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Loadshedding vs weaker Rand puts SARB in difficult position on rates

Carl Capolingua Carl Capolingua 25/05/2023
Loadshedding vs weaker Rand puts SARB in difficult position on rates Loadshedding vs weaker Rand puts SARB in difficult position on rates
Loadshedding vs weaker Rand puts SARB in difficult position on rates Carl Capolingua

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Local Macro 

Two stories dominated headlines in South Africa during the past two weeks; the ongoing Eskom saga and the controversy surrounding the docking of the sanctioned Russian cargo ship Lady R in Simonstown naval dockyard in December last year.  

Ever since former Eskom CEO Andre de Ruyter left his position, Eskom commentators have been wondering how much of Eskom’s problems related to the personality of de Ruyter himself. Many people thought that de Ruyter was the stumbling block to progress and that with him out of the way, Eskom would somehow come right and loadshedding would diminish. Unfortunately that hasn’t happened and loadshedding is as bad as it ever was. And there is no consistency of information from government about when loadshedding might decrease in intensity or stop altogether. ANC secretary-General Fikile Mbalula said on TV last week that loadshedding would stop at the end of 2023. But minister of electricity Kgosientso Ramokgopa said that this is highly unlikely and that loadshedding is going to be a feature of the South African environment for the foreseeable future.  

Who is right doesn’t really matter; the damage has been done. The next few months are forecast to be really tough from a loadshedding perspective, with the likelihood of at least stage 8 loadshedding, if not higher. This has ramifications for GDP; any growth however small that was anticipated this year will likely be wiped out by such high sustained levels of loadshedding. Q1 GDP figures will be released nu June 6.  

The other news dominating headlines in the SA media this past fortnight was the curious case of the Lady R, a sanctioned Russian cargo ship that was tracked all the way down the west coast of Africa by the US state Department until it turned off its transponder and docked in the naval base at Simonstown near Cape Town. The US ambassador to SA, Reuben E. Brigety publicly alleged that South Africa had loaded ammunition and armaments onto the Lady R while it was docked in Simonstown.

Brigety was so confident in his assertion that he said he would bet his life that such a consignment was loaded onto the ship without giving any details for his confidence. The South African Department of International Relations offered a half-hearted denial and hauled the ambassador over the coals for his non-diplomatic behaviour. Brigety apologised for breaching diplomatic protocols but maintained his assertion that weaponry was loaded on to the ship. President Cyril Ramaphosa has ordered a commission of enquiry into the affair.  

April’s CPI figure came in at 6.8% against March’s 7.1%. Normally this would have resulted in the SARB/MPC just hiking rates by 25 basis points but the repo rate is likely to rise by 50 basis points instead of 25 basis points in response to the poor economic situation, notably the very weak level of the ZAR. A number of analysts have pointed out that there is a strong correclaton between the levels of loadshedding and the ZAR/USD exchange rate; as loadshedding intensified, so the ZAR/USD rate weakens and vice versa. Thus it seems likely that the SARB, realising that loadshedding is here to stay for the foreseeable future, will raise rates to protect the external value of the rand.    

Retail sales figures for March 2023 were disappointing, with food retail sales down considerably. Many people are electing to use takeaway rather than cooking at home, due to the high incidence of loadshedding. However, Clothing, footwear, textiles and leather (CFTL) sales remain strong. Total retail sales at constant 2019 prices declined by 1.6%, the fourth consecutive monthly decline. 

Year on Year growth in SA retail sales
Source: StatsSA, Gilmour Research; click on image to enlarge 

CFTL & F&H YoY Δ%25
Source StatsSA; Gilmour Research; click on image to enlarge

Furniture and Household sales (F&H) have been in negative territory for the past four months. Meanwhile, home improvement sales, as proxied by the Hardware, paint & glass category, continued its show dismal year on year decline in sales. However, it may be troughing, as shown in the accompanying graph. This is relevant to shares such as Cashbuild and Italtile in the home improment/DIY space.  

Hardware, Paint & Glass Δ%25
Source StatsSA, Gilmour Research; click on image to enlarge 

Global Macro 

According to Reuters, US consumer spending appears to have increased solidly in April, with households boosting purchases at online retailers as well as spending more at restaurants and bars, which are traditionally seen as being signs of resilience in the face of growing headwinds to the economy. 

