MEGA MOLLA

Are lo­cal cor­po­rates too stuffed to move?

Finweek English Edition - - Front page - VIC DE KLERK

Are lo­cal cor­parates too stuffed to move?

IT’S A LONG TIME since com­pa­nies have been as cash-flush as they are now. This means they can eas­ily fi­nance the in­vest­ment that goes with the cur­rent sound eco­nomic growth in SA.

How­ever, it could also mean that trade unions touched a raw nerve re­cently when they said that com­pa­nies haven’t started in­vest­ing in the econ­omy on as large a scale as they claim, ac­cus­ing them of be­ing on an “in­vest­ment strike”.

In fact, it looks as if com­pa­nies’ sur­plus cash won’t tempt them to in­vest in ir­re­spon­si­ble lo­cal – or even in­ter­na­tional – ex­pan­sion, but that they will rather use it for the safe and rather bor­ing op­tion of buy­ing back their own shares. That could re­sult in the private sec­tor com­ing in for crit­i­cism, not only from the trade unions, but also from Gov­ern­ment, for their ap­par­ent un­will­ing­ness to in­vest in the econ­omy.

The cash de­posits of SA com­pa­nies have in­creased by more than 50% over the past two years, to­talling R352bn at the end of Jan­uary. For the three years to De­cem­ber 2004, the de­posits av­er­aged about R225bn, be­fore surg­ing by 33% in 2005, fol­lowed by a fur­ther 17% rise for the 12 months to Jan­uary this year. That’s ac­cord­ing to the latest con­sol­i­dated D900 re­turns of the lo­cal banks. This high level of cash once again con­firms how healthy the bal­ance sheets of SA’s com­pa­nies cur­rently are.

This trend, along with strong cash flow, is now a world­wide phe­nom­e­non, es­pe­cially among larger com­pa­nies in the de­vel­oped or older economies. This is in sharp con­trast to the in­vest­ment wave in IT-re­lated busi­nesses in the run-up to 2000. Then there was greater fo­cus on blue sky, and cash was of­ten seen by in­vestors as old hat. The graph from Stan­dard & Poor’s shows that the 500 com­pa­nies in the S&P 500 in­dex had about US$642bn in cash and equiv­a­lents in 2006. This was about 7,5% of the to­tal mar­ket cap­i­tal­i­sa­tion of the com­pa­nies. In 1999, the cash of the same 500 US com­pa­nies made up only 2,5% of their to­tal mar­ket cap­i­tal­i­sa­tion.

Sim­i­lar sta­tis­tics are un­for­tu­nately not avail­able for lo­cal listed com­pa­nies. The to­tal de­posits of com­pa­nies in the lo­cal bank sec­tor in­clude the de­posits of un­listed com­pa­nies. If you in­clude th­ese de­posits you still get an idea of the trend even though it’s slightly dis­torted. De­posits make up about 7% of the cur­rent to­tal mar­ket cap­i­tal­i­sa­tion of the JSE’s R5 300bn.

Anal­y­sis done by BFA McGre­gor for Fin­week, as well as the re­search by the team that took part in putting to­gether this ar­ti­cle, points out sev­eral lo­cal com­pa­nies where cash cur­rently rep­re­sents be­tween 3% and 5% of the mar­ket value. Add the ex­cep­tion­ally small amount of long-term or in­ter­est-bear­ing debt on the bal­ance sheets of our lead­ing com­pa­nies, as well as the large num­ber that are net earn­ers of in­ter­est, and it’s clear that lo­cal com­pa­nies will eas­ily be able to use their own re­sources for the cap­i­tal in­vest­ment that’s

nec­es­sary to main­tain our eco­nomic growth at the cur­rent level of about 5%.

The world­wide shift in the fo­cus of what in­vestors and an­a­lysts re­quire of com­pa­nies to earn a good rat­ing has played an im­por­tant role in build­ing up th­ese cash re­serves, says PSG On­line re­search head Franco Pre­to­rius. In the era of the IT ex­plo­sion, very few in­vestors – War­ren Buf­fett was one of the ex­cep­tions – placed much em­pha­sis on cash flow or the pro­jec­tion of fu­ture cash flow. In­vestors were quite sat­is­fied to fo­cus solely on profit, and if the mod­els showed that it would rise at an as­tro­nom­i­cal rate, they were even more ex­cited. That’s why the Nas­daq in­dex on oc­ca­sion rose to more than 5 000, with­out the IT com­pa­nies in the in­dex ac­tu­ally mak­ing cash-flow prof­its. The word div­i­dend was, of course, ver­boten.

But in­vestors learned an ex­pen­sive les­son when the Y2K prophets of doom were proved wrong.

