Finweek 30 July 2020

ECONOMY

WHY MORE TAXES ARE A BAD IDEA

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JANA JACOBS

n mid-July I needed to take a Covid-19 test as part of pre-admission screening for a routine outpatient procedure. While the test itself was about as bizarre and uncomfortable as I had read it would be, seeing the workings of the testing station and the frontline workers – both medical and administrative – was a stark reality check.

Here I must give the caveat that I am a huge fan of apocalyptic and post-apocalyptic fiction. So, my testing station experience was certainly coloured by this. Sitting in a demarcated area of a parking lot, on a chair perfectly distanced from the next person in line as we waited to be allowed into the container one by one (throwing fleeting, uncertain glances at one another) is a scene that can send a former literary student with a penchant for the dystopian off on an imaginative (read dramatic) tangent.

My predilection for the genre and the creation of Orwell’s Airstrip One or Atwood’s Gilead aside, these imagined worlds are often a consequence of a broken society or the trappings of a totalitarian one. And the current Covid-19 pandemic has been described as the reset our world needs. An overdue reckoning for the unsustainability of the status quo on various levels.

“The fault lines of today’s world – most notably: social divides, lack of fairness, absence of cooperation, failure of global governance and leadership and the critical degradation of our natural assets – lie exposed as never before, and many now feel the time for reinvention may have dawned,” reads a World Economic Forum (WEF) article accompanying the launch of COVID-19: The Great Reset by Klaus Schwab and Thierry Malleret.

While speaking to a global reality, these fault lines couldn’t be clearer than here in South Africa. As frontline workers at testing centres and hospitals across the country face the virus head-on, many South Africans continue to fight a broken system that was in place long before Covid-19 reared its ugly head. Now we are just bleeding jobs faster and more people will go hungry. Our crumbling infrastructure extends far beyond our inability to keep the lights on.

Corruption remains rife and municipalities are failing. Irrational lockdown regulations and graft allegations regarding funds meant to provide relief to citizens have deepened despondency.

Addressing all of this seems insurmountable.

Says the WEF article: “The fundamental question upon which the great reset depends: Will there be enough collective will to take advantage of this unprecedented opportunity to reimagine our world, in a bid to make it a better and more resilient one as it emerges on the other side of this crisis?”

I am not so sure our government has the collective will or the means to make good on their plans to reimagine our economy. If not, many South Africans are facing a continued reality that should only ever exist in a dystopian plot. ■

contents Opinion

4 The solutions we don’t need 6 Fewer rules and more enforcement

In brief

8 News in numbers 10 Local duo revolutionises first responder systems 11 SA’s current account surplus is little to celebrate 12 Orange juice to rhodium: A surge all round 14 Foreign governments fret over SA’s move to ‘autarky’

Marketplace

16 Fund in Focus: For high-quality foreign real estate 17 House View: Pan African Resources, South32 18 Killer Trade: Clicks, Dis-Chem 20 Simon Says: Listed property, Omnia, Pan African Resources, Quantum Foods, Richemont, stock exchanges, Taste Holdings, TFG 22 Investment: It’s the small things, really 23 Invest DIY: Now really is the time to go for gold 24 Trader’s Corner: Wildfires and bankruptcy may herald new beginning 26 Invest DIY: S&P 500 and Nasdaq’s different moves

Cover

28 SA’s private hospitals: Struggling amid a pandemic

In depth

34 Property sector: Economic pressure set to continue testing financial foundations 38 Lockdown models probed as death toll rises 40 Summer harvest a silver lining for the economy

On the money

42 Spotlight: Flying the flag in a crisis 44 Personal Finance: Setting up trusts for children 45 Quiz and crossword 46 Piker

opinion

By Johan Fourie

ECONOMY

The solutions we don’t need

a

Why building a new economy post-Covid can’t begin by saddling South Africans with higher taxes or more debt. few weeks ago, a small group of social scientists, most of whom enjoy, like I do, the comforts of academic life, wrote an open letter to finance minister Tito Mboweni, telling him to spend more. They are concerned about the prudent supplementary budget and would like him to increase spending to support the millions of South Africans who are now jobless and destitute thanks to a global pandemic and the subsequent lockdown that sounded the death knell for an already faltering economy.

But despite the signatories’ good intentions to aid poor South Africans and revive our economy, the letter exposes poor economic thinking. Let me explain.

Firstly, while the signatories encourage more spending, they fail to answer the obvious: what would the limit be? Their letter, widely reported on in the media, lists many deserving causes for government’s largesse: more on basic education, more on genderbased violence, more on transport, more on higher education, and so on. They seem to imply that Treasury can just spend indefinitely without any consequences. You don’t need to be an economist to know this isn’t true: if they believe the finance minister has set the spending limit too low, then they should make explicit what a better limit would be and why.

Secondly, the money to pay for all this spending must come from somewhere. What do they propose? Their three-page letter, unfortunately, only offers a single-sentence solution: the additional expenditure “could be financed through some combination of solidarity taxation, increased borrowing, mobilising domestic quasi-public funds and reserve bank action”.

The limits to expansionary monetary policy – quantitative easing and printing money – have been addressed by others, so let me consider the first two solutions they offer. A solidarity tax is something that has been mooted in several countries to cover emergency funding. One way to do that is a once-off wealth tax. But here the signatories make a crucial mistake: a once-off tax is exactly that, a once-off, single payment, while things like education and transport are annual expenses. No solidarity tax can be large enough to fund annual fiscal expenses into perpetuity.

Wealth taxes, as many researchers and experience have shown, present a myriad of other problems. In a world where capital is extremely mobile, such taxes often have the opposite effect: the wealthiest simply move their assets abroad, not only avoiding the tax but removing capital from a capital-poor country. And if you think, well, just impose a tax on unmovable assets like land and property, it is worth keeping in mind that property taxes are unlikely to affect the superrich as much as those lower on the wealth distribution scale. Most importantly, a wealth tax would discourage saving, accumulation and investment, exactly the kind of behaviour we want from the next generation.

One reason that wealth taxes are back on the agenda is because the superrich do well to avoid paying any tax, notably in the US. Yet, that is

not true in SA. Our taxes are highly progressive: Maboshe and Woolard estimate that the richest 20% of South Africans pay 98% of personal income taxes. Personal income taxes form the largest proportion of total government revenue. Our tax revenue as percentage of GDP is already at a high 27%, equivalent to much richer countries like Australia and the US, and above almost all of our peers. With GDP going backwards fast, raising taxes would be self-flagellation of the worst kind.

But there is a more fundamental problem with their proposal: a tax is contractionary. While the authors propose to increase spending – Keynesian expansionary fiscal policy – by raising a tax to pay for this, the effect is nullified. In fact, if the economic multiplier of government spending is not large, very likely given the types of categories the authors suggest, then the overall effect may actually be contractionary.

The signatories also suggest borrowing more.

Letting future generations pay for current consumption is a popular tool in times of crisis, like wars or pandemics.

The argument is that if we don’t spend now, there won’t be future generations anyway. But here, too, we must recognise that our position before the pandemic was already precarious; we now have to choose our punishment for the preceding period of profligacy. On the one hand we can swallow the medicine immediately, cutting back all non-essential expenditure in the hope we will be able to curtail what Dondo Mogajane, the director-general of Treasury, calls a “debt spiral”. Or do we spend on what the signatories suggest, only to end up in hospital, requiring surgery? Mboweni has opted for the first option, the correct choice.

If we have to spend more on emergency relief, one has to ask why the 120 signatories did not care to mention alternative sources of funding: reducing the public salary bill, avoid throwing more money at state-owned enterprises, selling state-owned assets like Waterfront properties or high-speed spectrum. There are other alternatives that are worth considering, too. The development economist Hernando de Soto recently made a plea for developing countries to implement a “capital-creation protocol”, turning the assets of the poor – like the land they live on – into capital that can be monetised.

SA can learn a lot from these ideas. A third of South Africans farm on land in former homelands that they do not own. Many millions more live in townships where they do not have formal title. Turning these assets into working capital could generate the bottom-up economic transformation we so desperately need.

If a new economy is to emerge from the pandemic, it cannot begin by saddling South Africans with higher taxes or more debt. Those of us in the fortunate position to enjoy the comforts of academic life – generously funded, I should add, by the already overburdened taxpayer – would do better to use our time and energy to think harder about creative solutions that empower rather than impede the next generation. ■ editorial@finweek.co.za

Photo: Shutterstock

With GDP going backwards fast, raising taxes would be self-flagellation of the worst kind.

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finweek 30 July 2020

Johan Fourie is professor in economics at Stellenbosch University.

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opinion

By Jaco Visser

GOVERNMENT REGULATION

Fewer rules and more enforcement

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Public funding should inspect compliance with existing regulations as opposed to putting up more red tape. e need less government intervention in this country. Especially if we want to kickstart the crumbling economy.

Two recent events have prompted a consideration of whether citizens, businesses and the government are taking a feasible route in their discourse around how to get economic growth back on track – and at a much faster pace at that.

First off was a recent discussion on whether to allow whiteowned businesses to enter the township retail market through spaza shops. The second was the ANC’s Economic Transformation Committee’s 31-page discussion document on reconstructing, growing and transforming South Africa’s economy.

Both of these examples have something in common: calls for greater government intervention. The ruling party went as far as proposing state-owned hatcheries in a bid to boost investment in aquaculture. I’d suggest that instead of wasting public resources on growing mussels, abalone and oysters, prioritising urgent amendments to labour legislation will have a greater impact on the aquaculture industry, not to mention the economy at large.

In the 16 July issue of finweek, contributor Andile Ntingi mentioned that foreigners own a sizeable chunk of the retail market in townships and rural areas, which can easily be verified by driving through these places. But we need to gauge why this is the case and whether more government red tape will in fact put more retail businesses in the hands of locals.

Firstly, two sectors of SA’s economy stand out for their ease of entry, especially to unskilled people: agriculture (even the growing of mussels) and retail. And with retail a very simple measure can be used to ascertain suitability of a potential entrant to the industry: Does the person know how to sell a product to consumers at a higher price than they bought the product for?

That difference between the purchase and selling price, the profit, has a lot of demands placed on it by various players, such as the retailer, the landlord, the government and others. And the government is mentioned here for a daunting reason. Many retailers, who act according to the laws of the land, comply with VAT, minimum wage, UIF, the commissioner for occupational injuries and a plethora of other regulations. This is expensive. If you take only VAT, it raises the selling price of a product by 15%.

In a hotly contested retail market, a 15% difference in the selling price gives those who don’t comply with VAT an enormous advantage. It means they can sell a product, just like the compliant retailer, for R1 but make 13c more. The compliant retailer, on the other hand, needs to pay that 13c over to the government. This is not to mention income tax, a skills development levy and UIF on wages, and dividend tax.

On the issue of entering the retail industry: there is obviously a need for some capital. This usually manifests in supplier credit (of which Pick n Pay’s balance sheet is a wonderful example), but for someone with no experience or credit record, this will be difficult to attain. Formal bank credit will likely also be difficult to access due to lenders’ strict risk measures. Then there are the micro credit suppliers, especially card-machine companies lending against the turnover of the small business. The inherent cash nature of the township and rural retail markets will pose a problem in this regard. That leaves us with the vast stokvel market as suppliers of capital to incubate locallyowned retailers. It is a perfect fit for a key reason – local knowledge. No government intervention is needed.

The very beauty of stokvels lies in the closeness of their members to local affairs. Many are based in the same neighbourhood where there is most likely a spaza shop run from someone’s house. Where this writer hails from, most of these are street-facing rooms in houses let to foreigners to operate a spaza shop. Why does the house owner not operate their own shop from their own premises?

The aggregated value of the money saved through stokvels differs according to sources, but one can assume this figure to be upwards of R40bn a year. About 11m South Africans belong to a stokvel – almost one in every five people. The chances that the house owner who rents out the spaza shop will know, or even be part of, a stokvel is relatively big. Should the house owner borrow from the stokvel, the risk of non-payment reduces substantially as many stokvel members will probably interact with the shop, and borrower, daily. No commercial bank has this advantage over controlling its lending risks.

The final question is how far do we want to formalise retail trading in the townships and rural areas? The ugly thing about formalising anything is that it takes away creativity, which is the foundation of entrepreneurship. This is something no one can be taught in any course, whether as part of an MBA or a workshop. Either you have it or you don’t. And for the micro-businessperson, including potential spaza shop owners, support rather than regulation is needed to get the idea off the ground.

The current success and allure of both spaza shops and stokvels are in their largely unregulated nature.

