finweek 23 July 2021 by New Media B2B

POLITICS

OPINION

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THE COST OF THE FUTURE OF RIOTS TO SA’S THE WINE ECONOMY INDUSTRY

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from the editor

JACO VISSER

he story of destruction and renewal is as old as the human race. In Nordic mythology, it is known as Ragnarok. It’s the moment that all the ice and fire giants (let’s refer to them as scoundrels) unite against the gods (the good guys) and go head to head in the biggest battle ever. The end result of Ragnarok is that the world is under water. When the water recedes, there are only two people left who repopulate the world. We also see this destruction and renewal in the Biblical tale of Noah where the whole planet is under water and then repopulated by a handful of chosen ones – with the aim of less sinfulness. If we move from mythology to history, there are many examples of devastation and renewal – it basically comes down to the saying that things must first go badly before they can improve. What makes history tougher than mythology is that human lives were usually lost in this process of destruction and renewal. We can think of the religious wars in Europe between the 15th and 16th century, and the uprisings in Western Europe in the 1860s, which ultimately led to the establishment of the welfare state. We can also think of the devastation caused by the apartheid junta in South Africa at the end of the 1980s, with the concomitant bloodshed, which led to the democratic system in the mid-1990s. In my humble opinion, we here in South Africa are experiencing such torment – even though it may be on a far smaller scale than in the 1980s. In this case, the ice and fire giants are the corrupt politicians with their greed, who has robbed South Africans of their dreams and opportunities since 1994. This cabal, led by former president Jacob Zuma and his lieutenants, have come up against the honesty and support of the constitutional system of most South Africans. Zuma can now finally be called a criminal. He has been convicted by the highest court in the country and is now firmly incarcerated. The cabal is busy disintegrating. And it’s this disintegration of patronage – where dirty money and links with corrupt leaders were the norm – that is now playing out in the streets of our country. With a liberal dose of criminal opportunism that goes hand in hand with the protests to free Zuma the criminal, it’s now critical that government fulfil its side of the social contract. This contract, among other things, includes that citizens of this country surrender their absolute freedom (to, for example, take the law into their own hands) in exchange for protection from the state (by means of the police and the courts). Ragnarok should now be carried into effect, in other words, members of this cabal must answer for their deeds through the justice system. However, it’s not only the leaders of this cabal that should be held responsible – there is currently a small window of opportunity for government to address the real problem. President Cyril Ramaphosa was quite correct when he asked for calm on 12 July: unemployment and poverty should be addressed. It makes one think of the end of the epic Raka where poet NP van Wyk Louw writes about the fearful women and children being driven out of their huts after the “cunning animal” has taken over their society: “hunger and thirst, those two, the slave drivers”. Contrary to what happens in Raka, where hope for a recovery to order is driven by the basic need for food and water, the current opportunistic protests and looting in South Africa are fuelled by the uncertainty of having a plate of food on the table tonight. Experts and academics have been warning for years that social unrest is brewing in SA owing to the fault lines of poverty, unemployment and income disparity. For years the Zuma cabal did nothing in this regard and enriched themselves. And now, under a new and more reform-minded administration, the chickens are running home to roost. Our government should reflect deeply on the state of the social contract between itself and SA’s citizens. Security of lives and property should now be prioritised. And then, at the speed of light, it should become easier for the private sector to create jobs. Luckily, in contrast to Ragnarok and Noah’s flood, people in this situation can talk to one another to avoid the inevitable. South Africans have always been good people. ■ 4

finweek 23 July 2021

contents Opinion

5 The future of a very old industry 6 Is Ramaphosa winning the race?

In brief

8 News in numbers 10 Living spaces for wealthy buyers after the pandemic 12 Calderon at the helm of AngloGold Ashanti 14 Sugar industry sets its sights on production of bio-jet fuel 15 Zuma’s sentence: too small a step

Marketplace

16 Fund in Focus: Ninety One Property Equity Fund 17 House View: Satrix China ETF, Transaction Capital 18 Killer Trade: Naspers 19 Invest DIY: Explaining the base effect 20 Simon Says: Didi Chuxing, EOH, Etion, Invicta, MultiChoice, Nedbank, Quantum Foods, Senwes, trade, US interest rates 22 Markets: The wealthy get richer even when governments ‘clamp’ down 23 Investment: How much do you need to save to retire comfortably? 24 Invest DIY: What to do with your portfolio when you die or become incapacitated 25 Investment: Constellation Software knows how to allocate capital 26 Investment: Economic outlook: The trends to be watching out for

Cover

28 The property market: Moving with the times

In depth

38 Looting following Zuma’s arrest raises SA’s risk premium 41 The construction sector is gearing up

On the money

44 Management: Navigate office dynamics in the hybrid workplace 46 Piker, quiz and crossword www.fin24.com/finweek

By Johan Fourie

opinion

XXXXXXXXXXXXXX TECHNOLOGY

The future of a very old industry

South Africa’s wine producers are struggling. How will they adapt?

o a quick Google search, and you will discover that wine What explains this? And what can prevent a further decline? is one of the oldest industries on earth. A 2017 study “This fall is due to financial reasons. It is more profitable to farm by a team of archaeologists found evidence of winewith products like lemons and plums and many traditional wine making in Tbilisi, Georgia almost 8 000 years ago. farmers choose the more profitable option. The consumer is used to To put that in perspective, it is almost 2 000 years before humans a certain price bracket for wine and is not willing to pay much more. domesticated horses, 2 600 years before we invented writing and 3 Inflation is a serious concern. It impacts heavily on the producer. 300 years before we built the first pyramid. What is more, Georgian Over the years, producers tried to get better yield to ensure better winemakers today use largely the same tools and methods as their profitability but at some stage yield affects quality. Most vineyards ancestors eight millennia ago. are already producing double what they were ten, 15 years ago. But Hein Koegelenberg is CEO of La Motte Wine Estate, where the we cannot push it any further. Inflation also makes SA producers French Huguenot Gabriël du Toit planted the first vines in 1752. Why, less competitive compared with our international counterparts.” I asked Koegelenberg, do we associate wine with Higher yields have indeed allowed producers timelessness? “Much of wine’s romance lies in to increase output. Between 2005 and 2019, its age. Wine is predominantly vintage-specific. exports increased by 153%. One reason, a new Each year has a unique character depending on study by a team of SA economists suggests, the growing conditions. This sense of history, is that SA wines increasingly use geographical together with the fact that it is somewhat indicators (GI) as value proposition. “Protected unpredictable, add to the mystique.” wine GI names command higher prices, given But South Africa’s wine industry is struggling. that some consumers may be interested in Covid-19, lockdowns and alcohol bans – again buying wine of a specific origin or quality imposed as SA moved to lockdown level 4 attributes unlike the other standard wines.” in July – have hurt sales. There are obvious Koegelenberg also sees SA’s geography as consequences in the short run. Says Koegelenberg: “Whether people an advantage: “What makes SA the most exciting wine area in the lost their jobs, had to close businesses or just because of a general world is our diversity and the fact that there are still many pockets sensibility when it comes to spending, Covid-19 has definitely of excellence to discover. We know about certain areas and climates resulted in people buying less expensive products. At the same time, working better for certain varieties, but there are still many more we because of the ban on alcohol sales, wine cellars face an can explore. Places like Stellenbosch and Franschhoek are oversupply. Some premium brands offer discounts reshuffling as these former small towns grow bigger. they would not have done before and this, in turn, While the traditional way of wine grape farming affects the medium ranges. This might be a might be influenced by this, I think technology temporary tendency, but it still affects the such as satellite mapping opens a whole new market.” world to the wine industry. We might soon be I ask him whether there has also been farming in a way that is smarter and more a noticeable change on the demand-side, competitive.” for example a change in consumers’ taste It seems almost an oxymoron to use or preferences as they now consume more technology and this ancient industry in wine at home? the same sentence. Where to next for “I don’t necessarily think the consumer wine? “While there are constant changes to preference has changed. I think the consumer winemaking technology, the online space is profile has changed. There is a new category the most exciting technological advance for of wine drinker that might know less about wine, wine. It is about understanding online behaviour who takes wine less seriously, but who is focused and how wine as a category manages to make on the brand. The challenge for the wine industry the most of it. Covid-19 has opened the online world Hein Koegelenberg is to connect with this new consumer. Winemakers and for wine – from shopping to virtual experiences – and we CEO of La Motte wine people often focus on what the traditional tastes cannot afford to neglect it.” and preferences are; they refer to terms like terroir and An industry that has perfected its art over eight tannins like it is general knowledge. We need to embrace a new way millennia will have to adapt quickly. Whether it can sell its of thinking about wine or we will miss a new generation of wine timelessness to a generation that is always busy will be a vital consumer entirely.” ingredient if it is to continue producing vintages of exceptional But the decline in wine is not just a Covid-19-induced effect. quality. ■ According to Wines of SA, a not-for-profit industry organisation editorial@finweek.co.za which promotes the export of SA wine, the number of primary grape Johan Fourie is professor of economics at Stellenbosch University and producers in SA has fallen from 4 360 in 2005 to 2 693 in 2020. author of Our Long Walk to Economic Freedom (Tafelberg, 2021).

Photo: Supplied

The number of primary grape producers in SA has fallen from 4 360 in 2005 to 2 693 in 2020.

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finweek 23 July 2021

opinion

By Andile Ntingi

POLITICS

Is Ramaphosa winning the race?

It’s now a case of wait-and-see if the president will be able to push through more reforms. he structural reforms that President Cyril Ramaphosa is currently introducing are a strong indication he is gaining an upper hand over left-leaning populists in the battle for control of economic policy formulation inside the ruling ANC. After taking over the reins of the ANC in December 2017, Ramaphosa made a raft of promises to tackle our country’s biggest bugbears – endemic corruption, a failing economy, and runaway unemployment. For a while he dithered, then stalled, on making good on his promises, to the disappointment of many South Africans who had bought into his message of “renewal”, “unity” and a “new dawn”. The murmurs of disappointment also extended to the investment community, which has been losing patience over the slow pace of policy reforms needed to breathe new life into a flagging SA economy. Ramaphosa’s supporters urged the public to be patient, arguing that the slow-moving president was consultative in his nature and preferred bringing everyone on board with him. However, the president was perceived to be overconsultative as South Africans wanted to see meaningful change following a decade of massive corruption and state ineptitude under his predecessor, former president Jacob Zuma. It turns out that Ramaphosa has been biding his time, painstakingly consolidating his power. Now we are beginning to see him flexing his power. He is enabling law enforcement agencies to pursue people that were involved in grand-scale corruption under Zuma’s rein, euphemistically referred to as “state capture”. Ramaphosa is also pushing through economic reforms to stimulate economic growth and employment.

Fighting corruption

Photo: Shutterstock

Having supported the suspension of his party’s secretary general, Ace Magashule, who is implicated in asbestos tender fraud, Ramaphosa has given law enforcement agencies such as the elite crime-fighting police unit, the Hawks, and the National Prosecuting Authority (NPA) free reign to bring to book businessmen and politicians involved in illegally siphoning funds from the state during the period of state capture. Recently, the fightback against corruption has been bolstered by the ratification of an extradition treaty between SA and the United Arab Emirates (UAE), which will open the door for SA to extradite members of the Gupta family, who are accused of being kingpins of state capture. Ironically, Zuma, who allegedly enabled the Guptas to loot the state, was sentenced earlier by the Constitutional Court to a 15-month imprisonment for contempt of court. He had ignored a court order compelling him to appear before the Zondo commission after he was implicated by more than 30 witnesses in state capture.

Economic reforms

Another area where Ramaphosa’s administration is making progress, is economic reforms. It recently made big announcements related to restructuring and repositioning of state-owned enterprises (SOEs), 6

finweek 23 July 2021

particularly power generator Eskom, airline SA Airways (SAA), as well as the railway and logistics company Transnet. If these reforms are executed meticulously, I expect them to bear fruit and provide sustenance for our country. Regarding Eskom, the government has opened electricity generation to private investment. In addition, the government sold a 51% stake in SAA to a private consortium while Transnet’s division, the National Ports Authority, has been established as an independent subsidiary with its own board of directors. These reforms are intended to crowd in private sector investment, boost the SOEs’ balance sheets, and improve their operational efficiency. The Minerals Council has already crunched numbers and estimated that the relaxation of the energy regulations could pave the way for investment in new projects amounting to R27bn while Business Unity South Africa (BUSA) said 16 000 jobs could be created as a result. The looming privatisation of SAA is a welcomed relief for taxpayers, who have forked out nearly R70bn since 1994 to save an airline that has made more than R32bn in losses since 2008. The consortium, made up of Global Airways and Harith General Partners, will stop the bleeding, make the airline competitive and operate it along commercial principles. Beyond these reforms, the government also must explore amending labour laws to make it easier to hire workers, particularly young South Africans who are bearing the brunt of high unemployment. Broad-based black economic empowerment (B-BBEE) must also come under scrutiny, particularly the implementation and enforcement of laws and regulations. The policy must be implemented in a manner that improves regulatory compliance, expands black ownership of the economy, promotes entrepreneurship, and stimulates investment and employment. For nearly 20 years, the policy encouraged quick enrichment with little contribution to employment and new economic value creation. The reforms that the ANC-led government is implementing are tantamount to an admission that the state developmental model, where the state plays a bigger role in the economy, is being quietly ditched. This model is favoured by socialist conservatives, such as Cosatu and the SACP, and the so-called RET forces, comprising of ANC politicians and their business associates who want to make money from state procurement. This group has been making unfriendly and hostile statements towards white capital, a behaviour that could scare away investors and threaten Ramaphosa’s efforts of attracting R1.2tr worth of investments into the SA economy. He wants an economy that is largely driven by the private sector, ably supported by the state. I am hopeful that Ramaphosa is going to hold his ground and push through more reforms, paving the way for future prosperity and employment. ■ editorial@finweek.co.za Andile Ntingi is the chief executive and co-founder of GetBiz, an e-procurement and tender notification service.

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advertorial samsung

A GREENER GALAXY

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Why Samsung is recycling electronic devices that are traded in. hese days we all have smartphones and other electronic devices we no longer use because they’re outdated or broken. Unfortunately, more often than not, these devices and its components can end up in trash and landfills. In fact, more than 50m tonnes of electronics are thrown away each year and a mere 17% is eventually recycled. In keeping with its mission to reimagine a better planet, Samsung is committed to ensuring that more devices are responsibly recycled. Driven by a desire to keep our planet clean for generations to come, Samsung regularly engages in eco-conscious efforts that are helping to establish a circular economy. The company is constantly exploring ways to reduce its products’ impact on the environment, including increasing product lifespans and spearheading efforts to recycle their resources. This is essential as most “e-waste” ends up polluting the environment by sitting in landfills or being incinerated. With annual e-waste expected to reach as much as 74m tonnes by 2030, it is undeniably the time to take steps to reduce consumption and minimise waste. Repairing old devices, on the other hand, saves energy and finite resources that would otherwise be consumed in the manufacturing of new products, which carries considerable negative impacts on the environment. The reality is that a disproportionate negative impact of the environment comes from smartphones as they have a relatively short average useful lifespan, due to the galactic speed on technology requirements and development as opposed to household appliances. This is why Samsung has designed initiatives aimed at alleviating the impact on the environment. Samsung South Africa has implemented a popular trade-in programme that makes a difference. You can trade-in over 6 000 Samsung and non-Samsung eligible devices, such as laptops, mobile phones, smartwatches, tablets and many more and it will be responsibly disposed of. Additionaly, Samsung’s repair or replacement process is designed such that electronic components and products are collected, checked, recorded and stored at Samsung warehouses. Identified e-waste is pre-scrapped to ensure no unauthorised reuse of substandard repairs or irresponsible disposal thereof. Waste is collated on a weekly or monthly basis. Hereafter, Samsung’s authorised recycling and scrapping partners collect all waste, recycle and dispose of the materials in the prescribed and governed processes to minimise

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waste to landfill. Finally, a scrapping certificate is issued by the partner as guarantee that material is responsibly disposed of. “It is an essential part of Samsung’s mission to put the environment first in all business operations, with several long-term sustainability programmes that include sustainable packaging design and the reduction of carbon footprints through the use of recycled materials. Critically, the positive impact on the environment will result in lasting change that benefits all South Africans. The fact is, all positive changes start with the determination to reimagine old ways and to do what’s right for all. We’re reimagining environmental sustainability into everything we do, from packaging to product design, energy consumption to recycling,” says Hlubi Shivanda, director for business innovation, group and corporate affairs at Samsung South Africa. Additionally, Samsung has a long-term vision for conserving the country’s natural resources, while at the same time playing a role in job creation. As part of Samsung’s R280m Equity Equivalent Investment Programme (EEIP), under the Broad-based Black Economic Empowerment that was launched in 2019, Samsung, in collaboration with the department of trade, industry and competition (the dtic), embarked on an initiative to provide opportunities for black industrialists in the recycling sector. Through this initiative, Samsung has become an integral partner in the creation and support of black-owned businesses which can manage and impact Waste Electronic and Electrical Equipment. Samsung believes in a better, greener tomorrow and that all things can be repaired, recycled, upcycled and renewed. Now is the time where technology and innovation can be used to solve environmental problems, not add to them. Together, we can create a greener galaxy. ■ *According to the Global E-waste Monitor 2020 by Global E-waste Statistics Partnership (GESP), the amount of electronic waste in 2019 was 53.6m metric tonnes.