Pre­to­rius ex­plains that in the cal­cu­la­tion of PSG’s pop­u­lar qual­ity in­dex com­piled for non-min­ing shares, he puts great em­pha­sis on cash flow per share rel­a­tive to the so­called de­clared profit per share over the past three years. If cash flow per share is not at least equal to the profit per share, the qual­ity rat­ing of a share is marked down, un­less there’s a good rea­son for the low cash flow.

For an­a­lysts, cash is king. For com­pa­nies, it’s nec­es­sary to keep share­hold­ers and po­ten­tial new in­vestors happy. That’s why they had to shift the fo­cus from dreams about fu­ture profit to cur­rent cash flow. That’s one of the most im­por­tant rea­sons for so many com­pa­nies sit­ting with large cash re­serves, Pre­to­rius ex­plains.

Karen M Kroll said in the mag­a­zine Busi­ness Fi­nance back in 2005 that “al­though many com­pa­nies’ cash bal­ances have grown over the past few years, fi­nance ex­ec­u­tives are tak­ing a mea­sured dis­ci­plined approach to us­ing those funds”.

There are in­di­ca­tions that the same can be said about lo­cal com­pa­nies.

Kroll says there are three new uses for sur­plus cash. First, com­pa­nies can fi­nance their own ex­pan­sions, which usu­ally con­sist 50/50 out of or­ganic growth and takeovers. For some lo­cal com­pa­nies, it’s clearly also the pre­ferred route. PPC Ce­ment, for ex­am­ple, will have to ex­pand sub­stan­tially over the next few years to keep up with the de­mand for ce­ment. Luck­ily it can fi­nance the new ca­pac­ity with ease from its own re­sources.

Mass­mart is also a good ex­am­ple of a com­pany that’s ex­pand­ing lo­cally with­out putting any pres­sure on its cash flow.

An­other use of sur­plus cash, also called the “war chest”, is for takeovers in or­der to ac­cel­er­ate growth. How­ever, this holds some­thing of a re­verse dan­ger. Some­times the stor­ing up of cash makes share­hold­ers im­pa­tient, and the com­pany it­self could be­come a takeover tar­get.

The third al­ter­na­tive is, of course, to dis­trib­ute the cash to the share­hold­ers. Two meth­ods can be used for this: in­crease the an­nual div­i­dend by dis­tribut­ing a larger por­tion of the profit, or pay a spe­cial div­i­dend if the cash re­ally be­comes too much. The sec­ond method of giv­ing the cash back to share­hold­ers is the buy­ing back of shares. The man­age­ment and board of­ten pre­fer this al­ter­na­tive, be­cause they feel it has more per­ma­nent ben­e­fit for the com­pany than, for ex­am­ple, a once-off div­i­dend. Share­hold­ers usu­ally pre­fer a cash div­i­dend and don’t like the pa­ter­nal­is­tic approach of a board buy­ing back their own shares, thereby de­cid­ing in­di­rectly for the share­hold­ers what to do with their money.

In SA, there are sev­eral ex­am­ples of all th­ese op­tions, and in­vestors must de­cide for them­selves, which ones they like best. To use sur­plus cash ef­fec­tively could be one of the good fu­ture chal­lenges for a com­pany’s fi­nan­cial man­age­ment. Kroll ends her anal­y­sis of US com­pa­nies with the fol­low­ing words from a fi­nan­cial di­rec­tor in a cash-flush com­pany: “While it’s a nice prob­lem, we take man­age­ment of this prob­lem very se­ri­ously.” Isn’t that nice? Hope­fully it ap­plies to our lo­cal fi­nan­cial man­age­ment too.

RECORD SELL­ING prices for met­als have helped min­ing com­pa­nies to un­prece­dented cash flow gen­er­a­tion.

Ac­cord­ing to a June 2006 re­port by Price­wa­ter­house­Coop­ers, the au­dit­ing firm, the world’s top 40 min­ing firms – of which nine are JSE listed – pro­duced R425,5bn ($57,5bn) in cash flow from op­er­a­tions in 2005, up from R303bn ($41bn) the year be­fore.

It’s dif­fi­cult to quite ab­sorb the lever­age min­ing firms have from a sud­den in­crease in the price of met­als. Take, for in­stance, BHP Bil­li­ton, the world’s largest min­ing com­pany. When cop­per was at $8 100/ton, it was gen­er­at­ing £22m in net profit/day. One can only imag­ine the daily cash gen­er­a­tion.

Free cash, how­ever, is a sep­a­rate is­sue, es­pe­cially for min­ers.

That’s be­cause holes in the ground are cash-eat­ing mon­sters. Fur­ther­more, the pres­sure on re­source re­newal means that dur­ing pe­ri­ods of high cash gen­er­a­tion, min­ing com­pa­nies usu­ally seek to im­prove their ex­plo­ration pro­grammes, or em­bark on merger and ac­qui­si­tion ac­tiv­ity.

