Opinionista Stephen Gunnion 25 October 2020

Business Highlights of the Week: JSE, Pick n Pay, SA Inc

Everyone loves a dig at the JSE. Well, at least most of the fund managers and managers I follow on Twitter do, anyway. It was, until not long ago, a monopoly. And that made it a price maker rather than a price taker.

First published in Daily Maverick 168

Thanks to its position of strength, the JSE has been accused of arrogance.

So, news of gases group Afrox’s likely delisting from the exchange if a buyout by controlling shareholder Linde goes ahead (which it almost certainly will) has reignited a debate on its relevance in a market where investors have a much broader investment choice than ever before.

Thanks to online share trading sites, you can now easily buy stocks on other exchanges, like the New York Stock Exchange (NYSE). But guess what? They’re losing listings too. When companies are perceived as too cheap, which many are as a result of the uncertainty introduced by Covid-19, it presents an opportunity for their founders and big shareholders, often backed by private equity funds, to take them private again.

Global investors also have more choice. Herenya Capital Advisors says China is crowding out the exchange-traded fund space, causing SA’s weighting to decline in these indices and contributing to reduced liquidity in the local market. Many SA shares are also available on other markets, so global investors don’t have to buy them here.

Owing to poor liquidity in a large number of shares, Herenya says shareholders and big fund managers can’t buy and sell shares as easily as they need to, making them less valuable and easier takeout targets by dominant shareholders. With diminished value, equity raising becomes an expensive option.

Afrox will add to a list of 17 other companies that have left the JSE in 2020, some with no choice, like Intu Properties after it failed to convince creditors to back a debt restructuring. Others include construction groups Group Five and Esor, financial services companies Peregrine and Efficient Group, and mining holding company Assore. While you’d hope that delistings would be countered by new listings, that hasn’t been the case. The JSE’s Patrycja Kula-Verster says that amid the Covid-19 pandemic most listing plans have been shelved. So far, 2020 has seen just four new listings, mostly of exchange-traded funds. New listings on the NYSE have also been overtaken by delistings.

Amid a downturn for some companies, Kula-Verster says it may present a prime opportunity to effect a change in strategy. She says it’s a cyclical trend, but it also cuts off a company’s ability to raise equity capital, one of the main reasons for listing.

The JSE says it’s actively engaging with companies listed on the exchange to address their concerns. However, it says delisting is very often a strategic decision based on the fundamentals of a business, a change in strategic direction or other factors outside its control.

Sure, markets are changing just like everything else. As Herenya puts it, the JSE is not becoming irrelevant, maybe just less relevant.

The death of SA Inc may have been greatly exaggerated

There may still be life left in a number of those so-called SA Inc shares, those companies fully exposed to the local economy. Sharp rises this week in the share prices of a number of them show that the market may have underestimated their ability to weather the impact of Covid-19 on an economy that was already on its knees.

Take Long4Life, for example. Investors were pre-warned that first-half profit was obliterated by the Covid-19 lockdown, as it closed the doors to its Sorbet beauty salons and its Sportsmans Warehouse and Outdoor Warehouse outlets. The ban on alcohol sales meant the Fitch & Leedes tonic water sold by its Chill Beverages unit had no gin to accompany it. So why the 13% jump in its share price when it released its results on Tuesday?

First of all, it has money. It’s a cash-generative company and ended August with R821-million in the bank and no debt. Unlike many of its JSE peers, it entered the pandemic with a strong balance sheet and it kept a close watch on cash flows during the lockdown, helping it eke out a tiny profit.

It’s also optimistic about its prospects after using the lockdown to ensure its businesses emerged stronger and positioned to take advantage of the “new norm”, as CEO Brian Joffe refers to it. Its Sports & Recreation brands are benefiting from more people holidaying locally and exercising at home rather than at a gym. With alcohol back on the table, Chill Beverages is looking at adding alcoholic beverages to its mixers range.

After spending R114-million buying back its own shares over the past six months, it plans to continue the repurchase, as its shares are worth much less than the value of its assets. 

While Long4Life says sales at its retail businesses are back to pre-Covid levels, Libstar has been supported by retail trade this year, as the closure of restaurants resulted in increased buying of brands that include Denny mushrooms, Lancewood cheeses and Cape Herb & Spice at supermarkets. With the food-service industry back in business, it’s seeing a recovery in sales to that too. It reported a strong rise in third-quarter revenue this week, also helped by strong demand for its spices and condiments from markets including the US and Japan. 

Cashbuild’s shares are actually positive for the year, up by a few percent after a 7% rally on Tuesday. Sales have recovered strongly since it reopened the stores that were shuttered at the height of the lockdown. It’s also expanding, adding more of its own Cashbuild and P&L Hardware outlets to the 160 outlets it’s acquiring after buying The Building Company from Pepkor in August. Maybe South Africans are also turning to DIY projects in lieu of overseas holidays.

While investors remain focused on larger companies, particularly those with hard-currency offshore earnings, perhaps more value can be found closer to home. 

Pick n Pay lines up Bottles

The big retailers all claim to be gaining market share. What’s unclear is at whose expense. While Shoprite consistently reports a growing slice of the local grocery market, Pick n Pay this week said it too was making gains, but it seems those are mostly at its Boxer stores targeting middle- to lower-income shoppers. Where it has seen a big gain is in online sales, which doubled over the six months up till the end of August. And they could continue accelerating.

Pick n Pay has bought Bottles after partnering with the alcohol on-demand delivery app in 2018. When alcohol sales were banned in March, Bottles repurposed its app, emerging with a new offer to deliver essential groceries. That was good for Pick n Pay during the lockdown, as more customers did their shopping from the safety of their homes, with many likely to continue doing so.

Equites, a property fund that specialises in logistics properties and warehouses – including those servicing the retail market – says research suggests online sales could reach 5% of total sales in 2020 from just 1.4% the previous year. SA is a late starter compared with countries like the UK, where internet sales account for a quarter of the total. 

Perhaps Pick n Pay’s latest purchase will help it even the score with Shoprite. DM168


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