Structural change brings change for the better

BUSINESS in South Africa has reason to smile – nowhere was structural change for the better more evident than in some of the big JSE-listed companies that reported results last week.

Chief executives interviewed spoke of particularly tough decisions having to be made over the past six months, of a “new normal” in a world characterised by single digit earnings growth, uncertain economic futures, currency volatility and a scarcity of new markets that can be tapped.

Companies on the JSE have seen particularly hard times over the past two years.

Uncertainty, political and economic, continues to dog local sentiment, unemployment is the highest in the world and interest rates remain stubbornly low.

In addition, corporate implosions have seen many companies once priced for uninterrupted growth wipe out billions of rand of shareholder wealth.

Think of EOH, Brait, Aspen, Tongaat Hulett, Steinhoff, British American Tobacco, the listed property sector and the almost wiping out of the construction industry.

As Samantha Steyn, chief investment officer at Cannon Asset Managers, put it, companies that appeared cheap (for investors) a year ago, are even cheaper today.

The environment has left management teams little room to wiggle out of the difficulties facing their companies, and job losses over the past six months attest to the many companies that have had to even resort to job cuts to keep their businesses afloat.

However, the financial results of some of the companies that reported last week show how managements have had to revise strategies radically to position their businesses to not only deal with the current weak trading conditions, but also keep operations primed for the growth that always follows such a prolonged period of economic torpidity.

One of few companies to report double-digit earnings growth (12.5 percent) last week was Bidcorp, which has grown from 1995 to become a R130 billion-a-year global food service giant, which generates only 5 percent of that turnover in South Africa.

The growth came despite low food inflation in the markets where it operates, low economic growth and rising wage and fuel cost pressures.

Its share price rose more than 8 percent to R322.47 on Friday morning.

Imperial Logistics reported earnings down 7 percent, but it had taken more than R2bn of impairments, and once-off restructuring costs on the nose to close down a big division that had been struggling with profitability for years.

Its share price appears to have arrested a slow declining trend over the past year, and was trading 4.1 percent higher at R51.86 on Friday, this after rising 9 percent from the previous week.

Long may it last.

Also doing well last week was South Africa’s biggest automotive group, Motus, which reported an 11 percent increase in headline earnings per share, a figure that would have been 7 percent excluding the impact of share repurchases,

National vehicle sales are falling, a trend likely to continue for the next six months at least. However, Motus’s high free cash-flow generation, ability to seek a new profitable regional market overseas, and exposure to annuity income attests to a resilience in their strategy that should see it continue to grow in the future.

The market rewarded Motus by lifting its share price 11 percent over a week to R75.50 and hopefully the uptick also ends a decline in its share price over the past six months.

Arising from deep within the ashes of the listed construction sector were two companies, Aveng and Murray & Roberts.

Aveng has been restructuring as part of a two-year strategy to survive by lessening its exposure to the South African construction and engineering market and transforming into an international group involved in contract mining in sub-Saharan Africa and West Africa and construction in Australia, New Zealand and Southeast Asia.

It reduced debt and realised R1bn through the sale of its South African rail, water, roads and infrastructure units. Further disposals are planned.

It still has some way to go in restructuring, but their strategy appears to be well on track.

Its share price has traded between 2 to 3 cents since March.

International construction and engineering group Murray & Roberts last week reported a near-record order book.

Attributable earnings were up 26 percent to R337 million and its share price increased by more than 9 percent over a week to R12.08 on Friday.