Ac­cord­ing to Bloomberg News, about R1,6 tril­lion ($186bn) in 1 361 min­ing deals had been trans­acted by the end of 2006. Bil­lions of dol­lars were also re­turned to share­hold­ers, or spent in buy­backs. Rev­enue was sky-high. The in­dus­try had not had it so good for years.

BHP Bil­li­ton

THE WORLD’S LARGEST min­ing com­pany sells about R740m ($100m) in metal goods to con­sumers ev­ery day, so as­sum­ing costs are con­tained, cash gen­er­a­tion is high. And it is. In the six months to endDe­cem­ber, net op­er­at­ing cash flow was $7bn. As a re­sult, it has more cash than it can sen­si­bly use not­with­stand­ing sanc­tioned de­vel­op­ment projects of more than R74bn ($10bn). BHP Bil­li­ton has led its peer group in cap­i­tal man­age­ment pro­grammes. In Fe­bru­ary, it un­veiled an 18month-long share buy-back pro­gramme to­talling $10bn. On com­ple­tion of the latest buy­back pro­gramme, the group will have bought back R126bn ($17bn) worth of shares since 2004, equal to a 17% re­duc­tion in shares out­stand­ing over the same pe­riod.

An­glo Amer­i­can

AS WITH BHP BIL­LI­TON, An­glo Amer­i­can has been pump­ing cash into de­vel­op­ment projects of which $6bn worth had been ap­proved at the end-De­cem­ber in­terim pe­riod, and a fur­ther $10bn to $15bn were un­der con­sid­er­a­tion. It, too, has been in­volved in cap­i­tal man­age­ment pro­grammes.

In fact, af­ter re­turn­ing be­tween $500m and $1bn in div­i­dends/year be­tween 1999 and 2004, cap­i­tal re­turned to share­hold­ers has sud­denly bal­looned. It an­nounced at its year-end fig­ures in Fe­bru­ary a buy-back of $3bn shares in 2007, af­ter last year’s $7,5bn buy-back and re­turn to share­hold­ers last year.

Gold Fields

GOLD MIN­ING com­pa­nies are some­what dif­fer­ent to the di­ver­si­fied min­ing com­pa­nies ow­ing to their so-called “pure­play” sta­tus. While BHP Bil­li­ton is able to par­tic­i­pate in the en­tire syn­chro­nous bull mar­ket for met­als, An­gloGold Ashanti and Gold Fields don’t quite have the same range. Ac­cord­ing to Nick Hol­land, Gold Fields CFO, the plan is to rein­vest over the next two years in an ef­fort to get an­nual gold pro­duc­tion to 5m oz/year.

Says Hol­land: “We have a cap­i­tal in­vest­ment pro­gramme of R6bn over the next 18 months so we’re strictly in a rein­vest­ment phase.” On earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­sa­tion (EBITDA), Gold Fields gen­er­ates about R7,3bn/year ($1bn/year), says Hol­land. How­ever, the cap­i­tal in­vest­ment pro­gramme, ser­vice costs on R4,4bn ($600m) in debt, ex­plo­ration of $50m/ year and div­i­dends means there’ll be no spe­cial div­i­dends for share­hold­ers in the short term. How­ever, if cash costs can be kept to around $350/oz or lower, and as­sum­ing an av­er­age gold price of $650/oz, Hol­land hints at a po­ten­tial op­er­at­ing mar­gin of 50% plus in the com­ing years.

Im­pala Plat­inum/ An­glo Plat­inum

SA’S PLAT­INUM sec­tor is rolling in lu­cre amid one of the most sig­nif­i­cant bull runs ever seen in plat­inum group met­als. Im­pala Plat­inum op­er­ates some of the high­est-mar­gin mines, and given that its bal­ance sheet is al­most com­pletely un­worked by debt, the ex­pec­ta­tion is that the group could yet un­veil a su­per profit div­i­dend in Au­gust at its year-end re­sults an­nounce­ment. At the in­terim stage, free cash in­creased R2,2bn to just over R4bn. The com­pany also cut its div­i­dend cover from 1,9x to 1,7x,

sug­gest­ing its con­fi­dence in cash gen­er­a­tion. “This im­plies a fur­ther R3,5bn to share­hold­ers over and above the div­i­dend they would have got,” says David Brown, CEO of Im­pala. He should know, since he was the for­mer CFO. “We have to strike a bal­ance be­tween re­ward­ing share­hold­ers and in­vest­ing in fu­ture, lower-cost ounces,” he says. It’s clear Im­pala is on the ac­qui­si­tion trail. It has pro­posed buy­ing African Plat­inum for R3,8bn fol­low­ing from Lon­min’s R3,2bn bid for Afriore, and there’s po­ten­tial for more to come.