DISCLAIMER: About Samsung Electronics Co. Ltd.

Samsung inspires the world and shapes the future with transformative ideas and technologies. The company is redefining the world of TVs, smartphones, wearable devices, tablets, digital appliances, network systems and memory, system LSI, foundry and LED solutions. For the latest news, please visit the Samsung Newsroom at https://news.samsung.com/za/ ■

finweek 23 July 2021

in brief EDITORIAL & SALES Acting Editor Jaco Visser Managing Editor Zerelda Esterhuizen Journalists and Contributors Simon Brown, Jacques Claassen, Andrew Duvenage, Johan Fourie, Moxima Gama, Marcia Klein, Glenneis Kriel, Schalk Louw, Paul Marais, David McKay, Maarten Mittner, Andile Ntingi, Brendan Peacock, Timothy Rangongo, Seleho Tsatsi, Melusi Tshabalala, Amanda Visser, Glenda Williams Sub-Editor Katrien Smit Layout Artists David Kyslinger, Beku Mbotoli, Mini Zwane Advertising Paul Goddard 082 650 9231/paul@ fivetwelve.co.za, Tanya Finch 082 961 9429/ tanya@fivetwelve.co.za, Nina Frank 084 434 7776/ nina@fivetwelve.co.za Publisher Sandra Ladas sandra.ladas@newmedia.co.za General Manager Dev Naidoo Production Angela Silver angela.silver@newmedia.co.za

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finweek 23 July 2021

>> Trend: Attracting investors with amazing living spaces p.10 >> Mining: AngloGold Ashanti’s new CEO talks about his plans for the miner p.12 >> In the news: Sugar industry to diversify into biofuels p.14 >> In the news: Putting Zuma in jail is not enough p.15

“EFFORTS TO BRING THE GUPTAS BACK HAVE INTENSIFIED.” – Hermione Cronjé, head of the National Prosecuting Authority’s investigating directorate, said that Interpol has issued red notices for two Gupta brothers wanted in connection with alleged corruption. Atul and Rajesh Gupta, their wives, and four other people were issued with notices. According to Interpol, a red notice is an alert to all Interpol member states that an individual is a wanted fugitive. Although a red notice does not equate to an international arrest warrant, it can be used to support extradition requests. The United Arab Emirates ratified an extradition treaty with South Africa this year.

“The world is ready to end the global race to the bottom on corporate taxation.” – US Treasury Secretary Janet Yellen said there is broad consensus on a minimum corporate tax, at a recent G20 finance ministers’ meeting in Venice, Italy, reported The Wall Street Journal. The G20 finance ministers backed a historic international corporate tax deal that took years to hammer out, and which will see multinational companies pay their “fair share” of tax around the world. The plan to battle tax avoidance puts in place a minimum global corporate tax rate of 15% (see story on pg. 22).

“WE’RE HERE TO MAKE SPACE MORE ACCESSIBLE TO ALL.” – English magnate Sir Richard Branson cemented his multidecade effort to help create a space-tourism industry after he flew to the edge of space and safely returned to Earth on a test flight by his Virgin Galactic Holdings. The space trip showcased the company’s ability to safely take passengers to and from space. The test flight was aimed at evaluating systems and the passenger experience, as well as providing additional validation of its safety. Virgin Galactic plans to initiate commercial service next year, which will charge passengers hundreds of thousands of dollars each for such flights. www.fin24.com/finweek

DOUBLE TAKE

THE GOOD

BY RICO

South Africa’s vaccination programme will open to people aged 35 to 49 from 1 August, with registrations having started on 15 July for this age group, said acting health minister Mmamoloko Kubayi. People will also be able to get shots on the weekends from 1 August, she said. The health ministry met with Treasury and secured funding to increase capacity to run the programme on weekends. The minister also said that the country has surpassed the 4m mark of people who’ve received vaccines.

THE BAD It is estimated that in May 2021, the total number of seven- to 17-year-olds who had dropped out of school (had not attended school once this year) was between 650 342 and 753 371, according to the National Income Dynamics Study – Coronavirus Rapid Mobile Survey. The report stated that this marks a threefold increase in pupil dropout and whether this is temporary or permanent is not yet known. Previous research has shown that the longer children remain out of school, the higher the likelihood of permanent dropout becomes. There are about 13m pupils in the South African education system.

Photo: Gallo/Getty Images

THE UGLY Deadly riots broke out in KwaZuluNatal and Gauteng earlier this month following the jailing of former president Jacob Zuma for being in contempt of court, with supporters blocking roads and looting shops. The AFP news agency said the N3 highway linking Johannesburg and Durban was blocked for many hours, including a stretch south of the Estcourt prison where Zuma is being held. The South African National Defence Force deployed soldiers in the two provinces to help law enforcement agencies. President Cyril Ramaphosa appealed for calm, saying that while people “may be hurt and angry”, there is no justification for the violence. @finweek

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FOREIGN RESERVES DROP

$51.36bn

South Africa’s net foreign reserves fell to $51.36bn in June from $52.24bn in May, according to the SA Reserve Bank. Gross reserves edged higher, to $54.47bn in June from $54.13bn the prior month. The forward position, which represents the central bank’s unsettled or swap transactions, fell to $3.84bn from $4.25bn. The bank said the changes in the gross reserves and international liquidity position was mainly due to the proceeds received from foreign borrowings on behalf of government from the New Development Bank, as reflected in the foreign currency deposits received. MANUFACTURING OUTPUT GROWS

35.3%

South Africa’s manufacturing output rose 35.3% year-on-year in May after rising 88.1% in April, according to data from Statistics SA. The largest contributions were made by motor vehicles, parts and accessories and other transport equipment (8.9 percentage points); basic iron and steel, non-ferrous metal products, metal products and machinery (8 percentage points); food and beverages (7.4 percentage points); and wood and wood products, paper, publishing and printing (4 percentage points). The largest negative contribution was made by the petroleum, chemical products, rubber and plastic products division (-1 percentage point).

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IMPERIAL DEAL

$890m

DP World plans to buy Imperial Logistics for $890m (R12.7bn). DP World is one of the world’s largest operators of marine ports and inland cargo terminals. “Imperial’s business strongly complements DP World’s existing footprint in Africa and Europe,” the Dubai-based company said, adding that the deal demonstrates long-term confidence in the South African economy and the wider regional market despite recent challenges. The company offered Imperial shareholders R66 per share, a 5% premium to Imperial’s last close at the time of publication. The deal is expected to close by the first quarter of 2022. US INFLATION FORECAST

3.2%

Economists surveyed this month by The Wall Street Journal on average expect a widely followed measure of inflation, which excludes volatile food and energy components, to be up 3.2% in the fourth quarter of 2021 from a year before. They forecast the annual rise to recede to slightly less than 2.3% a year in 2022 and 2023. That would mean an average annual increase of 2.58% from 2021 through 2023, putting inflation at levels last seen in 1993. If the economists prove correct, US Federal Reserve officials might have to raise rates sooner or by more than they anticipated to keep inflation under control. finweek 23 July 2021

trend

By Glenneis Kriel

Living spaces for wealthy buyers after the pandemic

How to innovate in the real estate market through niche services in the luxury segment.

ith over 60 real estate agencies competing for sole mandates across the country, it is near impossible for new agencies to break into the highend property market. Julia Finnis-Bedford, owner of Amazing Spaces, a film locations company, and Andrew Dewey, managing director of a national property services company, have joined forces to overcome this barrier by expanding the Amazing Spaces offering into a lifestyle property investment division, called Amazing Spaces Lifestyle Investments. To qualify for the Amazing Spaces Lifestyle Investments portfolio, properties do not necessarily have to be upmarket or “luxury” but have to be unique to capture the new trend in buying after the pandemic. Dewey explains that being forced to stay at home because of the lockdown and the freedom to work remotely from anywhere in the world have resulted in buyers putting more emphasis on the design and artistic expression of a home, outdoor spaces with views to match, home offices that evoke creativity and features that reflect their distinctive taste. “For many, a home has now become almost like clothing or cars – an expression of who they are,” Dewey says.

Photos: Supplied

Value-adding

Amazing Spaces Lifestyle Investments was formally launched in June this year, when their website also went live. “We wanted to get all the admin, our staff structure and the website in place before opening up for business,” Finnis-Bedford says. The launch of a residential real estate agency has been a long time coming for Dewey and Finnis-Bedford, who were both waiting for the right time and the right partner to venture into the residential real estate market. “Things finally clicked when I met Andrew during an Entrepreneurship Organisation meeting towards the end of last year,” Finnis-Bedford says. The two make a perfect match: Dewey because he is a principal agent with extensive experience in commercial property and Finnis-Bedford because of her strong network of high-end clients and portfolio of unique spaces, built through her international film locations company Amazing Spaces. Being able to build the business on the Amazing Spaces brand, which already has a following, is also much easier than starting a real estate agency from scratch. “Amazing Spaces has paired film crews from all over the globe with the most sublime settings offered by South African properties since 2000, with many of the 10

finweek 23 July 2021

Julia Finnis-Bedford Owner of Amazing Spaces and director and co-founder of Amazing Spaces Lifestyle Investments

Being able to build the business on the Amazing Spaces brand, which already has a following, is also much easier than starting a real estate agency from scratch.

Andrew Dewey Director and co-founder of Amazing Spaces Lifestyle Investments

clients over the years enquiring about opportunities to purchase location properties,” she says. The company has so far employed three consultants and someone with a property studies degree to run the office, allowing Finnis-Bedford and Dewey to focus on the business side of things. “Our property consultants come with experience and tertiary qualifications to add value to the sales process by guiding buyers in a professional manner and helping them to make the most of their investments. With this market segment, it is not enough to just list a property and hope for the best, you have to add some value,” Dewey says. Where most other companies expect agents to focus on specific regions, their consultants focus on the buyers, and matching these buyers with their “ideal” property. The company also offers after-sales services via Amazing Spaces to help clients who want to generate additional income through location shoots or holiday rentals, offering an attractive return on investment.

Building the brand

Since its launch, Amazing Spaces Lifestyle Investments have listed ten properties, most of which are in the Western Cape. Finnis-Bedford says that the company will expand its agent base into Johannesburg, Pretoria, KwaZuluNatal and other areas as their portfolio grows in these regions. The idea, however, is to keep the company boutique-sized. Finnis-Bedford points out that most of their clients are from overseas or looking to relocate from Johannesburg to the Western Cape. “South Africa is high in demand thanks to our exquisite landscape and desirable climate, with low interest rates rendering it even more appealing at the moment.” Most of their marketing is done via traditional channels, such as their website, direct marketing campaigns, social media and online portals in SA and the UK. They also employ a specialist company to help identify and target clients that suit their portfolio. One of their biggest challenges so far has been to source properties that comply with their mandate criteria. Says Dewey: “Everybody thinks their home is special, but to qualify for our portfolio the properties should have some historical significance and/or tell a story, be designed by a renowned architect or embody artistic architectural features worth noting and/or be technologically smart. The size of the building, land, and location are also of importance. In essence it must be amazing.” ■ editorial@finweek.co.za www.fin24.com/finweek

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in brief in the news By David McKay

MINING

Calderon at the helm of AngloGold Ashanti

AngloGold Ashanti’s newly-appointed CEO talks to finweek about his strengths and what he plans on doing within the first four months on the job.

Photo: Gallo/Getty Images | CNBC | sieberana.com

t 61 years Alberto Calderon, AngloGold Ashanti’s new CEO, is almost the same age as Nick Holland who, at 62, stepped down from Gold Fields to comply with the firm’s mandatory retirement age. Calderon, though, wasn’t in a retirement frame of mind. “I spoke to friends and I knew that I did not want to be a non-executive professional. That would be too boring. I wanted to be busy and see what lands,” he says in an interview with finweek shortly after the announcement of his appointment, which will be effective 1 September. “This appeared,” he says of AngloGold. “A friend told me, why don’t you look at it.” And that’s how some top executive placements start, apparently; in a world where information flow is dizzyingly sophisticated, there’s nothing like a word of mouth recommendation. Calderon had recently resigned as CEO of Orica, a large Australian explosives company. Before that, he ran a career as one of BHP’s “man for all seasons”, running its aluminium and nickel divisions as well as leading corporate development and its one-third stake in Cerrejon, the coal mine in Colombia, the country from which Calderon hails. According to him, AngloGold is something of a “fixer-upper”; one of those old-money, frayed-atthe-edges property gems you find on a lazy Sunday

finweek 23 July 2021

Alberto Calderon

Tyler Broda RBC Capital Markets analyst

René Hochreiter Analyst for Noah Capital

drive through the suburbs. Well, he didn’t exactly say it like that. His actual words were: “I read analyst reports, years of them and I saw this company was trading at a massive discount to fair value compared to other companies. I thought I could help.” In the estimation of one Australian portfolio manager, Alberto Calderon has an old-school approach: a calm, steady, “by the book” way of going about things. He also hinted he was very corporate; in fact, very “Anglo American” of yesteryear. That may exactly be what the gold producer needs right now. As Calderon says: “I am convinced that every large company needs a CEO for its times.” In the view of Calderon, what AngloGold needs is “… more international experience, more commercial, and a track record with mining company delivery”. AngloGold has been left twisting in the wind since its former CEO, Kelvin Dushnisky, surprisingly resigned in August 2020. The interim CEO, Christine Ramon, has been managing the company, and her return as CFO is viewed positively. It will provide continuity and “a quick ramp-up with the management team”, according to RBC Capital Markets analyst Tyler Broda. But until a permanent CEO was appointed, questions about AngloGold’s long-term direction have been omnipresent in everything the group says and does. These are not questions about www.fin24.com/finweek

in brief in the news

“I read analyst reports, years of them and I saw this company was trading at a massive discount to fair value compared to other companies. I thought I could help.”

suitability of the strategy – which has won plaudits – but whether a new boss would disturb what really needs to be refined and implemented. Analysts were positive about Calderon’s appointment. “Calderon is a seasoned resources industry executive, his familiarity operating across multiple jurisdictions provides a degree of requisite experience for multi-jurisdictional AngloGold,” said RMB Morgan Stanley analysts. The bank points to AngloGold’s Colombia projects as a major point of departure for Calderon. It’s true, developing the projects – Quebradona, La Colosa and Gravelote, representing 38.5m ounces of gold in mineral reserves as well as copper by-products – is critical, especially for a company that in 2020 sold the last of its SA mines, the giant Mponeng west of Johannesburg. René Hochreiter, an analyst for Noah Capital, said that Quebradona, if completed according to plan “... will represent a massive 32% of value of AngloGold”. He added that the appointment of a Colombian national as CEO for a single orebody “... that could constitute a third of the value of the whole company is therefore considered astute in our opinion”. Yet, the company also needs to deliver on stated aims. These are to chip away at debt; hammer home a track record of dividends, and – if possible – repatriate the $500m in profits from Kabila, the Democratic Republic of Congo mine the government of which has the money. There’s also the recent complication of Ghana mine Obuasi’s suspension. This was following an underground accident in May that concerned AngloGold enough for it to review parts of the mine’s re-engineering. The re-engineering, costing about $450m to $500m, was supposed to lock in gold production of 350 000 to 400 000 ounces a year. It’s critical Obuasi is put back on its rails, a job to which Calderon adds the life extension of another African mine in AngloGold’s portfolio: Geita, which starts to run dry after four years. Both jobs are especially technical in nature. Given that Calderon is not a mining engineer, one of the criticisms levelled against Ramon’s suitability, will this be a problem, especially as throughout his varied career he’s never managed gold assets? “With the board (during the interview selection process) ... we went about being an operator. It’s not like I was a CFO. I was in the direct line of coal, @finweek

finweek

finweekmagazine

Quebradona, if completed according to plan “... will represent a massive

32% of value of AngloGold.”

