44 finweek 24 October 2019 http://www.fin24.com/finweek
Photo: Gallo/Getty Imagescover story investment
different to what we are used to in South Africa.”
Some of the costly overseas adventures include
Sasol’s Lake Charles Chemicals Project in Louisiana.
Starting estimated costs of $8.1bn in 2014 have now
ballooned to $12.9bn.
Aspen Pharmacare, which shed almost three
quarters of its share price over the last five years,
ventured offshore aggressively. Expanding debt and
the impairment of R2.88bn intangible assets over the
past two fiscal years saw the company sell a chunk of
its business in Asia as well as its nutritionals division.
Impairment is accounting-speak for writing off an earlier
cash overpayment for an asset.
Woolworths’ misfortune in Australia, through its
subsidiary David Jones, cost shareholders almost a
quarter of the value of their investments from 2014.
Similarly, MTN’s struggles in Nigeria, among others,
saw shareholders lose more than 60% of their capital
since then.
“The execution of some of these international
expansion programmes, often funded via debt, has
had negative consequences for many SA companies,”
says Absa’s Koranteng. “This was driven by economic
concerns in SA and the desire to make these
companies global.”Local boom to bust
Not only overseas misadventures
hammered the JSE’s Top 40
stocks. Cheap credit five to
ten years ago spurred many
property developers and retailers
to expand. But the repo rate
increased from 5.75% five years
ago to a high of 7% in 2016.
It’s currently at 6.5%. Property
companies rely heavily on debt funding
to build new shopping malls and centres.
“The property sector was the darling of
the market five years ago,” says Investec’s
Van den Berg. “That changed dramatically
over the last 12 months.”
Growthpoint, the largest local real estate
investment trust (Reit), with a gross total property
portfolio worth R126.5bn, saw its share price decline
by more than 6% over the last five years. The company,
as an illustration of property stocks’ reliance on large
retail chains, took a R110m equity stake in beleaguered
clothing retailer Edcon during its last financial year and
wrote off R14m in a bid to keep the retailer’s brands
trading in its shopping centres and malls.
Van den Berg says the rollout of retail outlets across
South Africa over the past decade may have been tooaggressive. His view is supported by the fact that the
country has one of the highest numbers of shopping
centres in the world, according to the South African
Council of Shopping Centres. And the future lure of
shopping centres and malls is in jeopardy as online
shopping eats into sales of bricks-and-mortar shops.
In addition, the overhang of a poorly managed local
economy with lacklustre growth, a dearth of business
and consumer confidence and runaway unemployment
don’t bode well for property income.
“Lease renewals are negative,” says Van den Berg.
The fallout from, and unprecedented resolution
to, Edcon’s financial troubles prove how desperate
landlords, including some of the country’s largest Reits,
are to keep the cash flowing.Scandal!
Whereas Edcon’s travails, which affected retail investors
and pensioners through the owners of the retailer’s debt
and landlords of shopping centres and malls, were of an
honest miscalculation of the market and its ability to carry
debt, other large companies erred on a scandalous scale.
Even with the heralded King codes of good
governance guidelines and disclosure requirements in
place, some large listed companies managed to
blindside those trusting in SA Inc.’s ethics.
First it was Steinhoff. Then Tongaat-
Hulett, which said it wasn’t sure about
the veracity of its previous financial
statements. And it needed to
restructure its debt.
Then Microsoft said it no longer
wanted to do business with EOH, one
of the country’s largest IT companies.
The company fired some staff who
did business with government and went
silent about laying into reporters who asked
uncomfortable questions some time before.
Suddenly debt became an issue and Aspen
and fertiliser maker Omnia had to work hard in a
bid to salvage their balance sheets. And now, once
the jewel of industry in SA, Sasol doesn’t know
how much an American project will cost it. Sasol,
too, needs more time to release its financial statements.
“People have seen too many corporate scandals,”
says Van den Berg. “Investors are asking: Why should I
bear with this?”How do we turn on the lights?
The Top 40 is “a beautiful little index to invest in”, he says.
Broadly, it consists of three types of stocks: resources,
South Africa Inc. and global rand-hedge stocks.
The resource rally over the past two years hasShoppers exit an
Edgars fashion and
homeware store,
operated by Edcon
Holdings Ltd.