An­glo Plat­inum

HEAD of busi­ness strat­egy at An­glo Plat­inum, Francis Petersen says share­hold­ers should ex­pect an im­proved div­i­dend pay­out this year. “When we do have cash, it’ll be ploughed back into the busi­ness. That’s a ma­jor fo­cus. But we do in­tend re­ward­ing share­hold­ers,” he says. There was a pos­i­tive swing in net debt of R6,4bn in the com­pany’s year-end fig­ures an­nounced in Fe­bru­ary to a pos­i­tive cash bal­ance of R4,1bn. Be­tween R9bn and R10bn will be spent on cap­i­tal pro­grammes in the 2007 fi­nan­cial year.

Mass­mart

WITH R2,4bn IN CASH sit­ting on its bal­ance sheet for the six months to end-De­cem­ber 2006, highly cash-gen­er­a­tive re­tail gi­ant Mass­mart has lots to spend. The com­pany has set aside R480m for cap­i­tal ex­pen­di­ture for the full year to end-June 2007, says CEO Mark Lam­berti.

Along with grow­ing sales from ex­ist­ing out­lets (they were up 8,2% in the half-year to endDe­cem­ber), the money will be used to ex­pand the busi­ness into new cat­e­gories and for­mats (Mass­mart is tri­alling the Dion Wired store for­mat in Cen­tu­rion and is elim­i­nat­ing clothes and in­tro­duc­ing furniture at Game, for ex­am­ple).

Mass­mart is on the prowl for ac­qui­si­tions, though none has been con­cluded in this fi­nan­cial year. “We are al­ways vig­i­lant,” says Lam­berti.

Tiger Brands

FOOD AND PHAR­MA­CEU­TI­CAL con­glom­er­ate Tiger Brands un­der­took no less than seven ac­qui­si­tions in fi­nan­cial and cal­en­dar 2006, re­vers­ing its net cash po­si­tion into 17% net debt.

The ac­qui­si­tions were Sci­en­tific Group in Oc­to­ber 2005, food ser­vice busi­ness Hot Favourites in Novem­ber 2005, Clas­si­clean (which man­u­fac­tures Bio Clas­sic wash­ing pow­der) in Fe­bru­ary, Nestlé’s sugar con­fec­tionery busi­ness in April, and both bev­er­age busi­ness Bro­mor Foods and beauty prod­uct spe­cial­ist De­signer Group in Oc­to­ber and a merger of 50%-owned Sea Vuna and Vuna Fish­ing, with Tiger’s Sea Har­vest own­ing half of the merged en­tity.

Tiger said in its 2006 an­nual re­port that to achieve top-line growth, it needs to main­tain its po­si­tion as num­ber one or two in each prod­uct cat­e­gory in which it op­er­ates. Growth will come via ac­qui­si­tions, new prod­ucts and new pro­cesses, en­ter­ing new or ad­ja­cent cat­e­gories, ex­ports and or­ganic growth.

Im­pe­rial Hold­ings

IN­TER­NA­TIONAL LO­GIS­TICS, fleet man­age­ment and tourism com­pany Im­pe­rial Hold­ings in­vested R2,5bn in cap­i­tal ex­pen­di­ture and ac­qui­si­tions in the half-year to end-De­cem­ber 2006, an 11% in­crease over the pre­vi­ous year. The com­pany’s cash po­si­tion was a sturdy R1,6bn.

Specif­i­cally, ex­pan­sion cap­i­tal ex­pen­di­ture in­creased by 30%, while re­place­ment cap­i­tal ex­pen­di­ture de­clined by 18%. The com­pany’s cash con­ver­sion ra­tio was 97%, with free cash flow amount­ing to R1,3bn.

For the full year in fi­nan­cial 2006, the com­pany in­vested about R3,8bn net of pro­ceeds – mostly in beef­ing up its fleets – and says that with the growth in the econ­omy th­ese trends could well con­tinue.

Rem­gro

CASH is al­ways king at Rem­gro, and there was al­ways been plenty float­ing around when the group was still trad­ing un­der its old guise as the Rem­brandt Group. Fig­ures sup­plied by McGre­gor BFA show that Rem­gro had around R6bn in cash and near cash in fi­nan­cial 2006. The group’s cash bal­ance was about R4bn at the end of the half-year to end Septem­ber 2006. While Rem­gro could af­ford to buy half the coun­ters on the AltX in cash, the group tends to mo­bilise its free cash cau­tiously. While the group did make its first new in­vest­ment in years when it ac­quired a ma­jor stake in Kag­iso Trust In­vest­ments, if any cash is to be mo­bilised it most likely will be for share buy-backs and per­haps to fat­ten up div­i­dend pay­ments. Of course, the big prob­lem is that Rem­gro will bat­tle to find an in­vest­ment that’s mean­ing­ful (size-wise) to war­rant delv­ing deeply into the cash pile.

Sa­sol

A STRONG CASH gen­er­a­tor, cash on the bal­ance sheet stood at R6,06bn at the De­cem­ber in­terim, up from R2,94bn in the pre­vi­ous pe­riod and R3,10bn at year-end.

