The Finance Ghost: Reasons to be cautious about the near-term credit cycle

The Finance Ghost: Reasons to be cautious about the near-term credit cycle
From left: An automated teller machine in Pretoria, South Africa, on 23 September 2020. (Photo: Waldo Swiegers / Bloomberg via Getty Images) | Unsplash | A Mr Price Store in Westgate shopping centre on 27 May 2020 in Johannesburg, South Africa. (Photo: Gallo Images / Papi Morake)

Two major banks have released updates this week, proving the point that I’ve made multiple times before about the usefulness of a high inflation and interest rate environment for money lenders. Combine that with the fact that the lights are suddenly staying on for longer and you have a recipe for a juicy jump in headline earnings per share (Heps).

Those who were smart enough to buy during the recent dip are now smiling literally all the way to the bank, but there is reason to be cautious about the near-term credit cycle.

FirstRand has shown solid performance despite a weak macroeconomic environment. It predicts a 0.1% contraction in GDP this year and anticipates further interest rate hikes. However, it maintains its expectations for full-year earnings and return on equity, aiming for a return on equity within the range of 18% to 22%.

The group has benefited from higher rates and a strong net interest margin, as it has prioritised quality lending opportunities over growth in recent years.

In the blue corner, we have the latest set of results from Standard Bank. With record revenue growth of more than 20% in the five months to May 2023, the top-line story is exciting. Costs also seem to be better managed than at FirstRand.

The trouble at Standard Bank is that the credit quality isn’t on a par with FirstRand. The credit loss ratio is running hot, particularly in retail and business clients. Corporate clients are helping to maintain an acceptable credit loss ratio overall. FirstRand doesn’t break it down to this level of detail, but the overall mood is one of lower credit quality at Standard Bank. 

Dark days for Mr Price

Having focused on major acquisitions in recent years, it seems as though Mr Price has forgotten about its core value proposition. With increasing levels of competition in value clothing retail, this isn’t a smart idea. The group was caught napping with load shedding over the festive period, with a woefully underprepared store base in terms of backup energy.

Even cheap clothes don’t sell very well in the dark, particularly when the lights are on at other stores in the same mall. When you operate in a tough environment, customers vote with their feet.

This is why Heps fell by 6% in the year ended 1 April 2023. 

Did Novus take all the pain this year?

With plenty of pressure on the printing industry, Novus has had to look for new revenue sources to secure the future of the business. There are good news stories in the packaging business and a contract from the Department of Basic Education to print school workbooks, but the major focus has been the acquisition of Pearson South Africa (now called Maskew Miller Learning) in November 2022.

With flat growth excluding the acquisition and the flexible packaging solutions business carrying this group, all eyes will be on the Pearson deal and how that plays out. It raised R500-million in debt for the deal and acquired R206-million in cash from the business, so the impact on net debt is manageable, provided the business performs.

Because the acquisition closed in a seasonally slow period for the textbook business, the accounting costs of the deal outweighed the operating profit contribution. In other words, Pearson was loss-making to Novus in this period.

This coming year is what counts. The print division needs to try to reduce its operating loss of R23.7-million. The packaging segment needs to build off its base of a profit of R61.6-million. Pearson/Maskew Miller needs to show the market why Novus has taken a big bet on this business.

With a strong cash balance despite the acquisition, Novus is in decent shape to weather the storm. I suspect we will see major year-on-year growth numbers in the coming period. DM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.


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