Yes, every business should adhere to the rule of law, but complying with regulations should be made as easy as possible. In the end, the government doesn’t produce anything and doesn’t carry any risk for taking money away from the productive sectors of the economy through taxes.

So, rather than growing mussels and oysters, public funding should be steered towards inspecting compliance with existing (and in future, hopefully less) business and labour regulations and supporting brave South Africans who take the leap into business. ■ editorial@finweek.co.za

Photo: Shutterstock

The ugly thing about formalising anything is that it takes away creativity, which is the foundation of entrepreneurship.

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finweek 30 July 2020

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in brief EDITORIAL & SALES Acting Editor Jana Jacobs Deputy Editor Jaco Visser Journalists and Contributors Simon Brown, Jacques Claassen, Andrew Duvenage, Peter Fabricius, Johan Fourie, Moxima Gama, Mariam Isa, Glenneis Kriel, Schalk Louw, David McKay, Timothy Rangongo, Petri Redelinghuys, Melusi Tshabalala, Glenda Williams Sub-Editor Katrien Smit Editorial Assistant Thato Marolen Layout Artists David Kyslinger, Beku Mbotoli Advertising Paul Goddard 082 650 9231/paul@ fivetwelve.co.za Clive Kotze 082 335 4957/ clive@mediamatic.co.za 082 882 7375 Sales Executive Tanya Finch 082 961 9429/tanya@ 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 30 July 2020

>> Trend: Leading the field in emergency response systems p.10 >> Trade: Should the current account surplus be celebrated? p.11 >> Mining: Supply constraints cause surge in commodities p.12 >> Foreign Affairs: Protectionist or localising? p.14

“MORE THAN 95% SURE.” – UK security minister James Brokenshire on Britain’s certainty that Russian state-sponsored hackers targeted UK, US and Canadian organisations involved in developing a coronavirus vaccine. On 16 July, the UK’s National Cyber Security Centre (NCSC) issued a joint advisory with intelligence agencies from the US and Canada warning that a Russian hacker group was behind a spate of cyber attacks on medical research centres tasked with finding a vaccine for Covid-19. Brokenshire told BBC Radio 4 that the NCSC and its counterparts were confident that Russian intelligence agencies were responsible for the attacks on the drug companies and research groups. Russia’s ambassador to the UK, Andrei Kelin, rejected the allegations on BBC, saying that “there is no sense” in the story.

“Leadership is everything, so it is really up to President Ramaphosa.”

Colin Coleman, former CEO of Goldman Sachs in sub-Saharan Africa, told Bloomberg that President Cyril Ramaphosa is “likely” to be stronger after the pandemic, and will have more power to introduce the reforms he is promising.

Coleman, who is now a senior fellow and lecturer at Yale University, suggested that the SA government should look to introduce a basic income grant at a cost of about $8.5bn (R142bn) per year, recapitalise Eskom in the form of removing governmentguaranteed debt from the power utility onto the government’s balance sheet, and introduce special export zones and industrial incentives that will help with competition in the country and drive investment, among other proposals.

“The government will support and source funding for a business rescue plan for South African Airways.”

– The department of public enterprises in a statement welcoming the commitment

by National Treasury to support and source funding for the national carrier’s business rescue plan. The department stated that R10.1bn would be required to fund the rescue plan. Public enterprises minister Pravin Gordhan told eNCA that much of that R10.1bn was about shutting down the old airline and repaying SAA’s lenders. Asked about where exactly this money will come from, Gordhan said the funding is still being mobilised. www.fin24.com/finweek

C

M

Y

CM

MY

CY

CMY

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LOST MARKET CAP

DOUBLE TAKE

-$19bn

BY RICO

Photo: Gallo/Getty Images

Netflix lost $19bn of its market capitalisation in midJuly following a more than 10% drop in its share price, despite adding 10.1m paid streaming subscribers in the second quarter – 1.8m more subscribers than what analysts had forecast. The streaming giant reported that it will add just 2.5m paying members in the third quarter, well below the 6.8m it brought in a year earlier. Executives commented in a letter to shareholders that growth is slowing as consumers get through the initial shock of the coronavirus pandemic and social restrictions. Netflix also provided third-quarter revenue guidance of $6.33bn, below analyst estimates of $6.4bn, according to Refinitiv.

THE GOOD

THE BAD

THE UGLY

South Africa’s foreign direct investment (FDI) inflows rose in the first quarter of 2020 to R29bn ($1.7bn) compared with R10.5bn in the final quarter of 2019, according to the Reserve Bank. In its quarterly bulletin, the bank said “SA’s direct investment liabilities increased ... mainly as a result of the foreign acquisition of a domestic manufacturer and distributor of food and beverage products”. In March, the $1.7bn purchase of Pioneer Foods by US-based PepsiCo got the go-ahead from the Competition Tribunal. One of the BEE shareholding terms of the deal is that workers will get Nasdaq shares in PepsiCo worth R1.6bn through a locally-held workers’ trust, which will pay dividends to workers in dollars.

Listed SA wine exporter Distell is battling a glut of wine as an abundant harvest and lockdown restrictions hamper exports, reported Reuters.

Distell CEO Richard Rushton said the oversupply is a massive structural problem that could take at least two years to resolve. It is reported that there is around 240m litres of excess wine across the Western Cape, of which Distell accounts for 40m litres. Rushton said he told an investor call in June that the impact on prices could be severe and that the company had lost some of its listings in wine outlets abroad as exports were halted.

With over 365 000 coronavirus infections recorded, SA is among the top 10 countries in the world with the highest number of Covid-19 cases. SA is behind the US (with over 3.8m recorded cases in mid-July), Brazil, India and Russia. Since 31 December and as of 19 July 2020, approximately 14.5m cases of Covid-19 have been reported worldwide, including approximately 605 000 deaths, and around 8.65m recoveries. On 20 July, health minister Dr Zweli Mkhize informed the nation that Covid-19-related deaths in SA had breached the 5 000 mark.

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finweek xx Month 2019

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By Glenneis Kriel

a

trend

Local duo revolutionises first responder systems

What started as volunteer work has since made RapidDeploy a leader in the emergency response systems industry.

fter a ten-year stint as chief technology officer of a gaming business in London, Brett Meyerowitz made his way back to South Africa and started working for a banking company. With more time on his hands, he decided to volunteer as an ambulance assistant, which exposed him to the deep inefficiencies of the emergency response systems used in SA. “The systems were dated, expensive to maintain, unfriendly and extremely inefficient, resulting, among others, in emergency response teams being reliant on map books when they were in unfamiliar territory. This in situations where timing often meant the difference between life and death,” Meyerowitz says.

In response he started developing a mobile platform to help him and fellow volunteers overcome this challenge. Features were expanded as more companies became aware of the system and requested additional features, such as global positioning and real-time navigation.

Meyerowitz only registered the company in 2014, after TomTom asked him for his business banking details to pay over commission for referring clients to them, who were looking for navigational technology to link with his system.

“At that stage I still referred to the system as Dispatcher, but settled on the name RapidDeploy as it was more descriptive of what I wanted to achieve,” he says.

Photo: Supplied

Serendipity

centres to access dispatch, analytics and location systems. In addition, RapidDeploy maintains and continuously upgrades the system to the benefit of all users.

Being a generalised solution, companies are charged per vehicle and the number of responders, which also makes it more affordable for small players than traditional solutions.

The conference also allowed Raucher and Meyerowitz to gauge the system against other developments. “We only realised how revolutionary the system was after we saw that almost all the other systems were still stuck in the 1990s, being built on DOS or Windows.”

A testament to its technological edge, RapidDeploy last year won the Texas Innovator of the Year award and was also named Microsoft US Partner of the Year for government industry.

New opportunities

After the European conference, Raucher was invited to a Microsoft conference in Texas, which opened up new networks of early adopters and innovators, and paved the way for a $12m investment in a Series A round from US venture capital fund Great Point Ventures and innovation fund Samsung Next in 2019.

The funding gave RapidDeploy the means to add significant scale to the business and branch out to the US, where its headquartered in Austin, Texas, as well as to Namibia and Botswana.

“My initial idea was to develop a solution for volunteers that would help to save lives. It never occurred to me that we would develop the Rolls-Royce of first responder systems, with over a hundred employees and more than a hundred clients in the US.”

The solution became more business-driven in 2016, after Meyerowitz met Steven Raucher at a braai hosted by a mutual friend. Raucher had just returned after spending 20 years in IT programming for banks in London and New York. Despite their IT backgrounds, the two primarily connected because of Brett Meyerowitz and Steven their passion for volunteer work.

The journey Raucher were both emergency “Steven started working as an NSRI volunteer after his For Meyerowitz, one of the biggest challenges on their responders when they cobrother drowned, whereas I became involved because my journey to success was to take off his “techie” hat and founded RapidDeploy. dad fell while I was in London,” Meyerowitz says. learn to lead the company.

Raucher was completely in awe when he saw a demo of the “My first reaction to any problem has always been to get my hands solution and felt it deserved their full-time attention. Since then hard dirty and work on solutions, but I had to learn to listen, let go and work, combined with several fortunate breaks, has turned the business motivate others to buy into our dream and do the job. Trusting others into an industry leader. was actually not that difficult, as we invested in the best experts we Raucher attended a conference on the use of tech in the could afford from the start, people who in general are even better emergency response industry in Europe in 2017, where Microsoft’s skilled than we are,” he says. head of public safety, Kirk Arthur, was doing a presentation on future Another challenge was to get the staff composition right. “Initially, trends in the industry. When Arthur talked about solutions going we only hired programmers and computer engineers, but later realised cloud-based, Raucher was able to demonstrate that RapidDeploy had that we needed support staff for more balanced outcomes.” already developed the technology.

Meyerowitz’s advice to aspiring entrepreneurs is to not get “People generally did not take to the idea of response systems brainwashed into the idea that starting your own business means that going cloud-based at the time, either because they did not know what you are “your own boss”, as there are so many people who become the cloud was or, when they did, felt it should not be used for public dependent on the success of a business. With RapidDeploy even more applications due to potential security breaches,” Meyerowitz says. so, as the company has over 1m people depending on the system for Having a cloud-based system, however, has several advantages efficient emergency response delivery. over premised-based technologies, which has helped to accelerate the He adds that if you want to make it, you need to “network, network, acceptance of the technology during the Covid-19 outbreak. network” and find people with similar interests to help you move Among others, it allows telecommunicators to work from anywhere forward, as he had found with Raucher. ■ instead of having to be physically present at emergency dispatch editorial@finweek.co.za 10 finweek 30 July 2020

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in brief in the news

By Andrew Duvenage

XXXXXXXXXXXXX TRADE

SA’s current account surplus is little to celebrate

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Photos: Shutterstock

Trade data should rather be read considering the broader state of the economy.

outh Africa recorded its first current account surplus in 17 years in the first quarter of 2020 because of a trade surplus of around R208bn.

Essentially, a trade surplus shows the difference between imports and exports. A surplus indicates that a country is exporting more than it is importing, or earning more than it is spending.

Economic theory posits that a weakening currency can eventually lead to a higher level of exports, given that these exports are relatively cheap for foreigners with stronger currencies, and lower levels of imports. In theory this is positive as it supports economic activity and growth in a country which in turn has a positive impact on employment, wealth creation, and will even support the country’s currency over time.

A country where this occurred in recent years is South Korea. After being bailed out by the IMF in 1998, South Korea went on to turn its economy into one of the leading manufacturing and exporting countries globally, transforming – and importantly, reforming – from a state of bankruptcy to economic prosperity in less time than SA has been a democracy.

Unfortunately for SA, however, there is little to celebrate in the current trade surplus numbers reported for the first quarter of 2020, given that they did not emanate from any positive economic effects. On the contrary, the trade account surplus is reflective of the dire state of the local economy and a weak consumer and is a serious warning signal of the perilous state we find ourselves in. The economy contracted 2% in the first quarter, the third straight quarter of economic decline.

This contraction is on the back of an economy which has been in a state of decline for several years, with limited nominal economic growth. In real terms there has been no growth.

Unemployment was on the rise, even prior to the Covid-19 pandemic, which resulted in consumers feeling under pressure. Not only has @finweek

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this led to a reduction in consumer spending, but a total collapse in consumer demand. For a country that imports most of its goods – as opposed to manufacturing these items itself – this has led to a fall in the import side of the trade account equation. Despite much talk about growing SA’s ability to beneficiate to a greater extent, particularly as far as mineral beneficiation is concerned, the country continues to lag in this area.