But Sa­sol in­vests heav­ily in cap­i­tal projects, with the full R6,06bn ear­marked for: • The com­ple­tion of Project Turbo, the fuel

qual­ity en­hance­ment and poly­mer ex­pan­sion project in South Africa. • The Oryx gas-to-liq­uids joint ven­ture with Qatar Pe­tro­leum. • The con­struc­tion of the Escravos gas-to-liq­uids project in Nige­ria.

CE Pat Davies says sub­stan­tial new pro­duc­tion ca­pac­ity will be com­mis­sioned for poly­mers and gas-to-liq­uids in the course of the year.

With gear­ing at only 21%, there’s am­ple scope to take on debt for fur­ther ex­pan­sion.

Bid­vest

Sappi

CEO BRIAN JOFFE is ex­pected to make a ma­jor ac­qui­si­tion this year, but he’s not nam­ing the tar­get yet. Spec­u­la­tion is it will prob­a­bly be food ser­vices in Europe or the US – there’s not much in Bid­vest’s line of op­er­a­tions to buy in South Africa. The group has the cash and debt ca­pac­ity if nec­es­sary to make a large off­shore ac­qui­si­tion.

How­ever, it would be wrong to think Bid­vest only in­vests in new busi­nesses. Its cap­i­tal spend­ing bill to­tals R3bn, mainly in the freight and McCarthy busi­nesses, that Joffe says the group is yet to re­alise the ben­e­fits of.

Bid­vest has also main­tained gen­er­ous dis­tri­bu­tions to share­hold­ers, no­tably since re­fi­nanc­ing its em­pow­er­ment Di­natla deal.

Lo­cally, Bid­vest is look­ing at in­fra­struc­ture spend­ing projects “up to and be­yond” the 2010 Soc­cer World Cup, and could be mak­ing in­vest­ments here. THIS MUST BE ONE of the few groups where cash hold­ings are de­clin­ing, as Sappi con­tin­ues to bat­tle with fine pa­per pric­ing in Europe and the US. Net debt at the end of the first quar­ter (to end-De­cem­ber) was a hefty US$2,28bn.

But chair­man and act­ing CEO Eu­gene van As says re­cov­ery is un­der­way, point­ing for ex­am­ple to cash gen­er­a­tion up by 25% over the quar­ter to $152m.

The group also main­tains its large cap­i­tal-spend­ing pro­gramme, with the bulk ($460m) go­ing on the ex­pan­sion of the Saic­cor plant.

Murray & Roberts

MURRAY & ROBERTS was sit­ting on R1,8bn cash on hand as at 30 June 2006. The group has in­creased its stake in its Aus­tralian as­so­ci­ate Clough Lim­ited and is to par­tic­i­pate in fur­ther re­cap­i­tal­i­sa­tion of this busi­ness. The group cap­i­tal ex­pen­di­ture rose by 116% to R401m in the six months to 31 De­cem­ber 2006. In­creased de­mand from the Gau­train and the South African min­ing con­tract­ing op­er­a­tions are ex­pected to push up ex­pen­di­ture to more than dou­ble for the full year. The group is to al­lo­cate re­sources to ex­plore new op­por­tu­ni­ties in the Mid­dle East.

As­pen

THE PHAR­MA­CEU­TI­CAL group spits out cash, with cash gen­er­a­tion up to R338m (R244m) in its latest in­terim re­sults. Bal­ance sheet cash hold­ings have grown from R625m at the June year-end to R1,69bn at the in­terim.

But short-term debt is also ris­ing, to R2,5bn in latest re­sults. Cap­i­tal-spend­ing plans were not spelt out by the group, though CEO Stephen Saad did say As­pen was en­ter­ing a con­sol­i­da­tion phase af­ter the strong growth of re­cent years.

Cap­i­tal has been in­vested in in­creas­ing ca­pac­ity at the Port El­iz­a­beth plant, and there’s on­go­ing spend­ing on the es­sen­tial prod­uct pipe­line, where new prod­ucts can take years to reach the mar­ket.

It’s also likely As­pen is hold­ing funds in re­serve for off­shore ac­qui­si­tion op­por­tu­ni­ties – there’s noth­ing it can buy in South Africa.

Sun In­ter­na­tional

CASI­NOS spin cash…that’s a fact. No sur­prise then that Sun In­ter­na­tional – which ar­guably holds the best hand in gam­ing as­sets in SA – is so cash flush.

At the end of June 2006 the group had cash or near cash equiv­a­lents of nearly R800m. But casi­nos de­mand fairly reg­u­lar cap­i­tal ex­pen­di­ture for up­grades and ex­ten­sions. Up­grades and ex­ten­sions are cur­rently un­der­way at Sun City (R200m) and Car­ni­val City, while the new Golden Val­ley casino in Worces­ter has just been com­pleted.

