FU­TURES IM­PER­FECT

Ron Derby col­umn

Financial Mail - Investors Monthly - - Contents - RON DERBY

Agreat many com­pa­nies quoted on the lo­cal bourse have an as­ter­isk sig­nalling that they are in a state of re­pair or a turn­around play. The en­tire re­sources in­dex re­sem­bles a con­stel­la­tion of stars, given the end of the “su­per-cy­cle”, caused by the slow­down in the Chi­nese econ­omy. It’s a slow­down that con­tin­ues to sur­prise on the down­side, hence China’s cen­tral bank mov­ing to rein in the decline.

In­vestors have long moved out of re­sources, to the ben­e­fit of re­tail stocks, which for the most part con­tinue to rise de­spite con­cerns about the state of the South African con­sumer. But even among the star per­form­ers of the JSE over the past seven-odd years, there are a few coun­ters that have the as­ter­isk sym­bol above their name.

I have cho­sen the most im­por­tant “turn­around” sto­ries from th­ese two sec­tors of the econ­omy, which per­haps best rep­re­sent the shift in the SA econ­omy from re­sources to con­sump­tion. With the re­or­gan­i­sa­tion of its plat­inum unit its prime fo­cus, An­glo Amer­i­can, which is near­ing its cen­te­nary, is the main cor­po­rate story in the sec­tor. In the re­tail space, the res­cue of the mid­dle-aged Pick n Pay and the role of its found­ing fam­ily is the most talked-about story.

Both com­pa­nies ap­pointed CEOs to lead the re­ju­ve­na­tion, ap­point­ments that were wel­comed by the mar­ket.

They’ve re­cently com­pleted two years, and IM thought it apt to look at their re­port cards, start­ing with An­glo’s Aus­tralian CEO, Mark Cu­ti­fani, who started his cleanup op­er­a­tion on April 3 2013. Lon­don-based Bern­stein said in a note last June that the miner un­der his lead­er­ship would ei­ther suc­ceed at its re­or­gan­i­sa­tion and start pro­duc­tion at its Mi­nas-Rio iron ore mine in Brazil, or be ac­quired.

Not a job for the faint-hearted. An­glo has held cen­tre stage in both the cor­po­rate and po­lit­i­cal his­tory of SA, and any move tends to be read as a state­ment on not only the health of the com­mod­ity mar­ket, but the coun­try’s po­lit­i­cal risk.

Mar­kets haven’t been too kind in the two years since Cu­ti­fani took over to April 3 this year. An­glo’s stock has slipped 23% in Jo­han­nes­burg and 40% in Lon­don. Over the same time, its larger ri­val, BHP Bil­li­ton, has seen its lo­cal shares fall in the low sin­gle dig­its, 3,6%. Rio Tinto’s Lon­don shares have de­clined 11%.

Cu­ti­fani’s main con­cern has been the dis­posal of two of the com­pany’s plat­inum op­er­a­tions — Rusten­burg and Union — which have been strug­gling to re­main prof­itable in a plat­inum bear mar­ket. As for get­ting Mi­nas Rio up and run­ning, it is, but the iron ore mar­ket is in an over­sup­ply po­si­tion.

Be­fore the end of the first half of the year, we should be up­dated about the sale process at An­glo’s North West op­er­a­tion. In­vestors want an end to the un­cer­tainty around th­ese as­sets.

Fi­nal judg­ment on Cu­ti­fani, I feel, will be made with what­ever price An­glo gets for its as­sets and the strate­gic di­rec­tion that he will out­line to quite clearly unim­pressed in­vestors.

Pick n Pay’s Richard Brasher seems to have had a bet­ter time with in­vestors, with­out halt­ing the slide in the gro­cer’s mar­ket share — his main task.

In the two years to Fe­bru­ary 1, the day his term as CEO com­menced, the re­tailer’s stock gained over 24%, just be­low the all share’s 26,3% ap­pre­ci­a­tion over the same time. It beat Africa’s largest re­tailer, Sho­prite, which gained just over 8%. Spar was the out­per­former in the seg­ment, ris­ing 56,5%, while Wool­worths stock climbed 41%.

The higher earn­ings are a re­sult of cost cut­ting rather than find­ing chinks in the ar­mour of Sho­prite and Wool­worths. Like-for-like turnover growth came in at 3,6% for its full year, be­hind its main ri­vals.

The turn­around for the long term that peo­ple want to see hasn’t yet come to fruition. All that Brasher has achieved to date is to strip out the fat in the busi­ness. In­vest­ing for growth is go­ing to be his next chal­lenge, which may have to in­volve tin­ker­ing with that oh-so-pre­cious div­i­dend pol­icy.

With the re­or­gan­i­sa­tion of its plat­inum unit its prime fo­cus, An­glo Amer­i­can is the main cor­po­rate story

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