FirstRand declares dividend as it rebounds ‘faster than expected’ after lockdown

FirstRand has set a precedent for South Africa’s other listed banks to follow, declaring an interim dividend after the economy – and its banking operations – recovered faster than expected from last year’s hard lockdown.

Sure, the dividend for the six months to end-December is a quarter lower than the previous year’s interim payout, but that’s largely because of the increased provisions it has made to cover potential loan defaults by customers who have been affected by the Covid-19 pandemic. Strip those out, and earnings aren’t far off those of a year earlier.

South Africa’s largest bank by market value held back on a final dividend in June last year after making significantly larger allowances for bad debts because of the hard lockdown. Last April, the Reserve Bank’s Prudential Authority advised banks to preserve capital because of the potential stress Covid-19 could exert on their balance sheets.

“Since June 2020, earnings have recovered faster than expected, driven by a better-than-anticipated rebound in the economy, which has supported transactional volumes, growth in deposit balances and an improved credit experience,” says CEO Alan Pullinger. “Over the past six months, FirstRand accreted capital and strengthened its balance sheet, enabling the group to declare an interim dividend.”

The group, which comprises FNB, RMB, WesBank and UK lender Aldermore, reported a 20% decline in normalised earnings thanks to the provisions, with its impairment charge rising 59% to R9.4-billion. The comparative period a year earlier fell before the pandemic. Compared to the previous six months, it says there were indications of a positive rebound in its performance.

Advances held steady as it took a more conservative approach to lending and deposits increased by 8%. Normalised earnings declined by 21% to R11-billion from R14-billion a year earlier. Headline earnings a share were 20% lower at 198.9c. It reduced its interim dividend to 110c a share.

Despite the improvements over the six months, FirstRand says the domestic operating environment remains challenging, particularly given the risk of a third wave of Covid-19 and the projected timing of reaching the target levels of vaccinations.

Though it doesn’t expect the level of earnings for the first half to be repeated in the second six months, it still expects full-year earnings to exceed those reported last year.

Bidvest cleans up

The car rental industry may have stalled over the past year as the travel and hospitality sectors ground to a halt because of Covid-19 but, unsurprisingly, hygiene services have been in demand. Together with DIY products and commodity-handling services, that’s supported a strong first-half performance from industrial group Bidvest.

Although Bidvest’s empire extends across a number of industries, hygiene has been a staple of its business since the acquisition of Steiner 30 years ago. Bidvest Steiner has since quadrupled its reach organically to become one of the biggest hygiene service providers in South Africa, competing against global players.

As part of its strategy to expand its presence beyond South Africa in asset-light businesses, it spent about R9-billion to acquire UK hygiene service provider PHS Group last year, just months before the global outbreak of Covid-19 heightened the awareness of and need for out-of-home hygiene.

A year on, Mpumi Madisa, who replaced Lindsay Ralphs as chief executive in October last year, got to show the benefits of that strategy, along with a clean-up of its portfolio that was started after the 2016 unbundling of food services business Bidcorp.

“Bidvest is a company that has a history of earnings growth prior to the pandemic, which negatively affected the 2020 financial results,” says Ntombiyombuso Zulu, senior equity analyst at Sentio Capital. “In spite of the negative effects from the pandemic, the group has delivered a set of resilient interim results, with strong cost control that has been aided in part by government schemes in various geographies, strong cash flow and lower net debt levels.”

The company has put its car rental business up for sale, sold UK-based logistics group Ontime Automotive and has reached a deal to dispose of airports ground-handling business BidAir Services.

Last month, it sold its 6.75% stake in the Mumbai international airport, banking R1-billion in proceeds from the disposal. Once all these disposals were closed out it said the reorganisation would, in the main, be done. Comair doesn’t get much of a mention after it impaired its investment in the airline, affecting the comparative numbers from last year.

Zulu says the disposals will make space in the portfolio for bolt-on acquisitions, specifically in global hygiene, which is an area they see themselves scaling up even further.

“A notable feature of these results is that they were achieved in a period affected by Covid, whereas the comparable base wasn’t, and the business managed to grow, thanks in part to the PHS acquisition, which has given them scale in the UK within the services sector,” Zulu says.

Bidvest’s Services operations had a standout performance Zulu says, with trading profit growing by 38%, as a result of greater focus by customers on hygiene, and some Covid-related short-term contract wins. That made up for declines at its branded products and financial services businesses.

Group revenue grew by 3.4% to R44.4-billion. Normalised headline earnings a share increased by 6.1% to 651.6c. It raised its interim dividend by 2.8% to 290c a share.

Spur tweaks its recipe

Spur Corporation is reinventing itself after taking a beating because of lockdown restrictions that resulted in a 40% decline in first-half sales.

Under new management led by former Famous Brands executive Val Nichas and recently appointed chief financial officer Cristina Teixeira, it’s introducing drive-through delivery formats for its RocoMamas and Spur franchises and a drive-through, clickand-collect option for Bento franchises.

Its virtual kitchen brands, which have been trialling since May last year and operate out of the kitchens of existing restaurants, will move to the next phase of testing.

Spur has been the worst hit of the JSE’s listed restaurant groups because of its largely sit-down dining format, says Small Talk Daily Research’s Anthony Clark.

Famous Brands, which owns casual dining franchises that include Steers, Wimpy, Debonairs Pizza and Fishaways, has done better because of its larger range of takeaway and collection options.

Clark says Grand Parade Investments fared the best through its Burger King SA franchise, which is being sold to a private equity firm, because nearly two-thirds of its 90 restaurants are drive-throughs.

“Smaller formats, drive-throughs, click– and–collect, and delivery services like Uber Eats and Mr Delivery are the way of the world going forward,” Clark says. “You have to adapt your model to what will be a longterm trend.”

Ongoing uncertainty meant that Spur held back on an interim dividend and has again deferred payment of last year’s payout after the most recent lockdown affected profitability and cash generation from December through to February, just as it was recovering from last year’s hard lockdown.

For the six months to December, the impact of a curfew on evening restaurant trading hours resulted in a 39% decline in dinner sales. For its upmarket The Hussar Grill, Casa Bella and Nikos Coalgrill Greek chains, dinner sales fell by 48%.

Group alcohol sales were down 39% as a result of the ban on sales for part of the period. Revenue fell by 40% to R314-million and comparable profit before tax declined by two-thirds to R43.1-million. It ended the period with cash and cash equivalents of R178-million, up R12.8-million from a year earlier.

Even with the looming threat of more stringent trading conditions if infection rates rise, Spur has welcomed the further easing of restrictions this month.

Thanks to new management that realises it needs to be nimble to realign its business to changing consumer buying and eating habits, and an ungeared balance sheet compared to Famous Brands’ heavy debt pile, Spur is Clark’s pick among the JSE-listed casual dining groups. Still, he remains negative about the sector.

“If I had to be in fast food I’d probably want to be in Spur,” he says. “The question is: As an investor, do I want to be in fast food? The answer is no. Given what’s been going on with the market and the changing formats, it remains a risky area.”

Spur Corporation

is reinventing itself after taking a beating due to lockdown restrictions that resulted in a 40% decline in first-half sales

Stephen Gunnion is a financial journalist and news anchor.