Sun In­ter­na­tional also mo­bilised its cap­i­tal well when ac­quir­ing con­trol of gam­ing in­vest­ment com­pany Real Africa Hold­ings – even though it could buy out the com­pany 100%. Sun In­ter­na­tional’s six months to end De­cem­ber fi­nan­cials show that over R1,4bn was spent on in­vest­ment ac­tiv­i­ties. What­ever’s left in Sun In­ter­na­tional’s cash cof­fers is also likely to be ear­marked for off­shore ex­pan­sion – with new op­por­tu­ni­ties tar­geted in the UK, Rus­sia and Nige­ria.

Bar­loworld

THE GROUP, which had more than R2,13bn in cash or cash equiv­a­lents as at 30 Septem­ber 2006, is pri­mar­ily fo­cus­ing on un­lock­ing share­holder value. The group’s latest an­nual re­port re­veals that re­serv­ing re­quire­ments in the com­pany’s cap­tive in­sur­ance op­er­a­tions re­strict the use of cash bal­ances of R405m. Cash flow from op­er­a­tions is sound at R4,93bn. The group is in a process of dis­pos­ing of non-per­form­ing as­sets and un­bundling Pre­to­ria Port­land Ce­ment. Cash em­a­nat­ing from dis­pos­als and un­bundling will be re­turned to share­hold­ers. The group will re­turn to share­hold­ers R1bn in ad­di­tion to R900m in div­i­dends for the year to Septem­ber 2006. Share buy-backs in the year cost the group about R1,16bn, and the ac­qui­si­tion of prop­erty, plant and equip­ment was R1,22bn. The group is set to re­turn more cash to share­hold­ers as it un­locks value.

Aveng

was sit­ting on R1,58bn cash on hand for the 2006 fi­nan­cial year. Strong cash gen­er­ated from the group’s op­er­a­tions more than dou­bled to R712m in the six months to 31 De­cem­ber 2006. Cou­pled with debt to eq­uity ra­tio im­prov­ing to 4% in 2006 from 40% in 2005, Aveng is set for strong growth. The group is plan­ning to spend about R630m on gross cap­i­tal ex­pen­di­ture for the pe­riod to June 2007. Aveng could also de­cide to spend most of its cash to ac­quire a 54% stake in Holcim SA, which is held by Swiss-based par­ent com­pany Holcim.

Ton­gaat-Hulett

LARGE CAP­I­TAL spend­ing pro­grammes are un­der­way as the Ton­gaat-Hulett Group pre­pares to split, ef­fec­tively an un­bundling into two sep­a­rate listed groups, later this year.

To take ad­van­tage of the re­duced tar­iffs into the Euro­pean Union, the group has com­mit­ted R1,3bn to­wards ex­pand­ing its sugar in­ter­ests in Mozam­bique. A fur­ther R950m is be­ing spent at the soon-to-be un­bun­dled Hulett Alu­minium on an ex­pan­sion of rolled prod­ucts, aimed at the higher-mar­gin end of the mar­ket.

San­tam

THIS BAL­ANCE SHEET must be one of the strong­est on the JSE. De­cem­ber year-end cash hold­ings of R5,14bn (R4,93bn), eq­uity hold­ings of R5,44bn and debt se­cu­ri­ties of R2,11bn. And no debt to speak of.

Cash gen­er­a­tion is also a mighty R2,2bn, so what does San­tam plan to do with all the cash? CEO St­ef­fen Gil­bert says it will be re­turned to share­hold­ers to “op­ti­mise cap­i­tal lev­els”, but in an in­ter­est­ing way.

There’s a scheme of ar­range­ment to fa­cil­i­tate an em­pow­er­ment deal whereby San­tam will sell 10% of its shares. It’s com­pul­sory, so share­hold­ers will have to sell 10% of their hold­ing at a dis­counted price.

But it’s pre­ceded by a vol­un­tary of­fer for share­hold­ers to sell their shares to San­tam at a pre­mium. If the re­pur­chase goes be­yond 10% of San­tam’s share cap­i­tal, par­ent San­lam (which wants to buy shares in its sub­sidiary) has of­fered to mop up the rest at the same price.

A re­turn of cap­i­tal, sure, but it seems like a loaded of­fer.

Naspers

MOST ME­DIA com­pa­nies are pro­lific cash gen­er­a­tors and have sig­nif­i­cant am­mu­ni­tion avail­able to them for ac­qui­si­tions. The large com­pa­nies have also re­cently in­vested in cap­i­tal equip­ment.

Me­dia gi­ant Naspers – Fin­week’s par­ent com­pany – has just raised R7,4bn through the is­sue of 45,6m new shares to fund fur­ther ex­pan­sion in emerg­ing mar­kets. The of­fer was sub­stan­tially over­sub­scribed.

