Local Macro
The big news in South Africa during the past week was undoubtedly the State of the Nation Address (SONA) delivered by president Cyril Ramaphosa. In the SONA the president announced the state of disaster to deal with the worsening electricity crisis and the establishment of an electricity minister. Cynical observers might be excused for believing that creating another ministry will just add another layer of cost without necessarily improving the parlous energy situation. Only time will tell.
But at this juncture, it is crystal clear that rotational power cuts aka load-shedding of this magnitude and frequency is intolerable and need to be brought under control. It is negatively affecting everyday life to such an extent that, if allowed to carry on much longer, will result in structural paralysis of the economy.
South African inflation edged down slightly in January to 6.9% year on year from 7.2% in December, but remains stubbornly high and still well outside the Monetary Policy Committee’s range of 3% to 6%. Fuel inflation moderated during the month while food inflation accelerated.
The National Budget on 22 February will contain provisions for tax incentives for rooftop solar arrays. In such a sunny country as South Africa, one can only wonder why such a provision has taken so long to be adopted but this is definitely a step in the right direction.
Global Macro
Global markets were in risk-off mode last week, as observers reckoned that the US Federal Reserve (The Fed) will keep interest rates higher in the US than they ought to be, thus keeping the USD stronger for longer. Emerging market currencies such as the ZAR continued to take strain against such a background.
US inflation eased marginally in January, to 6.4% year on year from 6.5%in December, highlighting the stubborn and stick nature of the problem in America. US unemployment has fallen to 3.4%, the lowest in over 50 years and the number of job vacancies remains elevated. The consensus among economists is now for 25 basis point hikes at the FOMC meetings in both March and May.
The UK’s dismal economic outlook continues, with the Bank of England confidently predicting last week that the UK’s pre-pandemic level of GDP will not be achieved until 2026.
Following the removal of lockdown measures in China as a result of the scrapping of the Zero-Covid policy a few weeks ago, consumer price inflation increased to 2.1% in January from 1.8% year on year in December and reflects a more “normal” spending pattern associated with the Chinese New Year celebrations. However, Chinese producer price inflation actually fell in January, falling by 0.8%, following a 0.7% contraction in December.
Featured Stock- Pick n Pay
Pick n Pay released a very sombre trading update last week, highlighting the impact that load-shedding is having on its operations. Inevitably, load shedding has disrupted customers, with some impact on turnover. Of greater consequence, however, are the substantial unplanned costs incurred in running localised power generation for stores.
Group sales for the first 10 months of the 2023 financial year (FY23), covering the 43-week period from 28 February 2022 to 25 December 2022, increased by 9.3%. South Africa's sales growth for this 10-month period was 9.0%, with like-for-like sales growth of 4.8%. The Group’s Rest of Africa segment increased sales for the 10-month period by 17.0% (9.0% on a constant currency basis).
Group sales for the first 17 weeks of H2FY23, covering the period 29 August 2022 to 25 December 2022 increased by 6.4%. South African sales growth for the 17-week period was 6.1% (2.0% like-for-like). The Group’s Rest of Africa segment sales increased by 15.8% for the 17-week period (10.0% on a constant currency basis).
Group clothing sales grew 11.0% for the first 10 months of FY23. Sales for the 17-week period grew 6.2%, ahead of peers in the value-fashion clothing segment. Importantly, sales in standalone clothing stores (i.e. excluding supermarkets where clothing sales were disrupted by CVP upgrades) grew 11.4% for the 17-week period. Group liquor sales for the 10 months period grew 22.7%, while sales for the 17-week period increased by 9.8%.
The Group previously guided the market to expect broadly flat FY23 earnings (against the FY22 proforma earnings base) and guided in its interim result in October that external headwinds, including unprecedented load shedding, would have an additional impact on the full-year result. There has been a further escalation in load shedding since then, resulting in additional cost pressure.
The bottom line for Pick n Pay is that earnings are likely to be materially lower when the group reports its full-year figures to end February in early May.
The share price took a major tumble on the trading update and is now trading at levels last seen almost a decade ago. There is little if anything that can be done about the electricity situation and it could hardly have happened at a worse time for Pick n Pay, as the group attempts to re-invent itself under new leadership.
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