Banks, malls take strain Adcock Ingram under the weather

The SA Reserve Bank has thrown banks a curveball as they prepare to release their 2020 financial statements: they can now pay dividends to shareholders if they can afford to. The trouble is, some banks have already warned shareholders not to expect a payout.

Most banks held back on paying dividends that they hadn’t already declared in 2020 after the SARB’s Prudential Authority (PA) issued a guidance note last April advising them not to make payouts to shareholders or cash bonuses to senior executives because of to the heightened stress of Covid-19 on the banking system. In return, it temporarily eased some of their capital requirements.

In an updated guidance note that largely flew under the radar, the PA said banks could resume distributions and bonuses, but should continue to act prudently and that the benefits of the relief measures it provided in 2020 shouldn’t be used in the payment of dividends or bonuses.

The SARB was in lockstep with global peers like the Bank of England (BoE) in advising the suspension of dividends last April, but its new guidance comes late in the day. The BoE reviewed its guidance in early December, saying the UK’s banks remained well capitalised and were expected to be able to continue to support the real economy through the Covid-19 disruption.

As it turns out, SA’s banks have held up pretty well too. Although most have already warned that earnings will be significantly lower for the year, largely as a result of higher credit impairments and increased provisions for bad debts that may still arise, they haven’t been quite as bad as anticipated.

“There doesn’t seem to be any good reason not to pay dividends,” says Intellidex chairman Stuart Theobald. “Of course, boards always have to be prudent in deciding to pay dividends, but SARB is clearly trying to use moral suasion to tell boards not to pay any dividends that could jeopardise any of the key capital ratios.”

Banks including Absa and Nedbank have already told shareholders it’s unlikely they’ll pay dividends. Standard Bank has been less definite, saying it would review its capital position in March – as well as regulatory guidance – before deciding on a final dividend for 2020. FirstRand, which reports interim results next week, has made no mention of a dividend after it withheld a final dividend for its 2020 financial year.

“The challenge for banks is that the guidance has come late in the day – they are finalising figures for the year-end now and in most cases would have already made decisions about dividends,” says Theobald. “I think, however, shareholders will expect boards to go back to the drawing board to determine dividends. Banks are looked to as stable dividend payers and they will not want to let go of this key attribute of their investment case”.

Adcock Ingram has reported a fall in firsthalf earnings, showing that pharmaceutical companies aren’t as defensive as you’d expect during a pandemic.

The group, which is controlled by industrial conglomerate Bidvest, blames the decline on the lack of a cold and flu season last year, thus lower sales of over-the-counter (OTC) medicines, and fewer ophthalmic surgical instruments and hospital products after elective surgeries were postponed to free up beds for Covid-19 patients. Fewer South Africans visited doctors, resulting in lower demand for branded prescription drugs too.

It’s not just Adcock that has been affected. Recent results from retailers including Clicks and Dis-Chem show that they were also affected as people largely steered clear of close contact with others, wore masks and washed their hands more frequently.

In Adcock’s case, strong demand for immune-boosting products helped compensate. The renal segment in its hospital division benefited from an increased demand for acute renal dialysis. Still, overall volumes were down by 6%. Cough and cold remedies make up 40% of its OTC drug portfolio.

Revenue for the six months to 31 December rose by 3.6% to R3.76-billion, supported by last year’s acquisition of homecare products company Plush Professional Leather Care. But profit margins came under pressure because of a higher proportion of less profitable antiretrovirals in the sales mix.

An unfavourable exchange rate and above-inflation wage and utility increases added further pressure. Despite keeping expenses under control, headline earnings for the period fell by 16% to R312-million. Headline earnings per share were down by less (15% to 186.5c) after it bought back some of its own shares. After withholding a final dividend last year, it declared an interim payout of 80c per share.

Perhaps the Public Investment Corporation (PIC) got wind of Adcock’s weaker firsthalf numbers, reducing its shareholding to just under 10% from about 15% previously.

Ironically, along with Bidvest, the PIC stood against a R12.6-billion takeover by Chilean pharmaceuticals group CFR close to eight years ago when its stake was aboaut 19%. Since then, Bidvest has taken control of Adcock. Back in July 2013, CFR was willing to pay R74.50 per share for Adcock. With its stock treading water below R50, perhaps an outright takeover by Bidvest is on the cards.

There’s life left in malls

Liberty Two Degrees (L2D) has posted a big decline in 2020 earnings, but says shoppers are returning to its malls across SA after they were left empty during the hard lockdown last April. And, although numbers were still down on 2019, the landlord says customers spent more when they visited.

Conventional wisdom was that smaller, local shopping centres were faring better, so a big improvement in visitors to L2D centres, particularly Sandton City, towards the end of last year, caught the market off-guard.

For 2020 as a whole, foot count across L2D’s portfolio of centres, which includes Eastgate, Melrose Arch, Midlands Mall and Botshabelo Mall, was 30% down from 2019. Yet the total amount of money spent by customers was just 20% lower.

Sesfikile Capital portfolio manager Evan Jankelowitz says this “is the exception rather than the rule. Powerhouse assets like Sandton managed to persevere ... aided by its luxury retail offering.”

L2D’s revenue for the year to end-December was 12% lower at R879-million, and net property income fell by 46% to R377-million. It granted relief to tenants unable to operate, suspended hotel and convention centre operations, and made provision for tenants in arrears with their rent.

Headline earnings per share declined by 57% to 25.04c and it lowered its distribution per share by 47% to 32.33c.

“The recovery will take some time, but we don’t foresee the ‘death of the mall’,” says Jankelowitz.