Analysis

Local

Pick n Pay

By Ron Klipin

11 APRIL 2022

Pick n Pay

Trading Update for the 52 weeks ended 27 February 2022

  • Pick n Pay   delivered a solid trading update where it reported an   increase in sales of 5.2%, recovering from the riots and looting in July   2021, in an extremely competitive operating environment.

  • Peter Boone, the recently appointed CEO, stated that the group was   changing its focus from that of a serving its traditional middle-class   markets to that encompassing the higher-end of the market - in addition to   the lower end income market.

  • Its Boxer brand is already focused on the lower end of the market,   offering a limited range of more affordable foodstuffs. Boxer is well   entrenched in both Gauteng and KwaZulu-Natal, with these regions seen as   having good growth prospects.

  • Growing Pick n Pay’s share of the upper end of the market should   prove to be challenging. Checkers’ innovative business model and competitive   pricing is already well entrenched in this end of the market, having   attracted price-conscious customers from Woolworths.

  • Pick n Pay’s margin of 3.50% versus that of Checkers’ and   Woolworths’ at 7% also poses a major challenge. But the latest update appears   to show Pick n Pay to be turning the ship around.

  • HEPS growth of 8% to 18%, excluding insurance claims, has excited the market after years of tepid results. It is early days yet in terms of the turnaround, but the full set of results should provide a clearer picture of future prospects.

Thungela Resources

By Lee Kern

25 MARCH 2022

Thungela Resources

FY 2021

  • Coal miner Thungela Resources released its maiden set of results since listing on the JSE   and the LSE on the 7th June 2021.

  • Revenue   was up 601% year-over-year to R26.28 billion. Adjusted EBITDA came in just   under R10 billion, with the associated margin sitting at 38%. Profit for the   period was R6.9 billion from a loss of R362 million in the prior comparable   period. HEPS rose to 6657c from a HLPS of 531c a year earlier.

  • Thanks   to operational efficiencies and higher coal prices the company ended the   period with a net cash position of R8.66 billion from net debt of R388   million in the same period a year ago.

  • Robust   cash flow generation and the financial strength of the business allowed it to   declare a maiden dividend of R18.00 per share, slightly lower than the market   was expecting.

  • However,   the R2.5 billion it returned to shareholders, representing a pay-out of 63%   of 2021 Adjusted operating free cashflow, was well above the minimum pay-out   of 30% as per Thunegla’s dividend policy.

  • Thungela   remains cautiously optimistic that the challenges experienced in exporting   coal due to issues with Transnet Freight Rail are transient. The company   expects to export 16 million tonnes this year (13.9 million tonnes: 2021).

  • Continued   strong demand coupled with shrinking global thermal coal supply (and war in   Eastern Europe), which has driven thermal coal prices to record levels, will   continue to benefit the company going forward.

  • The market expressed concern over talk of potential diversification, which we feel management should avoid. If management do choose to go this route, I will likely sell the stock. But Thungela has clarified that it meant geographic diversification firstly, and secondly that asset diversification could possibly be an option much further down the line. So until then, I will continue to hold the share in portfolios. The share still trades at a massive discount relative to price movements in the underlying commodity, and trades on a PE ratio of around 2.5x with an 11% dividend yield.

Standard Bank

By Ron Klipin

18 MARCH 2022

Standard Bank

FY 2021

  • Standard  Bank reported a robust set of results for the year ended 31 December 2021, with growth in headline   earnings of 57% to R25 bn. This was on the back of a 9% increase in its   customer base.

  • These   results follow a prolonged lockdown period as a result of Covid-19, which was   characterized by severely constrained business activity. However, the recent   turnaround was driven by strong growth in home loans, vehicle and asset   finance, as well as business loans.

  • A substantial decline in credit charges also gave a boost to the banking   division’s earnings, which grew by 62% to R22.9 bn. This enabled the group to   more than double the final dividend payout to 511c, with management confident   that the economy will grow by 2% in 2022 underpinned by strong gains across   commodities.

