SA Market News

Local Macro

The SA Reserve Bank’s monetary policy committee (MPC) hiked interest rates by 75 basis points on 24 November against a widely-expect 50 basis point hike. It is this clear from this action that governor Kganyago and his MPC are not yet convinced that interest rates in SA have peaked and so it is reasonable to concur that another hike of at least 25 basis points and perhaps even 50 basis points can be expected when the MPC next meets in January. 

The consumer economy in SA is taking major strain and already “Big Ticket” items such as property and motor vehicles are feeling the strain. Traditionally it takes some time before interest rate rises work their way through the economy, though at the current level, rates are now higher than they were prior to the onset of the coronavirus pandemic. 

At the MPC briefing, governor Kganyago gave his revised outlook for SA GDP over the next three years; 1.1% for 2023, 1.4% for 2024 and 1.5% for 2025. These are extremely poor growth rates and will do nothing to soften the scourge of unemployment in South Africa. And if anything, they may even be optimistic, depending on what happens with Eskom during the next few years. 

Talking of Eskom, it was announced last week that Eskom has more than exhausted its budget for diesel to operate its open-cycle gas turbine (OCGT) generators, which are used as an emergency back to avoid going into progressively higher stages of rotational power cuts (load shedding in Eskom-speak). Eskom’s year-end finished in end-March and the statement from Eskom suggested that no more diesel had been ordered for these OCGTs, nor would any more be ordered until 1 April 2023 at the earliest. This prompted a response from fellow state-owned enterprise PetroSA to the effect that it would supply Eskom with 50 million litres of diesel to operate the OCGTs. Fifty million litres sounds like a lot but to put that in context, it’s only about 15 days’ worth of operating supply at current usage levels.  State-owned enterprises minister Pravin Gordhan is actively seeking a longer-term solution to Eskom’s operations woes. 

Well-known energy consultant professor Anton Eberhard of UCT has warned that going without diesel-powered OCGT backup greatly increases the possibility of a collapse of the entire electricity grid, something that is so horrendous that it doesn’t even bear thinking about. There have been regional blackouts in many countries of the world that have lasted a few hours or a few days maximum but if SA’s highly integrated electrical grid were to trip out sufficiently badly, it could theoretically take weeks to bring it back up again. Continuous load shedding is something that hard-pressed South Africans are just going to have to get used to for many more years in the absence of an elegant and practical solution.   

Fitch Rating, the smallest of the international ratings agencies, has affirmed South Africa's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB-' with a Stable Outlook. In its narrative, it says that South Africa's 'BB-' IDR is “constrained by high and still rising government debt, low trend growth and high inequality that will continue to complicate fiscal consolidation. The ratings are supported by a favourable debt structure with long maturities and denominated mostly in local currency as well as a credible monetary policy framework.” Fitch doesn’t pull its punches when talking about the impact of electricity supply either; “We expect GDP growth to slow from 1.6% in 2022 to 1.1% in 2023, on the back of weakening global growth and monetary tightening and fading support from post-pandemic re-opening, with only a mild recovery to 1.7% in 2024. Our forecasts assume that power shortages, which according to the South African Reserve Bank estimates held back growth this year by 1pp, will not significantly improve next year and will ease only gradually in 2024. While substantial investments in increasing generation capacity are underway, there is a risk that the power supply imbalances deteriorate further with escalating effects on growth.”

Global Macro

Rising protests against Covid restrictions in China are becoming much more common, as the Chinese Communist Party (CCP) refuses to budge on its zero-Covid response to the pandemic. Chinese vaccines are not especially effective against the latest strains of the Omicron variant and the CCP refuses to order western mRNA vaccines such as those made by Pfizer/Biotech and Moderna. Additionally, respiratory illnesses are especially common in China, especially among the elderly, where a culture of cigarette smoking is still the norm. Heavy pollution doesn’t help the situation either. So it’s difficult to see how this ends but it is definitely hampering economic growth throughout China.

The Iranian theocracy is struggling to keep a lid on internal protests in Iran. These protests have been going on for months now with no relief in sight and the regime may be on the verge of taking the level of violence up a notch or two as it ponders the possibility of sending in the army to crush dissent. At least 400 people have been killed in the violence that erupted a couple of months ago and it’s not just the usual suspects in a popular uprising that are causing headaches for the mullahs; well-trained and equipped Kurds, based in neighbouring Iraq, are smuggling weapons into Iran. The Iranian regime is pressing ahead with the enrichment of uranium and threatening to make it of weapons-grade quality. And all the while, Iran is losing friends in the region as it presses ahead with its bellicose response to requests for improvements to human rights. 

The oil price, as proxied by Brent crude, continues to drift lower, weighed down by concerns over an impending global recession and greatly reduced demand out of China as the CCP refuses to compromise on its zero-Covid approach. At current levels, the oil price is back where it was prior to the outbreak of the war in Ukraine.



Featured Stock

TFG

TFG, more commonly referred to as Foschini, turned in an outstanding interim result to end September 2022. It beat all of its rivals in the low-end clothing, footwear, textiles and leather (CFTL) category, including Mr Price.  Significant market share gains were made in South Africa has been producing great results for the past couple of years now and yet it barely trades at 50% of its peak from four years ago. 

For the six months to end September 2022, group retail turnover rose by 23.5% to R23.5 billion. Online retail turnover rose by 2.6% to R2.1 billion. There was strong cash retail turnover growth of 25.5%, contributing 80.4% to total group retail turnover. Segmentally, TFG Africa remained the largest single contributor to group retail turnover at 65.2%, followed by TFG Australia at 19.5% and TFG London at 14.9%. Market share gains were recorded in SA again. 

Gross profit rose by 24.8% to R11.6 billion. Headline earnings per share (HEPS) rose by 18.1% to 464.6c and a 170c dividend per share was declared, the same as at the interim stage in 2021. 

There are few if any South African retail stocks that have prospered in Australia but TFG is definitely one of them. It’s a simple formula for success in that country; their merchandise appeals to young, upwardly mobile Australians in employment, who usually don’t own property and who don’t mind spending their money on clothing to look good. Even in a significantly higher interest rate environment, these consumers will probably keep on spending as they won’t be burdened with ever-increasing mortgage costs. 

On a PE ratio of 9.9 times, the TFG share price is not expensive, especially considering its strong growth prospects. 



JSE Top and Bottom 5
 

Top 5	%
Indluplace Properties Ltd (ILU)	19.55
Huge Group Ltd (HUG)	14.16
Stefanutti Stock Holdings Ltd (SSK)	13.21
Quantum Foods Holdings Ltd (QFH)	12.39
Choppies Enterprises Ltd (CHP)	10.98
Bottom 5	%
Visual International Holdings Ltd (VIS)	-33.33
Datatec Ltd (DTC)	-28.77
Montauk Renewables Inc (MKR)	-9.10
Novus Holdings Ltd (NVS)	-7.86
SAB Zenzele Kabili (SZK)	-6.45