What also needs to be factored in is that the first quarter of 2020 coincided with a massive collapse in the price of oil. While SA pays for oil in US dollars, and the rand weakened through the period, the fall in the oil price would have been more than sufficient to offset the rand’s weakness and translated into less money spent on oil, which is a significant part of the trade account equation.

The dire state of the SA economy has also resulted in a significant erosion of business confidence, which has in turn impacted business investment appetite. The decline in corporate investment spend has a knock-on effect by limiting imports of plant and equipment, which further exacerbates the situation.

Although the full impact of the Covid-19 lockdown on the local economy will only be reflected once the numbers for the second quarter are available, the shock of the virus was already being felt in China and Europe during the first quarter. It is very likely that local exports were impacted during this period as the global economy began to grind to a halt, particularly given that the aviation industry around the world was largely grounded, ships dropped anchors and tourism came to an abrupt standstill. The negative impact on exports would have added to the surplus.

Another systemic factor to be considered is the dire state of the SA manufacturing sector.

Declining manufacturing capacity means that we have less need to import the components typically associated with manufacturing.

The reality is that a declining manufacturing

What also needs to be factored in is that the first quarter of 2020 coincided with a massive collapse in the price of oil. capacity remains SA’s Achilles heel in terms of producing a sustainable trade surplus. Over a period, the country has seen a hollowing out of its capacity to manufacture and export. If we are to have any hope of reversing this trend, SA urgently needs to implement economic reforms to ensure it is more competitive on the global stage.

While the trade account and current account surplus could help to strengthen the rand in the short term, the reality is that the rand will be more significantly impacted by investment flows, both in the form of foreign direct investment as well as portfolio flows.

Persistent mismanagement of the SA economy and a lack of competitiveness, coupled with credit rating downgrades and a general aversion to emerging markets, resulted in net outflows of money from local bond and equity markets over several years. It is likely that the direction of these flows of money will have a far greater impact on the rand for the foreseeable future than a somewhat ‘artificial’ trade surplus. ■ editorial@finweek.co.za Andrew Duvenage is the managing director of NFB Private Wealth Management.

finweek 30 July 2020

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in brief in the news

By David McKay

MINING

Orange juice to rhodium: A surge all round

Commodities – ranging from agricultural products to precious metals – are burgeoning as supply constraints worry investors and buyers.

Photos: Gallo/Getty Images

f

ew commodities have performed better than orange juice so far this year.

Traded in New York in a frozen concentrated form, it was much sought out during the early months of the Covid-19 pandemic when consciousness regarding health was especially high. Prices ended up more than a fifth higher by the end of June.

It can’t all be health, however. Arabica, a high-grade coffee bean, also experienced significantly improved pricing after initially retreating when investors first worried about its consumption in cafés amid lockdowns.

Prices then surged as concern shifted towards securing coffee in the face of rising logistical risks, another factor brought to bear by the Covid-19 pandemic.

Luckily, these are not the only commodities that have enjoyed price support since the pandemic. In fact, analysts think the earnings of mining companies producing rival commodities such as platinum group metals (PGMs) and iron ore might not end up as 12

finweek 30 July 2020

liquidised as first feared when the Covid-19 virus initially swept across the globe.

Macquarie, the Australian bank, said in a recent report that the last six months have seen one of the world’s fastest-ever “busts” replaced “... by one of the quickest recoveries”.

Global GDP growth is likely to increase by about 7% in the second half of the calendar year, after falling 8% in the first half, although the recovery may slow in the fourth quarter as occasional lockdowns are implemented by governments.

“In retrospect, we were perhaps too bearish,” the bank said. “The correction or recovery transition of the industrials was more fleeting than we expected, mostly contained within 1H20 [first half of the 2020 calendar year],” it said.

BMO Capital Markets, a Canadian bank, has also been reappraising earlier forecasts.

It upgraded by 11% its earnings predictions for industrial mineral producers – iron ore and metallurgical coal – in its coverage universe.

SA’s PGM production is expected to operate at

90% for the second half of the year.

Mark Cutifani CEO of Anglo American

www.fin24.com/finweek

in brief in the news Stimulus efforts aimed at speeding up broad economic recovery by central banks are also likely to support commodities in the short term.

Another bank, Goldman Sachs, thinks while outright bargains for some oversold mining shares are now gone, valuations are nonetheless still in buy territory assuming “normalised” market conditions.

The upshot is that allowing for some outliers, such as orange juice, commodities in general are in a decent place. Both uranium and rhodium had outperformed orange juice; in fact, rhodium was more than 30% stronger in price and off an already elevated base. So, it’s with some anticipation that investors look towards Anglo American Platinum (Amplats), which kicks off reporting season for SA’s mining stocks on 27 July when it posts its interim results (also see p.42).

The expectation is that the first half of Amplats’ financial year has been carved out by well-known, once-off events: Refined production was interrupted by processing capacity breakdowns, and mining reduced to 50% for five weeks during the hard lockdown.

The narrative is likely to settle strongly into one of second-half recovery, the shoots of which were underway as early as May. According to Stats SA, PGM production was 148% higher in May than in April. “As has been the case with many other commodities, Chinese imports of PGMs have remained robust year-to-date,” said RMB Morgan Stanley. “Over and above this we believe the market has begun to price in the postlockdown ramp-up in production,” it said.

SA’s PGM production is expected to operate at 90% for the second half of the year, a level that supports continued strong free cash flow generation since the randdenominated basket price is 60% above cost curve support, said RMB Morgan Stanley.

This spells good news for Anglo American, which owns 80% of Amplats as well as 70% of Kumba Iron Ore – the latter posts its numbers a day after Amplats on 28 July.

Anglo American reports its interim results on 30 July.

Commenting in an interview with finweek in June, Anglo American CEO, Mark Cutifani, said the pulse of recovery in commodities might be followed by another contraction, a so-called W-shaped recovery to contrast with the V-shape that currently seems to be the consensus. @finweek

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“We shouldn’t underestimate how crazy people will be coming out of the lockdowns,” he said of the current recovery in global consumer demand. This is a function of governments having “inappropriately terrified” people with the threat of the virus, although Cutifani hastens to add that the SA government has managed to “land” the crisis pretty well.

Over the course of the next two years, however, he’s sanguine about commodity market prospects, especially in iron ore.

“Prices are pretty good with all the things that are happening in iron ore at the moment, the Brazilian challenges,” he said in connection with supply reductions as Vale, the national iron ore producer, is having to deal with the consequences of iron ore tailings dam bursts that killed hundreds of people in 2017 and 2018.

Cutifani also thinks the accidental blasting of protected first nation caves in Australia by Rio Tinto, which was expanding its iron ore operations, will be another factor limiting new production. “The potential disruptions in iron ore are probably more significant than people appreciate,” he said. “Copper is tight given the challenges, so overall the prognosis for mining, we think, is fairly solid.”

The view at Macquarie is that the commodity markets will continue to be heavily influenced by some of the tensions that pre-existed Covid-19, such as the trade war between the US and China.

“China-related trade conflict is proving to be an enduring theme in commodities,” the bank said. “Since it consumes 40% to 70% of most commodity trades, investors now seek strategies to manage exposure to such conflict,” it added. Investors therefore avoid minerals where China has self-sufficiency, such as aluminium and coal, and prefer minerals where imports are required, such as iron ore and copper.

Stimulus efforts aimed at speeding up broad economic recovery by central banks are also likely to support commodities in the short term while supply shocks and the inability, for whatever reason, of the mining market to meet growing demand is also expected to support commodity pricing. ■ editorial@finweek.co.za

Will there be a demand for diamonds after the pandemic?

The outlook for this sector’s recovery remains tough.

The diamond market is in a serious hole from which it could take the best part of two years to emerge, according to Goldman Sachs analyst Jack O’Brien.

Previously, the narrative was for China to start stimulating demand with engagement and wedding jewellery sales beginning in tier-one cities before moving to tier-two and three cities.

This would be supported by sustained existing demand in the US, which comprises about 49% of the market, and falling supply. New diamond mines are thin on the horizon while the large Rio Tinto mine, Argyle, will close imminently.

According to O’Brien, however, the mid-stream market of cutters and polishers has collapsed in India owing to lack of credit, leaving behind significant stockpiles.

Alrosa, the large Russian diamond producer, expects to end this year with some 30m carats of diamonds in inventory, roughly the same as a year’s production.

De Beers, in which Anglo American has an 85% stake, is not expected to make any contribution to earnings in the group’s current financial year, O’Brien says. But Anglo American CEO, Mark Cutifani, is optimistic about the timeline of recovery, which will be assisted by a R250m marketing push.

“I think De Beers will pick up fairly quickly,” he says. “We have to continue to invest so we’re continuing to invest in marketing.” He hopes that coming out of Covid-19, the group will be able to convince consumers that diamonds, though a significant pull on discretionary spend in times of some asperity, are the right response.

“Life is fleeting and, therefore, you want to make sure that the people you love know that you love them. And what better way to say that than with a diamond,” says Cutifani. ■

finweek 30 July 2020

13

in brief in the news

By Peter Fabricius

FOREIGN AFFAIRS

Foreign governments fret over SA’s move to ‘autarky’

s

Is government going with the global turn inwards or is it looking out for local manufacturers as Africa opens up for free trade? outh Africa is heading towards “autarky”, inward, this presents opportunities to rebuild local a much greater self-sufficiency that industry, strengthen local manufacturing and drive includes trade protectionism, in its import substitution,” the document states. economic policies.

The focus of the document is on reviving The government began bringing the economy manufacturing in SA, which it says has “closer to home” before the Covid-19 crisis but significantly de-industrialised and as a result seems to be accelerating the move since then. imported the equivalent of about 25% of GDP That’s the view at least of some of the country’s last year. trading partners. They worry about a push to This excessive reliance on imports has been contract manufacturing value revealed by the Covid-19 crisis chains down to the region or to since most of the medical The focus of the document is on Africa; to localise much more equipment and personal reviving manufacturing in SA, manufacturing and to give protective equipment has had to which it says has significantly the state greater control of the be imported. de-industrialised and as a result imported the equivalent of about economy.

The slowing of global This would run counter to economic growth caused by the globalisation and free trade pandemic is reducing imports of and thereby deny foreign consumer goods, and capital and manufacturers and suppliers intermediate products. of GDP last year. beyond Africa a chunk of their “These developments share in the SA economy. present an opportunity for SA Western diplomats discern signs of these to look inward by strengthening the agenda for tendencies in recent policy pronouncements by localisation, in particular local manufacturing and the ANC and by the government, particularly local procurement,” the ANC document says. By Ebrahim Patel, minister of trade, industry and “localisation” it includes greater integration of competition.

SA manufactured products within the Southern Other Western diplomats are less worried African Development Community and continental because they believe so far SA is merely doing value chains, especially through the African what most of the world is doing: reducing its Continental Free Trade Agreement (AfCFTA), dependency on imports. which was due to start operating on 1 July this year The policy orientation that is worrying but was postponed until 1 January 2021 because diplomats is clear in the ANC’s discussion of the Covid-19 crisis. document, “Reconstruction, Growth and A “massive programme of localisation should Transformation: Building a New, Inclusive prioritise key industries such as agro-processing; Economy”. This was prepared in June by the ruling healthcare; consumer goods; household party’s Economic Transformation Committee in hardware products; capital goods, especially response to the Covid-19 crisis. for infrastructure projects, mining, agriculture, Like the left elsewhere in the world, the ANC renewable energy, the green economy and digital believes the crisis has exposed the limitations infrastructure; construction material, and transport of global capitalism, has tilted the “balance of equipment”, and “state procurement should forces” – which the ANC always obsesses about shift decisively to local procurement”, the ANC – between the public and private sector in favour advocates. of the public side and has “legitimised a greater Patel’s development of “master plans” in some and more active role of the state in guiding the of these areas, well before Covid-19 struck, is economy”. also worrying some diplomats. In his speech in “As the world economy enters recession and the State of the Nation debate in February, Patel global trade slows, this has opened up avenues for focused particularly on the master plans for the greater regional integration, trade and investment. clothing and textiles industry as well as the poultry Equally, as many economies are forced to look sector.

Photos: Gallo/Getty Images | Shutterstock

25%

14

finweek 30 July 2020

Ebrahim Patel Minister of trade, industry and competition

Phil Hogan EU trade commissioner

www.fin24.com/finweek

in brief in the news

“I think the Covid crisis has … made a lot of countries aware of their dependence on the Chinese market, on the US market, on the European market.”

He welcomed the commitment of leading retailers to increase their purchase of SA-made fashion products from the current local content level of 44% to 65%.