  • The  move to purchase the Liberty Insurance group for around R11 bn is part of its   vision to create a fully-fledged Pan-African financial services business.   This will entail a comprehensive offering of banking, asset management,   insurance and wealth management.

  • Standard   Bank believes that its extensive footprint across Africa has the potential to   ultimately serve up to 700 million clients based on the markets where it has   an operational presence.

  • Group CEO, Sim Tshabalala, stated that this business model will bring about additional capital-light revenues, away from the more traditional capital-heavy banking business. This should free up resources in due course once the Liberty acquisitions become fully integrated into the group, which will take time to bed down. Once complete, the integrated sales force should result in the cross-selling of an extensive range of products and services.

Shoprite

By Ron Klipin

11 MARCH 2022

Shoprite

HY 2022

  • The Shoprite group, encompassing Shoprite, Checkers, Checkers Hyper, Usave and its Liquor stores, reported a blowout set of interim results which saw a 25.5% increase in interim profits. Its multi-brand franchise of 3000 outlets grew sales by 10% to R91 bn, gaining market share from other food retailers for 34 consecutive months, and with its store base now in reach of 85% of its customer base. 

  • Trading profit was up 14.5% to R5.4 bn and Adjusted HEPS by 32.5% to 536c.

  • Organic growth seems set to continue with planned store expansion in its liquor outlets, SIXTY 60 (its home delivery services), and the new Checkers upmarket store formats, which have made inroads with the higher LSM customer group.

  • Checkers’ lower prices for high-end foods, appears to be taking market share from other competitors such as Woolworths, at attractive profit margins.

  • The group recently opened its first baby merchandise store, Baby Me, with that market estimated to be in excess of R12 bn. This strategy is similar to Dis-Chem, which purchased Baby City in 2020.

  • In addition, the company has made a foray into the Pet shop market, having already opened 12 stores, with that industry estimated to be worth in excess of R5 bn.

  • Expansion into areas such as the Medirite pharmacy chain, with standalone stores now a profitable entity within the group, could in time compete with established groups such as Clicks and Dis-chem.

  • The entrepreneurial flair of the group, growing into niche areas of higher margin retail, and with its good record of capital allocation, is a catalyst for the future growth of the group. The board declared an interim dividend of 233c, an increase of 22%, on the back of strong cash generation.

Bidvest

By Ron Klipin

04 MARCH 2022

Bidvest

HY 2021

  • Bidvest, the diversified industrial holding company, reported a sparkling set of   operating and financial results for the six months to   December 2021.

  • The group is optimistic that an economic recovery is taking hold.   Bidvest has been known to be a bell weather for South Africa, and it appears   to be experiencing an uptick following a relaxation of Covid pandemic   regulations. The company recorded a double-digit trading profit of 24.8%,   with loss-making operations now turning profitable due to proactive   restructuring initiatives.

  • The Freight division was the star performer on the back of record   maize exports volumes, and buoyant commodity demand. And Bidvest is expecting   a strong second half for exports. The branded and commercial products   businesses also both showed strong growth in trading profits.

  • The services division, of which hygiene is a major profit center, is   benefiting from the re-opening of the hospitality sector well as from people   returning to their offices.

  • Bidvest is a large-scale supplier to the mining industry in SA, with   a positive outlook for the year ahead.

  • Four acquisitions in the UK and Ireland have continued to build   critical mass on established operations, mainly in the niche area of hygiene   services and products. Offshore operations made a positive contribution to   group profits.

  • The company says that it has a strong pipeline for facilities   management and hygiene in the year ahead, with the continuous focus on the   capital light aspects of these operations. Cash generated from operations was   a sturdy R7 bn before investments of R3 bn in working capital.

  • Group HEPS increased by 37% to 852.9c with the interim dividend rising by 31% to R3.80, a testament to consistent delivery to shareholders. The diversity of the business model is a positive aspect in times of global volatility.

