Market Insights:Local Commentary – Equity

November 20

The DCI continued to lose ground, declining 5.7% and 1.0% on a price and total return basis respectively during the third quarter of the year. The biggest loser was Letshego Holdings Limited, falling 41.0%.

The banks reported a mixed bag of financial results. Above inflationary growth in both interest income and non-interest income resulted in FNBB reporting PAT growth of 13.0%, while Barclays Bank Botswana reported a 48.6% increase. The latter also had an impairment recovery during the period.

StanChart’s financial performance continued to disappoint; the bank achieved earnings of P27.0mn for the interim period. Operating income came in 5.9% lower and the loan book contracted by 2.0%. BancABC earnings declined by 47.4% due to upward pressure on interest expense and depressed non-interest income.

On the property front, RDCP earnings were down 5.6% for the interim period. The company announced that construction will soon commence for their retirement and frail care facility in Tlokweng, as well as the acquisition of a Radisson RED hotel in Johannesburg, South Africa. FAR Properties’replace with operating income before fair value adjustments grew 6.1% while PAT grew 178.5% on the back of positive adjustments.

The company is considering exiting volatile markets and diversifying their residential portfolio. Letlole La Rona’s operating profit from continuing operations rose 22.2% for the year. Despite this, earnings declined 32.7%as the company recognised a book loss of P27mn on the disposal of its hospitality assets to Cresta.

The BIHL Group reported a 34.0% decline in PAT despite a flat operating profit as their share of profits from Associates and joint ventures declined by 80.5%. This was a symptom of a write-down in the value of their holding in Letshego. Letshego earnings were flat.

The Group is rationalising their geographic and product exposure, as well as undergoing a management restructuring as the Board looks to appoint a substantive Letshego CEO and CFO. This has resulted in negative investor sentiment as it is unclear what the Group will look like once the restructuring and rationalisation is complete.

Sefalana year end results showed a growth in earnings of 11.8% as the company focused on cost savings and reduced promotional activity to preserve margins. CA Sales achieved earnings growth of 50.6% despite challenging environments in a number of geographies. Botswana continues to anchor Group performance, reporting a 108.1% rise in operational profit for the period.

Sechaba earnings grew 123.7% to P89.7mn. Performance was underpinned by a 14%growth in volumes, higher net revenues and cost savings which resulted in improved margins.

Minergy recorded a full year loss of P29.3mnas the company transitioned from coal exploration to mine development. Cresta’s PAT increased by 188.1% to P9.7mn as revenue grew and cost cutting initiatives improved margins. G4S earnings were up24.1% despite flat revenues as cost savings resulted in improved margins.

Engen earnings declined 16.5% despite a 21.1%increase in revenues due to margin pressure and lower inventory gains. Pressure on the company’s cash flow is steadily unwinding as the slate receivable reduced from P298mnto P250mn.

On the corporate actions front, Wilderness Holdings delisted from the Botswana Stock Exchange. Choppies and BBS shares remain suspended as financial statements remain unpublished.

The highly anticipated Choppies EGM convened on the 4th of September.We reviewed the Legal Report and its annexures, Forensic Report and its annexures, CFO Report and its annexures, and the then suspended CEO, Mr.Ramachandran Ottapathu’s, response to the Legal and Forensic Reports and their annexures. Based on our extensive review of the EGM documents, we concluded the following:

1_ There were weak internal controls at Choppies and the Group appears to have been run akin to a family business;
2_ The CEO wielded a lot of power anddid not clearly separate himself from thebusiness e.g. holding shares of Fours apparently for the benefit of Choppies and him holding butchery licenses on behalf of Choppies;
3_ The Board was passive and uninvolved in the operations of Choppies:– No one seemed to hold the CEO to account, possibly as a consequence of their passiveness;– There were no oversight structures, e.g.an Investment Committee to manage the store acquisition process;– Poor governance as evidenced by poor minute taking and unsigned minutes;– Prior to the current Company Secretary,Ms. Kgwarae, taking over in November2017, there was no declaration of interest done, resulting in undeclared interests from: Mr. Ramachandran Ottapathu, Mr.Farouk Ismail, Mr. Sydney Muller and Mr. Ronald Tamale.
4_ As a result, currently, financial statements prepared by Choppies cannot be relied on as a true representation of Choppies’ financial performance and position until the current auditor, Price waterhouseCoopers, finalises its audit for the year ended 30 June 2018.

Going forward, an overhaul and implementation of governance structures are required and succession plan implementation and a restructuring in the medium-term are also key.

We continue to engage Management to ensure that shareholder value is preserved during this period.

Looking ahead, we expect local equity market prices to continue on their downward trajectory despite a recent stabilisation, and in some instances a recovery in earnings.We are seeing reduced institutional investor activity outside of large corporate actions.

This is compounded by a shrinking investable universe due to de-listings. In other words,although the market remains cheap relative to historical levels, negative sentiment should keep price gains subdued in the near-term.

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Tshegofatso Tlhong
Portfolio Manager