Patel’s poultry master plan to support local chicken farmers and processors, which aims to save 54 000 jobs, create new ones and increase local production, including for export, is not in itself explicitly protectionist.

Yet, it can’t be separated from Pretoria’s increased responsiveness to demands from the local poultry industry for protection from imports.

For example, it slapped a 35% “safeguard” duty on EU chicken imports in 2018, which has been decreasing by five percentage points a year since then.

Patel said the government would finalise more master plans this year in the steel and sugar industries and in the digital and green economies.

An indication of Patel’s apparent ambivalence about global free trade could be discerned in last week’s SA-EU ministerial conference, which was dominated by the robust interaction between Patel and the EU trade commissioner, Phil Hogan, who is an ardent free trader.

Daily Maverick reported an EU official indicated that SA did not share the EU’s belief that stronger multilateral rules could help in making more resilient and sustainable those supply chains which had been weakened by the Covid-19 crisis.

And while Hogan had made a strong push for more free and fair trade as the driver of a postCovid global economic recovery, Patel’s response seemed to be rather half-hearted.

Some other Western governments, however, view SA’s drive towards localisation with greater equanimity because it’s “not very much different from what’s happening, even in Europe,” as one diplomat said. “The EU since the Covid crisis has also been strengthening some of the regulations.

“I think the Covid crisis has … made a lot of countries aware of their dependence on the Chinese market, on the US market, on the European market. And the Europeans have had a brutal wakening up on their overdependence on the Chinese,” the diplomat said.

“So, we have not only had a negative look at it. SA is actually trying to protect some of their markets and look at how they can improve the capacity of their plants, the capacity of Africa, @finweek

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but also of their own country in terms of certain industries. And this is not completely different from what is happening in Europe or in the US. So, it’s not completely surprising what they did.”

Even these diplomats, however, remain vigilant about whether or not the government might go further than just offering industry guidance and start to intervene more directly in the economy by giving businesses instructions on how much medicine must be produced in SA, for example.

“This has to be regulated by the market,” one said. Patel’s own ideological disposition fuels suspicions about his intentions for the economy.

Some foreign investors in SA have welcomed the localisation regulations because they believe it will open more of the African market, particularly through the AfCFTA. These foreign investors also appreciate the SA government protecting them against the immense Chinese market.

“I know the Chinese were not happy at all about these regulations because in the end it touches them a lot as well,” one Western diplomat said.

“Especially when it comes to textiles, when it comes to some other industries where the Chinese were very much looking at the SA market.”

The irony of the ANC and the SA government’s position is that while they lament growing protectionism globally, they are moving in the same direction.

And it looks like they are resolving the dichotomy by becoming more protectionist globally even as they become much freer traders in Africa.

The reason is simple; SA goods are much more competitive in Africa than in most other places.

If it’s true that in the end SA is just going with the global localisation flow, the net effect of all this turning inward by so many countries is nonetheless likely to make a big dent in global economic growth for a long time to come. Global trade has been a major driver of global GDP for decades.

Short-term localisation and import substitution to deal with a temporary – though, of course, devastating – phenomenon, is one thing. But if these structural changes become permanent, they must surely negate much of that growth impact of global trade. ■ editorial@finweek.co.za Peter Fabricius is a consultant to the Institute for Security Studies (ISS) and a freelance foreign affairs journalist.

finweek 30 July 2020

15

market place

>> House View: Pan African Resources, South32 p.17 >> Killer Trade: Clicks, Dis-Chem p.18 >> Simon Says: Listed property, Omnia, Pan African Resources, Quantum Foods, Richemont, stock exchanges, Taste Holdings, TFG p.20 >> Investment: Use the lower interest rates to pay off debt p.22 >> Invest DIY: It is (finally) gold’s time to shine p.23 >> Trader’s Corner: Good long-term opportunity in Californian power utility p.24 >> Invest DIY: The connections between the disconnects p.26

FUND IN FOCUS: FAIRTREE GLOBAL REAL ESTATE PRESCIENT FEEDER FUND

By Timothy Rangongo

For high-quality foreign real estate The fund aims to generate long-term growth from investing in internationally-listed property companies.

FUND INFORMATION:

Benchmark: Fund manager:

FTSE EPRA/NAREIT Developed Net TRI (ZAR) Rob Hart

Fund classification:

Global – Real Estate – General

Total investment charge:

1.94%

Fund size:

R97.6m

Minimum lump sum/ subsequent investment: Contact details:

R50 000/R1 000 021 943 3760/clientservices@fairtree.com

TOP 10 HOLDINGS AS AT 30 JUNE 2020:

1

Prologis (US)

6.87%

2

Sun Hung Kai Properties (Hong Kong)

6.01%

3

City Development (Singapore)

5.61%

4

Mitsui Fudosan (Japan)

5.53%

5

Segro (UK)

5.19%

6

Healthpeak Properties (US)

5.01%

7

Extra Space Storage (US)

4.86%

8

Sun Communities (US)

4.54%

9

Vici Properties (US)

3.95%

10

Alexandria Real Estate Equities (US)

3.93%

TOTAL

51.5%

PERFORMANCE (ANNUALISED AFTER FEES)

As at 30 June 2020: ■ Fairtree Global Real Estate Prescient Feeder Fund 10

■ Benchmark

9.97%

8

8.75%

6

2

2.82%

0

16

Fairtree Capital’s Global Real Estate Prescient Feeder Fund invests in international real estate assets which, according to the fund manager, are of “high quality” and “should benefit from capital appreciation while also delivering solid foreign dividends”.

The portfolio is long-term-oriented, and though US-dominated, is diversified across geographic regions, currencies, real estate sectors and stocks. Geography, sector and stock are at the core of the fund’s top-down investment strategy, according to fund manager Rob Hart, who refers to them as “three bites of the apple”. The three fundamentals are scrutinised in that order when making investment considerations.

Taking the said bites has, however, proved to be challenging lately. For example, “sectors where fundamentals are poor, such as retail and hotels, are extremely attractively valued, while the sectors with strong fundamentals, such as datacentres, are expensive,” says Hart.

The global hotel stock Hilton was, for instance, one of the worst performers for June in the fund’s portfolio, with the stock down 7.39% on the back of continued weak fundamentals for the hotel sector globally, which doesn’t look like it will improve any time soon, according to Hart.

“Clearly it is easier buying stocks that are cheap with good fundamentals and vice versa, but there are few such opportunities at present.”

Geographically, the fund primarily invests in real estate equities in the US, Japan, Hong Kong, Singapore, Australia, Europe and the UK – which were all dealt a heavy blow by the ongoing Covid-19 pandemic.

March 2020 was “the month that global investors became aware of the spread of Covid-19, and as a result global markets were hit hard, global property stocks included,” says Hart. Add to this rising trade and political tensions in Hong Kong. Monthly returns for March were the fund’s worst yet, seeing a decline of 6.98%.

It was exposure to sectors that were more resilient to Covid-19, such as datacentres and self-storage, in addition to being positioned in Asian countries that were already further down the road with the pandemic, that helped catapult the fund back to positive returns of 7.34% the following month, according to Hart.

The fund has been avoiding sectors most exposed to the virus, such as retail and hotels, and pursuing long positions in Asia and Australia. Hart says these two geographical regions have recovered well from the Covid-19 threat. It is also positive on the outlook for global developed market property over the medium term, while trends such as working from home are likely to negatively impact office sector holdings.

Why finweek would consider adding it:

4.69%

4

Fund manager insights:

1 year

finweek 30 July 2020

Since inception in March 2017

Global real estate stocks are outperforming SA stocks, most especially the locallylisted property sector. Emerging markets like SA are also likely to have a far harder time dealing with the pandemic and its aftermath than the developed markets the fund is invested in. ■ editorial@finweek.co.za www.fin24.com/finweek

house view PAN AFRICAN RESOURCES XXXXXXXXXXXXXXXX

BUY

SELL

marketplace

HOLD

By Simon Brown

Good days ahead On p.23 of this issue, I write about gold miners in general and Pan African Resources (see p.20) specifically.

Pan African is comfortably the lowest-cost producer of the precious metal and its new high-grade find at Barberton will further help drive down overall costs for the group. This is due to the higher yield of the metal, which means more gold output for largely the same amount of work and thus costs.

With gold finally having its day in the sun, the price seems set to move higher. But, even at the current price of around $1 800 an ounce, Pan African is very profitable with all-in sustaining costs (AISC) of under $1 000/oz. In addition, the mid-year operating results guidance was for AISC to remain below this level.

The miner is also managing to sell more gold and with the new deposit will see AISC lower and output increased further.

The first two risks are naturally the gold price and the rand exchange rate. The latter is strengthening but is not expected to go much beyond R15 for a dollar – if it even gets to that level.

The bigger risk remains the coronavirus pandemic and Pan African’s ability to mine safely within Covid-19 restrictions in an underground environment. ■

Last trade ideas

Even at the current price of around $1 800 an ounce, Pan African is very profitable.

BUY

SOUTH32

SELL

BUY

Purple Group 16 July issue

CAUTION

Banks 25 June issue

CAUTION

Hospital Groups 4 June issue

CAUTION

Mining 21 May issue

HOLD

By Moxima Gama

Manganese hurts valuation

Photo: www.south32.net

South32, which was spun out of BHP in 2015, said in a recent quarterly report that it expects to impair its manganese assets by $109m (R1.8bn) for the fiscal year ending December 2020. This is in response to the Covid-19 pandemic sweeping through the global economy. Manganese is used as a strengthening ingredient in steelmaking. The miner also expects to report one-off, pre-tax restructuring costs at its Metalloys alloy smelter in Vereeniging of about $7m. The share price remained unchanged as it continues to trade on the upper slope of its long-term bear channel.

With a market capitalisation of R124bn, South32 is a globally-diversified metals and mining company with operations in Australia, Southern Africa and South America. It has proven to be a consistently cash-generative business, with the strongest balance sheet in the sector and a dividend yield of 3.25%. South32 has made big strides over the years in cutting costs at its unprofitable operations to reduce its debt.

How to trade it: Upside through 2 665c/share would mean South32 has breached the upper slope of its channel – prepare to go long.

A positive breakout confirmed above 2 970c/share (go long) could see the stock finally recover towards its all-time high at 4 480c/share.

If South32 encounters major resistance at 2 665c/share, refrain from going long. A reversal through 2 280c/share could extend the bear channel towards support at 1 635c/share. ■ editorial@finweek.co.za @finweek

finweek

finweekmagazine

Last trade ideas BUY

Woolworths 16 July issue

BUY

Telkom 25 June issue

BUY

Distell 4 June issue

BUY

Sasol 21 May issue

South32’s manganese mine in the Northern Cape

It has proven to be a consistently cash-generative business, with the strongest balance sheet in the sector and a dividend yield of

3.25% finweek 30 July 2020

17

marketplace killer trade

By Moxima Gama

XXXXXXXXXXXXXXXX CLICKS

c

On the cusp licks Group has seen its share price more than double over the past five years, remaining almost unchanged compared with a year ago. The company said in April that it will suspend its dividend, even as profits rose, in a bid to preserve cash amid the uncertainty of the coronavirus pandemic.

Outlook: Though Clicks’ share price pulled back to support at 20 250c/share, it’s still trading in its primary bull trend and continues to outperform the FTSE/JSE All Share Index. Clicks has a robust balance sheet and generates strong cash flows and because it has an impressive business model and sound expansion plans for its pharmacy footprint, it’s a good defensive stock. However, it’s not immune to challenges in the

CLICKS

52-week range: R185.53 - R274.67 Price/earnings ratio: 30.78 1-year total return: 4.71% Market capitalisation: R54.1bn Earnings per share: R7.07 Dividend yield: 1.5% Average volume over 30 days: 1 295 285 SOURCE: IRESS

SOURCE: MetaStock Pro (Reuters)

operating environment.

On the charts: Clicks’ share price has fallen to the second support trendline of its primary bull trend.

It has recently bounced there.

But if it fails to break out of its corrective bear trend, the share price could fall further in the medium term.

Go short: Resistance encountered at 22 220c/share – thus forming another falling top – could

see Clicks retest its second support trendline (black dashed trendline) – and possibly breach it. A negative break through that trendline, coupled with the 3-week relative strength index (3W RSI) remaining bearish, would be confirmed below 18 550c/share.

Such a move could extend losses towards 16 915c/share or even the 15 250c/share support level in the medium term.

Go long: Clicks would end the correction above 22 220c/share.

