loss per share for FY19. At the time, the company noted that a weak operational performance, cane revaluations, and almost no land sales being concluded during the period were the main contributors to the poor result.
    • In March the company released a cautionary announcement saying that a strategic and financial review had uncovered “certain practices” that may warrant a restatement of its financial results.
    • On 31 May the company said that the company’s FY18 results would need to be restated with equity estimated to decline by between R3.5 billion and R4.5 billion. These adjustments were non-cash in nature and related to the reassessment of land sales, cane valuations, and a reversal of costs capitalised to cane roots, maintenance and inventory. The company said that FY19 results would not be finalised by 30 June 2019 (as previously guided for), but will instead only be released in October 2019 per current estimates.
    • This is the first time the JSE has suspended a listing for reasons other than non-compliance with listing regulations or a pending liquidation.

    We have been avid avoiders of the sugar industry for years, given its cyclical nature and the fact that we do not view the local industry as particularly competitive in the international context. Following the confirmation of asset restatements in May we labelled the company as un-investable.

    Company Releases

    MultiChoice (MCG) released a trading statement for the year ended 31 March 2019:

    • Core headline earnings per share are expected to increase between 8% and 12% y/y, behind expectations (Bloomberg: +15.6%). This was driven by positive subscriber growth and a reduction in losses in the Rest of Africa segment.
    • Trading profit will be 9% to 13% higher y/y and up by between 24% and 30% on an organic basis.

    This points towards a weak result relative to expectations, although we would like to see the full print to get a better idea of what drove the result.

    Meanwhile, the company said yesterday that Showmax is trialling live sport streaming and has also begun adding pre-recorded sport events to its back catalogue. The events include South Africa’s Cricket World Cup games, extended highlights, sports magazine shows, and certain live amateur events including games from the SuperSport Rugby challenge. Showmax emphasised, however, that there are no current plans to offer full bouquets of all sports. The trial broadcast of sport on Showmax is viewed as a positive step for the company into an area where we believe it has an inherent competitive advantage.

    MultiChoice is trading on a forward PE of 17.5 times, which seems fair given this company’s competitive position, an expected recovery in Africa ex-SA, and annuity-type income profile.

    African Rainbow Capital (AIL) released an investment update for the period ended 31 May 2019:

    • The group made net investments of R348 million, during the period 1 January 2019 to 31 May 2019, and had cash of ~R700 million available for future investments at period end.
    • TymeBank acquired 400 000 clients and is aiming to reach 500 000 clients by July 2019. TymeBank aims to amass 2 million clients over the next three years, with 1.3 million active client accounts (minimum of 200 000 clients having TymeBank as their primary bank account).
    • Rain continued to make good progress with its roll-out strategy and is on track to meet its key implementation targets. The 4G contractual roaming arrangement with Vodacom is performing well (end of April: 3 074 live sites). Rain also announced its intention to launch a 5G network by the end of 2019.
    • The ARCH Africa Renewable Power Fund achieved a first close at US$105 million in February 2019, targeting a final close of US$250 million. The fund aims to establish between 10 and 15 renewable energy projects across sub-Saharan Africa throughout the investment term. The ARC Fund committed to invest $30 million in the fund.
    • The group committed to a R100 million investment in the Ethos AI Fund, which was launched in October 2018 and had a successful first close of R600 million. The fund has a target size of R1 billion and the final close is anticipated in December 2019.

    The group continues to make progress in its respective investments and in deploying capital. We continue to like the company’s investment strategy and believe it has the capability of extracting value from the existing portfolio and identifying quality investments in the future.

    The counter is trading at a discount to NAV of approximately 46% (12% on listing). We expect the discount to unwind over time given the portfolio make-up (largely unlisted investments).

    Other News

    • NEPI Rockcastle (NRP) announced that its ordinary shares will start to trade on A2X from Tuesday, 18 June 2019. The group will retain its listing on the Johannesburg Stock Exchange (JSE) and Euronext Amsterdam, and its issued share capital will be unaffected by the listing on A2X.
    • Moody's Investor Services said the quantum of the contraction of South Africa’s GDP in the first quarter was credit negative for South Africa’s government and the country's banks. The agency lowered its forecast of real GDP growth for 2019 to 1.0% from 1.3% previously. Moody's is the sole global rating agency to still assess South Africa’s sovereign debt at investment grade.

