Are local corporates too stuffed to move?
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.
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.
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 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 TIONSource: Standard & Poor's & TreasuryOne
A RISING TIDE OF LIQUIDITYSource: S&P Quantitative Services
THE BIG GUNS, AND THEIR CASH BALANCESSources: Latest cash flow statements
CASH FLOW AS THE YARDSTICKSource: PSG Online
Mark Lamberti – Massmart
Brian Joffe – Bidvest
Pat Davies – Sasol
Eugene van As – Sappi
Stephen Saad – Aspen
Boel Pretorius – Reunert