However, it’s imperative that the 3W RSI follows suit by escaping its own bear trend – thereby negating a potential false break on the price chart. This bullish double breakout could then prompt a recovery back to the 27 470c/share all-time high.

If resistance is not encountered at that level, Clicks would commence a new bull phase. ■

DIS-CHEM

w

Maybe too cheap?

ith its share price slumping by almost 40% over the past three years, Dis-Chem Pharmacies must now contend with a Competition Commission fine too. The anti-trust authority fined the group R1.2m for charging excessive prices for surgical masks as it took advantage of the heightened demand due to the coronavirus pandemic. On a lighter note, the group posted a 12% increase in full-year revenue to R24bn in May 2020, thanks to a strong retail segment.

Outlook: Dis-Chem is testing alltime lows. With pharmacies labelled essential service providers, one would think its share price would do well during the Covid-19 pandemic.

With its price-to-earnings ratio, which hints at the premium the market has placed on the stock’s earnings, at a reasonable 24.4 18

finweek 30 July 2020

DIS-CHEM

52-week range: R16.70 - R29.30 Price/earnings ratio: 24.4 1-year total return: -27.21% Market capitalisation: R14.6bn Earnings per share: R0.70 Dividend yield: 0.75% Average volume over 30 days: 1 413 394 SOURCE: IRESS SOURCE: MetaStock Pro (Reuters)

and the share price trading at an all-time low, a recovery in the share price would trigger a good buying opportunity.

On the charts: Dis-Chem’s share price is trading in a bear trend which has steepened over the years. It’s currently testing the lower slope of a bear channel formed within its primary bear trend and bouncing on that lower slope could attract buyers.

Go long: A move above 2 000c/

share would confirm a positive breakout of the third, steeper bear trend – an opportunity to nibble into the share. Upside to either the 2 350c/share level or the upper slope of the channel could follow. A positive breakout of the channel would be confirmed above 2 830c/share, possibly extending gains to 3 090c/share. Dis-Chem would abandon its primary bear trend above 3 500c/share and the 3 995c/share all-time high could

then be retested.

Go short: Refrain from going long on continued downside through the lower slope of the channel or below 1 670c/share. The downtrend could steepen further towards 1 000c/share. ■ editorial@finweek.co.za Moxima Gama has been rated as one of the top five technical analysts in South Africa.

She has been a technical analyst for 12 years, working for BJM, Noah Financial Innovation and for Standard Bank as part of the research team in the Treasury division of CIB.

www.fin24.com/finweek

advertorial Samsung

Creating real empowerment Why Samsung’s Level 1 B-BBEE rating is good news for the transformation journey of corporate South Africa.

Samsung Future Innovation Lab opening at UWC

i

t wasn’t long ago that black economic empowerment was best summed up by the narrative of black investors buying minority stakes in white-controlled companies and then being proudly presented as real change on the boards of acquired businesses. Fortunately, this cynical notion of empowerment has evolved.

Organisations such as Samsung are intent on creating real empowerment; Samsung South Africa has therefore taken significant steps forward to build on its transformational vision.

This has been a journey long in the making – one which began with Samsung’s ongoing mission to attract and develop talent to address employment equity and skills development. It’s a philosophy entrenched in Samsung’s DNA since day one. And now its Level 1-certification, achieved for the second consecutive year, is aligned with Samsung’s belief that companies must play an active role in empowering people across all industry sectors.

Over time Samsung has also invested in major social, educational and enterprise development initiatives on a grassroots level that allows the brand to be actively involved in the community, as well as support local entrepreneurial talent. This is important as black investors are no longer content with being economic spectators simply collecting

@finweek

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dividends. They want to innovate, uplift their communities and create an economy based on the freedom to pursue their dreams of being large-scale industrialists. This is an important step in building the economy from the ground up.

“The certification demonstrates our dedication not only to operational excellence, but to remain an active and enthusiastic contributor to the future of the South African economy. Samsung is dedicated to harnessing the power of technology to effect positive change. Our team is firmly committed to ensuring long-term sustainability and remaining aligned with the government’s transformation imperatives,” says Hlubi Shivanda, Director: Business Innovation Group and Corporate Affairs at Samsung South Africa.

Samsung has wholeheartedly embraced the fundamentals of B-BBEE, which is why the company finds great purpose in contributing meaningfully to sustainable transformation across its value chain. Samsung’s enduring commitment to the objectives of the BroadBased Black Economic Empowerment Act is demonstrated by its ongoing objective to address the inequalities of the past.

The economic fortunes of black people and black-owned businesses must gain a foothold

in supply chains of both the public and private sectors, resulting in much-needed market access to drive growth. Samsung is driven by a focus on the meaningful participation of black people in the South African economy through management and business ownership.

In 2019, Samsung launched a R280m Equity Equivalent Investment Programme, aimed at stimulating job creation. It is estimated that it will contribute nearly R1bn to the South African economy at large. This investment is in addition to initiatives focused on the upskilling of youth, such as in the Samsung Engineering Academy, technology-based facilities in schools and universities, as well as student bursaries.

Ultimately, the aim is to pursue opportunities for black people to become actively engaged in the economy. This will have an impact on families, communities and, ultimately, the entire nation.

“We will continue to work directly with government through education and social upliftment programmes, bursaries and industry initiatives. Additionally, everything from the empowerment of our staff, Samsung Engineering Academies and Enterprise Development programmes will continue to actively reflect our unwavering commitment to the prosperity of the country and its people,” concludes Shivanda. ■

finweek 30 July 2020

19

marketplace Simon says

By Simon Brown

RICHEMONT

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.

TFG

Bleak outlook for bling Richemont’s trading update for the quarter ending June covered the full hard lockdown seen all over the world and, as expected, it was bleak. We also saw diamond sales from De Beers essentially collapsing in the first half of 2020, as announced by Anglo American. Richemont points out that a lot of its sales are to tourists and so the lockdown and current travel bans mean no tourists and thus a collapse in sales.

When we start to see countries and borders opening again, we can expect luxury goods sales picking up. It will, however, be slow as economies and consumers continue to struggle financially, and the latter will be low on confidence. The bigger question is the long-term impact on luxury goods.

They certainly will survive. But I wonder if one of the outcomes from lockdown will be a desire for more human experiences rather than owning material things? One of the consequences of the stricter lockdown regulations is that even surrounded by our possessions, we really miss experiences. Be it friends visiting, outings, holidays or even just walks in the park. Will a part of this remain after the lockdown?

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finweek 30 July 2020

Bargain hunting TFG, formerly The Foschini Group, has bought 371 viable Jet stores for R480m from Edcon.

This includes R800m of stock and lease liabilities of about R1bn. This puts TFG firmly in the value segment of the clothing market, a space it has not previously operated in. The purchase price for Jet looks good, although it now must sell the stock and in time decouple the business from the Edcon point-of-sale and inventory systems. TFG announced a R3.95bn rights issue, underwritten by RMB, Standard Bank and Absa, that will pay down over half of TFG’s debt and leave the group very well-positioned. However, the rights issue of 40 new shares for every 100 owned is very diluting for shareholders and is being done at TFG’s lowest share price in a decade.

L2D said it expects distributable earnings per share to be between

40% 55% and

lower.

OMNIA

Quick turnaround Omnia’s full-year results through March showed a strong turnaround from a company that was looking very distressed just a year ago when it undertook a R2bn rights issue. Most turnarounds take much longer than expected, with the only other recent exception being Altron. Credit must go to the new management, who have used the fresh capital well and won’t be needing any more of it. But Omnia remains in a very tough market and while I will be keeping a close eye on the company, the risks remain real and I don’t think it’s worth buying at this point of our depressed economy.

LISTED PROPERTY

Distributions contracting Trading statements from Liberty Two Degrees (L2D) and Growthpoint both come in pretty much as expected, albeit the latter with a lot less detail. Growthpoint’s distributable income per share will be down at least 15%, while L2D provided a lot more detail, estimating that property valuations will be down by between 10% and 20% and this will hurt loan-to-value ratios as properties’ valuations drop (also see p.34). But, as I have written before, lenders are not going to be calling in loans during a pandemic as they don’t want to be left owning the properties.

L2D also said it expects distributable earnings per share to be between 40% and 55% lower.

Note that these two companies use different metrics: Growthpoint refers to income and L2D refers to earnings. Income is the top-line figure before subtracting costs while earnings is the bottom-line number after expenses are deducted and is available to be distributed to shareholders. So, while the difference seems stark, likely they will be in line with each other when we see the full results. www.fin24.com/finweek

marketplace Simon says

QUANTUM FOODS

STOCK EXCHANGES

TASTE HOLDINGS

New regulations Beware the for execution price discovery

Photos: Gallo/Getty Images | quantumfoods.co.za | panafricanresources.com

Rattling the coop Quantum Foods arrived on the JSE after being unbundled from Pioneer Foods in late 2014, but there was no real splash or excitement about the new stock. It’s a quality but cyclical egg business and the share traded between 250c and 450c until recently. Then, in mid-June, Zeder sold its 30.8% stake that it had inherited when Pioneer unbundled the stock and now it seems everybody wants a slice of the business. Country Bird Holdings bought the Zeder stake and apparently initially wanted to take over the entire business, but then decided against it. The Luxembourg-based SilverStreet Capital (which also owns a stake in Crookes Brothers*) informed the company they’d be buying, through a subsidiary, a 32% holding from an unknown seller. Directors bought some shares and, finally, Astral acquired 6.4% to ensure the continuity of its long-term broiler supply agreement. The share traded as high as 1 157c, but at the time of writing it was back just above 700c, due to investors realising there is a standoff, with no takeover bid able to succeed considering all the significant blockholdings. I don’t hold any shares but if I did, I’d be on the lookout to sell at the best price I could get. There is no further corporate activity likely and so the price will surely revert to the levels seen before all this excitement. This is the case even as the stated net asset value is just under 920c/share. The only price mover here has been a possible take out of minorities, not a fundamental revaluation of the company. @finweek

finweek

finweekmagazine

The Financial Services Conduct Authority (FSCA) has announced a new proposed law of best execution. What this means is that when you buy a share through your stockbroker, they can’t only offer to trade on the JSE. If this law falls into place, they’ll have to also check other local exchanges on which the share is listed (which will mostly be A2X) and if the price on the other exchange is better, they’ll have to trade at that better price. This has huge implications for investors who will, at times, be getting better prices when buying or selling. The stockbrokers themselves will have to upgrade systems to enable trading on multiple exchanges. And, of course, the JSE will be under pressure and will surely lose trading volumes as A2X often has better prices due to its lower fees. The law will only likely go live in the first half of next year and I imagine the comment period that recently closed probably had many against the proposed law. But, ultimately, this is in the best interest of the market and investors.

In mid-June, Zeder sold its 30.8% stake that it had inherited when Pioneer unbundled the stock and now it seems everybody wants a slice.

Taste Holdings said in early July it will change its name to Luxe Holdings as its remaining assets will be the two jewellery businesses after an exit from food operations. It has also announced a 100:1 share consolidation.

So, if you hold 100 shares, you’ll have just one left after the consolidation. This is to help real price discovery, which is impossible with a share trading at just a few cents. But it also means that the share price will drop, potentially markedly, as that price discovery settles much lower than the current price.

PAN AFRICAN RESOURCES

Barberton struck gold!

Pan African is the best small gold miner even though, truthfully, that list is tiny with DRDGOLD the only other small gold miner. Pan African’s operational update for the year ended 30 June, which was released on 10 July, includes details on the New Consort Mine near Barberton, which delivers such high grades at times that you can see the gold with the naked eye. Some areas are reported to have 300 grams per tonne (g/t) with an average of 25g/t. Generally, 10g/t is considered an excellent, high-grade content with many mines getting less than 5g/t. So, even at 25g/t this is an exceptional ore body that Pan African is going to be mining and at 25g/t this should help an already low-cost miner reduce its costs even further. ■ editorial@finweek.co.za * The writer owns shares in Crookes Brothers.

finweek 30 July 2020

21

marketplace investment

By Schalk Louw

FINANCIAL MANAGEMENT

It’s the small things, really

t

Reduced bond payments could prompt homeowners to consider investing. Rather use these savings to pay off your debt, advises Schalk Louw. hey say that you shouldn’t sweat the small things in life, PERSONAL DEBT AS A PERCENTAGE OF PERSONAL AFTER-TAX INCOME IN SOUTH AFRICA and although there might be a lot of truth to this saying, % I think there lies greater truth in the fact that you can be 85.5 successful if you do the small things right.

