marketplace Simon says
30 finweek 19 March 2020 http://www.fin24.com/finweek
By Simon Brown
Simon’s
stock tips
Founder and director of investment
website JustOneLap.com, Simon
Brown, is finweek’s resident exper t
on the stock markets. In this column
he provides insight into recent
market developments.A gut kick
Sasol’s interim results through 31 December
were worse than expected, even as
management called it “satisfactory”. That’s
a gut kick to shareholders; some sense as to
the destruction of the share price wouldn’t
be amiss. Debt is higher than the market
cap, so dividends were skipped and won’t be
back soon. More pain was the downgrade of
their debt by Moody’s (S&P kept its rating
unchanged). In the immediate it’s moot,
but as debt rolls over they’ll potentially pay
higher costs. OPEC’s attempt in early March
to get Russia to cut production failed, so
Saudi Arabia (via oil company Saudi Aramco)
started an oil war with Russia, selling oil at
up to $10 under the market price. On
9 March oil fell 30% and Sasol lost almost
50%, with the share now back at 2004
levels. Sasol announced it has ethane and
rand hedges in place but no oil hedge – this
while every $1 annual oil move equals some
R840m move in earnings before interest and
tax. Adding to woes is the market that thinks
it needs a rights issue, which is likely, but at
this price? I also wonder if they’ll write down
some of the value of Lake Charles? Sasol is
in real trouble and while I think it’ll survive,
it’s going to be a horrid year or two.
SASOL
ASPEN PHARMACARE
Supply chain
risk rears head
SPUR
Spur’s interim results through 31 December
benefitted from the reversal of a black
empowerment deal. Even taking that into
account, the results were much better than
anybody could have hoped for. Headline
earnings per share (HEPS), after accounting
for special one-off items, were 14.6% higher
and the dividend increased 24%. Considering
the economic environment they operate in,
these are stellar results. Spur’s management
does, however, caution that it remains very
tough and there were some easier wins in
the previous year as they juggled with menus
and held down cost increases. Coupled with
the Shoprite results this shows that a good,
solid and well-run operation can extract
profits even in tough times. The issue is that
sustaining these great profits gets harder
and harder if the economy doesn’t start to
show some growth. Fortunately, the Budget
could be just the kicker that is needed. This is
especially the case for people earning below
R260 000 a year as they will take home
more money from April’s pay cheque due to
tax cuts. This extra money can go directly
into businesses such as Shoprite and Spur as
consumers spend their tax savings.Tax cut party
or not?
The challenge now is
to grow revenue and
that’s not going to
be easy.
Aspen’s interim results for the period ending
31 December were mostly flat with revenue the
exception – it was higher by a modest 3%. But
the key metric is debt and that is looking better
as the leverage ratio is now 3.5 times and bank
covenants are at 4 times. Furthermore, the sale
of the Japanese business was after the period
end and will further reduce debt. The challenge
now is to grow revenue and that’s not going
to be easy. In addition, the company runs the
risk of supply chain issues as the coronavirus
outbreak continues to shut down supply chains.VIVO
Morocco still
the concern
The retailer and distributor of Shell- and Engen-
branded fuels, Vivo Energy, posted decent
results for the 12 months through 31 December
with its diluted earnings per share flat and the
dividend down 14%. The company experienced
a squeeze on its gross cash unit margins while
its revenue increased by 11%. One of their
markets, Morocco, remains a concern for me as
King Mohammed VI still must rule on fuel price
regulation. That said, Morocco’s contribution
to earnings is reducing due to the Engen
acquisition. It, however, remains their largest
market and aggressive price regulation could
hurt the company. For now, this remains out of
their hands. However, I want this issue resolved
and its impact quantified before I’d consider
buying into the stock.