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





















  • Ashburton Morning Note 2019-06-10
    ANALYSTS: Chantal Marx, Pritu Makan, Thabiso Mamathuba, Tlamelo Mathakgane and Sithembile Bopela


    SA Economics this Week 

    The main data release for next week will be the RMB/BER Business Confidence Index (BCI) for 2Q19, which is coming out on Thursday. Over and above that, the first set of GDP production-side data for Q2 will also be released, with manufacturing production scheduled for Tuesday, followed by retail sales the next day and mining production on Thursday.

    The last print in the BCI showed a decline to a disappointingly low 28 points in 1Q19. For the second quarter, we expect the BCI to remain constrained at low levels. It is possible, however, that we could see a marginal uptick in the indicator following the benign outcome from the national elections which took place during 2Q19.

    The 1Q19 GDP release from this week showed a significant contraction of 8.8% q/q (saar) in manufacturing production, while mining output plummeted by 10.8%. Weakness in factory and mining production was largely underpinned by power cuts during the quarter. Moving into Q2, we expect that the absence of load-shedding was supportive to both manufacturing and mining production in April. For manufacturing production, we expect the support from the lack of power cuts to be somewhat limited by the build-up in inventories in Q1 reported by Stats SA. Mining output, on the other hand, is likely to have received additional support given the large inventory drawdown from last quarter.

    The last print for retail sales showed a slowdown in growth to 0.4% y/y in March. We expect that momentum slowed even further in April, following the implementation of various tax proposals announced in the National Budget in February. Although one could make a case for an improvement in retail sales in the coming print given the increase in the VAT rate last year to 15%, we believe the pass-through to consumers was lower than anticipated. To this end, we do not expect the base effect to be significant in April 2019.

    Company Releases

    Bidvest (BVT) released a business update for the ten months to April 2019:

    • The year to date operating performance was acceptable according to management. Trading profit improved, although at a slower pace compared to 1H19 (+6.3%).
    • While the annuity-type businesses continued to deliver growth, trading businesses (focused on industrial and infrastructure-related sectors) continued to face challenging trading conditions.
    • Freight benefited from previous investment in liquid fuel and multi-purpose tanks, resulting in higher trading profit despite lower product volumes.
    • SA Services delivered good results except for travel, weighed on by lower volumes, downtrading and margin pressure. Noonan (Ireland) achieved an outstanding performance while the UK market remained challenging and competitive.
    • The trading performance in Commercial Products weakened due to delayed industrial projects and scarce manufacturing activity. The consumer facing businesses continued to perform better than the industrial-focused operations.
    • Office & Print delivered a pleasing result, bolstered by healthy gross profit margins, strong cost control and efficiencies.
    • The Financial Services through Bidvest Bank is rolling out additional fleet under a heavy commercial vehicle Transnet contract. Business and personal banking are showing pleasing results while Insurance had a challenging year in the commercial sector.
    • Automotive came under pressure due to a decline in new vehicle sales with used vehicle and aftermarket gross margins remaining strained.
    • The Electrical division also continued to face challenging conditions within the building, construction and mining industries.
    • Tight expense control and numerous other actions taken to remain relevant and competitive have resulted in margins being maintained.
    • The group made several bolt-on acquisitions and continued to invest in existing businesses as its financial position remained strong (net debt/EBITDA was unchanged). A few larger sized acquisitions are currently being pursued as the R1 billion Liquified Petroleum Gas (LPG) project continues to progress well and remains within budget.
    • The delisting and take-over offer for Bidvest Namibia was accepted by minorities. The integration back into the South African operations will now commence.

    This was a resilient update from the group against a challenging operating environment. The maintenance of margins, amid what would have been pedestrian top-line growth, was impressive. Economic growth is expected to advance at a slower pace in the current year compared to 2018, which could place pressure on trading profit growth going forward. However, active cost management and efficiency gains could help to offset some of the downside risk.

    Bidvest is currently trading on a forward PE of 13.9 times. This counter is a solid play on an expected recovery in SA economic growth. The disposal of non-core assets is regarded as a potential near-term catalyst. We retain our favourable long-term view of this counter.

    Other News

    • Mondi (MNP/MND) provided an update on the simplification of the Group’s corporate structure (from two listed entities to one). The simplification process has been extended as all regulatory consents have not yet been received. The simplification is now expected to be completed in 2H19.
    • The Public Investment Corporation (PIC) has disposed of a portion of Adcock Ingram (AIP) shares, reducing its shareholding to ~18.6%. Bidvest (BID) increased its interest in AIP to 43.3%.
    • Sibanye-Stillwater (SGL) and Lonmin (LON) announced this morning that the acquisition of Lonmin by Sibanye-Stillwater has now become effective. The number of shares in issue for Sibanye-Stillwater will increase by 12% today and Lonmin will cease treading.