Anglo American

By Ron Klipin

25 FEBRUARY

Anglo American

FY 2021

  • Anglo American released a blockbuster set of results for the year to year   to December 2021 on the back of sustained demand for commodities such as   copper and Platinum group metals. These commodities are a significant feature   of global de-carbonisation efforts, and with bulk commodities such as iron   ore being essential for infrastructure developments.

  • On   the flipside, supply-side growth has been constrained by the lack of new   greenfield projects as well as a tight regulatory operating environment.   These factors have resulted in major delays for new projects being completed.

  • Robust   cash generation from operations resulted in a $20.6 bn inflow compared to $8   bn in 2020. Meanwhile, free cash flow grew from $1.2bn to $7.8bn. The return   on capital employed of 43% was way above the target of 15% through the cycle.

  • The company stated that they were committed to capital discipline, and to   maintaining a strong and flexible balance sheet. This is a major positive   factor when operating in a cyclical commodity business.

  • One of the most important and significant measurements of the financial strength   of Anglo American was the net debt of $3.8bn, which is a paltry 0.2x   underlying EBIDTA. The EBITDA margin of 56% is also a very impressive feature   of its financial prowess.

  • In addition to a proposed final dividend of $1.18, a special dividend of $0.50,   as well as the interim special dividend of $2.51, has resulted in a bonanza   dividend pay-out of $4.19, excluding the share buyback of $0.80.

  • A strong pipeline of new projects, such as the new copper venture in Chile   which will become operative in mid-2022, will be a positive for the further   diversification of the commodity portfolio of the Anglo American group, as   well as various brownfields expansion operations.

Mr Price

By Ron Klipin

03 DECEMBER 2021

Mr Price

HY 2021

  • Mr Price released a solid set of interim   results for the six months to September 2021, despite the challenges from   Covid-19 which mainly impacted the first quarters’ results. Supply chain   disruptions and a downturn in consumer spending were major impediments. Other   challenges, include the looting of 111 stores in KZN and Gauteng, resulted in   a loss of R320m, equivalent to 3.7% of sales.

  • Despite the many   obstacles facing the company, such as manufacturing costs rising 8.1% year on   year in October 2021, Mr Price was able to keep to its formula of low prices   as a discount fashion retailer, with the flexibility of reducing margins on   selected product lines.

  • Robust growth in revenue   of 35.2% to R12.4bn resulted in operating profit increasing by 48.9% to   R1.7bn. HEPS rose 33.7% reflecting an outstanding delivery by the management   team of this quality diversified retailer.

  • Strong cash generation,   aided by the 85.7% largely cash-focused nature of its business model, enabled   the company to declare an interim dividend per share of 282c per share, an   increase of 34.4% compared to the 2020 interim dividend.

  • This increase was   achieved despite capex for the continuing rollout of new stores and   acquisitions. The most significant buyout was Power Fashion, which still   resulted in closing cash on the balance sheet of R3.9bn at the end of the   interim reporting period. The Power Fashion acquisition fills a gap in the   group, enabling it to increase its presence and volumes in the lower LSM   markets.

  • Mr. Price’s apparel   division has gained market share for 19 consecutive months with its offering   of discount merchandise and fashion at affordable prices, which highlights   the strength and defensive nature of its largest and most profitable business   segment.

  • Around 40% of its   merchandise is sourced in SA which should be a positive aspect, resulting in   a more flexible supply chain with rapid merchandise delivery in a world with   global supply concerns.

  • The strong brand of the   Mr Price group is legendary, and the company is classified in the top 20   brands in SA, with a growing following by the Brand Z index.

  • Capital allocation and   acquisitions indicate a proven track record, despite some glitches along the   way.

  • Share buybacks totaled   R165m in 2021.

  • Mr Price has a clear   vision and strategy, and is well-stocked for the festive season. However, it   faces the challenging balancing act of passing on costs to protect profit   margins, and keeping prices low. Mr Price is exploring new market niches such   as school uniforms and baby clothing where it believes it can grow and   synergize its existing business operations. There has been speculation that   Mr. Price was involved in a bid for Long-4-Life’s sports division, consisting   of Sportsman’s Warehouse and Outdoor Warehouse, which would be a good fit.   This is part of the acquisition philosophy of the group to build on the   existing core operations using a strong balance sheet. This could be a   positive for the group, should a deal materialize.

