Market Insights:Local Commentary – Equity

May 27

The Domestic Companies Index (DCI) started the year on a positive note, advancing 0.6% for the quarter on a total return basis. This contrasted with all other global markets that ended the quarter with significant losses on the back of Covid-19recessionary fears. On a total return basis, the largest gainers for the quarter were Letshego with a 19.7% return, and Letlole La Rona (LLR) returning 7.8%.

Sefalana kicked off earnings season with agood set of interim results. Revenues and earnings per share (EPS) grew by 11.4% and13.4% respectively as margin management and cost control initiatives bore fruit. On theother hand, CA Sales’ EPS for the full yearperiod increased by 22.5% on the back of continued organic growth.

In other consumer related sector developments, Sechaba’s full year EPS was1.9% lower despite a 21.0% increase in overall volumes and improved operational performance. The disconnect was due to a once-off levy refund received in FY2018.Furthermore, the Group made changes toits Board and structure; notably, Mr. Thabo Mathews was appointed as substantive Managing Director.

On the property front, LLR’s EPS reduced by13.4% due to cash drag as proceeds from the sale of the Group’s hospitality properties are yet to be fully deployed. FAR Properties reported flat EPS for the interim period despite a 5.7% increase in operating profit as the number of shares in issue increased. Also,RDCP full year earnings increased by 3.6%, inline with rental revenue growth.

In the banking industry, First National Bank Botswana (FNBB) registered EPS growth of12.5% for the interim period.

The performance was underpinned by a10.0% growth in non-interest income and the Bank’s ability to attract cheaper transactional deposits which reduced the cost of funding.Barclays Bank of Botswana Limited officially changed its name to Absa Bank Botswana Limited. The Bank’s EPS increased by 14.5%on the back of broad-based improvements across key areas. Banc ABC’s EPS was 5.0%lower than the previous period as the net interest margin compressed and non-interest income was lower than the previous period. StanChart reviewed results showed a 133.0%growth in full year EPS to 18.62t on the back of expanding net interest margins. Both BancABC and StanChart continue on their transformation journeys.

Likewise, Letshego Holdings Limited Group released reviewed full year results that showed a 41.1% increase in EPS for the period. This performance was driven bya 53.2% reduction in impairments and a reduction in the Group’s effective tax rate.During the first quarter, the Group made several executive appointments, including the appointment of Mr. Andrew Fening Okaias Group CEO. The BIHL Group’s EPS for the full year increased by 17.0% to P1.58 driven by 169.0% increase in share of profits of Associates and Joint Ventures (JVs).

On the contrary, Cresta’s full year EPS declined 17.3% due to the inclusion of depreciation and finance expense post the acquisition of 5 properties from LLR. Engenreported flat full year EPS as volume growth was negated by above inflation cost growth.The Company’s liquidity position improved significantly, as National petroleum slate under-recoveries owed to Engen by the Government were paid in full.Property counters dominated corporate actions for the quarter. Some key highlights for the period include Prime Time entering into an agreement to acquire Lot 14076Lobatse from Time Projects with the intention to develop a shopping centre thereon.

The estimated contract price for the development is P106.2mn, with a guaranteed net return of 8.0% in the first year of operation. The Company engaged in funding roadshows to raise funds through a rights issue and a debt issuance.LLR also entered into an agreement to buy a portfolio of 6 industrial properties from Western Industrial Estate, a company wholly owned by Botswana Development Corporation (BDC). This was for the consideration of P174.4mn and an initial net yield of 9%. The acquisition will increase the Company’s gross let table area by 34,104m2.

Moreover, RDCP acquired Tribal Lot 14154in Tlokweng for the sum of P4.3mn. The plot is 1.1ha in size and will be re-developed by the Company. The Company additionally issued P52.15mn worth of bonds under itsP500mn Medium Term Note Programme; this represents 69.5% of the P75mnintended raise.

Another key highlight was Choppies’appointment of Mazars as auditors to the Company and its subsidiaries, following the resignation of PWC. It is anticipated that the 2019 Annual Financial Statements will be completed and released by 30 June2020. Additionally, the Group released a circular to update shareholders on several pending issues. Key takeaways were as follows:

• The CEO’s employment contract has been reviewed and salary cut by 43.0%;• A Group CFO has been appointed and a Deputy CEO identified;

• CDC, a 100% subsidiary of the Group in Botswana, instituted liquidation proceedings against Pay less, who owes CDC P121mn and previously signed aP111mn acknowledgement of debt;

• Lenders agreed to hold off making demand for immediate payment ofP680mn of debt following various instances of default and breach of covenants. This agreement was made on the provision that the Group made an immediate reduction in the loan capital outstanding and sold non-performing businesses, particularly those in South Africa within an agreed time frame.

– Choppies has exited the Mozambique and Tanzanian markets. In Kenya, operations have been scaled down to 2stores and efforts are being made to sell equipment to local operators and/or existing landlords to clear some of the outstanding liabilities;

– The sale of the Group’s South African subsidiaries to Kind Investments has been concluded; and

– The Group repaid P150mnworth of debt; P100mn of which was from a shareholders’ loan granted to the Group by the founding shareholders.

In mining, Minergy issued 38.9mn new shares, representing a debt to equity conversion by one of the Company’s creditors. The shares were issued at a price of P0.99 per share.

As we look back, for most of 2019, we highlighted that the local equity market was cheap relative to historic valution levels.

Structural issues that had constrained market participation had unravelled and sentiment was less negative. However, a positive catalyst was required to turn price momentum positive. As the market anticipated a positive catalyst, we experienced the outbreak of the COVID-19 pandemic. We have since seen several countries globally go into lockdown, and by extension partial economic shut-down. Locally, discretionary spending has been completely halted. For now, our bottom up model estimate simply a 13% contraction for listed company earnings in 2020 before a recovery into 2021.

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Tshegofatso Tlhong
Portfolio Manager