diamonds, nickel and aluminium. Every commodity has its own particularities, but they also have their similarities,” he says. “I also know I have a lot to learn and I will immerse myself in commercial and technical issues. But the role of a CEO is also to support staff. My experience is that things that go to the CEO are never black and white; they are grey, they are soft. But I do deeply understand operations.” People have their own rituals over life-changing decisions: some rely on gut feel, others are scientific. “Health, love, work: those are the most important things in that order,” he says. “It will involve sacrifices and all that and so the most important thing was the support of my wife.” Work, though, starts officially in about two months. Calderon says the first four will be in AngloGold’s Johannesburg headquarters, but in the main, he will “co-locate”, loosely based in Perth near to the group’s second-largest mine, Sunrise Dam. “In time, the board will decide where to be located. But for the time being, I will move around the world.” This raises the question of where AngloGold will eventually locate. Prior to the departure of Dushnisky, the company was said to be considering a primary offshore listing, most likely in London. The logic was that UK investors were seeking a gold company they could hang their hat on following the delisting of Randgold Resources, which had merged with Barrick during 2019. Since then, there’s been a flood of gold firms listing in London, including Endeavour Mining, a West African play that operates very much in the Randgold mould of greenfields exploration and entrepreneurialism. In June, however, Nordgold, a Russian gold miner, abandoned its UK listing citing a deterioration in the outlook for gold, suggesting the UK investment market was now saturated with gold options whilst the market had cooled. Says Calderon: “The move to London or the north is not a priority in the short term. It’s just part of a whole range of options. For me, there are many options over the next two to four years and my ambition is to claw back and recover that discount the company suffers from.” ■ editorial@finweek.co.za finweek 23 July 2021

in brief in the news By Jacques Claassen

GREEN ENERGY

Sugar industry sets its sights on production of bio-jet fuel

The generation of green energy could become a game-changer for the local sugar industry. n line with its value chain master plan, the sugar industry plans to SAFs are low-carbon, non-petroleum-based drop-in aviation fuels come up with specialised services and products, including sustainable which are generally produced from bio-based feedstocks, including aviation fuels (SAFs) for visiting jets that have to refuel once they waste, residues, and end-of-life products. New technologies are also have touched down in Johannesburg, Cape Town or Durban. being developed to produce SAFs from non-biogenic resources. This is according to Richard Nicholson, who was an SA Cane Regarding biogas production, Nicholson points out that it’s an Growers panellist in an Agri SA-Farmer’s Weekly webinar recently. opportunity that provides a value proposition for the diversification of Since a sharp drop in sugar sales within the Southern African Customs the sugar industry by adding value to waste – both on-farm and on an Union in the 2017/2018 season, the industry has made slow but industrial level at sugar mills. steady progress to regain lost ground. The industry’s Once the excess fibre of sugar cane has been crushed and attempts to bolster demand came amidst washed it results in a watery waste mixture from which the introduction of a “sugar tax” in 2018, solid leftover fibre, called bagasse, is separated. From which made sugar roughly 200% more a cost and return point of view it will be better to expensive for the sweetened beverage generate biogas rather than steam energy from manufacturers, who then switched to bagasse, which is a renewable source of energy. artificial sweeteners. Says Nicholson: “Biogas could complement Moreover, the local industry had solar and wind energy. Moreover, it potentially to deal with excess production offers a more flexible source of green power, around the world as a result of while it could provide a source of local gas for subsidies, a problem with dumping South Africa’s integrated resources plan of and a drop in recent years in the 2019 and reduce the country’s dependency on so-called recoverable value (RV) imported gas with its associated price volatility.” producer’s price for sugar cane. The The sugar industry would like to pursue latter has subsequently recovered these two energy production options, which to R5 000 per tonne for 2020/2021, will require large-scale investments as well as which is just higher than the R4 931 of further research and innovation. “Although I’m a the 2016/2017 season. Meanwhile the bit concerned about the financial performance of international sugar price has also shown an the country’s sugar mills in recent times, they do have increase. industrial capacity. However, these options will have to be Says Nicholson: “We’re looking for markets for our pursued by the entire industry, including growers. Proceeds excess production of 6m to 8m tonnes of sugar cane. of additional industry products like electricity will have to be “We’re looking for The co-generation of electricity following President divided between growers and millers,” says Nicholson. markets for our excess (Cyril) Ramaphosa’s recent announcement of increasing Two of the industry’s 14 mills were mothballed or shut down production of 6m to the power generation cap to 100MW for independent during the 2020/’21 season. However, Nicholson concludes or private producers presents opportunities to the sugar that pursuing these two options might be a turning point for industry despite cash constraints.” companies who have been exporting sugar at a loss. “The In acknowledgement of the sugar industry’s important industry’s decision makers just need a good investment case.” ■ tonnes of sugar cane.” contribution to SA’s economy, the government and other editorial@finweek.co.za stakeholders devised the industry master plan to address some of its current production and marketing dilemmas. Following its adoption in November 2020, the plan has already resulted THE SUGAR CANE INDUSTRY IN NUMBERS in a positive give-and-take approach between producers, manufacturers l Sugar cane production – 18.2m tonnes (2020/2021 season) and retailers. The modest recovery in the producer’s price can be l Sugar production – 2m tonnes (2020/2021 season) ascribed to the plan’s positive spin-offs. l Local demand – 1.4m to 1.5m tonnes Having considered seven possibilities for globally competitive value l Dependent livelihoods – 1m chain diversification, a task team concluded that the production of l Direct jobs – 75 350 l Indirect employment – 350 000 bio-jet fuel or SAFs, as well as the generation of biogas are currently l Gross industry revenue – R17.5bn (2020/2021 season) viable options offering the most promise. l Land under cane – 362 000ha SAFs, unlike biofuel for local road transport, is considered a l Support to domestic value chain – R400m per year. premium product driven by international market demand which currently far outstrips supply, good margins, and incentives. Moreover,

Photo: Shutterstock

finweek 23 July 2021

www.fin24.com/finweek

in brief in the news By Marcia Klein

XXXXXXXXXXXXX ECONOMY

Zuma’s sentence: too small a step

Photo: Gallo/Getty Images

Major issues bearing down on SA’s economy overshadow the recent triumph of the rule of law.

he 29 June Constitutional Court ruling that former president is an important test in that regard. Jacob Zuma must serve 15 months in prison for failing to Sasfin deputy chairman David Shapiro says markets are up because appear before the Zondo commission is unlikely to provide an commodity prices are higher and there is no indication that the Zuma impetus for improved investor sentiment. decision has swayed sentiment. “Over time, one might see investor The judgement represents one small step up a mountain of reaction to accumulated decisions, should they take place, that might corruption and malfeasance and is unlikely to change sentiment start to swing the pendulum, but we have so many issues to get about investment in a country which has a junk credit through before then,” he says, adding that reliable power supply rating, mushrooming debt, failing public institutions and the roll-out of vaccines were immediate issues. and no security of supply of basic services such However, what will make a difference to investor as electricity and water, investment industry sentiment is if Zuma does not go to jail, Shapiro sources say. says, and ratings agencies and investors will react There are, however, several other if they see there are different rules for Zuma and reasons why investor sentiment towards other elites to ordinary South Africans. Shapiro South Africa has recently improved. This points out that while markets have improved, includes the recovery in the global and indicating better sentiment, volumes are low local economy and the commodity boom, and most of the activity is around Naspers* which resulted in a significant increase and Prosus. “Markets are very quiet at the in exports and higher company earnings, moment, and when you track volumes, they which are translating into improved trade are very low, reflecting the lack of interest and figures and better tax revenue, which may scope in our market.” help the country’s fiscal position. Additionally, Protea Capital Management CEO Jean the cheap valuations of JSE-listed companies Pierre Verster says: “At this stage, I don’t believe relative to global peers have resulted in positive that the Constitutional Court judgement means investor sentiment, and to some extent, increased much for investment. Broadly speaking, investors would investment in local companies. want to see that judgements are sound in law and are Former president Jacob Zuma But, given the fact that the judgement only covers applied and or executed on by law enforcement agencies.” Pictured at a previous court appearance Zuma’s contempt of court, and none of the vast array Sygnia CEO David Hufton says: “The Constitutional of potential criminal charges which need to be laid Court holding a former president accountable for his against many companies and individuals with regard actions or, at this time, inaction, is key to preserving our to years of widescale corruption and theft, the apex trust in SA’s democracy”. He says this sends “a loud signal court’s judgement is too small a step forward to warrant any change in that no one is above the law, which is an important and positive factor investor sentiment in itself. that influences decisions made by companies around the world when While the judgement may send a message about the strength and investing abroad. The alternative would be especially detrimental independence of our courts, the plethora of examples of government’s to our already fragile case for attracting long-term foreign direct weakness and lack of political will to stop corruption, irregular investment.” expenditure and the irregular award of business by state entities This investment has been drifting back, for other reasons. As Old continue to undermine any uptick in investor sentiment. Mutual Wealth investment strategists Izak Odendaal and Dave Mohr Daniel Silke, director at Political Futures Consulting, says the points out in their recent investment note, the commodity-driven judgement is important for SA’s image that the rule of law is seen export surge is reflected in near-record exports of R163bn in May, to run its proper course and is not threatened in any way, “so the while tax revenue increased 41% in April and May. They said SA assets effect of the Zuma issue is not just a domestic political issue – it are also still cheap compared to their global counterparts. This makes goes to the issue of confidence in SA in terms of its ability to pursue a them “more optimistic about return prospects from local investments constitutional framework and keep the rule of law”. than has been the case for the past few years”. However, Silke says that SA “starts from a rather low base, However, they also pointed to recent news that Rio Tinto unfortunately, and there are such low expectations for issues such suspended operations at its mineral sands business in Richards as state capture to be resolved and such frustration with processes, Bay due to ongoing violence, including the murder of the operation’s making it unclear whether this ruling will make much difference to the general manager, and news that coal miner Exxaro could not ramp up outside world”. foreign sales volumes, despite higher prices, “because of Transnet’s Silke says SA desperately needs to restore its good name. It is not limited and unreliable rail capacity”. just about prosecuting those involved in malfeasance, or whether The Zuma judgement is too small a step, albeit in the right Zuma goes to jail or whether the Gupta family is caught. “It is really direction. ■ about injecting confidence in SA as being a functional state in terms editorial@finweek.co.za of the ambit of the Constitution and protecting investor rights,” so this * finweek is a publication of Media24, a subsidiary of Naspers. @finweek

finweek

finweekmagazine

finweek 23 July 2021

market place

>> >> >> >> >> >> >> >> >>

House View: Satrix China ETF, Transaction Capital p.17 Killer Trade: Naspers p.18 Invest DIY: How to work around the base effect p.19 Simon Says: Didi Chuxing, EOH, Etion, Invicta, MultiChoice, Nedbank, Quantum Foods, Senwes, trade, US interest rates p.20 Markets: How the wealthy just keeps getting wealthier p.22 Investment: The amount that you will need by retirement p.23 Invest DIY: Putting portfolio management measures in place for when you die p.24 Investment: Constellation Software is built on strong fundamentals p.25 Investment: Will SA maintain its economic growth? p.26

FUND IN FOCUS: NINETY ONE PROPERTY EQUITY FUND

By Timothy Rangongo

Maximising long-term growth

The fund invests in SA listed property companies and aims to outperform the JSE All Property Index. FUND INFORMATION

Benchmark: Fund managers:

FTSE/JSE All Property Index Peter Clark, Ann-Maree Tippoo and Luqman Hamid

Fund classification:

SA – Real Estate – General

Total investment charge:

1.56%

Fund size:

R3.2bn

Minimum lump sum/ subsequent investment: Contact details:

R10 000 minimum investment 011 301 6335/utclientservicessa@ninetyone.com

TOP 10 HOLDINGS AS AT 31 MAY 2021

NEPI Rockcastle

14.8%

Growthpoint Properties

14.4%

Redefine Properties

12.2%

Fortress Income Fund

6.2%

Resilient Property Income Fund

6.1%

MAS Real Estate

4.9%

Hyprop Investments

4.8%

Attacq

4.6%

SA Corporate Real Estate Fund

4.5%

Investec Property Fund

3.5%

TOTAL

76%

PERFORMANCE (ANNUALISED AFTER FEES)

As at 31 May 2021: ■ Ninety One Property Equity Fund

■ Benchmark

70 60 50 40

45% 37.7%

Why finweek would consider adding it:

20 10 0

Fund manager insights:

The first three months of the year saw SA listed property continue its recovery, but at a slower pace than was realised at the end of the fourth quarter of 2020. The sector experienced a severe Covid-19 sell-off starting in March 2020. One of the reasons share prices slumped so dramatically was because everybody had anticipated heavily discounted equity raises, says Ann-Maree Tippoo, one of the portfolio managers at the Ninety One Property Equity Fund. At the time, a lot of the market thought that actual property prices were going to fall, meaning that the loan-to-value (LTV) ratios for property companies would have breached their debt covenants, she says, adding that for most companies LTVs are currently sitting at around 40% and that before Covid-19 it was lower. “When debt covenants are breached, there is this worry that debt financiers would come looking to cure those covenants, meaning that property companies would have to inject equity or pay something to the banks and bondholders,” says Tippoo. “That in time would mean that they would have to come to equity holders to ask for cash, for equity raises.” Inasmuch as debt financiers did not come knocking, last year several companies delayed dividend payouts. Listing rules and regulations require that SA real estate investment trusts (Reits) pay out at least 75% of their distributable income if they want to remain a Reit with its accompanying tax benefits. Companies that delayed dividend payouts ended up paying them to keep their Reit status, according to Tippoo. A few Reits used the solvency and liquidity criteria laid down in the Companies Act to ditch payouts in 2020. She says that 2021 has really been about the recovery story and people better understanding what is going on in the balance sheets of property companies. This is work that the investment team did upfront, says Tippoo. For example, with Redefine, she says “it took a long time for the market to catch up with our analysis”. “It is one thing being right, but it can hurt when you are right for too long and the market is taking too long to realise.” The fund topped up on Redefine during the second quarter of 2020. It had fallen below R2 a share. Tippoo says they realised that the market was pricing for a deeply discounted equity raise because Redefine’s LTV ratio was a little bit higher than that of the sector. Ninety One was not so worried about it and Redefine did a good job of executing on what they call their “LTV glide path” to reduce their LTV. Redefine recently closed at R4.45 per share. Portfolio construction is probably the biggest question of 2021, according to Tippoo. Last year, there was a lot more bottom-up in terms of stock specifics that they had to get right and this year it is a lot more top-down, she says.

12.4%

1 year

finweek 23 July 2021

12.5%

Since inception in May 2004

The fund is observing sustainability and a clean base for income and dividend growth. The property sector’s balance sheets continue to improve and at current valuations it may be deemed a long-term buy. ■ editorial@finweek.co.za www.fin24.com/finweek

house view SATRIX CHINA ETF

BUY

SELL

marketplace

HOLD

By Simon Brown

A passing concern

Last trade ideas

The Satrix China Exchange-Traded Fund (ETF) listed just a year ago and at the time there were lots of excitement about being able to get direct exposure to the Chinese stock market. But a year later it trades 7% lower than its listing price and almost 25% off highs it reached in February this year. This has resulted in many readers emailing me asking what to do. The short answer is that ETFs are long-term investments, and one should not worry. The Chinese government has been cracking down on the nation’s large technological companies, sending share prices lower, but this will not be an issue forever. So, ignore this and ask yourself about China in ten years’ time. Will they be an even larger economic powerhouse? Will these tech companies still be giants? Will the Chinese consumer base still be growing and spending? The answers to all the questions are surely yes. Thus, all the current worries are a passing concern. The ETF offers an opportunity to get into one of the world’s best economies at a lower price. ■

TRANSACTION CAPITAL

BUY

SELL

JSE 9 July issue

BUY

Thungela Resources 25 June issue

BUY

CoreShares Total World ETF 11 June issue

BUY

Raubex 28 May issue

HOLD

By Moxima Gama

Last trade ideas

Share price could top out

Photos: Archive | Atterbury

Transaction Capital is an investment holding company that operates as a non-deposit-taking financial services company. Its segments include SA Taxi, WeBuyCars and Transaction Capital Risk Service. In September 2020, Transaction Capital concluded a transaction to become a 49.9% non-controlling shareholder in WeBuyCars and recently concluded agreements to increase that stake to 74.9% – subject to regulatory approval. To obtain that desired shareholding, Transaction Capital had to raise capital through an accelerated bookbuild. During the first half of July, SA’s biggest taxi financier announced that it has successfully raised R1.17bn in an oversubscribed bookbuild, with shares placed at R35.50 apiece – a 4.4% discount to the group’s share price at the close of trade on 8 July 2021. How to trade it: Since listing on the JSE in 2012, Transaction Capital’s share price has been on the rise, notwithstanding the losses incurred from the pullback in March 2020, which have been fully recovered to date. Transaction Capital recently tested a new high at 3 875c/ share but has been encountering resistance there for a couple of weeks. Firm support at 3 590c/share has formed a topside consolidation. If that level should give in, Transaction Capital’s share price could top out and commence the descending phase of the bearish pattern towards first support at 3 265c/share. Continued downside could see the share price fall even further to 2 800c/share. Therefore, a short position would be triggered below 3 590c/share. Alternatively, if support is solid at 3 590c/share and resistance is breached at 3 875c/share, go long or retain long positions as Transaction Capital’s share price could continue forming new highs. ■ editorial@finweek.co.za @finweek

finweek

finweekmagazine

SELL

BHP 9 July issue

BUY

TFG 25 June issue

BUY

Adapt IT 11 June issue

BUY

Famous Brands 28 May issue

In September 2020, Transaction Capital concluded a transaction to become a 49.9% noncontrolling shareholder in WeBuyCars and recently concluded agreements to increase that stake to

74.9%. finweek 23 July 2021

marketplace killer trade By Moxima Gama

XXXXXXXXXXXXXXXX NASPERS

Investors seem rather doubtful

aspers* is a broad-based multinational internet and media group, with a 14% weighting on the JSE together with its spin-off Prosus. Naspers is Africa’s largest company by market value and most successful technology investment firm. It offers services in more than 130 countries, with its principal operations in internet communication, entertainment, gaming and e-commerce.

NASPERS (MONTHLY CHART)

Share price history

Naspers was once the FTSE/JSE All Share Index’s top performer; it maintained a longterm bull trend which commenced in 2014. By 2015, Naspers had returned 82% over 12 months and was hitting psychological levels at R2 000 per share. In 2018 the share price had grown by over 440% and the company’s price-to-earnings (P/E) ratio was at a whopping 95 times. As upside momentum continued, concerns that Naspers was overpriced grew and investors became uncomfortable with the fact that Naspers’ 31% stake in Chinese tech giant Tencent was the primary driver of this impetus. This sentiment commenced a correction and in August 2018, Tencent surprised investors with its first drop in profits in at least ten years as a Chinese regulatory freeze on game approvals hurt its ability to bill customers. Tencent was struggling to monetise its new games – resulting in a more than $150m loss of its market value.