Barloworld

By Ron Klipin

26 NOVEMBER 2021

Barloworld

FY 2021

  • Barloworld reported   a blockbuster set of results that ticked all the boxes as the group recovered   from the low point of the global downturn caused by the Covid -19 pandemic.   Barloworld has over the past few years undergone major restructuring which,   in addition, has been responsible for the turnaround in the company’s   fortunes.

  • The Caterpillar equipment operations surged due to the strong demand   for commodities in SA, Russia and Mongolia, contributing approximately 70% of   group operating profits in excess of R4 bn. This division has high margin   parts and services revenues, which was a major profit driver in the current   year.

  • A strong order book for equipment in the region of R4 bn for 2022 is   already secured, and should be a positive catalyst for the next financial   year. The turnaround in the car rental and leasing segment, previously   battered by the falloff in tourism, reflected an operating profit of R850m,   compared to a loss of R302m in the previous reporting period. This was also a   function of downscaling of the AVIS fleet. This division’s operating margins   jumped by 340%, with FCF up by 223%, on a rise in   revenue of only 3.5%. It benefited from the leverage of a lower cost base and   stronger pricing on the back of buoyant demand.

  • The Avis operations have been earmarked for disposal, with the sale   closing in 2022, and is part of the strategy of selling low margin capital   intensive businesses. It was the same strategy followed in the exiting of the   loss-making logistics division.

  • The grain, food and starch operations purchased from Tongaat made an   operating profit of R534m, and is part of the strategy to double the services   contribution to the group by 2026.

  • Group operating margins grew by 450bps, with FCF conversion of 92%   vs that of 69% in the previous year. EPS was 1391c compared to the previous   loss of 1236c, which enabled the group to pay a special dividend of R11.50   per share. This special dividend reflects the strengths of the balance sheet,   and the good capital allocation investment strategy (and good execution of   acquisitions).

  • The equipment division, with its geographic and commodity   diversification, are a sound long term theme, which should be positive for   Barloworld, as well as growing rand hedge income. Barloworld’s forward PE   rating of 12x, does not appear to be onerous given proactive management   results.

Bidcorp

By Ron Klipin

01 OCOBER 2021

Bidcorp

FY 2021

  • Bidcorp,   the global food service business, has just released an impressive set of   results for the year to June 2021. They come despite major challenges from   Covid-19, which resulted in lockdowns in the all jurisdictions in which   Bidcorp operates.

  • The UK was hardest hit with nine months of lockdowns, and now seems   to be in turnaround mode despite supply chain headwinds caused by labour   shortages, transport bottlenecks, cost pressures and skyrocketing energy   prices.

  • The company believes that it should be able to pass on most of the   higher food prices as economies reopen. Europe experienced a rebound in most   sectors during summer with local tourism buoyant. The Australian-New Zealand   operations, an important part of Bidcorp group operations contributing 50% of   group trading profits, showed strong growth to the end of June 2021. However,   the subsequent lockdowns in Sydney and Melbourne, coupled to the lack of   interstate travel, has in the short term resulted in a downturn in business.

  • The geographic spread of the group’s operations encompasses all   continents except North America and ranks in the top three players in the   global food services market. This diversification has stood Bidcorp in good   stead, enabling it to show quality results throughout the ups and downs of   the businesses cycles.

  • This quality is reflected in the recent results, where outstanding management   enabled the company to accomplish bottom line growth in HEPS of R868.4c, up   by 21.8%, despite a decline in revenue of 4.8% to R114.8 bn. Trading profit   increased by 17.7%, with working capital days seven days better, and cash   generation of R7.7 bn. Free cash flows were impressive coming in at R4.7 bn   versus R2.0 bn in the comparative period in 2021. This is the result of sound   management as well as proactive initiatives.

