Lynley Donnelly surveys the JSE as the global economic downturn hits home and finds more survivors than wrecks.
South Africa is weathering the market meltdown better than most, with more survivors (and even thrivers) than wrecks.
The JSE has a handful of poor performing companies, but many are relatively unscathed, so far at least. Some are even thriving, reporting excellent results and making off-shore acquisitions.
BEE is also a mixed bag, with a reported 40% of BEE deals being underwater, meaning that the market price is below the purchase price.
Leading BEE player Patrice Motsepe retains his dollar billionaire status.
Company heads are gloomy in their forecasts for the future, and economic experts are adamant the worst is yet to come.
The JSE’s total market capitalisation—its market value—is down 33%.
It has shrunk from R6 037-trillion a year ago to R4 019-trillion.
The JSE All-Share index meanwhile is at a four-year low at 18 465.33 points in February, figures not seen since December 2005.
Sasfin’s David Shapiro points out, however, that as interest rates decline, “savers” who benefited from previously high rates may turn to equities to increase their yields.
When investors’ appetite for risk will improve and when the market will stabilise, however, “no one can say”, he told the Mail & Guardian.
The stability of South Africa’s financial institutions are “fortuitous”, says Shapiro, but despite this the country’s economy has not seen the worst effects of the global crisis.
“Even though some [company] results have been good, the warning signs are there.”
He points to the conservative forecasts made by company executives, as well as the cash-saving paths that many companies decided to take ahead of 2009.
Economic vulnerabilities still remain, says Shapiro, particularly with regard to exports where the volume of goods being exported as well as prices, are in decline, thus doubling the pain of the economy.
Wreck . . .
During the flurry of recent interim results, some distinctly poor performances have emerged.
Not least of these is paper producer Sappi. The company has seen its share price plummet 85% in the past year, according to Moneyweb data. Its recent interim results paint a gloomy future for the company. Its sales volumes in South Africa and in developed markets have plunged.
In a research note investment bank Goldman Sachs rates the share as a “conviction sell” and warns that Sappi is likely to breach its debt covenants. These are agreements between a company and its creditors that the company will operate within certain financial limits. The expected breach, notes Goldman Sachs, will have a further negative effect on the company’s share value.
AngloAmerican, another former stalwart, suspended its dividend payout for the first time in 80 years in a drive to conserve cash ahead of a tough 2009.
Its share price has fallen 69% year on year and it has reportedly fallen in rank from the third-largest global mining house to the 10th.
Despite tough economic times, rival BHP Billiton retains its place as the largest diversified miner in the world.
Old Mutual, too, has seen tough times. Although its majority stake in Nedbank will not be sold just yet, as the rumour mill has suggested, the company also cut dividends to preserve cash. Its share price has seen a 71% decline year on year.
Storm survivors . . .
Demand for commodities is plummeting while prices simultaneously weaken, really hurting resource companies.
Heavy-hitter BHP Billiton nevertheless managed to increase revenue by 16.6%. Profit from operations, however, took a 23.8% nose dive, as did attributable profit, falling 56%.
This was as a result of once-off items, including the indefinite suspension of Ravensthorpe operations in Australia and costs relating to the Rio Tinto offer.
Sasol reported good results, seeing operating profit up 53% and headline earnings per share rose 51%. The company emphasised, however, that a similar show could not be repeated this year. It cut its capex budget by 40%, with chief executive Pat Davies emphasising Sasol’s cash conservation strategy.
Standard Bank announced a modest 8% increase in earnings during its interim results. While its share price is down 25% year on year, the bank has been confident enough to acquire a 33% stake in Russian investment bank Troika Dialog.
Among the cash rich we can also include South African billionaire Johann Rupert. The Financial Times reported that Rupert intends to rescue Lehman Brothers Merchant Banking Partners, the failed bank’s private equity arm, by buying it out from Lehman’s.
Companies such as Aspen Pharmaceuticals have outshone the market. Aspen announced an incredible 91% increase in revenue, with operating profits rising 87%. Its share price has risen 56%.
South Africa’s retailers have also seen some good numbers recently with companies such as Massmart posting decent numbers, with sales increasing 13% for the period to December 2008.
Chief economist at Rand Merchant Bank, Rudolf Gouws, says that, although there is no doubt that South Africa is headed for a recession, the country has done well.
“There may well be a second round of effects on the way but South Africa is in a relatively good state,” says Gouws.
He puts this down in part to the strength of the state’s finances.
Finance Minister Trevor Manuel defied his critics with his conservative fiscal policy, ensuring that the budget could work to buoy the economy when times got tough, says Gouws, despite the fact that it may have “cost him politically”.
Falling interest rates and the local banking sector’s lack of exposure to the sub-prime crisis are also contributing factors to South Africa’s standing, he says.
BEE power players
According to information supplied by Who Owns Whom, some of South Africa’s largest BEE players have seen less than stellar results under tough economic conditions.
An examination of directors’ holdings in locally listed companies gives a strong indication of the hit BEE big wigs have taken to their personal wealth.
The only outright winner is Patrice Motsepe, whose total value in investments through directors’ holdings in African Rainbow Minerals and Sanlam increased 11.9% from November 2008 to February 2009. His investments are now worth a cool R11.858-billion.
Other players, however, have not been so fortunate.
The value of Phuthuma Nhleko’s investment in MTN fell 20.04% between November 2008 and February this year, according to Who Owns Whom, settling at R1. 713-billion.
Similarly, the Royal Bafokeng’s investment in Merafe Resources fell 24.71% in the same period. In November last year the stake sat at R612-million, falling to R461-million last month.
Irene Charnley’s investments in MTN fell 20.04% to R1.208-billion over the same period.
Meanwhile Tokyo Sexwale’s investment in Absa, the Mvelaphanda Group and Mvelaphanda resources increased in value by a marginal 0.98% to R721-million.
In a letter to Business Day Who Owns Whom, managing director Andrew McGregor noted that the impact of the economic crisis on private company dividend payouts will hurt empowerment shareholders who rely on those dividends to finance their debt.