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



  • Ashburton Morning Note 2019-06-07
    ANALYSTS: Chantal Marx, Pritu Makan, Thabiso Mamathuba, Tlamelo Mathakgane and Sithembile Bopela


    President Cyril Ramaphosa issued a statement yesterday addressing conflicting statements from government officials and members of the ruling party regarding the mandate of the South African Reserve Bank. Uncertainty around monetary policy going forward has had a pronounced impact on the rand. The currency weakened from R14.45 at the beginning of the week to over R15 yesterday.

    The president highlighted that the “Constitution sets the role of the SARB as protecting 'the value of the currency in the interest of balanced and sustainable economic growth'. It further states that this mandate must be exercised in regular consultation with government, through the cabinet minister responsible for national financial matters. This policy has not changed.”

    He added that considering current economic and fiscal conditions it would not be prudent to transfer ownership of the reserve bank to the state given the cost associated in doing so.

    South Africa’s current account deficit deteriorated to -2.9% of GDP during the first quarter of 2019, from -2.2% in 4Q18. This is better than market consensus for a deterioration of -3.3%.

    Among the underlying components, the trade surplus narrowed to 0.9% of GDP during 1Q19 (1.4% previously), as the value of merchandise exports declined more than that of imports. Furthermore, there was a widening in the shortfall in the services, income and current transfer account compared to the previous quarter. The deficit in this component widened to -3.8% of GDP, from -3.6% in 4Q18.

    On a more encouraging note, SA’s Terms of Trade improved notably in 1Q19 by 4.7% q/q, following declines in the previous two quarters. This was in line with the combined effect of a fall in rand price of imports (-4% q/q) and the slight rise in exports (+0.4%). It is likely that this improvement in relative prices helped to limit further deterioration in both the trade and current account balances.

    The European Central Bank (ECB) pushed out the timing of its first-rate hike in nearly eight years to the second half of 2020 at the earliest, citing concerns about global growth and the inflation outlook as reasons for the delay.

    Company Releases

    Attacq (ATT) released a pre-close investor update:

    • While the consumer remains under pressure, the group maintained regional market share in retail.
      • Sales growth over the year ended March 2019 came in at 6.1% with retail vacancies remaining low at 2.9% (1H19: 2.6%).
      • Trading densities improved by 6.1%, supported by strong growth at Mall of Africa (+9.6%) and Waterfall Corner (+9.1%).
      • Mall of Africa achieved average lease rental escalations of 6.7%.
    • The portfolio vacancy level increased to 5.4% (1H19: 5%), due to an increase in retail (+30bps) and office and mixed-use (+40bps) vacancies.
    • Most completed developments and developments under construction at Waterfall City and Waterfall Logistics Hub are 100% let/sold.
    • The group remains positive regarding MAS Real Estate (22.8% shareholding) following upbeat trading guidance with further investment into Central and Eastern Europe to come. However, Attacq will not participate in future capital raisings.
    • There is no intention to invest further capital into retail investment within Rest of Africa. The group will focus on recycling non-core assets with recycled capital also being used to reduce debt.

    This was a decent update with the group maintaining solid metrics despite ongoing strain within the local property market. Management’s strategic focus on recycling non-core assets, reducing debt and improving the local portfolio’s property fundamentals were key positives.

    We like the counter’s development pipeline as well as its quality income-producing assets. The group is currently trading on a forward yield of 5.6%.

    Other News

    • SA Corporate (SAC) advised shareholders that the finalisation of the investigation into a whistle-blower report received on 9 February last year against the company’s management had been delayed. Advocate JJ Reyneke SC was tasked in March 2018 to investigate the allegations. The delay has been ascribed to Advocate Reyneke’s other commitments. It is anticipated that the final report will be received by 22 June 2019.
    • Omnia (OMN) announced that its board Chairman Mr Rod Humphris would be retiring at the September 2019 AGM but will step down immediately. Mr Ralph Havenstein, who has been the lead independent director, will succeed Mr Humphris.

    Information Sources: Information contained in this note references Attacq, The Presidency of South Africa, Fin24, Trading Economics, SARB, Bloomberg, SENS and ProfileData.