80 Best-selling author James Kerr tried to determine how the 72.8% 75 New Zealand rugby team (the All Blacks) manages to remain so 70 successful year after year in his book Legacy. One of the things 65 in his findings that made quite an impression on me, was the 60 fact that every player in the All Black team cleaned up the locker 55 room after every game. It doesn’t matter who you are, every team member does his part by sweeping and ensuring that the locker 50 room is left in a better condition than they found it.

45 Now, you may wonder what this has to do with their success, 43 41 and the answer is: a lot. It is something as small as that, that gives the team its power. It teaches them discipline and, in general, to ’74 ’78 ’82 ’86 ’90 ’94 ’98 ’02 ’06 ’10 ’14 ’18 ’20 be in the service of others. Something as small as that makes a Source: IRESS huge difference on the rugby field.

Even considering a good recovery from local and offshore stock markets since March this year, markets remain under We all know, however, that SA interest rates have pressure in 2020, but many investors are willing to push decreased dramatically since the beginning of this year, their fears aside and see the great potential or success this with our current prime rate now at 7.25%. That means that Most South African asset class has to offer. Although I also can see great value your monthly repayment on the same 20-year home loan investors below the age of in shares right now, especially over the long term, many would have decreased to R3 952. So, what should you do? investors also tend to look past the smallest and simplest, Should you invest this monthly “saving” in an equity-linked yet highly effective, investment of all: personal debt. investment in the hopes of making a fortune?

Most South African investors below the age of 50 still Consider this: by being disciplined and sticking to your have some or other form of debt, of which a mortgage is original repayment of R4 825 per month, you won’t be still have some or other probably the most common. But when I look at personal paying off your home loan over a period of 20 years, but form of debt, of which a debt as a percentage of after-tax income in SA, this ratio is actually in just a few months short of 14 years (if interest mortgage is probably the most common. troubling, to say the least (see graph). rates do not change). In other words, by continuing to pay Several private investors have approached me recently the extra R873 per month, which you were used to paying with a need to invest extra capital, but they are unsure about and irrespective of the lowered interest rates, you could the right investment vehicle to use between endowments, be completely debt-free roughly six years earlier than you unit trusts, linked products, direct shares or properties. would have been if you paid the lower premium. After One of the first questions I ask, in context of the you paid off your bond earlier, don’t just increase your broader discussion with the investor, is always: “What lifestyle expenses, invest the full original premium in is your current debt ratio?” an investment.

Always start by saving on your debt. If you had Obviously, there is a time and place for made a 20-year home loan worth R500 000 everything, and I would never discourage an in December 2019 at the prime rate of 10% at investor from investing in shares. What I’m that stage, your monthly repayment would have recommending, however, is that you first settle been R4 825. If the prime rate had remained your debt, and then move on to other types of unchanged, you would have made repayments investments. to the value of R579 000 after 10 years. But the Unlike paintings, the more expensive reality is that even after making these payments investment isn’t always the better investment, and for 10 years, you still would have owed the bank about many investors have fallen into this trap over the years.

R365 000, which effectively means that you had to pay Great success often lies in something as simple as paying R579 000 over a period of 10 years to settle only R135 000 off a little extra on your home loan, but the secret lies in having on your home loan. The main component of your repayments the discipline to start today. ■ would have been allocated towards servicing the interest on editorial@finweek.co.za your home loan.

Schalk Louw is a portfolio manager at PSG Wealth.

Photo: Shutterstock

50

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finweek 30 July 2020

www.fin24.com/finweek

marketplace invest DIY

By Simon Brown

COMMODITIES

Now really is the time to go for gold

b

After a decades-long slump, the bulls are ready for some prime-time gold profits. ack in the early 1980s, gold was all the rage. The US had abandoned the gold standard and it was on the move from under $100/oz in the early 1970s to hitting $682 in September 1980.

Our local exchange was having a great time with literally dozens of listed gold mines that were suddenly printing money. This fever lasted for at least a couple of years, even as the gold price started to slip, with gold closing the 1980s at around $400/oz. Even at that price mines still made great profits, thanks in part to their fixed cost base.

Back then most listed gold mines were single shaft affairs, not the large conglomerates we see today. The plan was to mine the shaft at a profit, pay chunky dividends and then close when the costs were higher than the price; and with the boom in the price, mines could mine for longer.

But then the 1990s came along and two things happened. Firstly, the gold price continued sliding, closing the decade at around $300/oz. The second issue was the start of the trend of mining conglomerates owning multiple shafts and mines, which meant that buyers of these mining stocks would own not only highly-profitable shafts, but also loss-making ones – as well as greenfield and brownfield mines.

But the old-timers never forgot the heydays of the early 1980s and kept on punting gold, even as it was a horrid investment – whether in the metal itself or in a gold mine. The running joke among us newbie traders in the late 1990s and early 2000s was that the only time to buy a gold mine was when closing a short, and for much of the late 1990s and early 2000s that was the only time I ever bought a gold mine.

Unbeknown to us at the time was that the gold

price was bottoming out at $250/oz in late 1999.

This coincided with the Bank of England selling about 395t of gold over 17 auctions from July 1999 to March 2002, at an average price of about $275.

These sales, undertaken by then Chancellor of the Exchequer, Gordon Brown, remain controversial as we now know for certain that this happened at the bottom of a decades-long cycle.

Gold then peaked again in August 2011 after S&P reduced the US sovereign credit rating from AAA to AA+ and gold traded briefly above $1 800/oz. But by late 2015, the yellow metal had fallen to just above $1 000/oz and many, me included, wondered if gold would ever be a worthwhile investment.

And then 2020 arrived. And brought with it the coronavirus pandemic. Gold is now trading at around $1 820/oz. But the real story is the gold miners.

The gold miners index has broken out of a multi-decade sideways channel and is at all-time highs over the last few months. This is helped by a weaker rand against the dollar, as the fixed cost base of the gold miners are paid in local currency.

They are now again printing money. Most people that I speak to refer to Pan African Resources and AngloGold Ashanti as the best top-tier gold miners, and DRDGOLD and Harmony as the best secondtier stocks in this category.

Certainly, the time for gold has arrived, and those of us who’ve ignored it for decades need to pay attention as there are profits to be made.

But we need to remember the lessons of previous decades: Nothing lasts forever and when this bull finally leaves town (as all bulls eventually do), we need to move on. But for now, this is goldbull time and there is money to be made. ■ editorial@finweek.co.za

52-week range: Price/earnings ratio: 1-year total return: Market capitalisation: Earnings per share: Photos: Shutterstock

Dividend yield: Average volume over 30 days:

Certainly, the time for gold has arrived, and those of us who’ve ignored it for decades need to pay attention as there are profits to be made.

GOLD MINERS INDEX (J150)

R19.45 - R59.41

5733.75 4 800

37.56

4 000

100.23%

3 200

R474.49bn

2 400

-

1 600

0.49%

800

19 030 000 SOURCE: IRESS

0 1996

1999

2002

2005

2008

2011

2014

2017

2020

SOURCE: TradingView, monthly closing level

@finweek

finweek

finweekmagazine

finweek 30 July 2020

23

marketplace trader’s corner

By Petri Redelinghuys

STOCK PICK

Wildfires and bankruptcy may herald new beginning

o

PG&E, a Californian power and gas utility, has solid long-term potential, argues Trader Petri.

Petri Redelinghuys is a trader and the founder of Herenya Capital Advisors.

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finweek 30 July 2020

GRAPH 1: PG&E WEEKLY SHARE PRICE

70 65 60 55 50 45 40 35 30 25 20 15 10 5 ’17 Mar

Jun

’18 Mar

Sep

Jun

’19 Mar

Sep

Jun

Sep

’20 Mar

Jun

Sep

SOURCE: StockCharts.com

GRAPH 2: VIX TERM STRUCTURE

40

Peak crash

• CBOE Volatility Index (VIX): CBP: Last Price: Last Data • CBOE Volatility Index (VIX): CBP: Last Price: 17/08/2015 • CBOE Volatility Index (VIX): CBP: Last Price: 24/08/2015

35 30 $

ur long-term stock pick is a company in California that has just come out of bankruptcy.

The reason the company entered bankruptcy was that it was held responsible for causing wildfires in California due to badly-maintained power lines which killed 85 people. In the end, the court ordered the utility company to pay $25bn.

The company that we are talking about is PG&E (ticker code PCG) and it has recently had its plans approved to exit bankruptcy. PG&E works in a regulated environment where most of its revenue is controlled by the California Public Utility Commission (CPUC). The commission sets the rate at which PG&E can charge customers. The current rate the company can earn on its equity is 10.25%, and this agreement expires in 2022.

In other words, the company has guaranteed users as electricity consumption is stable and a guaranteed return on its assets.

The big risks lie in more wildfires and more liabilities, but something has changed.

New legislation has been passed, which created a fund to deal with wildfire claims, ending the open-ended losses utilities could face. The act created a $21bn fund to pay out wildfire claims. The first $1bn of a claim is paid by the relevant utility company, and if the utility is deemed negligent, this can rise to $2.4bn but is capped there. The fund will be partially funded by the utilities and $10.5bn will be funded by customers. This will be done by adding $2.50 to their monthly bill.

On the flip side, PG&E has started to clean up the bush and undergrowth around its power lines and is installing new equipment that is less likely to cause fires. Although this will take the better part of a decade, it will reduce the risks of more fires.

We also like the fact that the company has recently raised capital at $9.50 a share for a total of $5bn and has rearranged its debt too.

The share is rated a buy by 53% of analysts with a oneyear target price of $13.23. The 2021 price-to-earnings ratio (P/E)is just nine times, which is less than half the industry average. No dividends can be paid as part of the bankruptcy settlement until 2022, hence the share will trade at a discount to its peers and we think a good long-term opportunity exists.

To sum up, the company has guaranteed revenues and is thus able to have a fixed return on its investments. The risks to the company come from liabilities relating to fires, which have been heavily reduced both by new legislation protecting utilities in California, and the fact that the utilities are now more aware of the risk fires pose to their business and are proactively managing this risk. We rate this share a buy anywhere below $12 for a longer-term target of $20. ■ editorial@finweek.co.za

25 Current

20 VIX term structure

Pre- crash Spot

Aug ’15

Sep ’15

Oct ’15

Nov ’15

Dec ’15

Jan ’16

Feb ’16

Mar ’16

Apr ’16

15

May ’16 SOURCE: ZeroHedge

GRAPH 3: VIX TERM STRUCTURE INVERSION: 6-MONTH AVERAGE GAIN OF 8.9% The VIX term structure inverting is often a sign of an imminent low. The exceptions are January 2016 and October 2018 when markets still had another two to four weeks of decline left. Even in those two cases the further downside was between 3% and 4% and while it seems huge, recoveries were rapid.

5 0

-2,7000

-5 -10 3 000

2 844,74 2 790,39

2 600 2 400 2 200 2 000 1 800

2014

2015

2016

2017

2018

2019

SOURCE: Fundstrat Global Advisors, Bloomberg and Factset

www.fin24.com/finweek

marketplace trader’s corner

Trading terms: How to trade volatility indices market is expected to be.

The VIX we often see quoted is the 30-day expected volatility on the S&P 500. The VIX generally trades between lows of around 10 to highs of 20. In volatile environments, the VIX can trade above 20 with a recent high of over 100 during the March 2020 Covid-19 crash.

We will now focus on how the VIX can be used to increase the probability of finding a bottom after a sell-off.

The normal term structure of the VIX is for VIX contracts trading for further-dated expiries to be more expensive than closer-dated VIX contracts.

This leads to an upward-sloping line.

The example in graph 2 is from 2015 – the green line resembles a normal term structure; thus, months further out have a higher VIX than closer months.

The reason for farther out contracts to have higher volatility is that the less time there is left, the less risk there is, and the more time elapses, the more likely an unknown event may occur.

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When a panic-inducing event occurs, the shorter-term VIX rises a lot faster than the longerterm VIX. The blue line VIX term in graph 1 is shown as fully inverted across all points once the peak of the crash has happened. The inversion does not signal the exact low of the market, but improves the timing of finding the low. This low can be a mediumterm low and not necessarily a long-term low.

In graph 3 we see an extreme inversion of the VIX curve between what’s called the front month (closest month) and four months away. Shown in red are the times when this relationship falls below zero.

These time periods have been quite good at timing the lows of the S&P 500 as shown by the lows highlighted in the blue boxes. The timing is not exact and never will be, but it increases the probability of finding a better entry after a panic-induced sell-off.