Current outlook

Because Naspers shares were trading at a steep discount to the value of its stake in Tencent, the group decided to list its global internet investment business unit Prosus (which includes its stake in Tencent) on Euronext Amsterdam. It was also a step for Naspers to unlock shareholder value following its unbundling of MultiChoice Group in March 2019, which locked an estimated $3.5bn for Naspers shareholders. Naspers currently owns a 72.5% stake in Prosus and wholly owns Media24 (Africa’s largest publishing company) and Takealot.com (SA’s largest online retailer). Naspers dropped 30% in share price value after listing its offshore internet assets in Amsterdam. Prosus became the holder of the 31% stake in Tencent. The latter’s market cap is currently equivalent to $780bn, and Naspers is at approximately $107bn (R1.53tr), which means Naspers’ market growth is failing to keep up with that of Tencent – thereby continuously trading at a huge discount, despite its $5bn 18

finweek 23 July 2021

SOURCE: Metastock Pro (Reuters)

share buyback between November 2020 and April 2021.

On the charts

Naspers’ share price plummeted to the support trendline of its long-term bull trend when it listed Prosus in 2019. It managed to claw back all its losses in 2020 after bouncing on that trendline and formed an all-time high at 388 800c/ share. But since testing that high, the share has been forming falling tops and is rapidly losing ground again. The share swap scheme between Naspers and Prosus in an attempt to address and reduce its discount problem could be the reason for the current drawdown. Prosus is offering to acquire 45.5% of Naspers N shares through a share exchange at a ratio of 2.27 Prosus shares for every Naspers N share. If this plan succeeds, it will take Prosus’ overall interest in its parent company to 49.5% as well as proportionally increase Prosus’ free float (the shares of a company that can be publicly traded and are not restricted), which will also unlock further value for both Naspers and Prosus shareholders and reduce the discount. It seems the issue here is that Naspers is struggling to reduce its discount value against Tencent and listing Prosus in 2019 has created two discounted companies as opposed to one.

What to anticipate

Naspers’ share price has recently breached key support and if this downside should continue, Naspers could retest its March 2020 low.

52-week range: Price/earnings ratio: 1-year total return: Market capitalisation: Earnings per share: Dividend yield: Average volume over 30 days:

R2 685 - R3 888 19.7 -10.4% R1.23tr $9.70 0.21% 1 406 558 SOURCE: Bloomberg

How to trade it

Go short: The share price has held firmly above 278 825c/share since May 2020. Because it’s breached that level and its three-week relative strength index (3W RSI) remains bearish, a sell signal has been triggered. But because Naspers gapped downwards last week, it may attempt to close that gap by recovering towards 321 800c/ share in the near term. However, encountering resistance there could prompt a pullback through the 278 825c/share selling level again. In which case, support at 256 795c/share could be revisited, and if breached, further downside to either the major support trendline or the 200 015c/share level could ensue. Go long: A reversal above 321 800c/share could attract new buyers and upside towards 349 945c/share may follow. Effectively Naspers will start a new bull phase to new highs only once it breaches its all-time high at 388 800c. ■ editorial@finweek.co.za Moxima Gama is an independent stock market analyst at The Money Hub. *finweek is a publication of Media24, a subsidiary of Naspers.

www.fin24.com/finweek

marketplace invest DIY By Simon Brown

XXXXXXXXXXXXXXXX INVESTMENT

Explaining the base effect

We have seen this effect in the surge in inflation, GDP data and company results. But how do we work around it?

Photos: Shutterstock | Archive

ne of the new popular phrases being used within the investment world is “base effect”. For example, globally we’re hearing all about how the current surge in inflation is due to base effect. This is because a year ago we’d seen the price of Brent crude oil crushed (and even turn negative for West Texas Intermediate contracts). In addition, while being locked down nobody was out spending much, so last year’s inflation came under severe pressure. Now, a year later, that lower number is the base for calculating inflation and as such this year’s number spikes higher. It is important to take this base into account. We’re seeing the base effect in company results too. Recently, Capitec* issued a trading update saying it is reasonably certain that headline earnings per share (HEPS) for the six months ending 31 August are expected to be more than 500% higher than for the same period a year earlier. This is in large part due to the base effect as the comparable period was under massive pressure and Capitec also included large provisions for bad debts. So, that jump of 500% is skewed by a lower base and in this case also by the provisions that they made and didn’t need. Hence, Capitec return these back into the business via the income statement, which boosts HEPS. The problem is how do we work within this base effect? One easy way is to compare the results against an earlier period; in the case of Capitec it can be the period ending in August 2019 (which was before the Covid-19 pandemic struck). This is easy enough, but we then have to be careful as this way of working glosses over the impact of the pandemic and the reality is that Covid-19 did happen and it did impact results. @finweek

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What we also need to prepare ourselves for is the same base effect talk in a year’s time.

Staying with Capitec, we can also deconstruct the results when they arrive. Removing the unused provisions from both last year and this year will help. With economic data such as inflation and GDP it is harder to do. I’ve been referring to our return to economic output prior to the pandemic and what we can do as an alternative measure. Stats SA puts our total GDP at R782bn for the quarter ending March 2020, just as we went into hard lockdown. At the end of the first quarter of 2021, local GDP was estimated at R761bn. So, a year after the pandemic started our economy is 2.6% smaller. As an aside, that’s a lot better than I would have expected a year ago. The recovery has been fast. What we also need to prepare ourselves for is the same base effect talk in a year’s time. Then we’ll have the high base, especially with inflation, and this will skew the 2022 numbers downwards due to that higher 2021 base. This won’t be as stark within GDP but will also manifest within company results. Staying with Capitec, what we’ll see is August 2022 mid-year results not as rosy as this year’s results. So, we’re going to have skewed data until probably the end of next year as the impact of the lockdown works its way through the system. In some data sets the pandemic has forever skewed the charts, with US unemployment being perhaps the best example. Previous worst initial jobless claims had peaked at around 800 000 in the global financial crisis of 2008/2009. Yet, last year they hit about 7m and that chart will forever have this insane spike that makes all the other data essentially look like a flat line. ■ editorial@finweek.co.za *The writer owns shares in Capitec.

finweek 23 July 2021

marketplace Simon says By Simon Brown

NEDBANK

Work from home Nedbank announced a work-from-home (WFH) policy to be implemented after the pandemic. The bank expects 60% of staff to be on one of their campuses each day, relating to two days of WFH every week. We are seeing various companies locally and globally adopting different policies, with Apple at the extreme with only two weeks of WFH a year while other US technological companies are looking to adopt more flexible WFH schedules for staff. This means the death of the office has been greatly exaggerated recently, but it does mean lower demand for offices in the years ahead as there will be excess capacity in current space.

QUANTUM FOODS

Keep a close watch Remember a year ago when all the excitement was about Quantum Foods as Zeder sold their shareholding? Astral Foods picked up a stake and offshore buyers also built a significant holding. The share price spiked to 1 157c before losing almost half since then. Stories are great for driving prices higher (and sometimes lower), but traders need to be quick. If you are late to the story you are buying from the early buyers and will potentially be left holding the shares with their falling prices. The Quantum surge was exciting, but a takeover offer was unlikely and so the share was always going to retrace a fair bit when things quietened down. Make sure you are not the last one when the music stops. 20

finweek 23 July 2021

Simon’s stock tips Founder and director of investment website JustOneLap.com, Simon Brown, is finweek’s resident expert on the stock markets. In this column he provides insight into recent market developments.

TRADE

Surpluses continue The month of May was the third in a row with a local trade surplus of over R50bn. This time it clocked in at R54.6bn. This surplus is huge and has been driven primarily by commodity exports, precious and industrial metals as well as agricultural produce. The other side of the coin is weak demand dampening imports. This is what is sending our currency stronger and will also be boosting tax receipts, making for a less onerous budget in February. We should continue to see repeats of these trade surplus levels if commodity and agriculture prices stay at current levels, albeit a stronger rand takes some of the shine off the numbers.

The month of May was the third in a row with a local trade surplus of over

R50bn.

DIDI CHUXING

China’s clampdown The New York listing of Chinese ride-hailing company Didi Chuxing was a mess as three days after the listing the Chinese government cracked down on the company. Didi is not allowed to take on new clients and has had to pull its app from app stores in China. This is a continuation of what we’ve seen out of China over the last year, like when the listing of Ant Group was cancelled days before it happened. The Chinese government is concerned about the power these technological giants have and is reining them in and will likely continue to do so. We’re also seeing anti-trust issues against big technological companies in the US and Europe. Investors opting to remain invested in China over the long term may view this as good news for the technological companies as the latter have been sold off recently. This offers a lower entry price for long-term investors. The stock that has been hardest hit is Tencent. Subsequently, this flowed through to Naspers* and Prosus (which owns a large stake in Tencent) with both trading at lows for the year. That said, they’re only back at April 2020 levels. This, however, is putting pressure on the FTSE/JSE Top 40 and FTSE/JSE Industrials 25 indices as Naspers and Prosus accounts for the largest weighting in both.

SENWES

Solid results Senwes is another agriculture stock that delivered an excellent set of financial results recently. But being listed on the ZAR-X exchange means that the price didn’t move much as there is little trading activity on that exchange. I always say that a great business (or financial results) is important when investing, but that needs to be followed up with buyers so that prices move higher. An ignored stock (or exchange) means little or no price discovery and translates into a weak investment return, even if the investment case is strong. www.fin24.com/finweek

marketplace Simon says

INVICTA

ETION

Remarkable about-turn

Delisting on the horizon

Engineering company Invicta released strong results for the year ended 31 March on 28 June. Headline earnings per share (HEPS) jumped more than four-fold and the dividend was reinstated at 60c per share. But what really struck me about this turnaround is the company’s inventories. I’ve written recently on how high inventory levels are essentially cash trapped in the balance sheet. The new CEO, Steven Joffe, has halved inventories to around R1bn and this turns an extra R1bn into cash, making the group not only a better operation but also more profitable. Operating primarily in the mining, agriculture and automotive sectors, Invicta should have another strong year ahead and on a forward price-to-earnings (P/E) ratio of around seven, the stock offers good value.

Etion is a micro-cap stock that listed during the 2007 boom as Ansys. (The company’s name changed to Etion three years ago.) Etion sells defence technology, railway sensors and mining equipment. Recently the company moved into “digital technology” and had acquired LAWTrust. Etion is now selling LAWTrust for R245m while the market cap of the stock is just over R250m. The LAWTrust sale carries a loan of some R20m, and there will be capital gains tax to pay too. But the new acting CEO, Richard Willis, says they plan to sell off the other divisions, return cash to shareholders and ultimately delist the company. They have an order book of just over R700m that includes one large contract of almost half that book. The questions are how much can they sell their other main assets for and what costs will we see at group level as they wind up the company? They should be able to easily get R250m for the other businesses, which after costs suggest at least a 50% share price increase from the current 46c and you may be able to get a better price in the market. This is not without risks (such as poor sale prices or large costs) but worth looking at for a speculative punt.

US INTEREST RATES

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Recovery tells us two things In mid-June, the US Federal Reserve (Fed) spooked markets with news that interest rates in the US could start to increase in 2023 rather than 2024. This resulted in an equities selloff, as well as gold and the US ten-year treasury notes. But they’ve all recovered, and this tells us two things. Firstly, interest rate increases two years away are not this year’s problem; and secondly, the buy-the-dip strategy continues to work. US market valuations are stretched but spending is booming, and the pandemic has helped many companies become more efficient. That said, the current earnings season in the US needs to deliver the profits. @finweek

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The new CEO, Steven Joffe, has halved inventories to around R1bn and this turns an extra R1bn into cash, making the group not only a better operation but also more profitable.

MULTICHOICE

Nigeria poses risk MultiChoice has been hit with a massive tax claim from Nigeria in the amount of R63bn. Considering that full year financial results for the period ended 31 March saw group trading profit of only R10.3bn (up 28%), the amount being claimed is well in excess of the profits that MultiChoice has made in Nigeria. As such, it is reasonable to expect the tax claim to be reduced, but it shows the risks involved in operating in Nigeria. With HEPS coming in at 496c, the historic P/E is 23 times. This is not cheap for a group that is reinventing itself by venturing into streaming and competing with the likes of Netflix and Disney+ (when they launch locally).

EOH

Gunning for execs EOH has announced its decision to pursue former executives in the courts for billions of rands they claim were lost due to the executives’ poor management of the company. Regardless of whether they win or even get any money, this is a particularly important point. We’ve had several companies going bust in the last decade and in many cases, executives were certainly partly to blame (here we think of African Bank, Steinhoff and Tongaat). Yet, where are the court cases? The new boards of these companies need to have the courage to go after executives who derelict their duties. ■ editorial@finweek.co.za * finweek is a publication of Media24, a subsidiary of Naspers.

finweek 23 July 2021

marketplace markets By Maarten Mittner

TAX

The wealthy get richer even when governments ‘clamp’ down

The global tax system decided on a minimum level of corporate tax. This won’t address the creation of rampant wealth. arkets have shown little fear in reaction to renewed revelations of vast personal wealth accumulation among the wealthy over the past decade. The Nasdaq has risen to an all-time high, Facebook hit a market cap of $1tr and Apple remains comfortably above the $2tr level. A new minimum global tax level of 15% for companies has been agreed to by 130 countries. This is lower than the 22% which has been calculated to offset any tax arbitrage, whereby a tax rate of 28% is levied in one country, say South Africa, as compared to 11% in another, say Ireland. And obviously, the country with the lower tax rate is preferred. Therefore, a rate of 15% may not be as effective as hoped. The reality is that the global tax system continues to favour the wealthy, and their companies. Low-tax havens may not become a thing of the past. Yet. But how do the wealthy actually pay less tax? Globally, as in SA, the creation of wealth is not taxed. Only income, and to a lesser extent capital gains. Theoretically, the wealthy face hefty capital gains tax on the selling of shares. But that rarely happens. Why? Mainly because capital gains taxes are linked to residency requirements. If a person is not a resident of a particular country, no tax is payable in that country, unless it is from a local source. As it relates to ownership of a house, for example, or immovable property in tax jargon. But determining tax residency is subjective, and not based on the passport holder or nationality. The owner of a house in Clifton, and who has another in London, will arrange affairs to only pay tax in the country with the lower tax. Residency is also linked to a physical presence test. A holder of an SA passport who only lives here for a certain number of days per year and is mostly domiciled in the UK (and can prove it) will not be held liable for tax in SA. Many of the wealthy escape this requirement by living in one country only half of the year. The application of double tax agreements (DTAs) also provides an escape route to the well-off. Most DTAs have provisions whereby only a certain country may tax an individual, to avoid double taxation, with tie-breaker rules in the event of a dispute. DTAs are so designed to offer lower tax payable in certain countries, mainly the developed ones, as a quid pro quo for investing in a developing country, apart from certain provisions that cater for a permanent establishment. In

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Every taxpayer has the right to legally avoid taxes. But not to evade tax, which is illegal.

finweek 23 July 2021

which case tax will be payable in the developing country. But, as can be expected, a lateral-thinking tax expert may be able to prove that a permanent establishment in a certain country is non-existent because the board meets in another country. Or if a distribution outlet is only temporary, or leased. Then there are dividends. The wealthy receive income mainly in the form of dividend pay-outs. Unlike income, dividends are tax-free. Well, mostly. SA introduced a withholding dividend tax of 20% a few years ago, paid over by the company. But income from dividend tax has been disappointing because exemptions are available and most DTAs make provision for a lower dividend tax rate, say 5%. Or nothing at all. Another big favourite among the wealthy has been trusts. Especially foreign trusts. This is where most of SA’s expat wealth is held. Many measures have been taken to curb tax avoidance among local trusts, such as the section 7 attribution rules, or the section 7C interest-free loan provisions. These rules are quite stringent. But the results have been mixed because the SA Revenue Service (Sars) cannot touch foreign trusts, for obvious sovereignty issues. Local trust beneficiaries can be taxed, but only if they are SA residents. Once again, if you can prove non-SA residency or pass a physical presence test in favour of a foreign trust, tax cannot be levied on a beneficiary. This is all legal. No cloak-and-dagger stuff. Every taxpayer has the right to legally avoid taxes. But not to evade tax, which is illegal. In the past it has been difficult to prove evasion as intent must be shown. Sars recently removed this provision from legislation, with potentially adverse consequences for tax evaders. But it has not been tested in practice. All this has resulted in Tesla mogul Elon Musk only paying 3.27% tax on his wealth of $14bn, created between 2014 and 2018. And Warren Buffett forking out 0.1% on his $24bn created. Sometimes even a percentage is lacking, as no tax was paid, as with Amazon CEO Jeff Bezos, who even claimed a tax deduction over the period. Market investors and asset managers know markets will always follow the big money. Where tycoons continue to add to their existing wealth. Sure, it has been way too easy for the wealthy to avoid taxes. But unless the whole tax system is reconfigured, this trend is set to continue as the wealthy will always find ways to avoid a high tax burden. ■ editorial@finweek.co.za Maarten Mittner is a registered tax practitioner, freelance financial journalist and a markets expert.

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marketplace investment By Schalk Louw

RETIREMENT

How much do you need to save to retire comfortably?

Schalk Louw calculates the amount of money one will need and the possible variables that may affect it. know I have mentioned this a few times over the course of the last year, but these are very strange times we find ourselves in. The Covid-19 pandemic hasn’t just played havoc with many investors’ finances, but many of them have been forced to withdraw from their retirement savings in, for example, the form of a preservation fund, just to survive. They know they must somehow replenish their retirement savings, but a more pressing question these days is, “How much do I need to retire comfortably?”

