First published in the Daily Maverick 168 weekly newspaper.

Truworths set the ball rolling with a trading update after the market closed last Friday. Its shares rose a whopping 15% on Monday. The Foschini Group (TFG), owner of chains that include Markhams, Sportscene, Totalsports and @home, among others, followed through on Tuesday with a similarly resilient performance from its SA operations. Their shares continued to rise.

Though their updates could hardly be described as good, they were certainly less bad than expected. Ironically, it’s their local operations that have cushioned them from the ongoing impact of Covid-19 on their global businesses – that is the benefit of diversification. Offshore, it was a different story, with ongoing lockdown restrictions in the UK obliterating store sales but pushing more customers online.

Truworths’s local sales fell 6.8% for the six months up to Christmas. Office, which it bought for £256-million in 2015 to diversify its business and bring in foreign currency revenue, reported a 13% decline in sales. It is now planning another impairment of its investment in the UK shoe store chain, which means earnings per share for the period will be down by as much as 19% while headline earnings per share, which exclude the impairment, will be 4% to 9% lower. Not a great outcome, but probably not the disaster that some were expecting.

With nowhere to go, UK customers aren’t spending as much on Office’s shoes. They’re also not doing as much shopping – online or otherwise – at TFG’s UK clothing chains, which cater very much to the office and social wear markets.  

Again, TFG’s local operations saved the day, with turnover for the three months to end-December rising by 14.7%, boosted by its acquisition of Jet in September. Excluding Jet, it was marginally lower. Its Australian stores grew turnover by 0.4% over the same period, despite some localised lockdowns. UK turnover sank 41%.

Last year’s interest rate cuts have no doubt helped our retailers, particularly those selling on credit. Consumers are also spending less on travel and entertainment. And the alcohol ban is also, no doubt, diverting spending. But jobs have been lost and the state has run out of cash to continue providing relief to those affected by the pandemic. Perhaps it was the stark reality of the situation that led to investors taking some money back off the table, resulting in a big pullback in retailers’ shares on Wednesday. Even so, Truworths and TFG were still well up for the week and Mr Price and Pepkor were also positive. Considering last year’s declines, which saw TFG shedding a third of its value and Truworths and Pepkor both falling by about a quarter,  the recovery doesn’t seem unreasonable. 

M&R fends off foul play in the Middle East

Murray & Roberts’ recent run of good fortune came to a halt this week after it revealed a sizable claim against a project it completed 18 months ago. It has also highlighted the risk that comes with investing in the construction sector, which is highly competitive with tiny margins and, it turns out, a dirty game. M&R’s shares have been on the rise, helped by a number of big contracts won by its Clough unit in Australia. The company has reinvented itself as a specialist engineering and construction group over the past few years, using its refocused strategy as a reason to fend off a hostile takeover bid by its biggest shareholder, ATON, two years ago.

So far, so good. But after scaling to a 10-month high last week, M&R’s shares toppled more than 6% between Monday and Tuesday after it confirmed Musanada, a former client in the Middle East, had drawn down on two guarantees that were issued by a Dubai-based bank over the Al Mafraq Hospital project in Abu Dhabi that a joint venture between its local subsidiary and construction company Habtoor Leighton Group built, fitted out, equipped and handed over last July. It wasn’t entirely unexpected: Musanada had warned of its plans in the same month as the handover. At the time, M&R said the claim was unlikely to be successful. But the bank didn’t see it that way, paying out Musanada without formal warning and sending the joint venture’s bank account into overdraft. As a 30% partner in the venture, M&R’s share of the bonds amounts to about R650-million at current exchange rates. It says the instruction by the client was an act of bad faith and was therefore unlawful. It’s also still owed money by the client, which has been backed up by the opinion of a third-party expert.

M&R insists that there was no problem with its performance on the project. The handover was behind schedule, but it was substantially the fault of the client and the hospital has been in use for more than a year now. It didn’t name Musanada in its SENS announcement this week, hoping that the joint venture’s claim against the client – and the call on the bonds – would be settled amicably. That may have been optimistic. It has now placed the bank on formal notice that it will resist a call against its parent-company guarantees over the bond securities and says it will also pursue its defences in court.

Group Five ran into a similar problem with a project to build a power plant in Ghana a few years ago, resulting in claims and counterclaims – which may have contributed to the construction and infrastructure group’s eventual demise.  

Although M&R doesn’t expect the pay-out of the guarantees to have any impact on its income statement, nor any direct cash flow implications, it is an unwelcome distraction for the company as it wraps up its business in the Middle East.  

What’s PSG’s next trick?

The discount that PSG Group trades at relative to the value of its underlying investments stubbornly refuses to narrow despite the efforts of the investment holding company to realise more value for its shareholders. Last year’s unbundling of most of its stake in Capitec has had little effect. In fact, numbers released this week show that the discount is wider today than it was a year ago.

It’s a problem that Naspers also faces, with the unbundling of its global consumer internet business Prosus failing to significantly narrow its investment holding company discount. Like Naspers and Prosus, PSG has also embarked on a share buyback programme.

The company says it may buy back up to 20% of its shares, the maximum allowed in any given year by the JSE, after repurchasing just more than 3% since August. It bought them as low as R43.97, when the discount was at its widest. But, even at R60.50 on Tuesday, the discount to the sum-of-the-parts (SOTP) of its underlying investments was still 35%. Last February, before the Capitec unbundling, it sat at a 32.5% discount to its SOTP value per share of R276.43 at the time. Whether the share repurchases do the trick or not, it makes sense to buy back cheap shares with any spare cash.

However, the unbundling or liquidation of other investments has also been mooted by analysts. Its biggest holdings in financial services group PSG Konsult and private schools group Curro look pretty solid.

Zeder, on the other hand, appears to be a value trap. Anthony Clark of Smalltalk Daily Research has long called for the breakup of the agribusiness, particularly after last year’s sale of its stakes in Pioneer Food Group and Quantum Foods. It too trades at a big discount to its investments and cash that it holds – about 35%.

It might just be what PSG needs to reinvigorate its portfolio and narrow the discount. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores.