Leading South African companies are world beaters in the profit stakes.
The Cabinet was this week handed a document by the Department Trade and Industry, which calls for new interventions, including by the competition authorities, to lower prices charged by top corporations.
These are intended to cut excessive pricing, identified as a constraint in achieving a 6% growth rate. A -comparison of the profits of dominant players in the South African market with international companies featured on Fortune‘s Global 500 shows that many are very profitable.
Just seven of South Africa’s top companies — in the fuel, air travel, steel, banking, electricity, building materials and telecommunications sectors — earned R23,5-billion in the past financial year in additional after-tax profits over and above the median profits of their peers on the Fortune Global 500.
With a few exceptions South African companies are too small — or just too small — to appear on the Global 500, but they often have big profit-generating power and would come in at the top, or near the top, by sector of Fortune‘s lists if included.
The super profitable, measured by after-tax profits as a percentage of revenue, include:
- Banking giant Standard Bank would have the second-highest after-tax profits as a percentage of revenues if included on Fortune‘s global list of banks. It would also be the second-most profitable of any company on the Global 500;
- Fuel major Sasol’s South African operations would make it the second-most profitable of internationally listed fuel companies and one of the top 10 500 companies;
- Cement producer PPC would feature as one of the world’s top 10 most profitable companies;
- Steel supplier Mittal is the world’s most profitable metals company, its South African operations (formerly Iscor) being as profitable as its parent;
- Power utility Eskom would vie for second place if included on Fortune‘s ranking of 23 utility companies; and
- Telkom would be the fifth-most profitable telecommunications company.
Fortune‘s latest survey of the top 500 international companies is drawn from 51 sectors and 32 countries.
A comparison of the sectoral rankings with the performance of top South African companies during the past year shows the latter are often well above median levels of profitability of their peers:
- PPC’s 22,9% after-tax profits as a percentage of turnover is nearly four times Fortune‘s median for this sector of 6%;
- Mittal’s after-tax profits of 21% as a percentage of turnover are more than three times that of the 6,5% median for the 12 companies listed by Fortune;
- Standard Bank’s taxed profits-to–revenue ratio of 28,8% dwarfs that of Fortune‘s median of 10,5% for the 56 banks it lists;
- Telkom earns 15,78%, nearly twice the median of its peers (7,9%);
- Sasol’s 13,8% it makes globally is nearly twice the median 7,4% earned by its 32 peers, including BP (5%), Exxon Mobil (9%), Royal Dutch/Shell (7%), Total (8%) and Chevron (9%);
- Eskom’s 12% after-tax profits-to-revenue ratio is also nearly twice the 6,29% median produced by 23 utilities listed by Fortune;
- SAA’s R966-million in after-tax profits is 6,21% of revenue. Fortune lists seven airlines. The four that reported a profit were Air France/KLM (2%), Lufthansa (2%), Japan Airlines (1%) and British Airways (3%).
These seven South African corporations on average earned 17,18% after-tax from their sales compared to the median figure of just 6,58% earned by 162 of their international peers.
The 10,6% difference is R23,5–billion after tax of their combined R222-billion turnover. Pre-tax the figure would be about R35-billion.
Just one company on the Global 500 has higher after-tax profits to revenue than Standard Bank, the China Construction Bank at 30,7%.
A United States bank, US Bancorp (28,3%) is in second place on Fortune‘s overall highest returns on revenues list.
South African banks are known to be highly profitable. This was one of the reasons why Barclays launched its takeover bid of Absa.
Barclays is in position 42 on Fortune‘s list of highest returns on revenues, but with a ratio of 15,2% is almost half as profitable as Standard Bank.
Fortune determines nationality through the company’s primary stock-market listing. As such, no South African companies are included in its Global 500.
Anglo American (Britain) and Old Mutual (Britain) are in the 500. Anglo, which has De Beers as a major source of profit, reported after-tax profits of 12% of revenues. Canada’s Encana and Australia’s BHP Billiton were more profitable at 28% and 15% respectively.
Old Mutual matches its international peers with after-tax profits of 4% as a percentage of revenues, equivalent to the median for 20 companies on Fortune‘s insurance list.
The seven South African companies profiled here include two that are state-owned (Eskom and SAA), two that rely on regulated prices for their profits (Sasol and Telkom) and two that are claimed beneficiaries of import-parity pricing (Mittal and PPC).
Only four banks — three in the US and one in Japan — listed by Fortune manage profit margins in excess of 20%.
Top South African companies are often well managed and represent a deterrent to investment in that they dominate their markets.
Notwithstanding Telkom’s apparent profitability, potential competitors have been in short supply, possibly partly because they fear such a dominant competitor.
Likewise, for instance, as one observer remarks, you can hardly imagine Pick ‘n Pay tackling the fuel market when it knows that Sasol can easily spend R1-billion ensuring it retains its market dominance.
The Super Seven
We compare seven market leaders with their peers, as ranked by the latest Fortune Global 500. The companies profiled were invited to respond; where they have chosen to respond, their comments are included.