Thus, the strategy for someone looking to buy into the market during a time of panic is to hold off until the term structure of the VIX curve is fully inverted and enter their long positions on these extreme sell-offs. ■

BRAVE/6094/MOM/E

“The VIX” is a term that is often thrown around in the investment world, although also one that is often not fully understood. That’s why we are going to explore what the VIX is.

Admittedly, we are not going into too much detail as it gets rather complex. Once we understand the basics of what the VIX is, we can start to look at how it can be used to assist in both protecting your portfolio or trading it outright as an instrument to profit from.

The VIX is part of a complex formula used in valuing an option. The formula, known by the name of its creators, is the Black-Scholes formula.

There are several components to the BlackScholes formula, but the one we are interested in is the volatility component.

The higher the expected volatility, the more you need to pay for an option. It can be compared with the short-term insurance on your car: the riskier you are, the more you need to pay to insure it. Hence, the higher the VIX, the more volatile the

marketplace invest DIY

By Simon Brown

STOCKS

S&P 500 and Nasdaq’s different moves

m

Simon Brown takes a look at why there is such a marked disconnect in the performances of two leading American indices and how the coronavirus pandemic will continue to affect various shares globally and here at home.

tech exposure, but it is a lot less, and it uch has been also includes counters from ‘old-school’ written about the industries such as leisure, airlines and bricksdisconnect between and-mortar businesses that are suffering Wall Street (the and will continue to suffer under lockdown. markets) and Main Street (the consumer) So, the Nasdaq being at all-time highs as unemployment remains above 10% in while the S&P 500 lags makes sense the US while markets soar higher, with the and is likely to continue for a while. As the Nasdaq hitting new all-time highs recently.

S&P 500 rebalances, it will get more of As I have previously written, there are these high-flying tech stocks. There have two drivers of this disconnect. The first is been reports that Tesla will be included, that markets look forward 12 to 18 months which will see the stock soar even higher. into the future and, as such, are investing for That said, the reality is that the S&P 500 the second half of 2021. Of course, one can has a number of criteria for listing aside from make a solid argument that the economy just market cap, including “positive GAAP will then still be under pressure, but likely profit over a 12-month period”, which would less than it is now. exclude Tesla.

This then brings me to the second Locally, we’ve seen a similar disconnect reason: The US Federal Reserve (Fed). It’s between gold miners and the rest, with banks been pumping hundreds of billions of dollars and property remaining under pressure. Gold into the system and that money has found a miners continue to soar higher on booming home in the markets, pushing them higher. profits, thanks to a gold price of around And, as old-timers in the market always say, $1 800 an ounce at the time of writing. never fight the Fed. But we’re going to There is, however, a see a further disconnect, second disconnect in Gold miners continue to soar higher on even within sectors. For markets that also makes booming profits, thanks to a example, TFG’s mid-July sense: that between tech gold price of around trading update showed and the rest of the market. clearly that, compared with Most indices peaked Pepkor’s update, the latter after the outbreak of the is doing better, and this pandemic in early June, an ounce at the time of writing. too makes sense. Pepkor while the Nasdaq has generally has lower-priced continued to move higher, clothing than the various hitting new all-time highs.

TFG brands; a consumer under pressure In the case of the S&P 500, all-time highs and concerned about the future will be came late February, and its post-pandemic shopping down and will hence be more likely high hit on 8 June. to frequent a Pepkor brand rather than a This disconnect makes a lot of sense TFG store. as the tech-heavy Nasdaq is full of stocks This trend will also be evident among the that are actually doing very well during this food retailers as consumers shop down to pandemic, including Microsoft, JD.com and cheaper stores, which will benefit brands at Amazon, which are all seeing significant the lower end of the price spectrum and will revenue boosts during the lockdown. hurt the more upmarket (read expensive) This new revenue is likely to be sticky as stores. Over the longer term, consumers people learn new habits, develop new ways will start shopping up again, but for the of doing things and work differently during next year or two the trend will certainly be lockdown; we are using a lot more tech and benefitting the lower-cost brands – and as we will likely continue using much more of such, their share prices can be expected to it, even when the pandemic and resultant outperform. ■ lockdowns are over.

The S&P 500 certainly has some editorial@finweek.co.za

Photo: Shutterstock

$1 800

26

finweek 30 July 2020

Locally, we’ve seen a similar disconnect between gold miners and everybody else, with banks and property remaining under pressure.

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cover story private hospitals

STRUGGLING AMID A PANDEMIC South Africa’s listed hospitals have seen steep declines in their share prices.

What is the outlook for them as the coronavirus rips through the country?

By Jaco Visser

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finweek 30 July 2020

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cover story private hospitals

t

he outlook for South Africa’s three largest listed Of interest, says Wayne McCurrie, a portfolio private hospital stocks is dimming as elective manager at FNB Wealth and Investments, is that surgeries get postponed, patients fear the risk “prior to the surge, the lockdown restrictions have also of contracting the coronavirus when visiting resulted in fewer ‘winter’ illnesses and the resultant hospitals, and hospitals struggle to recoup operational lower doctor and hospital visits”. costs.

In addition, fear took its toll on hospitals. “The One ray of hope is that medical aid schemes’ overriding factor that has severely impacted hospitals’ memberships remain stable as consumers try to ensure activity levels has been that of fear,” Carmen Mpelwane, getting better healthcare services through the private a senior equity analyst at Absa Asset Management, sector rather than having to rely on public hospitals. tells finweek. This resulted in many elective surgeries, This amid a very bleak economic outlook, increased which aren’t deemed emergencies, being cancelled job losses and a slump in consumer confidence, which during the lockdown period or postponed until patients have put strain on the finances of many who can afford feel comfortable entering a hospital, she says. private medical care and insurance.

“For hospitals, these are the most profitable Nevertheless, a sharp decline in operations to perform,” says Mpelwane. occupancy levels at private hospitals – “Doctors across the country have reiterated A sharp decline in occupancy levels at private hospitals – from a “normal” 65% to about 40% at the pressure on their ability to generate from a “normal” 65% the onset of the government lockdown income due to very low consultations, to about – has led to some operating their stateespecially plastic surgeons and of-the-art medical facilities at a loss. ophthalmologists.”

As the coronavirus pandemic cuts This drop in trauma cases, elective its way through SA, news of insufficient surgeries and the fear of infection, together at the onset of the capacity to house and treat the sick in with the initial low prevalence of coronavirus government lockdown – has public hospitals has become the norm. cases at the end of March and during led to some operating their This even as government imposed a April and May, have hit private hospitals’ state-of-the-art medical hard lockdown at the end of March, profitability hard. facilities at a loss. which curtailed the civil liberties of “This was probably an ‘Armageddon’ South Africans to prepare for the scenario for a hospital group, and this saw “surge” in the pandemic. The surge has arrived, but hospital occupancies fall well below 50%,” Charl de government preparations have fallen short. Private Villiers, a portfolio manager and equity analyst at hospitals, which have been enlisted to accept public Sanlam Investments, tells finweek. “Earnings before patients at a rate where their costs are covered, haven’t interest, tax, depreciation and amortisation (ebitda) experienced the brunt yet. generated during these hard lockdown periods actually “In recent weeks the surge in Covid-19 cases has went negative in some instances.” also led to an uptick in hospitalisations, although almost The surge no private hospitals are actually full (despite what As the economy opened from June, and the recent fake news has suggested),” Mark Wadley, a fund coronavirus infection rate started accelerating across manager at Vision Fund Management, tells finweek.

SA, activity levels in private hospitals have started Early in the lockdown to pick up, although from a low base in April, says The implementation of the lockdown – regulated by De Villiers. “lockdown minister” Dr Nkosazana Dlamini-Zuma, The level-3 lockdown restrictions, supposedly who oversees the country’s floundering municipalities less imposing on civil liberties than the original hard and traditional leaders – and the concomitant ban on lockdown level-5 impediments, have led to greater alcohol sales, proved to hurt private hospitals. freedom of movement, alcohol sales (before the During the initial lockdown period in SA the private newly-announced ban) and more businesses, including hospitals were hit by several unusual events, says personal care enterprises such as beauty salons and Wadley. “Their usual patient load from car accidents, hairdressers, opening to the public. This might have sports injuries, infectious diseases like pneumonia, and seen a change in the situation for hospitals, although so forth decreased because of the lockdown, curfews detailed guidance hasn’t been given at the time of and reduced alcohol availability,” he says. writing this article.

Photos: Supplied I Gallo/Getty Images

40%

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Wayne McCurrie Portfolio manager at FNB Wealth and Investments

Carmen Mpelwane Senior equity analyst at Absa Asset Management

Charl de Villiers Portfolio manager and equity analyst at Sanlam Investments

finweek 30 July 2020

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cover story private hospitals

“This is because as we moved to lockdown level 3 (with people moving around again, socialising and drinking etc.), the hospital groups started actively introducing more elective surgical work, while also seeing an uptick in urgent medical care from car accidents and the like,” says Wadley.

“In due course, the hospitals may reach full occupancy (in intensive care units and general wards) if Covid-19 cases continue to grow,” he says.

“This may lead to better profitability levels, but it has to be remembered that the hospitals are also incurring additional expenses in terms of personal protective equipment, sterilisation, sanitisation and equipment – provision of oxygen requires lots of consumables, while ventilated patients require drugs for sedation, for example.”

However, despite the higher costs of caring for patients infected with Covid-19, increased occupancy will ultimately allow private hospitals to better manage operational costs.

“We generate revenue from every patient admitted into our facilities and hence it contributes towards recovering our costs,” Adam Pyle, CEO of hospital group Life Healthcare SA, tells finweek. “The increase in Covid-19 cases needs to be balanced by the drop-off in elective cases. However, with improved occupancies, the group is better able to manage its fixed and variable costs.”

Pre-pandemic symptoms

Even as hospitals are filling up with sick patients, the structural issues that pestered private hospitals in the days before the pandemic remain.

First off, there is the stagnant medical schemes market which isn’t experiencing stellar growth in new memberships. These members are the big drivers behind private healthcare in general, and private hospitals in particular. With the costs of healthcare – from drugs and doctor visits to equipment and hospitalisation – escalating for the better part of the past two decades, medical schemes, and even the government, became uneasy. That culminated in the release of the Competition Commission’s inquiry into the sector last year.

Consumers stomached high premium increases from medical aid schemes year after year as the costs of healthcare – much of which is imported and beholden to the rand’s exchange rate idiosyncrasies – outpaced Stats SA’s consumer price index.

And the reliance of private hospital groups on medical schemes’ members can’t be illustrated more clearly than by the following stat: “Approximately

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finweek 30 July 2020

Adam Pyle CEO of hospital group Life Healthcare SA

Lonwabo Maqubela Head of research at Perpetua Investment Managers

Tatum Starkey Equities analyst at Balondolozi Investment Services

95% of Netcare’s payments are from medical schemes which are dependent on employment in SA,” Tatum Starkey, an equities analyst at Balondolozi Investment Services, tells finweek.

With the economy contracting for three straight quarters through the end of March, and likely also in the three months ending June, job losses are mounting. A recent Nids-Cram study, conducted from a representative sample of 7 000 South Africans, estimates that 3m people lost their jobs in April. The government has warned previously that about 7m people could be unemployed due to the pandemic.

That is from a total workforce, as estimated by Stats SA, of 23.4m people at the end of March. If you add the 2.9m discouraged work seekers, those able to work constitutes 26.3m people – less than half of the country’s estimated 59.6m citizens. By the end of the first quarter, 38% of those abled were discouraged to look for a job or looking but not finding one, Stats SA data shows.

Against this job market picture, medical aid schemes need to lure new premium-paying members. Or rather keep those that are paying. The anecdotal evidence is heartening.

“Discovery Health Medical Scheme’s CEO recently made a comment that the scheme’s membership has remained stable thus far,” Lonwabo Maqubela, head of research at Perpetua Investment Managers, tells finweek. “This is consistent with the experience during the Great Financial Crisis when medical scheme membership declined by 1% to 2%.”

Starkey says that expectations based on historical pandemics suggest that medical aid scheme memberships should increase in the future “as people began to re-evaluate the need for medical aid as a necessity given the impact of the pandemic”.

A second pre-pandemic structural change impacting on private hospitals is how medical aid schemes attract new members or keep those that can’t afford the more comprehensive plans they’ve been covered under.

“Existing private medical aid membership has been migrating from open plans into network deals which limits member choice in terms of selecting healthcare providers, but importantly, reduces monthly premiums and improves affordability,” says De Villiers.

This so-called “network migration” effect has meant that private healthcare providers, including private hospitals, in many instances had to do the same work for less income under a new network deal, he explains.

