Market Insights:Local Commentary – Equity

February 18

The Domestic Company Index (DCI) ended the year on a high note; returning 2.2% and 0.9% for the quarter and year on a total return basis. On a total return basis, the largest gainer for the year was Letlole La Rona (LLR), returning 42.2% and the largest loser was StanChart, registering a 54.7% loss for the year.

NAP full year earnings came in 8.5% lower despite an increase in operating profit of 8.3%, due to lower revaluation gains relative to the previous year. There were no changes to the property portfolio and the company remains focused on delivering steady distribution growth. Turn star reported a 7.8% increase in operating profit for the interim reporting period, while earnings remained flat. The company is facing challenges in the Tanzanian commercial office space portfolio, where they are experiencing significant vacancies.

Chobe interim results increased by 10.6% due to an increase in bed nights sold and achieved room rates. The company has acquired two game farms and Sedia Riverside Hotel, a 31 room hotel in Maun. Botswana Telecommunications Corporation Limited (BTCL) also released their interim results, which showed a 2.6% decrease in earnings. Though revenues were up 3.7%, gross margins contracted as depreciation growth on the network roll-out outpaced asset monetisation.

Moreover, SeedCo registered a $2.5mn loss for the interim period despite flat revenue due to a decrease in exchange gains and increased finance costs. Though maize volumes increased in some jurisdictions, unfavourable currency movements impacted financial performance. Moving forward, the company sales growth would have to outpace local currency depreciation for reported USD earnings to show growth.

The highly anticipated Choppies results for the 2018 financial year (FY) were released during the quarter. The auditor, PwC, issued a disclaimer of opinion on the results as it could not gather enough evidence to form an audit opinion. The financials indicated a loss for the year of P418mn due to P335mn net impairment losses and write-off of deferred tax assets P69mn. Impairment losses related to goodwill, PPE and receivables write-offs. The counter remains suspended from trading as the FY19 results are still pending.

The release of the FY18 Choppies financials has fuelled the negative sentiment in the market and raised more questions than answers. We anticipate the release of the 2019 accounts to give a better understanding of the current operating position of the Group. That said, due to the major changes in Group structure, the business is fundamentally different from what it was before and investors will need to take the time necessary to understand the new Choppies’ structure and the implications thereof to their investment.

On the corporate actions front, 23.75% of the share capital of LLR held by Botswana Development Corporation (BDC) was sold to Grit Services Limited, taking their total shareholding up to 30.0%. PrimeTime acquired a mixed-use property in Sandton, South Africa for P60.8mn. CA Sales will acquire an additional 10.15% shareholding in Pack ‘n Stack, increasing their current shareholding of 84%. This purchase will be done in two tranches for a maximum possible consideration of R44.8mn.

Choppies Enterprises entered into an agreement to sell its SA Subsidiaries to Kind Investments (Pty) Ltd for a consideration of R1.00, subject to the fulfilment of conditions precedent. The purchaser will purchase all issued share capital and loan accounts given by Choppies to the subsidiaries. Sefalana has also cautioned the market that they have entered into negotiations with a 3rd party outside Botswana that may result in a transaction.

Over the last year, we have highlighted that the local equity market is cheap relative to its historic average valuation metrics. Structural issues that have constrained market participation are unravelling and sentiment is less negative. That said, a catalyst is needed to fuel a shift in the tide and turn price momentum positively and this year could potentially be the year we see that turn.

StanChart and Letshego were the worst performers of 2019. In the coming year, we look to see if StanChart management will be able to deliver on their turnaround strategy and get the Bank back on track to deliver their shareholders a return on equity comparable to its peers. In relation to Letshego, leadership issues, questions around strategic direction and execution have investors jittery. A well-communicated resolution to these key issues will be positive for the share.

On the property front, companies continue to progress with their respective investment cycles and the manner in which this is done will greatly impact return. We look to see how LLR will deploy the cash from the sale of their hospitality assets and what the impact of the increased shareholding by Grit will be. The trade-off between yield enhancement and variability of earnings is a major concern given the increased property acquisition and development activity.

Another sector to watch is Mining. Minergy is in the process of transforming into a coal producer. Tlou Energy is also at an advanced stage where investment to transform into a gas producer and power generator is imminent. However, funding and implementation risks remain elevated.

The last five years have been characterised by consistent declines in the DCI. This decline, initially a correction in relative valuation given declines in listed company earnings, has now extended beyond expectations.

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Tshegofatso Tlhong
Portfolio Manager