Expected monthly income

LIVING ANNUITY WITHDRAWAL RATES VS RETURN BEFORE INFLATION

Drawdown rate

Annual investment return before inflation, but after all fees 2.5%

7.5%

10%

12.5%

2.5%

50+

7.5%

10%

12.5%

5 Let’s start at the beginning. In this case, it will be the amount of 15% 1 1 2 2 2 money you need to live off right now. Many experts recommend 17.5% 1 1 1 1 1 that you use 80% of this amount as a benchmark for what you will It is important to note that the table above assumes that the income drawdown rate is adjusted over time to need to cover your monthly expenses once retired. I won’t personally maintain a real income by allowing for inflation of 6% per year. Once the number of years in the table above guarantee the accuracy of this figure, but it does give us a basis to has been reached, the pensioner’s income will diminish rapidly in the subsequent years. start from. SOURCE: Asisa For the sake of this illustration, I will keep things as simple as possible, but it will be wise for you to also consider any possible variables that may affect you personally, such as portfolio, you may fall short of your required total income Many experts declining health, possibly having to move into a retirement after retirement. Unfortunately, inflation is also one of the recommend home with assisted living facilities, or the possibility that you most difficult variables to consider, as you effectively have that you use may still have to cover mortgage payments after retirement. to try and calculate something that still needs to happen. Let’s suggest that you currently earn R15 000 per Let’s assume that you are 40 years old and you plan month. By applying the 80% rule, you will need at least to retire at age 65 (25 years from now). By using the top R12 000 per month after retirement to maintain your of the SA Reserve Bank’s inflation target range, the best of this amount current living standard. calculated guess we can offer on annual inflation is around as a benchmark for 6%. What this means is that if your current needs dictate what you will need to that you require R2 880 000 to retire in today’s rand Safe withdrawal rate cover your monthly expenses once retired. terms, you will need around R12 360 588 when you retire Unlike food products, human beings don’t have a “use by” in 25 years’ time, when you take inflation into account. date, so we have to rely on a safe withdrawal rate to ensure As shocking as this figure may be, you’re one step ahead, that we do not outlive our savings. According to this rate, because you can now determine how much you will have you should be able to withdraw 5% of your portfolio yearly, to save on a monthly basis to reach this target. With without having to use any of your remaining capital. the help of a tool such as a retirement calculator, you This approach is based on the fact that the can simplify this process even further. historical return on the South African stock market If you are already saving towards your (since 1964) was about 8% higher than the local retirement by contributing the maximum inflation rate, and that you would expect to earn towards a retirement annuity or pension fund, slightly less than that in a typical balanced fund you have a good head start. It is an absolute portfolio (over time). By limiting your withdrawals fact that very few people can survive on the to 5% of your portfolio, you should still have an current government old age pension grant of additional 5% to 6% growth to cover inflation (in a maximum of R1 890 per month (or R1 910 for the long run). Based on a 5% annual withdrawal rate people older than 75 years) as their only source after retirement, the amount you will need to save in of income after retirement. If you’re not making rand terms will look something like this: sufficient contributions toward your retirement by means R12 000 x 12 months = R144 000 (annual income) ÷ of something like an employer pension fund or a retirement 0.05 (5% safe withdrawal rate) = R2 880 000 (see the table). annuity, you will have to start or increase your contributions now to avoid paying for your mistakes after retirement. ■ Inflation factor One of the biggest variables that may affect your retirement planning editorial@finweek.co.za is inflation. If you don’t properly compensate for inflation in your Schalk Louw is a portfolio manager at PSG Wealth Old Oak.

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80%

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finweek 23 July 2021

marketplace invest DIY By Simon Brown

INVESTMENT

What to do with your portfolio when you die or become incapacitated

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A backup person to close out your trading positions and someone (or more) to take over the management of your portfolio when you can’t manage it, is crucial. have written before about the benefits of a trading buddy, including them being able to execute trades for you if required and to keep you honest to your trading strategy. In this edition I want to go a little wider, and a little more morbid, into the topic of somebody to help. The first question is what happens to your trading account if you’re incapacitated for whatever reason and unable to monitor and exit your trades? You need a backup person to get you out of derivative positions, especially if you have open positions that do not have a stoploss in the trading system. But even with a stop-loss there is a risk of that stop being missed and it could turn out very expensive. I trade both very short term (typically with a duration of between 10 and 20 minutes, resulting in minimal risk) and longer, which carries potential risk. These longer trades can run for weeks or even months. Further, I place my stoploss on the longer trades at a level equal to a share price close below the 21-day exponential moving average (EMA). I can’t put that level into my broker’s platform as they exit stop on touch, not close. So, I have a friend who knows the trading platform I use and can exit all my trades if required. I also have a detailed letter (with screen shots) for my wife in case the friend can’t help so that she can log in and close out all positions when I’m incapacitated. This is equally important in case you were to suddenly pass away (I have warned that we’d get morbid). Sure, your trading account will be part of your estate, but if trades are left open while the estate is being wound up, the losses could become

finweek 23 July 2021

significant. The above letter for my friend and wife serves in this case too. But I also have a letter for my wife should I die that includes passwords, investment accounts and the details on how to exit my trading positions, if any. In a sense it is a backup. Now, the young readers will all be thinking that dying is not their concern right now, and probably you are right. But let’s be frank: it’s not impossible, regardless of age, so rather be safe than sorry. With my long-term investments this is very much less of an issue in terms of a quick exit. These long-term holdings are designed to be held for years, if not decades, and the year or so that it takes to wind up my estate shouldn’t be a concern. This, of course, would not always be true – what if you held African Bank, Steinhoff, EOH, Tongaat and the like? Stocks that seem excellent can suddenly turn out to be horrid and may need to be exited in a hurry. So here, both in my letter for when I am dead and in my will, I detail what and who should manage my portfolio after my death. My wife is 100% not involved in managing the portfolio, so even though she inherits my estate, she’ll need help, especially with individual stocks. So, I have nominated two friends who do know what’s happening in the markets to assist. One is a passive-only holder of exchange-traded funds (ETFs) while the other is an active fund manager. The remit to them is to derisk the portfolio, mostly ETFs, and to find a long-term solution for somebody to help her manage the portfolio. The last thing I want after my death is somebody taking over the portfolio and making a mess of it. ■ editorial@finweek.co.za

You need a backup person to get you out of derivative positions, especially if you have open positions that do not have a stop-loss in the trading system.

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marketplace investment By Seleho Tsatsi

OFFSHORE

Constellation Software knows how to allocate capital The Canadian holding company of Volaris, which made a takeover pay for SA’s Adapt IT this year, has strong financial fundamentals worth a look.

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dapt IT is currently the subject of a bidding war between JSE-listed Huge Group and Volaris, the subsidiary of a Canadian company called Constellation Software. We own Constellation Software in our funds on behalf of clients and we believe that the share is worthy of consideration for those investors looking to allocate capital to offshore equity portfolios. Constellation Software focuses on acquiring what it terms “vertical market software businesses”. These software businesses are in a variety of “vertical markets”, from marine asset management to catering and parking. Constellation has a fantastic long-term track record. The share listed in 2006 and has compounded at a rate of more than 40% per year between 2010 and 2020. This was driven by good operating performances. Earnings per share (EPS) grew at a compound annual rate of 31% between 2010 and 2020. Understandably, growth has slowed down as the business has scaled up. Nevertheless, its operational performance remains impressive even when assessed over a shorter time frame – EPS grew by 20% per year from 2015 to 2020. We believe that Constellation’s moat is its attractive offering to potential acquirees that rival bidders may not always be able to match. Constellation offers potential acquirees three important things – autonomy, a permanent home, and access to hundreds of peer companies. Sometimes a founder is looking to sell their business but wants to continue to be in charge going forward. Whilst Constellation does offer advice to its subsidiary teams, it does not look to install new management teams in the way that a private equity firm might do. Another important distinction between Constellation and the average private equity firm is that Constellation can offer acquirees a permanent home. Private equity companies generally acquire businesses with the intention of exiting a few years later, ideally at a handsome profit. Constellation has an “acquire-for-keeps” mentality that may be more attractive to a prospective seller who does not want to be up for sale again in a few years. Finally, as the owner of a significant number of software companies, Constellation can give acquirees access to hundreds of peer companies’ insights and networks. Highly acquisitive companies can be a cause of concern for investors and rightfully so. “Roll-ups” can show sparkling share price performance for years before unravelling quickly. However, we believe that there are important differences to keep in mind when thinking about investing in Constellation. First, Constellation does not take on debt to make acquisitions. The company has been in a net cash position for the last few years. Second, Constellation does not issue shares to acquire companies. In fact, Constellation’s share count has remained static at 21.192m shares over the past decade. The company can do this because it invests in businesses that are very cash-generative. Finally, returns on capital have @finweek

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RETURN ON EQUITY

125% 100% 75% 50% 25% Fiscal years

0 2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

SOURCE: Anchor Capital

remained high over time, suggesting that Constellation is not acquiring increasingly less profitable businesses over time to keep absolute growth rates looking good (see graph). The quality of management is particularly vital for highly acquisitive businesses. Such businesses need management that is honest, able, and aligned with shareholders. We believe Constellation’s management has all of these attributes. The CEO is Mark Leonard, who founded the business in 1995. Leonard’s letters to shareholders are praised in financial circles for both their insight into the business and their frankness with shareholders. The company’s ability to allocate capital has been demonstrated over a long period of time, both by the share’s total return and the growth in its earnings and free cash flows. Finally, Leonard is also the biggest individual shareholder of Constellation, owning around 2%. In our view, Constellation still has a good runway for growth. We don’t expect the business to compound earnings at its historic 30%-plus rates since it’s only natural that increased size makes prospective growth harder. However, we do believe it can grow at a mid-teens rate over the next few years. The vertical market software sector is very fragmented and this is conducive to opportunity for Constellation. Future opportunities will also be a function of valuations in equity markets. Naturally, we would expect the company to be less active as valuations for software companies and the broader equity market become less attractive. Constellation Software has many of the attributes we look for when considering businesses in which to invest. It is capital light, earns high returns on capital, and management has a good track record of allocating capital as well as a meaningful stake in the business. Finally, there is still a runway for growth and the valuation is attractive. Given this outlook, we believe Constellation is an attractive investment opportunity now. ■ editorial@finweek.co.za Seleho Tsatsi is the co-manager of the Anchor BCI Global Technology Fund.

finweek 23 July 2021

marketplace investment By Andrew Duvenage and Paul Marais

ECONOMY

Economic outlook: The trends to be watching out for

There is a big question mark over whether South Africa’s recent better-than-expected economic growth can be maintained in the latter half of 2021.

he recent growth in South Africa’s economy, which defied IMF predictions, can be attributed to global demand for resources linked to infrastructure-led recoveries and pandemic-related decompressions around the world which have led to high commodity prices. This, coupled with a bumper agricultural export performance and the added benefit of Covid-19 relief grants, have helped the economy recover off what was arguably a low base. It is important to understand that this growth is partly the result of pentup demand which accumulated during 2020. The big question in the next few months is whether this short-term growth can be translated into long-term sustainable momentum. One of the most significant risks to the country’s economic recovery continues to be the Covid-19 pandemic, including the Delta variant currently driving SA’s third wave of infections which resulted in government moving the country back to lockdown level 4 and stricter restrictions in late June. Whether the recent economic growth levels can be maintained will largely depend on how quickly and effectively the government can roll out its vaccination programme – which to date has been far too slow – the extent to which commodity prices will hold up, whether inflation will result in the SA Reserve Bank (SARB) and other central banks increasing interest rates, how quickly SA’s infrastructure programme gains traction, the extent to which consumer confidence will be impacted by the end of the Covid-19 relief grants, and how successful National Treasury is in containing the public sector wage bill.

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The concerns

Recent reports indicate that National Treasury is not managing to be as successful in containing the public sector wage bill as it had hoped to be. Paradoxically, the improvement in economic performance might work against Treasury when it comes to wage negotiations. Another concern is that although corporate tax collections are back to levels before the Covid-19 pandemic, a large part of which is being driven by the strong performance of the miners, personal tax collections have not recovered to the same extent. The latter constitutes most of tax revenue. The fact that personal tax collections have not recovered to the same extent indicates that pandemic-led retrenchments may turn into permanent job losses. Unemployment is likely to be further exacerbated by the recent level 4 restrictions on alcohol sales and in-restaurant dining. While the commodity rally is good news for the economy, the question must be asked whether mining companies will be reinvesting their elevated profits into expanding supply side capacity or will pass the benefits on in the form of dividends. The latter augers well for tax collections and National Treasury but is not as positive for long-term economic growth. 26

finweek 23 July 2021

The outlook for inflation, interest rates and the rand

Inflation is expected to continue to rise and to an extent this has already been priced into the market. Contingent on the uptick in inflation, expect one or two 0.25 percentage point increases in interest rates before the end of the year. Given the fragile state of the economy, the SARB will be acting cautiously so as not to tighten interest rates too quickly. Uncertainty arises should inflation rise more than or faster than expected. In the case of the latter, expect markets to come off to some extent, off the back of an increase in interest rates or even faster than expected withdrawals from central bank bond-buying programmes. However, if the future is deflationary then markets are likely to do better. The recent strength of the rand has been a boon for importers. Local factors likely to influence the currency in the remainder of the year include the local elections, the impact of the third wave of Covid19 infections – which is likely to be worse than the first wave – and an expectation that the level 4 restrictions will be extended. Recent court judgements against those implicated in corruption, and the trade surplus are both encouraging factors in the rand’s favour. However, myopically focusing only on local factors where rand movement is concerned is a mistake given the extent to which international factors play a role. The market will be watching the inflation trajectory in the US with interest given that US rates have a significant impact on the movement of the local currency. The rand continues to be an extremely volatile currency and its recent strength is not an indicator that the economy is through the quagmire. In fact, it’s a good idea to protect risks inside a portfolio and not be carried away by currency movements, particularly given the anticipated long-term trend of rand weakness and higher inflation than SA’s trading partners.

Can confidence be restored?

An economic recovery is inextricably linked to confidence. Consumer confidence is currently low and business confidence will likely follow suit, which does not auger well for a sustained economic recovery. There is no quick fix to rebuilding confidence but a concerted effort at rooting out corruption, stopping fruitless and wasteful expenditure at local government level, removing barriers to business such as policy and regulatory uncertainty and releasing spectrum would go some way to restoring faith in the government’s handling of the economy. Ultimately, the focal point of government’s effort needs to be on becoming an enabler of growth given that this is the only solution to most of SA’s challenges. ■ editorial@finweek.co.za Andrew Duvenage is the managing director of NFB Private Wealth Management and Paul Marais is the managing director of NFB Asset Management.

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THE PROPERTY MARKET: MOVING WITH THE TIMES

The pandemic has moved the goal posts, changing the criteria for property.

finweek 23 July 2021

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cover story property

iving preferences and working behaviours triggered by Covid-19 have upended the property landscape. Our homes are no longer just living spaces, they have become working, social, and educating places. With the ability to work from home, suddenly things like commuting time or geographical location are not such critical issues anymore and people have been making different decisions about how, and where, they want to live. Commercial property has borne the brunt of altered patterns. And while residential property has not escaped entirely unscathed, these changes have, to some degree, favoured the residential property market. Now more than ever before, there is more focus on the home. And South African homebuyers have continued to capitalise on the favourable buying environment. The three percentage points interest rate cuts in 2020 and the decision in May to leave the repo rate unchanged at 3.5%, has culminated in an active residential market.

Safe as houses?

