Winning the hearts and minds of investors

LAST WEEK might have been quiet on the corporate earnings front in South Africa, but some progress was made to win the hearts and minds of the business investor community and on trying to free up additional investment capital.

The Investment and Jobs Summit 2019 hosted by President Cryil Ramaphosa was a success that attracted more than R363 billion of additional fixed investment commitments, although, as some media reports noted, the level of enthusiasm did not appear to be as high as in previous years.

That’s understandable, given the parlous economic environment that SA Inc finds itself in.

Something that worries is a view often expressed by left-leaning political luminaries that corporate South Africa is not doing enough for job creation. According to this view, corporates are not investing enough of their capital on new productive capacity, and are simply hoarding cash on their balance sheets.

This view fails to consider hat corporate South Africa is facing headwinds just to keep the front doors open and their existing people in work, never mind employing new people. Also, and while this may seem trite, there is no point in building a new factory if there is no demand for its products.

Fortunately, the government, faced with its own serious fiscal constraints, now seems ready to tackle some of the measures needed to generate improved investor confidence,

That said, most of the chief executives interviewed in the past few weeks do not expect a major positive economic shift in the short-term – they hope for a mild improvement next year. All this makes stock picking, based on growth prospects for next year, a difficult process.

Shoprite, Africa’s biggest retailer, managed to surprise the market last Monday by reporting a 10.3 percent increase in its South African supermarkets, still its core business, in the three months to September.

A group this size needs to continually invest in new spaces to keep abreast of changing consumer trends.

It opened 15 new stores under its Usave, Shoprite and Checkers brands in the three months. Its stores in other African markets are experiencing tough trading conditions due to currency issues.

Its share price has shown a strong upward trend from around R112.27 at the end of August to the R137.29 that it was trading at on Friday. The p:e was 17.5. Shoprite’s size and breadth of the market that it caters for in South Africa, to my mind, makes it a solid defensive stock in a low-growth environment.

Also still reporting good earnings growth in the weak consumer environment last week was the fresh, frozen long life and prepared meal maker Rhodes Food Group, which said it expected earnings to rise by up to 35 percent in the year to end-September.

Turnover, which increased 8.2 percent for the year, has grown consistently over six years. Many of its brands, such as Bisto, Packco and Rhodes are consumer stalwarts in this country, and about a fifth of sales now also go overseas.

In the six months to March the group invested R129 million on capital projects, including the completion of the relocation of the pulps and purees plant, expansion of a Western Cape ready meals facility and a site upgrade at the Groot Drakenstein production hub.

The share price was trading 1.9 percent higher at R16 on Friday morning, about midway between a 52-week high and low, and on a quite high, but well worth it p:e of around 25.

Also signed at the investment conference last week was a Poultry Industry Master Plan, where the sector essentially promised to employ more people and expand production, as long as the government was tougher on chicken meat imports.

Chicken producers committed R1.5bn in fresh investment in their production 30 facilities over four years, and to create some 4 000 additional jobs. In addition, some R1.7bn would be spent on establishing 50 more commercial scale farmers.

This is good news for South Africa’s biggest poultry group RCL Foods, which was trading 0.4 percent higher at R9.60 on the JSE on Friday, also on a p:e of 25.

Its share price has fallen about 36 percent since January, in line with the 60.8 percent decline in headline earnings per share reported for the year to June 2019, which it has blamed largely on higher volumes of imported chicken displacing local producers, and higher production input costs.

RCL could be a good defensive stock in the weak economy next year, because chicken is not only a favourite meat in this country, but it also remains among the lowest priced sources of protein.

For many years South African investors saw property in the UK as a solid investment hedge against the weak local economy, but the uncertainty caused by Brexit, growing online sales and a weak global economy has put paid to that.

No more evidence of that was needed following UK-shopping mall owner intu’s release of a trading statement last week where its directors essentially admitted they would need to raise capital to strengthen the balance sheet, which analysts reckoned would most likely result in a substantial dilution of existing shareholder interests.

The share price fell up to 20 percent to R6.29 on the JSE on Wednesday. On Friday the price was trading 3.89 percent lower at R6.18.

Also surprising the market last week was a trading statement from Africa’s biggest cement group PPC.

Its share price crumbled nearly 20 percent to R3.14 on Thursday after it issued a trading statement warning of lower profit due to the effects of hyper-inflation on its Zimbabwe, restructuring costs and the difficult trading environment in South Africa.

On Friday the share price was up 1.46 percent to R3.47, on a quite high p:e of 17.

Headline earnings per share are expected to fall 65 to 85 percent. It wasn’t as though the problems in Zimbabwe were not expected by the market. It was the extent of them that surprised.

Higher investment activity in South Africa will boost cement sales, in a few years, at least.