SA Inc may miss recovery as consumers take strain
Companies dependent on middle and lower-income market among the big declines
FAST-RISING gold and commodity prices signal that a global economic recovery may be in the offing, although SA Inc shares may miss that bus.
Commodity prices rose sharply during July and August on the belief that a world recovery will see demand for commodities strengthen.
Commodity prices are 18.8 percent higher year on year, driven in particular by industrial and metals prices.
Industrial commodity prices are 27.2 percent higher year on year, and the last time these inputs to the global supply chain had seen such material uplift was at the beginning of 2017,” according to Investec economist Annabel Bishop.
Sustained quantitative easing, the relaxation of Covid-19 restrictions in most countries, and easing US and China trade relations are some of the factors pushing these prices higher.
Investors last week piled into fast-growing big global tech stocks such as Tesla, Microsoft and Apple, and the FTSE All Share World Index hit a new high last week.
Unfortunately, in South Africa, where demand remains largely consumer-driven, the latest indicators remain gloomy.
A UN Development Programme report warned of major setbacks in addressing poverty, unemployment and inequality, with about 34 percent of middle-income households likely to face financial vulnerability because of the impact of the Covid-19 pandemic in an economy that was already on the brink of recession.
So it was surprising to see Italtile on top of the JSE’s top movers’ dashboard on Friday morning, with its share rising 6.02 percent to R13.20, after staging a 23 percent increase over a week. Italtile’s primary customers fit squarely into South Africa’s middle-income earners.
The share price was boosted after the group last week declared a 10 cent second-half dividend (many companies have suspended dividend payments over the Covid-19 uncertainty), and it announced an R800 million capital expenditure (capex) programme for 2021 (many companies have cut capex to conserve cash in the uncertain environment).
Turnover was down 7 percent in 2020 at R9.3 billion.
Also among the top JSE movers was IT group Altron, which also has operations in the rest of Africa, Europe, the Middle East and Australia.
Its share price was up 5.92 percent at R23.99 on Friday morning, after rising about 26 percent since the end of July. Tech shares have been driven by developments in artificial intelligence, machine learning products, and catch-phrase trends, such as the Fourth Industrial Revolution.
Altron’s shareholder return over three years is 167 percent, making it one of the JSE’s best information and communications technology companies, and, as at mid-May, it was on track to double earnings before interest, tax, depreciation and amortisation by the 2022 financial year. Chief executive Mteto Nyati caused a Twitter storm recently by writing that the ANC had “passed its sell-by date”.
Also trawling middle-income earners is Discovery, which fell 2.57 percent to R127.32 midday on Friday.
This was after warning that profit for the year to June 30 could be wiped out due to provisions for the coronavirus and volatility in long-term interest rates. It predicted headline earnings per share to fall by 90 percent to 100 percent.
It could be possible that the optimism that lifted the share price more than 17 percent this month may be misplaced.
Also among the big declines on Friday was RCL, which makes private label food products, mainly from chicken, also in Swaziland, Namibia, Botswana and Zambia. Its share price was down 5.7 percent to R6.11, bringing its price decline over a month to more than 12 percent.
RCL warned this month it expects headline earnings per share to fall 70 to 57.2 percent in the year to June 30, much worse than an earlier forecast on June 8, and headline earnings were expected to fall by at least 30 percent due to the impact of the lockdown on sales.
As arguably the biggest supplier of protein to South Africa’s lower-income market, I don’t foresee a sharp uptick in demand any time soon.
Dis-Chem Pharmacies, another player in the middle-income market, saw its share price slide 2.3 percent on Friday to R18.65, off a quite high price earnings ratio of 27.40.
One can’t help but wonder whether this share price wasn’t boosted by its essential service provider status through the lockdowns, but that it now faces a different valuation matrix.
Its online sale grew 344 percent from March 1 to August 15, while likefor-like retail sales grew only 1.5 percent, over the same period, although obviously, off different bases.