  • Hong Kong, China, and Singapore had various challenges due to   Covid-19 variants, as did South America. Chile and Brazil’s results were,   however, sound. Bidcorp ended the year with a strong balance sheet, with cash   and cash equivalents of R8.1 bn from R7.0 bn in 2020. The company maintained   its gross profit margin of 24%, and reduced finance charges by 10.3% and   13.4% in operating costs. This enables Bidcorp to make acquisitions and   increase dividends in the future. This is evidenced by the declaration of a   final dividend of R4.00 after passing on the interim dividend previously. One   blemish on the otherwise great set of results was a loss of R694 m suffered   in the Chinese business operations. This was relatively insignificant in the   overall context of the group.

  • The group’s business model to focus on fresh, chilled, and frozen   foods in the hospitality industry should enable it to capitalise on growth   opportunities in a fragmented food services market. The management team has   consistently bedded-down bolt-on acquisitions which have been earnings   accretive. Despite volatility and uncertainty caused by the ongoing Covid-19   pandemic, Bidcorp remains optimistic for the prospects of the food services   industry. We have been long term investors in Bidcorp shares for our   portfolios and remain invested in this quality counter with its exceptional   Rand-hedge attributes.

AVI

By Lee Kern

10 SEPTEMBER 2021

AVI

FY 2021


  • AVI, the producer of food, snacks and beverages, as well as footwear, apparel and personal care items, reported results for the year ended 30 June 2021 earlier this week. Group revenue increased by a lower-than-expected 0.5% to R13.27 bn due mainly to higher sales volumes at I&J and higher selling prices generally. Selling price increases were taken to offset the impact of higher raw material prices. These price increases across the group were supported by a tighter management of discounts, which was offset by volume declines in most of the business. Export sales in I&J did however benefit from the impact of the weaker Rand. As a result group gross margins came under pressure, falling 90 basis points to 39%. 

  • Group operating profits rose 3.2% to R2.41 bn, higher than in the 2020 period but below the 2019 levels before the pandemic. Selling and administrative expenses fell 5.4% in the period, and as a result operating profit margins jumped 50 basis points to 18.2%.

  • This set of results did not reflect the recovery many other companies experienced over last year when the pandemic hit. However, AVI did have a higher base, and these results cement its track record of resilience throughout the Covid-19 disruptions.

  • The group recorded an overall increase in earnings, although the segmental performance remains behind the pre-Covid numbers. Part of this dip in sales experienced in the recent period was a normalisation from the very high demand seen in the initial lockdown period for food stuffs and beverages.

  • Food and beverages, which includes Entyce Beverages, Snackworks, and I&J saw revenue rise 1% to R10.65 bn y-o-y for 2021. Operating profit was up 1.7% to R2.03 bn. Fashion Brands, comprised of personal care and apparel, had revenues fall 1.8% to R2.62 bn. Meanwhile operating profit for that segment jumped 13.7% to R400.8 million as lockdown restrictions eased verus the year-ago period.

  • The pandemic continues to have a material impact on demand for Ciro’s out of home coffee solutions business, and some of Indigo’s personal care categories, however the impact of the third wave on operations has not been significant, and AVI said it hopes to sustain operations without material disruption in the year ahead. Ciro is recovering gradually, in line with the opening up of the hospitality, leisure and tourism sectors. I&J experienced fewer operational disruptions from COVID-19, and therefore better fishing vessel availability in the period.

  • Net finance costs for the group fell 40% which helped push HEPS higher. HEPS were up 6.2% to 499.9 cents, the midpoint of guidance. A final dividend of 275 cents per share was declared, up 6.1% - as was a surprise special dividend of 280 cents per share, bringing total dividends for the year to 715 cents, ahead of consensus expectations. This highlights the remarkable cash conversion (of 100%) during the past five years, which has allowed the company to maintain a dividend policy with an almost 100% payout ratio.