Air travel
Seven airlines from five countries made it into the Global 500. They have a median turnover of $18 645 and after-tax profits, as a percentage of revenues, are 1,5% of this at $280-million.
State carrier SAA reported after-tax profits of R966-million last year, 6% of total revenues of R15,5-billion.
Banking
Banks show the greatest profit range of any sector. Those which are profitable reported after-tax returns as a percentage of revenues (the sum of interest plus non-interest revenues) ranging from 1% to 31%.
A total of 56 banks are listed from 16 countries. The medians are $22-billion revenue and $2,3-billion in after-tax returns and after-tax profits (10,5%).
Local market leader Standard Bank reported revenues of R25,4-billion and after-tax profits of R7,3-billion (28,8%).
Cement
PPC makes R22 (after-tax profit) off every R100’s worth of cement it sells. Its operating margin is 36% of sales, extraordinary given that it sells a low-value product.
PPC is the only locally listed cement company, but at least one other company that also operates here appears on the Fortune list. This is Lafarge, which reports after-tax profits of 6% of sales. The median is 5% for five companies listed under building materials.
PPC’s John Gomersall said the issue with cement is increasingly becoming availability rather than price. Sustained growth, particularly in the residential sector, and a lack of development in new capacity for many years, has created a shortage.
Gomersall said the cement cost is about 5% to 7% of the basic government house, the higher of the two figures being where cement blocks are used in construction.
PPC, which has “under 35%” market share, is building a new plant and recommissioning a disused one but, said Gomersall, PPC’s large customers are now more concerned about whether they will be able to get the product, rather than what the purchase price will be.
Gomersall said that, while the cost of capital has come down in South Africa, it is still twice as high as Europe and there remain risks in the local market. “The last plant we built went unused for 14 years, and shareholders had to fund it.”
Electricity
Fortune includes 23 utilities from 11 countries on its Global 500 list. Median after-tax profits are $1 249-million (6,2%) on sales of $19 849-million.
An American company, Exelon, achieved 13% after-tax return. Eskom, at 12%, matches two others: South Korea’s Korea Electric Power and Spain’s Iberdrola.
Fuel
Making it into the petroleum refining section of the Global 500 are 32 companies, eight of which show more than 10% profit as a percentage of sales. The most profitable is Malaysia’s Petronas, coincidentally the 90%-owner of Engen, which reports after-tax profits at 26% of sales.
Sasol has just reported after-tax profits of R9,5-billion on sales of R69,2-billion, a 13,8% margin.
Sasol’s international profits are relatively low compared to what it makes at home; its South African operations show a 23% after-tax profit as a percentage of sales, calculated on a proportionate basis.
Steel
JSE-listed Mittal (formerly Iscor) is part of the world’s most profitable steel group, Netherlands-headquartered Mittal. Only two companies, Mittal (21%) and South Korea’s Posco (16%), report profits as a percentage of sales in double digits.
Mittal South Africa, which contributes about one-sixth of group revenues and profits, also reports after-tax profits at 21% of sales or turnover. Most of the other 10 steel producers in the Fortune 500 show after-tax profits of between 4% and 8% of turnover.
Mittal South Africa, says the group, has championed consolidation, been a cost leader and moved up the value ladder.
“Since about the middle of 2004, all commodities are enjoying a fairly sustained run of high cycle. Steel prices have also achieved historic levels. The explosion in Chinese demand has been the main contributing factor.”
Steel mills have felt the pressure of this commodity cycle on their costs, also because of the almost doubling of prices for coking coal, iron ore and other input costs. “Steel mills with a higher degree of backward integration have been shielded from cost-push. Most of the Mittal Steel units, including South Africa, are well positioned in terms of captive sources of raw materials. All the above factors, coupled with world-class efficiencies, have helped Mittal Steel return good margins to its shareholders.”
Telecommunications
Telkom would be the fifth-most profitable telecommunications company on Fortune‘s list of 24 companies if it was large enough to be there. At 15% taxed profit to turnover, it would come in just ahead of its former shareholder SBC Communications, which makes 14c of after-tax profit for every dollar of sales.
Telkom would be out-performed by former monopolies such as Australia’s Telstra (19%), but be significantly ahead of the United Kingdom’s British Telecom (10%).
Telkom said in a response to the Mail & Guardian that its “growth in net profit for the 2004/05 financial year was mainly derived from fixed-line data volume growth as a result of the acceleration in the uptake of data services, growth in mobile South African customers, efficiency gains and reduced finance charges”.
A smaller portion of the growth in net profit, only 10%, was due to the impact of prices, the statement said. “The reduction of 48,1% in finance charges was driven largely by a repayment of R3,883-million in debt.”
Telkom has often been criticised for making “excessive profit”, the statement said. “Net profit of R6,8-billion in the context of a total asset base of R57,6-billion and equity of R26,9-billion is reasonable.”