Furniture companies’ are beginning to shine on the stock exchange, reports Jacques Magliolo
For the first time in five years, furniture companies are performing well on the Johannesburg Stock Exchange dispelling investor concerns that these companies are doomed never to resurface as players of note.
Their return to prominence on the JSE board is a direct result of the economic upturn in South Africa during mid- 1993. Gross domestic product grew by about 2,2 percent that year, signalling the first rise since 1989.
Similarly, furniture companies displayed positive retail sales increases that year, which came after a long period of negative growth.
Analysts point out that it was only in 1994 that furniture sales really took off and that these results are now filtering through to improved investor sentiment and thus share price increases.
Doug Ellish, analyst and head of research at Anderson, Wilson & Partners says: “General perceptions that extra houses would be built, as a result of our new government’s Reconstruction and Development Programme, caused investor sentiment towards the Building & Construction and the Furniture sectors to improve during the past year.
“Unlike commodity-linked companies which are affected by global factors, these two sectors are influenced by the domestic environment,” he says.
Yet numerous experts suggest that results need not have been as poor as they were during these years of downward trend.
Since 1990, furniture companies have gone through extensive rationalisation, yet they produced appalling results and the entire sector often reflected absolutely no trade on the JSE board.
While the absence of traders is, in itself, unusual, it was not surprising. Investors had been promised a turnaround in the industry since early 1989, when major restructuring was earmarked for most furniture companies.
Even the usually trustworthy Ellerine announced a 34 percent decline in its interim pre-tax profit to R35,1- million in 1993.
Investors were dissatisfied enough for the JSE board to reflect no price quotes on that day. In its 1994 financial year, Ellerine increased its dividend by 23 percent to 36,5 cents from 29,6 cents in 1993.
The JD Group is another example of a company primed for better results. Following the release from prison of now-President Nelson Mandela in 1990, the JD Group improved dividends paid to 7 846 cents (1989: 6 063 cents), but failed to capitalise on this improvement and had to maintain dividends at this rate through to end-1992.
Financial problems, such as an 86 percent debt:equity ratio in 1992, led the group to sell its debtors book to a consortium of banks and thus promised investors an improved financial performance for 1993. These benefits did not materialise.
Instead, it produced a 51 percent decline in its interim pre-tax profit to R30,5-million in 1993. This subsequently led to W&A’s takeover of the JD Group and the restructured company’s dividends per share improved marginally in 1994 to 24 cents from the previous year’s 22 cents. This includes a capitalisation issue.
Another problem furniture companies faced during this period
of transition was a change in tax laws during 1993, which forced furniture companies — which previously did not pay tax on their debtors’ books — to choose between comprehensive or partial taxes on their hire purchase receipts. Only Ellerine chose the former. The partial tax method helped the JD Group to restrict its earnings per share decline to 36 percent in that year.
While the debate on the necessity of new tax laws continues, some analysts believe that they were essential to level the business playing fields.
In a climate of high interest rates, furniture companies had a distinct and unfair advantage. The now defunct Rusfurn Group — sold in part to Wooltru and the JD Group — for instance, had more than R1-billion worth of debtors. These were fixed at a high usury rate of 33 percent, while it was funding debtors with bank acceptances and preference shares at an average cost of 15 percent.
In essence, furniture companies were not taxed, but allowed to make more than 50 percent profit from financing debtors and were thus taking on banks without paying for the privilege.
Also, it meant that, as long as furniture companies increased their debtors book, profits from financing margins would offset any tax paid by retail sales.
However, furniture companies could not be blamed for trying to turn their operations into banks, given that retail operations were being severely affected by radically declining sales volumes.
Overall risk-to-return profiles deteriorated as business and financial risks worsened. Until mid-1993 industrial and technical analysts were wary of furniture shares, advising investors that, as a long term investment option, these shares still “had room to fall and were not yet cheap enough to buy.”
Now the situation has changed, and the entire furniture sector is showing promise, with analysts recommending Ellerine as a blue chip favourite.
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