  • AVI is a high quality company and an exceptionally well run business. It did provide a cautious outlook necessitated by higher raw material costs, with gross profit margin pressure being a concern. But despite the tepid results, and below par guidance, AVI is likely to attain high single-digit earnings growth and maintain its dividend. The company also has a healthy balance sheet in spite of the special dividend, and is a share I am comfortable adding into weakness for local portfolios.

Shoprite

By Ron Klipin

10 SEPTEMBER 2021

Shoprite

FY 2021

A   stellar set of results for the Shoprite Group, South Africa’s largest   supermarket retailer. It is a reflection of its successful investment in the   ShopriteX software, which has enabled it to launch its Sixty60 e-commerce   service in addition to many other aspects of its operations - such as its   Xtra Savings Rewards Program which has reached 20.3 million clients,   significantly above that of its peers.

Shoprite   confidence in the ongoing transformation of its business model is reflected   in the recent release of results for the year to 30th June 2021. This is on   the back of 27% growth in diluted headline earnings per share to 890c.

It   exhibited strong sales from continuing operations of 8.1% to R168bn, with the   RSA supermarket representing 79.7% of group sales.

Robust   cash generated from operations of R16.1 bn resulted in a major reduction in   debt. Trading profit increased by 24.9% to R10.3 bn, due to robust sales   growth, and aided by a solid increase in gross margin expansion of 55 basis   points to 24.5%.

A   strong balance sheet, with sound capital allocation returns, resulted in ROIC   of 12.4% from 9.7% in 2020. The debt to equity ratio of 24.9% is below the   group target of 25% to 30%.

Shoprite’s   operating margin of 6.1% is more than double that of Pick &Pay or Spar,   as well as beating global peers such as Walmart (3.3%), and the German   discount supermarket at 3.9%. This reflects the growing efficiencies brought   about by digital transformation, with areas like supply chain, inventory   management, e-commerce and the mushrooming growth in the loyalty rewards   schemes bearing fruit.

The   groups’ mobile app is now SA’s top grocery app with more than 1.5 million   downloads. Checkers’ value for money offerings, which enable users to track   the progress of their order status, is now operative in 233 stores.

The   recent acquisition of Massmart’s Cambridge food division will serve the lower   end of the Shoprite and Usave divisions with affordable merchandise.   Management believes that they can use their expertise in this sector of the   market to turn this this loss making operation around.

Furniture   showed growth of 13.5%, and other operations, such as the OK Franchise,   MedRite Pharmacies, Checkers Food Services, and Liquor operations, reflected   good growth despite lockdown challenges.

Pieter Engelbrecht, group CEO, stated that Shoprite has stolen   market share in South Africa for 28 months, which is reflected in the recent   results. The share price has re-rated by around 37% year-to-date, a   reflection that management strategy has proved to be successful, and that the   transformation is not yet complete. I have been invested in the share over   the past year in segregated portfolios, and remain a long term investor in   Shoprite shares.

Implats

By Roy Topol

03 SEPTEMBER 2021

Implats

FY 2021

  • Impala Platinum reported record breaking results this week for the year ended 30   June 2021.

  • Headline earnings increased by 125% year-on-year on the back of   record PGM prices and an improvement in output.

  • Production volumes of refined 6E PGM was up 16% as sales volumes   increased 17%.

  • The group recorded a net profit of R37.9bn, free cash flows of   R38.3bn and paid out R18bn in dividends to shareholders for the financial   year.

  • In addition, Impala repurchased its convertible bonds giving it a   strong debt-free balance sheet. It is now sitting with an extra R23.5bn of   net cash.

  • The average price received for a 6E basket was $2587 per ounce.

  • Rhodium was by far the biggest contributor to earnings growth, and   with rhodium prices having fallen more than 30% from their highs earlier this   year, the market may be stamping these results as peak earnings.

  • Interestingly Impala said they were first platinum miner to   vaccinate all of their staff. And with the share trading on just 4x earnings   with a 10% dividend yield, there is margin of safety buying Impala at these   levels, with the possibility for significant growth should platinum prices   continue to remain elevated.