Though Naspers also gen­er­ates lots of cash, it has con­tin­ued to in­vest ag­gres­sively in new op­por­tu­ni­ties, re­quir­ing it to raise cap­i­tal.

In the most re­cent fi­nan­cial pe­riod, for the six months to Septem­ber, Naspers gen­er­ated R1,6bn. But, there was a cash out­flow of R3,9bn, the bulk, or R3,7bn, of which was due to ac­qui­si­tions. Re­cent pur­chases have in­cluded a 30% stake in lead­ing Brazil­ian me­dia com­pany Abril and an­other 38% of M-Net and Su­perS­port. But Naspers also spent some money on cap­i­tal ex­pen­di­ture in the South African print op­er­a­tions, and paid div­i­dends.

Cax­ton

THIRD BIG­GEST me­dia com­pany Cax­ton is far less ac­quis­i­tively ag­gres­sive than Naspers. In fact, CEO Terry Mool­man would prob­a­bly wait years for the right mo­ment to make an ac­qui­si­tion he’s been eye­ing for ages.

But that’s not for a lack of re­sources. At the end of June (year-end), Cax­ton had R859m in cash and cash equiv­a­lents af­ter gen­er­at­ing R717,3m, and spend­ing R510,4m in­vest­ing in cap­i­tal equip­ment (up­grad­ing print­ing presses), and an­other R559,6m on ac­qui­si­tions. But, with share­hold­ers hav­ing ap­proved a dou­bling of the au­tho­rised share cap­i­tal in 2005, it’s well poised to act ag­gres­sively if the right op­por­tu­nity comes along.

Telkom

THE LARGE fi­ixed line in­cum­bent, Telkom, which also owns 50% of Vo­da­com, gen­er­ated R9bn (af­ter tax, in­ter­est and div­i­dends) in the six months to Septem­ber, en­abling it to spend R4,2bn on capex and R1,45bn on share buy-backs. It had R718m in cash at the end of the pe­riod.

Telkom is in the process of up­grad­ing its net­work to a next gen­er­a­tion net­work (NGN), to en­able it to of­fer mul­ti­me­dia ser­vices over a faster, more ef­fi­cient net­work. Planned capex over the next five years, in­clud­ing the NGN, amounts to roughly R30bn.

The group is also on the lookout for fur­ther ac­qui­si­tion op­por­tu­ni­ties in Africa and wants to grow in the IT ser­vices space. To this end, Telkom has of­fered to buy Busi­ness Con­nex­ion for R2,5bn (the de­ci­sion rests with the Com­pe­ti­tion Tri­bunal, which is cur­rently con­duct­ing hear­ings). It also re­cently pur­chased multi-coun­try African In­ter­net ser­vice provider Africa On­line.

Other fixed and mo­bile op­por­tu­ni­ties are also be­ing pur­sued in Africa.

MTN

MO­BILE GI­ANT MTN re­cently added Ye­men to its ag­gres­sive Africa/Mid­dle East growth drive. While Telkom paid sig­nif­i­cant div­i­dends to share­hold­ers (R9 per share last year), MTN’s dis­tri­bu­tion sub­sti­tuted far more mod­est dis­tri­bu­tions (65c per share last year) for rapid ex­pan­sion. Ac­qui­si­tions have in­cluded multi-coun­try Africa/ Mid­dle East op­er­a­tor In­vest­com, as well as a 49% stake in Iran­cell. The lat­ter com­menced op­er­a­tions last year.

MTN gen­er­ated R5,4bn from op­er­at­ing ac­tiv­i­ties in the six months to June last year (De­cem­ber year-ends are due out soon), and had R9,5bn at end of pe­riod. This was, how­ever, be­fore do­ing the R33,5bn In­vest­com deal, which was com­pleted in July and fi­nanced out of cash – net debt would rise to around R23bn to fa­cil­i­tate the deal, MTN said at the time of an­nounc­ing it – and the is­sue of 183,2m new shares.

The group must now fo­cus on strik­ing a bal­ance be­tween bed­ding down ex­ist­ing coun­try op­er­a­tions, pay­ing down debt and tak­ing ad­van­tage of other new op­por­tu­ni­ties that could be snapped up by ri­vals.

Re­unert

THE LARGE elec­tron­ics com­pa­nies on the JSE are also fairly cash flush and on the lookout for fur­ther op­por­tu­ni­ties. But find­ing them is not al­ways easy. Both Re­unert and Al­tech paid out spe­cial div­i­dends last year.

Re­unert had R969,3m in cash and cash equiv­a­lents at its Septem­ber year-end, af­ter gen­er­at­ing R707,5m from op­er­a­tions dur­ing the year. Al­though the group has en­gaged in some cor­po­rate ac­tiv­ity re­cently, in­clud­ing a black eco­nomic em­pow­er­ment deal, merg­ing its cable busi­ness with Al­tron’s, and the cre­ation of a joint ven­ture fi­nance com­pany with PSG, CEO Boel Pre­to­rius has said that the com­pany has bat­tled to find good deals at the right price. So it an­nounced a spe­cial div­i­dend in Au­gust, giv­ing back R2 per share.