By G

len da

Wi llia

National house price inflation has bounced back; the Pam Golding Residential Property Index showed house price growth of 5.1% for June 2021. It is quite the rebound from the low of 2.4% in March 2019, and the first time it has breached 5% since 2016. “There is definitely a sense that house price growth is on the move, and it is on the move at or near inflation, which previously was not the case. That indicates real house price growth as opposed to just nominal house price growth,” Dr Andrew Golding, chief executive of the Pam Golding Property group (PGP), tells finweek. Meanwhile growth in house prices in the lower price band (below R1m) continued to accelerate by 7.47% in May 2021, says PGP. The strengthening of the market is also reflected by the decline in the average time of homes on the market prior to sale. That shortened from 17 weeks and six days at mid-2018, to eight weeks and two days in the first quarter of 2021, says John Loos,

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finweek 23 July 2021

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cover story property

property sector strategist at FNB Commercial Property Finance. As size for remote working and home schooling took on more significance, freehold properties outperformed sectional title much of last year, reversing sectional title’s outperformance trend before the pandemic struck. Seeff Property Group says that while the market for family houses below R1.8m has been booming since mid-2020, they have also seen a marked increase in sales of suburban houses in the R3m to R4m price band. Still, sectional title numbers are in line with what they were before the pandemic, says Golding. The demand for larger-sized homes may be short-lived as households are financially constrained, says Loos. “We saw building activity show some growth in the ‘free standing’ over 80m2 category in recent times, probably due to big interest rate cuts and demand shifting ‘upward’ as a result of improved credit affordability. I think that will revert back to smaller-sized flats and townhouses that are financially more economical.” Entry-level buyers and sectional title sales are on the move. Prior to last year’s interest rate cuts, home buying for entry-level buyers was cost-prohibitive. Now these buyers are at the heart of SA’s active residential market and sectional title units are attracting a growing number of first-time homebuyers. Despite the impact of Covid-19 and lockdown, property sales in Bloemfontein in 2020 were the highest recorded over the past decade, 50% of those sales attributed to first-time homebuyers, reports PGP. In May 2020, sectional title sales represented 25.3% of total sales. That rose to 27.7% by February 2021, says PGP. According to Seeff Property Group, over the last 12 months almost 80% of all units sold on the Western Cape’s Atlantic Seaboard and about 67% in the city centre and City Bowl area were sectional title. Then there is the revival in the luxury market. The hard-hit luxury market revived after the lockdown with sales to a combination of foreign buyers and South Africans. “High-net-worth individuals are purchasing properties they now feel they can live in permanently, which they couldn’t before,” says Golding. “The top end of the coastal market has been better than the top end of the Joburg market, although even in Joburg for the first time in ages we are seeing properties changing hands above R20m.” Samuel Seeff, chairman of the Seeff Property Group, tells finweek that the company has enjoyed a significant uptick in the R20m-plus sector of the

finweek 23 July 2021

GRAPH 1: FNB NATIONAL AVERAGE RESIDENTIAL RENTAL VACANCY RATE

12.91%

13.15%

10 7.47% 5.35%

0 2016 Q1

2017 Q1

2018 Q1

2019 Q1

■ National Vacancy

Dr Andrew Golding Chief executive of the Pam Golding Property group (PGP)

John Loos Property sector strategist at FNB Commercial Property Finance

Samuel Seeff Chairman of the Seeff Property Group

2020 Q1

2021 Q2 (SOURCE: FNB/TPN)

market, boosted also by foreign buyers from the UK, Germany, US and so forth as well as SA expats looking to invest with a view to returning to the country. The Covid-19 pandemic and the ability to work remotely have driven people to areas like coastal towns, which afford more space and a better quality lifestyle. According to Seeff Property, out-of-towners now make up 70% of all sales in Hermanus. Traditionally a town for older buyers and retirees, almost a quarter of permanent residents are now under 35 years. And semigration to coastal areas has picked up pace. “The semigration trend from inland to the coast, from the KwaZulu-Natal coast all the way down to the Cape coast, has been reignited,” Golding tells finweek. There is also a surge in demand for secure estates. While activity in the national housing market slowed in recent years, estate sales have remained relatively consistent. The pandemic and lockdown measures merely increased their appeal. Estates accounted for a significantly larger percentage of total units sold, rising from 13.1% in May 2020 to 17.1% by December 2020, the highest percentage recorded over the past 10 years, says Golding. Estates have cast their net far wider, providing access to a broader market of potential homebuyers. As well as luxury homes and apartments, some now offer affordably-priced sectional title units and retirement components and many prioritise “green” living, says Golding. Bijou pads were also boosted. Lowered interest rates and reduced bond payments have boosted home ownership affordability, enabling many traditional renters to own their own property. With the affordability of micro-units increased, many players have entered the market to feed

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Steyn City Properties announced during 2019 an additional R5bn investment into phase 2 of the secure family centric parkland residence, and now delivers on that development plan. school campus from grade 000 to matric and a AAA-grade office epresenting the perfect confluence of luxury and convenience, park, it is not difficult to see that these visionaries have developed a Steyn City continues to redefine luxury living – not just in master plan for the future of luxury and convenient living. South Africa, but in the world. When Steyn City first launched It’s small wonder, then, as demand for properties within gated in 2015, home buyers and investors alike were astonished. communities continues to increase in SA as people seek greater Here was a project quite unlike any other seen to date: it was forwardthinking, not only in terms of its location in Johannesburg’s new north, security, interest in Steyn City climbs. With the development’s first investors and purchasers already realising exciting returns on their a burgeoning hub between Johannesburg, the Waterfall/Midrand investment, there is every sign that the upward trajectory will remain node and Pretoria, but also its offering. This was, quite literally, a city unabated – especially as it continues to garner international interest. within a city, presenting every possible leisure amenity or essential In fact, Steyn City was earlier this year picked as one of the top 10 facility residents might need as they navigated their day. lifestyle estates in the world by New World Wealth. What made the development more impressive still is that all Interest has also been on the increase since Steyn City Properties infrastructure for these facilities was in place from the outset. This announced its further R5bn investment into the next phase of the was a crucial element in the developer’s quest to add value for buyers: residential development, a project which is so ambitious it they were adamant that purchasers should be able to see what promises to transform this already sought-after address they were buying into from the very beginning. It was a into a global destination. This is thanks largely to novel approach in an industry where promises about the pioneering vision driving the City Centre forthcoming attractions are often made but not development; an entirely pedestrianised always kept. complex featuring 700 unique apartments As the facilities started to come online, and penthouses. These are designed it became clear that Steyn City Properties around tree-lined piazzas, featuring Steyn was very serious about creating the very City’s iconic landscaping, and will one day best lifestyle development in the world. be lined with bespoke retail stores and Investors were first introduced to a range restaurants. SA’s leading design luminaries of accommodation types, from stands to have been called upon to give the show build your own home, to lock-up-and-go homes their special touch, and the result is clusters and luxury apartments – all told, an interpretation of urban living that rivals something for buyers at every stage of the most innovative developments around their lifestyle, whether they were growing the world. Luxury touches such as integrated their families or looking for a low maintenance Gaggenau kitchen appliances, blu-line kitchens, option for their retirement years. extra space, high ceilings and marble tops add to These were augmented by amenities the ambience and elevate the development further out noteworthy not only because of the extensive variety, of the ordinary. but also their exceptional quality. Steyn City’s recreational The Clubhouse and Nineteen Restaurant at Steyn City This sense of the special is enhanced by the addition options highlight its accent on family time and an of world-class facilities that help to move Steyn City outdoor-oriented lifestyle as well as wellness. Everything even further into a league of its own. Take the 300m Clearwater has been provided for residents to embrace everything active, no Lagoon, for example, with its beach volleyball, water slides, and matter what their interests, in a secure environment so that they Laguna kiosk offering everything you could need for where “every day have complete peace of mind. From a fully-equipped gym to outdoor feels like a holiday”. workout stations, a 45km well-lit promenade for safe walking and Then there’s the Steyn City Ultimate Helistop, including executive jogging at all hours, to an 18-hole Nicklaus design championship golf business suites and a coffee bar with a premier lounge waiting area, course (with award-winning clubhouse), a purpose-built, challenging enabling busy executives to hop between meetings with ease or 55km mountain bike track, world-class Equestrian Centre (also be whisked away to their favourite bush retreat. This is the perfect with a clubhouse facility), fishing dams, resort pools and an indoor complement to the development’s other spectacular facilities, aquatic centre. Residents are also able to enjoy fine dining at the XIX promising to eradicate wasted minutes from the day by eliminating a (Nineteen restaurant), or opt for more casual meals and poolside ice potential lengthy commute. cream with pizza at The Deli. And all of this is set against Steyn City’s With this next step forward, Steyn City is taking a leap into a new signature 2 000-acre indigenous-planted parkland, giving every single era for property investors. ■ resident a pristine back garden to be envied. Couple these phenomenal leisure facilities with a forward-thinking www.steyncity.co.za

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entry-level homebuyers purchasing these small bijou pads of about 18m2 to 30m2. One is BlackBrick, developers of residential and hospitality apartments in Sandton, Cape Town and KwaZulu-Natal. With its first Sandton development fully sold, a second Sandton 275-apartment development has launched with studio apartments (about 33m2) priced from R895 000. Recently, JSE-listed Attacq launched its second residential offering in Waterfall City. ‘The Mix’ caters to the entry-level buyer, priced from R999 000 for a studio apartment of about 34m2. Attacq said expressions of interest had exceeded the total number of units in the block. Balwin Properties, though, axed its ‘Wedgewood’ entry-level development in Sandton. One reason cited was a low level of take-up for its units priced from R799 000.

GRAPH 2: TPN RENTAL ESCALATION VS CPI

6.5 5.5 4.5 3.5 2.5 1.5 0.5

finweek 23 July 2021

Photo: Supplied

2021/01

2021/04

2020/10

2020/07

2020/04

2019/10

2020/01

2019/07

2019/01

2019/04

2018/10

2018/07

2018/04

2017/10

2018/01

2017/07

2017/01

(SOURCE: TPN)

GRAPH 3: TPN TENANTS BUCKETED BY AGE

25 20

Diminishing rental demand

The departure of renters to home ownership, renters returning to the parental home or delaying moving out due to financial pressures has ruptured the once strong rental market and reduced the tenant pool. By the end of 2020, the residential rental vacancy rate had risen sharply to 12.9% from 7.47% at the start of 2020, reaching 13.15% by the second quarter of 2021, reports TPN (see graph 1). Restrictions on business, international and to some extent domestic travel also caused many property owners to pivot their short-term rentals into the long-term market, pushing up supply and exacerbating high vacancies, says Michelle Dickens, CEO of TPN Credit Bureau. With diminishing demand for rental properties, it is a tenant’s market. An oversupply of vacant properties is driving down rental prices and escalations have nosedived from almost 6% in 2016 to -0.2% during the second quarter of 2021 (see graph 2). “The residential rental market was starting to show signs of strain before the impact of the pandemic,” says Dickens. “Residential rental escalations in the years preceding the pandemic have not managed to keep pace with CPI. Landlords have seen an erosion of profit as rental price escalations slow down and even turn negative in 2021. “At the same time municipal charges have increased above CPI. Municipal charges are levied on a property level, meaning landlords have become collection agents for municipal usage charges, recovering electricity, water, sewerage and refuse removal expenses from the tenant. Worse, as tenants’ affordability deteriorates and rental delinquency is on the rise, landlords are forced to

2017/04

-0.5

15 10 5 0

2008

2009 ■ 18 - 24

2010

2011

■ 25 - 29

2012 ■ 30 - 34

2013

2014

■ 35 - 39

2015 ■ 40 - 44

2016

2017

■ 45 - 54

2018

2019

■ 55 - 64

2020

2021

■ 65 - 80 (SOURCE: TPN)

cash flow the tenant usages costs which are ultimately a claim against the property.” Residential rental recovery hinges on job recovery, which positively impacts demand for rental properties, says Dickens. There is a worrying dynamic playing out in the rental demographics, she tells finweek. “Younger tenants, 18- to 24-year-olds, who are experiencing the highest level of unemployment, are not feeding into the rental market at the same pace as this age bucket in 2008. There is a year-on-year slowdown as demand for rental property by the younger generation fails to materialise.” (See graph 3). Where is the rental market sweet spot, finweek asked? “One-in-three tenants rents in the R7 000 to R12 000 per month price bracket,” says Dickens. “This is the sweet spot – best-performing rental payment behaviour, with 84.37% in good standing and a vacancy rate of 12.39%, below the national average of 13.15%.” Sectional title properties, Dickens says, earn more bang for your buck, delivering 10.3% gross yield compared with 7.2% for full title properties.

Michelle Dickens CEO of TPN Credit Bureau.

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advertorial Cypriot Realty

Choose island living

Cyprus enhances the permanent residency programme

n 24 March 2021, the Cypriot government removed the requirement to invest €30 000 into a three-year fixed-deposit bank account in Cyprus as part of residency applications. This is a considerable saving of around R510 000 for South Africans at current exchange rates. Cyprus is an English-speaking nation and full EU member and is a popular European destination for families wanting a Plan B. Not only has it been voted as having the best permanent residency programme on offer, but investments are pouring into the economy focusing on infrastructural development and natural gas fields.

There are three main benefits of investing in Cyprus:

1. Your Plan B: The whole family can enjoy immediate permanent residency for life in Cyprus on buying property. Cyprus’

permanent residency programme is quick, affordable and includes three generations in the same application. Dependent children up to age 25 and both the parents and the parents-in-law of the main investor are included. 2. The lifestyle: The country offers a relaxed, stress-free lifestyle. Amenities include worldclass golf courses, beautiful countryside, 66 blue-flag status beaches, the cleanest water and beaches in the Mediterranean and excellent medical facilities. 3. Safe investment destination: Cyprus offers a safe, solid environment in which to invest in real estate. Properties offer excellent value for money when compared with other European countries – especially homes right on or near to the sea. The western side of the country is like the Western Cape and enjoys the biggest demand and highest growth. There is also no inheritance tax. In Cyprus, expatriates are not restricted to buying only in designated areas

or prescribed to stay in the country every year to retain their residency. Being able to rent your property out has the real benefit where you can earn a decent Euro-based income. There is a high demand for both long-term rentals and short-term holiday lets.

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“I think some mild rental market recovery is due, especially as we expect to move to interest rate hiking next year, which normally encourages some aspirant homeowners to put home buying on hold and continue to rent for longer.”

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Lie of the (buy-to-let) land

With a home-buying market now stronger than the rental market, the picture for buy-to-let investors is less rosy. In FNB’s first-quarter 2021 estate agent survey, buy-to-let buying was estimated at around 10% of total buying. That is a fairly moderate level, says Loos. “Back in the pre-2008 boom years at one stage the survey was showing buy-to-let at above 20%. It seems that the most recent surge in residential demand, on the back of last year’s interest rate cuts, was largely primary residential demand.” It has not been a great buy-to-let investment opportunity in recent times given that the home purchasing market has been on the strong side and yields on residential rentals are still generally on the low side, he says. But he does expect the buy-to-let investment opportunity to improve. “I expect this to change in the next few years as we move towards interest rate hiking, yields on residential property begin to rise and price growth returns to underperforming rental growth, which is not the case of late.” Loos also believes we may begin to see some recovery in the rental market. “We have seen economic recovery post-lockdown, and Rode’s first quarter flat vacancy rate declined just a bit, while TPN’s tenants in good standing recovery has also slowly been increasing. I think some mild rental market recovery is due, especially as we expect to move to interest rate hiking next year, which normally encourages some aspirant homeowners to put home buying on hold and continue to rent for longer,” he tells finweek. “Globally, the low interest environment is putting pressure on the rental market. I believe the sweet spot for property investment is probably around the R700 000 to R1m mark where we have a considerable shortage of space,” says Francois Viruly, property economist and professor at the University of Cape Town. The offshore investor market is still very much in play given the offshore advantages of currency diversification, some capital growth (not rental yields because rental yields are lower) and portfolio diversification, says Golding. “There is a constant appetite for South Africans and Africans to diversify their property portfolios offshore

finweek 23 July 2021

and that hasn’t really stopped. We recently launched a product in Lisbon and had 400 enquiries from our initial burst to the market. That was a surprisingly high number for us given that it is a pure investment product, not a Golden Visa (a scheme offering residency or citizenship through property purchase) product.” Given the rising SA country risk of the past decade or more, diversification offshore is a good thing for many investors, says Loos. But it depends on investors’ current exposures. And he cautions, right now there is hype around housing bubbles in many countries, including the US. “With many seemingly overheated markets, it’s probably not a great buying opportunity for residential investment right now in many foreign countries. Patience is required; wait for markets to cool.” Viruly advises: “If you are going to choose a sector, whether here or internationally, the residential market is probably your best bet. The shortage of residential space is a global issue so you will always do well in that market. But choose your segment carefully.” Francois Viruly Property economist and professor at the University of Cape Town

Roland Peens Founder of Hemelzicht Vineyards

Buying a fraction of a property

An alternative buying method that lowers the barriers to entry is fractional property ownership, an investing method used to purchase a portion of property. One model, where a group of individuals each buy a portion in the property and therein a share in the usage, has historically been termed syndicated property. But this comes with significant challenges around usage and resale, warns Golding. “Resale to sell a share in a fractional ownership has always been the biggest challenge and so it’s a thin part of the market.” Says Viruly: “The issue is how to get out of these structures. Often that market is fairly limited. There’s a liquidity problem, that’s where one has to be careful.” And, he adds, the costs associated with those management structures have to be looked at very carefully. “If you want to buy some holiday [time] with associated services, then see it that way. Be careful you don’t necessarily see it as an investment opportunity. “There are other ways of investing,” he says. “If you want to be invested in SA’s best properties, we have a well-developed Reit structure. If you buy a share in a Reit you can be out of that in minutes because there will be a buyer.” But as he points out, there are new technologies

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cover story property

SA LISTED PROPERTY

Fortress A, -1% Hospitality, -1% Balwin, -3% Fortress B, -7% Rebosis A -24%

Accelerate, 3% Hyprop, 3% Capital & Regional, 3% Stor-Age, 4% Acsion, 4% EPP, 10% Capital & Counties, 11% NEPI Rockcastle, 12% Tradehold, 12% Safari, 13% Fairvest, 13% Sirius, 13% Equites, 13% Arrowhead A, 15% Investec Australia Property Fund, 16% Stenprop, 19% Liberty2Degrees, 21% Indluplace, 23% Growthpoint, 24% Lighthouse Capital, 24% Investec Property Fund, 27% Rebosis, 27% Redefine, 29% Resilient, 29% Dipula A, 30% Spear, 31% Octodec, 32% SA Corporate, 33% RDI Reit, 34% Tower, 36% Attacq, 38% MAS, 43% Hammerson, 44% Vukile, 44% Emira, 57% Arrowhead B, 57%