The economy's improving fortunes were further bolstered by other data last week showing factory production surged last month. Homebuilder sentiment also increased to a 10-month high in May. The data added to strong job growth in April, suggesting that the economy was experiencing a revival after activity slowed in February and March. 

The ZEW Indicator of Economic Sentiment for Germany recorded a significant decline in the current May 2023 survey. At minus 10.7 points, it is 14.8 points below the previous month’s value. This means that for the first time since December 2022, the ZEW Indicator is back in negative territory. The assessment of the economic situation in Germany also decreased. The corresponding indicator lost 2.3 points and now stands at a new value of minus 34.8 points. 

Japanese GDP grew by 0.4% in Q1 compared with a consensus forecast of just 0.2%, helped by a recovery in inbound tourism after Sars_CoV-2 pandemic border restrictions were lifted. 

The world's third-largest economy fully reopened its borders to foreign tourists in October last year following two-and-a-half years of Covid restrictions that largely killed the economy. Nearly five million visitors visited Japan in Q1, although that is still some way off the record eight million visitors the country experienced in Q1 2019.

Featured Stock: Clicks

The Clicks share price is approximately 20% lower than at its peak in late October 2022. Since then, headline earnings per share (HEPS) has largely gone sideways, but the weakness in the share price probably has more to do with its being perceived to be over-priced than anything else. Clicks has been an expensive share for many years an has confounded its critics by just going higher even though earnings growth has been far from exciting.  

Even after its recent decline, the share is still trading on an historic PE ratio of 23.7x, which is expensive in anyone’s terms.   It remains the most expensive retail stock by far, with no apparent justification for such a rarefied rating. What has kept the Clicks share price so expensive over a number of years has been its ability to produce consistent, if somewhat boring earnings and dividends. But investors like boring and hate nasty surprises. And so there remains the possibility that the Clicks share price will recover over time, but it will probably require a more conducive economy and equity market for that to happen.  

Coinciding with this fall in the share price has been a noticeable weakness in retail sales figures from Statistics SA relating to pharmaceuticals and medical supplies, cosmetics and toiletries. This category of retail spending has always been perceived to be fairly resilient and defensive and yet low single digit year on year declines in sales have been apparent every month for the past few months. As the leading pharmaceutical retailer and distributor, Clicks (and UPD, its distribution arm) has been reflecting this. It’s perhaps not surprising that, as the Sars-CoV-2 pandemic’s impact continues to recede, both retail and whole pharmaceutical demand has fallen.  

Pharma Sales Year on Year Δ%25
Source StatsSA, Gilmour Research; click on image to enlarge

For the six months to end February 2023, group turnover rose by 6.8%, although if the impact of vaccines is removed, turnover only increased by 2.3%. This was achieved on an increase of 7.5% in floor space.  Headline HEPS rose by 1.1% to 472.2c and a dividend of 185 cents per share was declared, an increase of 2.8%.  

Retail sales grew by 11.9%, excluding vaccinations, with like for like sales rising by 8% on volume growth of a fairly low 1.7%. The store estate now stands at 861 stores, with a net new 18 stores added during the first half. 691 of these stores now have pharmacies, with 18 new pharmacies being address in the interim. 

Like other retailers, Clicks was affected by loadshedding and incurred R9 million in diesel costs to run generators required to keep its stores operating. While an unwelcome, it pales into insignificance beside the hundreds of millions of rands incurred by Pick n Pay and Shoprite on diesel. Clicks doesn’t have refrigerators that use up a lot of electricity, hence their diesel requirements are much lower than those of the large supermarket chains.  

clicks cls jse chart and technical analysis
click to enlarge image

The Clicks chart shows clear short -and long-term downtrends (light and dark pink ribbons). Both trends appear to be accelerating indicating excess supply of Clicks shares is growing. This technical pattern generally indicates a poor outlook for a company's stock price going forward.

Clearly, investors are finding few reasons to invest their cash into the stock, and those who own the stock are increasingly trying to get out - even if that means offering lower and lower prices to do so.

The price action shows lower peaks and lower troughs which again confirms an environment of excess supply of Clicks shares, as does the prevalence of candles which exhibit black bodies and upward pointing shadows.

All indications from the technicals suggest the Clicks stock price may trend lower in the short-to-medium term.

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Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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