Al­tron/Pow­ertech Al­tech/Bytes

VEN­TER- FAM­ILY com­pany Al­tron, the owner of Pow­ertech and hold­ing com­pany for ma­jor­ity stakes in Al­tech and Bytes, had R1,5bn in cash at the end of the in­terim pe­riod to Au­gust, af­ter its sub­sidiaries par­tic­i­pated in var­i­ous strate­gic ac­qui­si­tions dur­ing the pe­riod.

Al­tech had R1,3bn in cash and said it con­tin­ued to care­fully eval­u­ate ac­qui­si­tion op­por­tu­ni­ties both in­ter­na­tion­ally and lo­cally. It also paid out a R1 per share spe­cial div­i­dend to share­hold­ers.

Di­men­sion Data

AECI

LARGEST tech­nol­ogy com­pany Di­men­sion Data had cash and cash equiv­a­lents of $347,9m (around R2,7bn at the year-end ex­change rate) spread around its op­er­a­tions in var­i­ous ge­ogra­phies at the year-end to Septem­ber.

But with a con­tin­ued fo­cus on im­prov­ing the op­er­a­tions, ex­tract­ing higher mar­gins and fix­ing prob­lem re­gions like Europe, Di­data is not in ag­gres­sive ac­qui­si­tion-mode.

Which is not to say it, like oth­ers, wouldn’t take ad­van­tage of strate­gic op­por­tu­ni­ties. Last year, Di­data bought the re­main­ing 20% of In­ter­net So­lu­tions it didn’t al­ready own, as well as the re­main­ing 51% of Plessey and 51% of ICL East Africa. It also spent money open­ing ad­di­tional re­gional of­fices in the US, East­ern Europe and Africa. con­trary to many other cor­po­rate bal­ance sheets, AECI is mov­ing the other way. Cash hold­ings are down to R375m and debt is up to R797m. But cash gen­er­a­tion re­mains strong, in­creas­ing to R1,39bn at the De­cem­ber yearend from R1,17bn in the pre­vi­ous pe­riod.

The com­pany con­tin­ues to in­vest in op­er­a­tions, with a cap­i­tal spend­ing bill of R416m in 2006 and ap­proved spend­ing of around R1bn this year, mainly on African Ex­plo­sives and Chem­serve.

Share­hold­ers con­tinue to re­ceive steady div­i­dend in­creases, up by 17% in the last fi­nan­cial year.

Illovo Sugar

Afrox

CASH HOLD­INGS in­creased strongly over the fi­nan­cial year to end-March from R353m to R627m. Gear­ing has also been re­duced to 67,2% at the in­terim, so what plans for the cash?

Illovo has not been spe­cific but the raised in­vest­ment pro­gramme in fu­ture op­er­a­tions, from R43,2m to R98,7m, is bound to go on ex­pan­sion in the many African states in which it op­er­ates to take ad­van­tage of the more ex­port friendly Euro­pean Union sugar regime. WITH CASH hold­ings up nearly three times to R448m, Afrox has a dream list to ap­ply its on­go­ing R600m growth pro­gramme to.

Key projects still need to be com­mis­sioned, but they in­clude six gas-pro­duc­ing fa­cil­i­ties (badly needed ca­pac­ity as Afrox bat­tled to meet de­mand at the end of last year), a new weld­ing wire plant and an up­grade of the gases op­er­a­tion cen­tre.

Other growth projects be­ing in­ves­ti­gated are stor­age fa­cil­i­ties on the coast for im­ported liq­ue­fied pe­tro­leum gas when lo­cal re­finer­ies are un­able to meet de­mand, as hap­pened last year.

All seem like use­ful cap­i­tal projects. The ques­tion is, with ca­pac­ity clearly stretched at Afrox, why th­ese in­vest­ments were not made ear­lier.

CAP­I­TAL­ISA>S&P 500 CASH AS % OF MAR­KET TION

Source: Stan­dard & Poor's & Trea­suryOne

A RIS­ING TIDE OF LIQ­UID­ITY

Source: S&P Quan­ti­ta­tive Ser­vices

THE BIG GUNS, AND THEIR CASH BAL­ANCES

Sources: Latest cash flow state­ments

CASH FLOW AS THE YARD­STICK

Source: PSG On­line

Mark Lam­berti – Mass­mart

Brian Joffe – Bid­vest

Share buy-backs

Aqui­si­tions

Or­ganic growth

Div­i­dend pay­out

Pat Davies – Sa­sol

Eu­gene van As – Sappi

Stephen Saad – As­pen

Boel Pre­to­rius – Re­unert

IS MOV­ING

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