Texton, 126% Dipula B, 158% SOURCE: ASB

coming through. “The proptech world is rapidly shifting and over the coming decades I think we will see opportunities for people to invest in a component of property through blockchain technologies etc., so we will see a changing environment in how we invest in property.” One proptech example enabling affordable access to property, is EasyProperties. The online fractional investment model allows investors to start small through investing and buying shares in properties on their platform. It’s technology that Hemelzicht Vineyards is now exploring after failing to reach its R50m subscription goal. Hemelzicht’s fractional investment model sought 50 investors investing R1m for a 1% share of the Western Cape wine farm. “We reached R40m of subscriptions in April, before the contract with the seller expired and funds were returned. We are working on financing the project in order to relaunch, but as yet haven’t been successful,” Roland Peens, founder of Hemelzicht Vineyards, tells finweek. Peens says they are looking to further fractional ownership, especially with blockchain and token technology, allowing a lower barrier to investment. ■ editorial@finweek.co.za 36

finweek 23 July 2021

Listed property debt levels and returns to investors But on the back of additional finweek asked Pranita Daya, valuation write-downs counteracting the real estate analyst at Anchor effects of disposals, Accelerate Property Stockbrokers, to weigh in on the Fund’s LTV increased to 48.5%, above subject of listed property companies’ levels the market is comfortable with. debt levels. “We are mindful that there are still The listed property sector has tremendous pressures on property been experiencing the challenge of fundamentals, which will impact balance sheet pressures. These include further devaluations. Thus, counters elevated loan-to-value (LTV) ratios, which may look in a safe spot at which were exacerbated by property present could still see their LTV ratios value devaluations over the past year, increasing,” says Daya. as well as significantly lower interest Banks, she says, have been cover ratios due to pressure on earnings from rental support provided to tenants, supportive of most Reits in terms of renewals and debt extensions. aside from an overall tough “We have seen a mixed bag trading environment. of counters renewing debt, Many Reits, says Daya, some receiving covenant have made substantial relaxations (Redefine progress in terms of Properties an example) decreasing (and managing) with others negotiating their LTV ratios, mostly permanent increases in LTV through disposal programmes Pranita Daya and retained earnings. A few Real estate analyst at ratio covenants (SA Corporate). Anchor Stockbrokers “In terms of foreign debt, stocks, like Growthpoint Vukile is an interesting one; Properties and Equites over 90% of their foreign debt was Property Fund, have completed equity refinanced through rand debt. We have raises, however most counters have also seen many counters reducing their opted to steer away from this option exposure to cross-currency interest rate given the deep discounts to NAV per swaps, which have historically been a share at which the sector trades. complex instrument that investors don’t Daya says their preferred range particularly favour.” for LTV ratios is between 35% and Daya expects dividend payouts will 40%. Using the All Property Index as continue to be close to or just above a reference, counters with LTV ratios the 75% minimum Reit requirement, above 45% would be of concern, these including the likes of Attacq, Hammerson especially for those who still have elevated LTV ratios. However, she says, and EPP, she says. there are counters, like Resilient and “EPP is the one with the highest Equites, who have indicated that they will LTV ratio and which we expect will continue to pay out 100% of earnings. take at least another 18 to 24 months 2020 was a miserable year for to see some improvement, however listed property, the asset class posting we are satisfied that they are actively a negative return of 35%. But year-toaddressing this via their disposal date listed property has been a star programme as well as finding equity performer with the ALPI (All Property partners for other assets.” Index) rallying to 20.1% while the SAPY Attacq’s gearing, though, will reduce to 43.4% after a 50% disposal to Equites (SA Listed Property Index) posted 19.3%, of two logistics properties, and 56 723m2 to outperform most global property sectors. (See graph). ■ of undeveloped land in Waterfall.

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(YTD TOTAL RETURNS - JUNE 2021)

YOUR DREAM COASTAL RETIREMENT

Sharyn: 079 853 8946 | sales@renishawhills.co.za | www.renishawhills.co.za

in depth economy

LOOTING FOLLOW ARREST RAISES SA’

By Jaco Visser, Timothy Rangongo and Zerelda Esterhuizen

Photos: Gallo Getty Images | Unspash | Supplied

call by President Cyril Ramaphosa to calm widespread unrest in KwaZulu-Natal and Gauteng following the jailing of former president Jacob Zuma wasn’t enough to stop thousands of looters, many opportunistic, to attack and pillage businesses in South Africa’s two most populous provinces. Especially small businesses, many of which are owned by foreigners, bore the brunt of attacks linked to supporters of the former president, now a criminal. “The Small Business Institute strongly condemns the wanton looting of businesses, destruction of vital economic infrastructure, burning of trucks and blockading of roads, primarily in KwaZulu-Natal and Gauteng,” the institute said in a media release. The SA Chamber of Commerce and Industry’s CEO, Alan Mukoki, said: “There is no protest that involves breaking into a shop, removing TVs and fridges, damaging property, going out to the streets and damaging infrastructure. That is not a legitimate protest, notwithstanding the fact that the constitution allows you the right to free protest and also allows other people not to protest if they don’t want to.” At the time of writing, shopping centres in Durban, Pietermaritzburg, Soweto, Roodepoort, the Johannesburg central business district and Mamelodi, among others, had been ransacked. In a press briefing on 13 July, police minister Bheki Cele said about 800 people had been arrested. Assurances by Cele and state security minister Ayanda Dlodlo that no lapses in intelligence gathering had occurred before the outbreak of violence, didn’t convince everyone. “We are shocked and concerned that law enforcement agencies, especially intelligence services, have allowed the situation to develop for weeks ahead of the Constitutional Court judgement on 29 June,” the Small Business Institute said, with

finweek 23 July 2021

The violent ransacking of businesses following the incarcera

Christo van der Rheede Executive director of Agri SA

reference to Zuma’s incarceration. “The response has been slow, fragmented and woefully inadequate. This is completely unacceptable, and South Africans and economic operators, especially small and mediumsized enterprises, deserve protection from the official security services.” Calls for stronger action by the police follows questions on how government came to decide to deploy around 70 000 soldiers to enforce the first hard lockdown a year ago, but only sent 2 500 troops to support the police in quelling the recent violence. Defence minister Nosiviwe Mapisa-Nqakula said during the 13 July press briefing that the government is informed by the facts on the ground. On calls for the declaration of a state of emergency, Mapisa-Nqakula said: “South Africa will declare a state of emergency if a need arises based on an assessment report. “Whether it would be correct to declare a state of emergency right now, we do not think so,” she said. “During a state of emergency, in a sense you take all liberties from citizens and the military takes over the country. For now, we do not think that we have reached that point.”

Food and health security

A man gestures as rioters loot the Jabulani Mall in Soweto, Johannesburg on 12 July.

In the meantime, Agri SA, which represents the country’s commercial farmers, called on government to implement a national state of emergency. “The looting of shops, stoning of cars, blocking of roads, burning of trucks and crops as well as theft of livestock are posing a serious threat to food security in the country,” Christo van der Rheede, executive director of Agri SA, said in a statement. “Furthermore, SA is a constitutional state, and our constitution places a constitutional obligation on the state to protect its citizens against such criminality.” Van der Rheede’s concern was validated by the closure of the critical N3 highway which links SA’s www.fin24.com/finweek

in depth economy

WING ZUMA’S A’S RISK PREMIUM

ation of former president Jacob Zuma hits business confidence.

pressure and livelihoods under constant threat,” busiest harbour and factories in Durban with the the company said in response to questions. “We country’s economic heartland and most populous denounce the criminal acts of violence, looting and province, Gauteng. More than 20 trucks were burnt damage to property. It puts the lives and safety of before the road closure, according to media reports. millions of South Africans at risk and brings further Clicks CEO Vikesh Ramsunder told finweek: “The food security challenges in South Africa.” Several of violent protest action across South Africa is having the group’s stores in KwaZulu-Natal and Gauteng a major impact on the country’s access to essential were unable to trade due to extensive damage. healthcare services in the midst of the third wave of Brian Leroni, the senior vice president of the pandemic and is disrupting the national Covid-19 Massmart’s group corporate affairs, said as at close vaccination programme.” This linked with Discovery’s of business on 12 July, 19 of their facilities had been medical aid scheme temporarily closing its vaccination breached, 16 in KwaZulu-Natal and three in Gauteng. site at Gallagher Estate following the unrest. Provincial Vikesh Ramsunder “We are in the process of assessing the losses and health departments in KwaZulu-Natal and Gauteng CEO of Clicks would prefer to not speculate at this stage. also suspended vaccinations at various sites. “Our immediate priorities remain first to And it is not only the vaccination ensure the safety of our staff and second to programme being jeopardised by the “The looting of shops, further secure our physical assets. We are also unrest. “Owing to the destruction of property and the threat to the safety stoning of cars, blocking rapidly shifting our focus toward finalising plans to expedite business recovery and of our employees and customers, we have had to close our stores throughout of roads, burning of trucks responsible reopening of stores as soon as it is safe to do so.” KwaZulu-Natal and in parts of Gauteng and crops as well as theft David North, chief strategy officer at Pick and continue to monitor other areas that n Pay, said as the safety of their customers may come under attack,” Ramsunder said. of livestock are posing and staff is their first priority, they temporarily “This is not only impacting the provision closed a number of stores in the affected of chronic medication to Clicks customers a serious threat to food areas. “It is, however, too early to give an but is also impacting on the supply of lifesecurity in the country.” assessment of the trading and financial saving drugs to hospitals through UPD, our impact thereof.” pharmaceutical distributor.” In response to questions, Jacqui O’Connor, In response to questions from finweek, corporate communications manager for Dis-Chem confirmed that its vaccination clothing retailer TFG, said: “I am afraid that we are sites, pharmacies and drive-through testing stations unable to comment at this stage as we are very busy in KwaZulu-Natal remain closed due to the high dealing with the crises.” levels of unrest in the province on 13 July. The Andrew Bahlmann, chief executive of Deal Leaders company also advised that certain sites in Gauteng International, told finweek on the morning of 13 July: have been affected. “While the images on television and social media are disturbing, the looting and unrest remains relatively Closing shop isolated on Tuesday morning, and while the damage Various large grocery chains have closed their outlets Jacqui O’Connor may be in the hundreds of millions, many businesses in the areas hit by the looting. Corporate communications are wisely closed rather than risk incidents.” Shoprite, the largest grocer on the continent, manager for TFG condemned the unrest. “It is especially damaging Property after the dire impact of the Covid-19 pandemic on Following the looting and, in some instances, setting the economy with unemployment at record highs alight of shopping centres, locally-focused real estate and South African consumers under tremendous @finweek

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finweek 23 July 2021

in depth economy

“Without a sustainable programme of reform of the economy and adequate training and education to empower the workforce with practical job-ready skills, any stemming of the current unrest will simply be a Band-Aid.”

investment trusts sold off on 12 and 13 July. Growthpoint was almost 3% lower over the two days through 13 July, with Resilient Reit down by a similar percentage over the two days, Redefine fell 5.5% and Fortress Reit slumped 7.6%. Responding to questions, Neil Gopal, CEO of the South African Property Owners Association, said: “It’s deplorable. Whilst people have the right to protest, they do not have the right to destroy property and steal. We recognise and respect the rights of every South African to protest peacefully and freely express their views on any matter of concern. Our constitution affords us that right. However, these protesters must respect the rights of others.” The listed property sector, which had a terrible couple of years recently as they struggled to firstly contain debt and then had to scramble to mitigate the impact of lockdowns on office and retail rentals, will certainly be set back by the looting. “Clearly our police services are being overwhelmed and are ill-equipped to deal with the magnitude, scale and nature of the violence and destruction that is happening around us,” Gopal said. “This maliciousness and damage to infrastructure and other property is only going to further exacerbate the country’s socioeconomic challenges; the broader financial impact of the looting and property destruction undermines the country’s economic confidence and will in all likelihood result in a great economic downturn.”

South African Police Service members arrest a looter at the Gold Spot shopping centre in Vosloorus, southeast of Johannesburg, on 12 July.

Neil Gopal CEO of the South African Property Owners Association

Photos: Gallo Getty Images | Unspash | Supplied

Hurting the economy

As SA’s economy is trying to escape a decade-long lull brought about by diminished consumer, business and investor confidence due to corruption and the government’s inability to boost growth, tackle rolling power outages and hostility towards the private sector, the current unrest doesn’t bode well for the economy. Green shoots of reforms, implemented by Ramaphosa recently, may wilt as businesses shun investing in a geography which bodes heightened security risks. The unrest “comes at a time when confidence was returning strongly”, said Bahlmann. “The vaccination 40

finweek 23 July 2021

Peter Armitage CEO of Anchor Capital

drive was gaining momentum, the economy was starting to recover from its worst recession in 90 years, and the rand was the world’s best-performing emerging market currency. “In keeping with South Africa’s stop-start progress, the latest unrest is another step backwards,” said Bahlmann. “However, consumers, businesses and investors (including foreign investors) have become inured to sporadic violence in this country, and investors in particular are perhaps not overtly concerned as yet.” Peter Armitage, CEO of Anchor Capital, told finweek that “this is obviously worrying for investor confidence. Growth and commitment of new capital is all about confidence levels,” he said. “Safety and law and order is top of people and companies’ lists. The bond and equity markets have not been materially impacted as yet, indicating some hope that the situation will quieten down and losses for listed companies will be manageable. However, in the longer term the underlying issues need to be addressed and the socioeconomic stability is essential for everybody’s long-term prosperity and to improve the lives of ordinary South Africans.” The immediate impact of the looting and unrest was summarised on 13 July by Bianca Botes, director at Citadel Global, in a daily note to clients: “Fear and uncertainty grip South Africa as businesses and shops close their doors in an effort to avoid the violent looting that took the country by storm yesterday. As a result of the violence, sentiment around the stability of South Africa is being eroded, seeing the rand trade weaker with added risk priced in.” Going forward, though, would entail greater effort from the government. “I believe the combination of SAPS (police) and SANDF (army) on the streets will halt the current unrest within days,” said Bahlmann. “Without a sustainable programme of reform of the economy and adequate training and education to empower the workforce with practical job-ready skills, any stemming of the current unrest will simply be a Band-Aid.” ■ editorial@finweek.co.za www.fin24.com/finweek

indepth xxxxxxxxxxxxxxxx in depth companies

THE CONSTRUCTION SECTOR IS GEARING UP of listed After a decade of tough operating environments, SA is left with only a handful builders to tackle the government’s infrastructure rollout.

Photo: Shutterstock | Supplied

By Brendan Peacock

teps toward economic reform, greater accountability for public sector officials and intent to get the economy on track again appear to have gathered momentum in recent weeks. One of the beneficiaries potentially sitting in the sweet spot of all three factors is the construction industry, which has endured a torrid decade. After the 2010 Fifa World Cup stadium and infrastructure projects, order books in South Africa began to shrink and an oversupplied construction sector was quickly pushed to find alternative options to fill existing capacity. As the decade rolled on, a combination of the downward part of the commodity cycle, a lack of African infrastructure spend, stalled Middle East projects and cut-throat competition for contracts pushed construction firms to the brink. Some, like Group Five and Basil Read, ultimately capitulated and entered business rescue in the face of project contract fines and an industry-wide liquidity crunch. Listed sector representatives in which to invest dwindled to a few. 2021, by contrast, has offered glimmers of hope as roads agency Sanral begins opening the taps on road construction spend, mines move to re-engage in postponed maintenance work, and the government announced an unexpected increase in the nonlicensed private electricity generation cap to 100MW. @finweek

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Rowan Goeller Chronux Research analyst

Andrew Joannou Portfolio manager at Ninety One

Chronux Research analyst Rowan Goeller says Sanral is back in gear after years of not spending its allocated budget. The tenders being awarded – including by provincial and local municipalities – are up to multi-billion rand in size, including for some national roads. “These are some big jobs, which only the largest listed and unlisted players have the balance sheets to take on. You can see it in Raubex’s order book, which is effectively full. They’re not chasing work at the moment because they already have two to three years of visibility, which they haven’t had in many years. If Raubex can pick and choose the projects it takes on, that should lead to decent margins.” Ninety One portfolio manager Andrew Joannou agrees that the Sanral work will be significant for Raubex. “Off the base they were at, it is meaningful, and they will be the major beneficiary. The side of the business that deals in aggregates, building supply, bitumen and asphalt will also benefit. Even the airport construction work that was stopped by Covid19 must return – preferably when all companies are at full capacity and Raubex can command higher margins,” he says. The raising of the power generation cap is significant, Goeller says. “Previously the only private sector involvement was companies like Reunert finweek 23 July 2021

in depth companies

(GRAPH 2) RAUBEX FIVE-YEAR SHARE PERFORMANCE

(GRAPH 1) WBHO FIVE-YEAR SHARE PERFORMANCE

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SOURCE: TradingView

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installing solar panels on roofs and in parking lots, which is not large construction work. A 100MW power plant is full utility scale. There is a dual business case for building larger plants: to lower electricity costs and to move in line with increasing global scrutiny on environmental impact and carbon footprint. South African businesses have, until now, by default been held hostage by Eskom’s embedded fossil fuel liability,” says Goeller. Another upside for such power utility builds will be that the lenders involved will want to avoid risk and will likely appoint listed players as construction partners. “Private sector customers will be good customers providing a steady revenue stream, rather than the stop-start nature of much of government infrastructure projects. I have no doubt many sites around SA are already being measured for their solar and wind generation potential and will then be marketed to corporates as an off-the-shelf solution to their power needs. It can all happen relatively quickly,” Goeller says. Construction companies, electrical equipment suppliers and transmission line installers will benefit. “This could see R50bn quickly being thrown at renewable energy and all the listed companies could be involved because it isn’t highly specialised work – a solar energy plant really involves concrete bases and the installation of the equipment. Even if specialist foreign firms get involved in these projects, they are likely to subcontract any construction to local players,” says Goeller. There are still some headwinds. “The lack of office space construction will affect a company like WBHO, but we’re a year or two into that already. It’s no longer such a big part of their business. General construction is not where business will come from – it will come from civils, roads, mines, renewable energy and low-cost housing,” says Joannou. 42

Cents 3 600

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SOURCE: TradingView

The lean years also brought unlisted players back to the pack. “There are big, well-run and competitive private businesses who have eaten the lunch of some listed players. Listed players also frequently need to subcontract to meet BEE requirements while carrying all the risk, as well as contending with local community discontent with the supply chain in larger projects. It’s not an easy environment,” Joannou says. However, he believes the sector is less than a year away from all spare capacity being taken up. “While the road projects were overdue, the lifting of the electricity generation cap was a surprise and one of several fortuitous events to benefit construction players recently. I believe demand is there and most corporates will already be doing feasibility studies. The numbers look good in terms of cost. Even if the cost created a slight disadvantage, they may do it anyway for security of supply. “There will likely be two models – building and owning the generation facility, which will require capital being invested up front; or leasing assets from whoever builds the plant. This would provide long-term revenue for the builder, but it’s early days to predict which model will prevail,” says Joannou. Another potential tailwind for some players is mining maintenance, which has been neglected for at least the last five years. “Mining houses have been skimping on maintenance and replacement capital expenditure, which has traditionally been a good source of activity for large construction companies. There is a lot of work for yellow equipment around mines and often at quite good margins. “If spending on maintenance normalises, there could be some big jobs flowing, and where this used to form a substantial part of the business of WBHO and Group Five, Group Five’s demise means WBHO could benefit from the return of reliable customers who pay well and on time. There are pockets of evidence that this could www.fin24.com/finweek

in depth companies

Houses of cards

“In good times, at the top of the cycle, supply is tight and contracts are written with good margins and beneficial terms for construction companies. When the cycle turns, however, companies in need of work will begin to accept poorer terms and more challenging projects that carry greater risk of default. In construction, it matters a lot at what price you sign the contract,” says Ninety One’s Andrew Joannou. “If you price incorrectly, falling foul of stipulations can hobble the company – you can lose money on the contract quickly. Traditionally, a company like WBHO wrote good contracts and knew how to price up front. Getting that calculation correct and implementing effectively meant customers were happy,” he adds. To be fair, says Joannou, the catalyst for mistakes in managing risk is almost always external. “Lack of demand and a significant fall-off in work from a high base through industry oversupply creates the classical boom-time implosion. Then companies would price contracts badly – we saw Group Five effectively wiped out by one bad contract, with Basil Read not far behind. In such an environment, liabilities become very real. Then there is the working capital issue. If you get wrapped up in a court case over a project and you’re not being paid, liquidity dries up completely.” He says the correct decision would be to respond to shrinking demand by right-sizing the business immediately. “But that is easier said than done – letting people go. Companies get pushed into signing contracts because they can’t be seen to let the order book wane if competitors are still signing business. To keep people, many companies look offshore for acquisitions and activity, but very few become winners. It is very difficult to learn enough about operating in a foreign market and probability of success drops precipitously.” Most South African listed construction players sought replacement revenue offshore during the last decade but successful exceptions are few and far between. “Murray & Roberts, Stefanutti Stocks and others are still trying to close

happen, and WBHO doesn’t need to tender for the work – they already enjoy a favoured contractor relationship and would simply need to negotiate prices,” Goeller says. Though he expects a continued dearth of greenfield mining projects, Joannou says coming off such a low base even mine maintenance work will be significant for construction companies. “Unlike previous cycles, I doubt we will ever see another shaft sunk in South Africa. The economics just don’t make sense anymore because it’s a ten-year undertaking and there is too much uncertainty. But brownfields work is significant now, given how much supply we lost in recent years.” Overall, Goeller says, African mining appears poised to require the services of construction companies again. “That work dwarfs anything the government might put out to tender in terms of profitability.” For this reason, Goeller’s pick to outperform in the sector is WBHO (see graph 1). “They have the capacity and relationships to benefit from mining work, while also being positioned to @finweek

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businesses that probably stopped trading five years ago, which are now embroiled in legal battles. Murray & Roberts is no longer a South African construction business. Its biggest division is Clough, which has seen unbelievable order book growth in Australia and is doing well. Raubex has a modest Australian business and WBHO has been largely successful in Australia aside from a recent loss-making project which has destroyed the profits it has made to date,” says Chronux Research analyst Rowan Goeller. Afrimat’s chosen course was to shift into mining. “Mining’s contribution will soon overshadow Afrimat’s construction revenue. They have quickly morphed into a mid-sized mining house,” Goeller says. The sector is historically good at quickly expanding to meet rising demand, but a major constraint is the state of balance sheets after some lean years. “These companies are quite resilient, but in order to meet guarantees for such large projects there needs to be a lot of cash on hand and that does not happen easily during tough times,” says Goeller. “More than half these companies’ problems are of their own making, but construction is a very risky business by its nature. Even the seasoned guys get into trouble once in a while. Those who survive are those who don’t lose sleep over risk because if they worried about risk too much, they wouldn’t be awarded any contracts. If competitors are bidding and winning, you have to do the same. The problem is that contracts signed at zero margin can very quickly become losses,” he adds. While South African listed construction was left weakened, Goeller doesn’t foresee any corporate action. “Mergers and acquisitions in construction don’t usually work well. You could just hire the people instead of paying the goodwill for the company itself.” Joannou says trade buyers are not contrarian investors, so the outlook would have to be extremely good for any local player to be bought. “If any corporate action happens, it would be from overseas and it would have to be a very tight fit for their strategy. South African companies with large offshore components would be more likely to divest those.” ■

pick up on road construction jobs where Raubex doesn’t have capacity, as well as renewable energy projects. Anything from the government would be a cherry on top. I believe WBHO can grow their order book with work at decent margins from where they are placed now,” he says. Joannou’s pick is Raubex (see graph 2). “To me this is likely the company in the sweetest spot and most into its cycle already. It is also the most focused player. I expect from the current number around R30, the share could double. There’s nothing to stop that happening except for two factors: we need to see the order book to do even better than expected, because the expectations are not so low anymore; and we need to see margins getting a lift – not just back to average, but higher. The market is aware and is starting to price this in already. However, I think the probability of both factors coming right together are quite good because of the current limits to supply in the industry in relation to work on offer.” ■ editorial@finweek.co.za finweek 23 July 2021

on the money management By Amanda Visser

Navigate office dynamics in the hybrid workplace

With some workers at home and others at the office, there will be power imbalances, and it needs to be addressed.

he hybrid workplace – a blend of in-office and remote workers – allows people the flexibility to choose where they want to work. However, for leaders this means new power dynamics in the workplace. It is almost inevitable that there will be power imbalances, and it will not take care of itself, says William Elliot, founding director of ActionCo, executive coach and registered psychologist. “It is not about whether you are a fair leader or whether there is a good company culture, it is important to deal with the new power dynamics in split teams since it can very quickly develop into real or perceived unfairness or bias if not dealt with.”

The psychology

People who prefer working from home because of fear or specific circumstances may quickly feel “judged”. There is also the potential perception that those who do go into the office are more committed 44

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to the organisation. People who must travel to the office may see it as a burden and it could even create resentment towards those who are working from home. At the same token it could be a relief for others who need some “me time”. People who are working in the office can resent those working from home if they feel their workload has increased because they are more visible to the boss. Others may consider it a privilege. People working from home may feel they have less of an opportunity to contribute and add value. They may even feel their jobs are at risk because they are not feeling as integral to the organisation. New dynamics can shift very quickly. Sometimes those working at the office may be seen as the privileged, having access to the best technology and information. At other times it may be those working from home, having more time and flexibility to organise their day.

The virtual experience

Virtual meetings have quickly become the norm but continue to pose some real challenges. A recent survey by Cisco, a multinational technology company, shows that 98% of participants experienced frustration with video conferencing while working from home (see sidebar). Elliot says virtual meetings are like having a conversation over a walkie-talkie: Good morning, John. How are you? Over. Hi Sam, well thank you. And you? Over … “There is no real free flow of conversation. In a virtual meeting it is mute, unmute, camera on, camera off. Micro-expressions such as reassuring noises, a nod of approval or thumbs-up at someone specific, or hearing people laugh at your joke, are absent,” he says. People may feel shut out because they do not want to simply jump in. There are no natural pauses because of the “walkietalkie effect”. In other instances, video calls make it www.fin24.com/finweek

on the money management

Photos: Shutterstock I Supplied

easier for the quiet ones to speak up. They feel safer in their home environment and they are not intimidated by loud or overly dominant people. “It is more difficult to dominate a Zoom or Teams meeting. We are all the same frame size and people have the ability to turn the volume down if someone is too loud,” says Elliot. People need access to the right tools, such as noise-cancelling software, to encourage them to switch on their microphone. If there is a racket going on at home – such as barking dogs or loud teenagers – it has a silencing effect on those working from home. Jodene Steyn, account manager at MakwaIT, says many companies have increased their investment in remote working tools to enable employees to work “seamlessly” from home. Companies need specific “collaboration technology” that is more than a mere virtual platform where employees can host or attend meetings virtually. The workforce of the future requires “feature-rich” applications. This will allow team members – whether they are in the office or at home – to use messaging, calling, virtual meetings, white-boarding, and content sharing effortlessly.

has been reached, people can access the meeting virtually from another space in the office, explains Steyn. Information technology and facility managers can use advanced analytics to avoid overcrowding in meeting rooms, indicate chat room usage to prevent people from touching door handles to check availability and sanitation requirements of shared spaces. “It is quite easy for an organisation to provide its employees with the necessary tools and technology they require to either work remotely or from the office. The most important aspect is the ability of the employees to use the tools to its full extent.” According to Steyn, companies are profiling its employee base to determine the different user personas and where they fit within the hybrid workforce. This process will determine which employees can only work from the office, and how the fear of returning can be mitigated by using technology to create a safe workplace.

Ensuring fairness

Elliot says being aware of the new power dynamics created by the hybrid workplace is not enough. Leaders need a specific plan, a specific person who will execute The office experience the plan, and an “equalising budget”. Steyn says many employees Some consider mandatory who are returning to the office rotation a potential option to have a legitimate fear of correct real or perceived power contracting the coronavirus. imbalances and to ensure Technology gives them the cohesive teams. However, one assurance that changes are cannot be too rigid about this. made to make the workplace safe. “Open up the conversation to find Jodene Steyn According to the Cisco survey, out who feels unfairly disadvantaged. Account manager the top concern for people returning Raise the topic and know that bias is at MakwaIT to the office is touching shared built into the situation. You have to devices (64%), while 62% of actively correct it,” advises Elliot. employees are concerned about elevator congestion, 61% is concerned about sharing Explicit efforts a desk, 52% worries about room sanitation When leaders call a meeting for the and 41% is concerned about exceeding entire team it is simply “deadly” to have room capacity for social distancing. the in-office team in the conference The new office will see people walking room and the out-of-office team on a in without having to touch anything. virtual meeting. Everyone should join the They can pair their own devices with a meeting virtually. collaboration technology board within the Leaders need to manually track the room which will automatically connect amount of time they spend with people. their calls or start scheduled meetings “You are naturally going to spend more through voice-controlled demands. time with people who are geographically Data analytics can give employees a in the same location as you.” “people count” that verifies the maximum It is a good idea to put up pictures capacity within a room. Once the capacity of team members working from home @finweek

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TOP DEVICES AND CAPABILITIES THAT WOULD IMPROVE AT-HOME MEETINGS • A high-quality headset 59% • A digital assistant to capture meeting notes and action items 51%

• Digital white-boarding technology 47% • Dedicated video meeting equipment 35% SOURCE: Cisco and/or its affiliates)

in your office. The natural consequence if you do not, is to connect more with people in your proximity, warns Elliot. He also suggests having an “equalising slot” in one’s calendar where the leader can remind him or herself who is at home, who is in the office and what tasks or projects have been assigned to everyone. Use the equalising budget to ensure people are equal in terms of technology and equipment. If there is no mandatory rotation, organisations are advised to set up a chat or a canteen channel where people can meet up informally. Create a communication buddy system where people in the office can give one-on-one feedback about what is happening at the office to a buddy working from home. It will require effort to neutralise inherent inequalities in the hybrid workplace, remarks Elliot.

Productivity and safety

Information technology and its jargon can be quite intimidating to companies, especially small and medium-sized enterprises (SME). There is an increased focus on understanding the needs of these businesses. Steyn says SMEs are becoming easy targets because they do not invest in the right solutions. People who have lost their jobs due to the pandemic are getting smarter at accessing information for financial gain. There are simple solutions to protect data and to grant SMEs access to analytics that will allow them to grow the business and increase productivity. They should not think they don't have a lot to lose. They have. ■ editorial@finweek.co.za finweek 23 July 2021

Piker

On margin Fighting for w(right)ing

This issue’s isiZulu word is amalungelo. Amalungelo is rights. The singular is ilungelo. Just the other day Facebook violated my amalungelo by limiting my posting abilities. I have no idea what I did wrong to have them violate my amalungelo like this. As such, I will be hosting a press conference where I will address the nation. There will be snacks and tea, but they will be for me, as the press conference will be virtual because I follow Covid-19 protocols. This violating of my amalungelo willy-nilly shows that the leadership of Facebook has a hidden agenda. Hidden in plain sight. But because it is hidden, I don’t know what this agenda is. Yes, I said it is hidden in plain sight, but it is still hidden.

This period in history will be remembered as one when the forces of darkness conspired to deprive Zulu people of their amalungelo. First, the people of Mnambithi had their mining amalungelo deemed worthless. Then the esteemed Zuma had his amalungelo violated. Then Duduzane was mocked for his accent and apparent lack of that Zulu thing – that is a violation of his amalungelo to be a boytjie, a chana, a bruh, a boet. I will not stand for it. I shall fight Mark Zukazuka on the beaches. I shall fight him on the walls. I shall fight him on the status updates. I shall fight him on Messenger. I shall take him on in Market Place. In groups. On pages. And in the comments. Just not on other people’s comments. I shall fight him for my amalungelo.

on the money quiz & crossword Test your general knowledge with our latest quiz for July. You can complete it online via fin24.com/finweek from 19 July. 1. Public services and administration minister 5. Who is the new CEO of Macsteel? Senzo Mchunu announced that South Africa has offered civil servants a ____ salary increase 6. True or False? Acting health minister Dr in wage negotiations with trade unions. Aaron Motsoaledi announced that 35- to ■ 3.5% 49-year-olds can register for vaccination ■ 2.5% from 15 July. ■ 1.5% 7. True or False? The Constitutional Court 2. Nigeria’s tax collection agency ordered banks sentenced former president Jacob Zuma to to freeze the accounts of MultiChoice to prison for nine months for being in contempt recover how much in alleged unpaid taxes? of court. ■ R23bn ■ R43bn 8. With which company did the US defense ■ R63bn department cancel its $10bn JEDI cloudcomputing contract? 3. The governor of California asked residents ■ Microsoft to voluntarily cut back on household water ■ Amazon consumption as drought conditions worsen ■ Alphabet and temperatures continue to rise across the state. Who is the governor of California? 9. Dubai’s DP World announced that it made a ■ Andrew Cuomo cash offer of R12.7bn to acquire all shares of ■ Chris Christie which JSE-listed logistics company? ■ Gavin Newsom 10. True or False? China said it would ease rules 4. True or False? England made it to the Euro for companies listed overseas or seeking to 2020 finals. sell shares abroad. CRYPTIC CROSSWORD

ACROSS 1 Monsoon times (8) 5 Indication of how the pitch should play? (4) 9 Teach diligence offstage (5) 10 Challenge Thailand man’s backing for communist regime (7) 11 Agents got nothing for so long (4) 12 Prepare to leave the band (8) 13 “It’s a musical,” a chef explains to cook (4,1,8) 18 Worker’s rate change in poor move (8) 19 Becomes a river (4) 20 You want a garland? By all means, it will be fun (7) 21 Winter windcheater (5) 22 County can get over-the-top (4) 23 & 8 Down Tripped on a camp-site rut – big deal! (5,1,1,6)

NO 779JD

DOWN 2 Girl back to appearing in pornographic literature (7) 3 Excitement no longer continuing at starting time (4-3) 4 Some violent exchange of leaders desiring different things (13) 6 What’s left in loan can be used to make ointment (7) 7 A little smell? Quite a strong one actually! (7) 8 See 23 Across 13 Cope with smoker, that’s tough (7) 14 Flower girl always goes around in a wary manner (7) 15 Arrange a scuba for summer (6) 16 Sleeper car is introduced between Egyptian and Moroccan capitals - what snobbery! (7) 17 South American bash held in field (7)

– Melusi’s #everydayzulu by Melusi Tshabalala

Solution to Crossword NO 778JD ACROSS: 1 Inseparable; 9 Noserag; 10 Inrun; 11 Optic; 12 Squeeze; 13 Eloper; 15 Player; 18 Aniseed;

20 Going; 22 Chime; 23 Extinct; 24 Inside track DOWN: 2 & 14 No set opinion; 3 Earache; 4 August; 5 Adieu; 6 Larceny; 7 Intolerance; 8 Interrogate; 14 See 2; 16 Lighter; 17 Advene; 19 Elemi; 21 Ionic 46

finweek 23 July 2021

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