At the same time, these providers run the risk of losing significant pockets of market share should a competitor outbid them in one of the handful of large new network

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cover story private hospitals

tenders, “which are often binary in nature in terms of winners and losers”, he says.

Pyle says that it is too early to comment on “the quantum of a possible decline in membership”. Their experience in the past has been that members will “typically buy down to ensure they remain covered for hospital cover”.

“Information from medical aids to date have not reflected a dramatic drop-off in membership,” he tells finweek. “However, in the current environment we would expect to see some drop-off in membership.”

Finally, regulatory limitations imposed by the government in terms of market share and pricing had forced private hospital groups to seek growth opportunities in new areas.

“Areas such as mental health, day clinics, rehabilitation, primary care, radiology, pathology and so forth are all areas that the incumbents are now looking at in order to drive future topline growth,” says De Villiers.

So, what is the outlook for SA’s three largest listed private hospital groups?

SA, Switzerland and the United Arab Emirates, have their debt linked to their operations. The company also postponed non-emergency capital expenditure and told investors it had sufficient cash, £515m, on hand to sail through the pandemic. The debt, however, remains a worry to some analysts.

“Mediclinic’s balance sheet remains stressed, as a result gearing risk remains key for an investor,” says Starkey. “The announcement on being cash conservative, as well as the fact that the group has negotiated covenant waivers on their debt due June 2021 (which amounts to 10% of their borrowings, excluding the effect of IFRS 16) and September 2021 (the remaining 90%), should bring some reprieve to investors given the stressed balance sheet.”

Mediclinic didn’t respond to questions from finweek by the time of publication.

2. Life’s lifeline

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1. The Swiss and the debt

Mediclinic International, the largest listed private hospital share on the JSE, according to its market capitalisation of R40.1bn, has seen its share price decline by 55.8% over the past three years. Since the beginning of this year it has slumped 28%.

The biggest drag on Mediclinic, now headquartered in London and reporting in pound sterling, is its quantum of debt, according to analysts.

The group reported £1.95bn of borrowings at the end of its financial year in March, roughly the same as at the previous year-end. The group’s Swiss operations, Hirslanden, lagged due to regulatory changes in the Alpine federation.

“In the prior year, Mediclinic suffered as the market was not convinced that the Swiss operations were value accretive to the group,” says Mpelwane.

“Various cantons (similar to SA provinces) in which the group operates stipulated where certain medical procedures could be done, such as day hospitals against acute hospitals – the former being less profitable to hospital groups.”

Nevertheless, the company pre-empted possible liquidity constraints early in the pandemic, renegotiating its debt covenants, or financial conditions placed by borrowers as a prerequisite to lending, and informed the market that its debt is “ring-fenced”. This means that each of its divisions, in

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Since the beginning of this year, Mediclinic’s share price has slumped

28%.

The second-largest locally-listed private hospital group is Life Healthcare, with a market capitalisation of R28.1bn. Its share price slumped by 22% since the beginning of the year and by 24.5% over the past three years.

The company also owns Alliance Medical, which conducts MRI, CT and PET-CT scans in the UK, Ireland and Italy, as well as 11 sites in 10 other countries. This offshore diversification, and concomitant forex hedge against rand weakness, may bode well for the hospital group.

“Life Healthcare is not only generating revenue in SA; roughly 25% of its revenue and ebitda is generated internationally,” says Pyle.

In addition to Alliance Medical, the group also has a stake in the Polish medical-imaging company Scanmed. Following deep tariff cuts by Scanmed’s largest client, the Polish government, a couple of years ago, Life Healthcare had considered exiting this market last year. These plans have been placed on hold since the pandemic swept across the globe.

Life Healthcare’s European holdings have been hit hard through lockdowns by various governments, explains Mpelwane. “The impact of this, together with reduced expected occupancy levels, will result in earnings decline in fiscal year 2020. However, a recovery is expected in fiscal year 2021 back to preCovid-19 levels. The group is focusing on reducing costs in the imaging operations as it completes capacity for the feedstock used in its most profitable imaging offering, as well as other cost-reducing initiatives.”

Life Healthcare’s management has guided the market that they are in the process of attempting to

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cover story private hospitals

“Although extremely difficult to predict the impact on financial results, it is fair to say that the overall impact of Covid will be a net negative for our business and the industry as a whole.”

bring their radiology offering into SA, she says, if they overcome regulatory hurdles, though.

In addition, there is the possibility that Life Healthcare may be able to meaningfully participate in the production of a global Alzheimer’s disease drug, which is currently going through approval in the US, Mpelwane explains. “This presents blue sky potential which is not being priced in at present.”

All these factors “make this an interesting company to watch”, she says.

He continues: “Although extremely difficult to predict the impact on financial results, it is fair to say that the overall impact of Covid will be a net negative for our business and the industry as a whole. Fortunately, Netcare was not heavily geared going into the pandemic and has access to sizeable undrawn, committed banking facilities which, along with our cash preservation measures, place us well to withstand potential losses from the currently uncertain environment.”

Being the only group only focused on SA may have its upside. “Netcare is the only pure domestic play of the three hospital groups and on this basis has the most clarity in terms of the landscape within which it operates at present,” says Mpelwane. “This has been a positive for the group pre-Covid. Relatively, Netcare has the lowest leverage rate of its peers and therefore a very undemanding balance sheet. At present price levels, there is likely room for growth on the back of normalisation of occupancy levels into the end of the year (and) towards 2021.”

Photo: Supplied

3. The local guy

Netcare, the third-largest listed private hospital group, with a market capitalisation of R20.65bn, has seen its share price decline by 25.8% since the beginning of the year and by 42.8% over the past three years. The company exited its UK operations and is now focused on its SA assets.

“Netcare has been out of favour with the market for some time, despite having exited the problematic UK private hospital business they bought in 2016, buying back shares and increasing their dividend pay-out ratio,” says Wadley. “Part of the reason is that the company is now ‘just’ an SA-focused healthcare company, so has none of the offshore diversification and rand-hedge properties that Mediclinic and Life have.”

Add to this the bleak macroeconomic outlook for the SA economy, and it is understandable why investors rate Netcare as the cheapest of the three hospital groups. It trades at a forward priceto-earnings ratio of 8.95 times, compared with Mediclinic’s 9.75 and Life Healthcare’s 27.2.

Despite its local focus, Netcare is in the position of having the smallest gearing, thus debt level, of the three hospital groups.

“In its favour, the group has low net-debt-toebitda by global hospital standards, which gives it flexibility to use its free cash flow to do buybacks or pay out better dividends,” says Wadley.

In the meantime, the group expects the pandemic to weigh on profitability.

“The impact of Covid on our business will be influenced by the timing, peak and duration of the curve,” Dr Richard Friedland, CEO of Netcare, tells finweek. “Margins will be affected by changes in volume and case mix. Operating in a Covid environment also brings additional costs into play, which are necessary and essential to delivering healthcare in these circumstances.”

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Aftermath

Dr Richard Friedland CEO of Netcare

The hospital sector is trading at attractive multiples relative to the past, says Perpetua’s Maqubela.

“We believe that from current undemanding valuations (nine times earnings), coupled with business models that are re-adjusting to the weaker environment, the sector is well-placed to benefit from a long-term thesis of increasing healthcare service utilisation,” he says.

Although the pandemic will have a short-term negative impact on the sector, he expects a relatively “quicker” recovery for it.

This will depend on those pre-existing conditions for the private hospital groups turning more benign soon. As FNB Wealth’s McCurrie says: “Globally, hospital groups have had a tough time over the last decade, intensifying in the last five years.”

These include increasing resistance from medical aid schemes and governments, to escalating healthcare costs, he says. “Governments have increasingly legislated to curtail the costs of medical service provision. This has been firmly in place before the virus hit us. We are not positive on hospital groups.”

Starkey summarises the general market sentiment: “We refrain from buying healthcare stocks as there are too many uncertainties and risk.” ■ editorial@finweek.co.za

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YOUR PROPERTY. OUR PRIDE.

in depth property sector

C I M O N O EC URE SET S S E R P CONTINUE TO ESTING T L A I C N A FIN DATIONS N U O F

rental is e r e h w nt vironme . n e n a e e in o declin ifferenc t d d e e t h t c e ll p a ill make ty values are ex w s t e e h r alance s pted and prope Strong b disru

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f

avoured for its growing income and capital appreciation, listed property – the cheapest entry point into property – was the top-performing asset class for near on two decades.

But a recession, global pandemic and concerns around debt levels among the country’s largest landlords have ushered in a different story.

On its own, the economic downturn was somewhat manageable, even given rental growth and vacancy pressures. But together with the Covid-19 pandemic, cash flows and capital values are coming under pressure. So too are debt levels, which have been taken on in the pursuit of opportunities both locally and abroad.

The first quarter of 2020 saw an aggressive sell-off in listed property shares. Despite small upticks, year-to-date the sector has lost about 37% of its value, and around 43% over a year.

Although on the receiving end of significant rental income disruption themselves, South Africa’s property industry, including its real estate investment trusts (Reits), came together to offer rental relief to tenants affected by Covid-19 lockdowns.

But reduced income is impacting balance sheets, so Reits are now focused on strengthening them.

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in depth property sector

Photos: Supplied I Shutterstock

Debt and liquidity

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RENTAL MARKET ACTIVITY NEAR-TERM EXPECTATIONS INDEX BY SECTOR

70 Index +100 to -100

A strong balance sheet is primarily about low debt. For the Reit sector that equates to a loan-to-value (LTV) ratio of under 35%. Its last reported LTV was around 35%. But that was before the pandemic and is likely to increase.

“The most important metric investors use to assess the quality of a balance sheet is a Reit’s LTV ratio. In an environment where property values are expected to decline, it is paramount to have headroom to absorb asset write-downs, otherwise there could be a risk of permanently breaching debt covenants. This is, however, not necessarily a problem across the entire Reit sector, with some Reits currently benefitting from strong balance sheets, their last reported LTV ratios ranging between 27% and 35%,” Wynand Smit, real estate analyst at Anchor Stockbrokers, tells finweek.

Investors also focus on the liquidity positions of Reits, so cash is king. “However, it is not just the current cash balance, but also access to undrawn debt facilities in order to fund any upcoming commitments, or to repay debt maturities that have not been renewed by a lender,” explains Smit.

Reduced income has forced Reits to look at retaining dividends.

“Retaining dividends will certainly assist the gearing levels and liquidity positions of Reits,” says Smit. “However, the actual cash flows that can be retained in the current financial year will be severely under pressure due to reduced tenant collection rates and rental relief provided by landlords to tenants. Moreover, the tax leakage by retaining dividends will also cut the net amount that a Reit can retain in the short term.

“We favour a sustained lower pay-out ratio in the medium term as we think it is no longer sustainable for Reits to distribute 100% of their earnings. Continuous reinvestment of earnings will therefore provide a new source of funding, which will strengthen their balance sheets.”

Some – among them Attacq, Hyprop and Redefine – have already put a hold on dividends or adjusted their pay-out ratios.

Laurence Rapp, CEO of Vukile Property Fund, whose retail-focused portfolio is split pretty much 50-50 between SA and Spain, tells finweek that Vukile’s dividend pay-out ratio is likely to be “closer towards the lower end than the upper end”. The minimum Reit pay-out requirement is 75%.

“A 100% pay-out ratio is not sustainable and, in retrospect, not good business practice. One needs to keep capital flexibility.”

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58

50

35

30

20

10

32 31 13

8.3

18.4

19

17.4 22

13 10

3

-10 -30

-18.6

-50 ■ Q1 – 2019

-25 Office ■ Q2 – 2019

Industrial and warehouse space ■ Q3 – 2019

■ Q4 – 2019

-17 Retail ■ Q1 – 2020

■ Q2 – 2020 SOURCE: FNB

Property value decline

Commercial property held up fairly well during the 2008 global financial crisis. But the magnitude of the coronavirus-enforced lockdown on the back of a recession and a correcting property market led some to believe that the story will be different this time around.

“The Covid-19 crisis and associated lockdown promises to cause the deepest recession in post-World War II history in 2020,” John Loos, property strategist at FNB Commercial Property Finance, tells finweek.

Should this play out, he expects significant property value declines in both commercial and residential property, projecting “nearer to 15% negative capital growth spread over 2020/2021 and perhaps going into 2022”, for commercial property and between 9% and 10% deflation in residential values.

Rapp says he doesn’t buy into doomsday scenarios on valuations. “You have to be able to look through the short-term crisis, understand each asset’s dominance, its rental profile to see what the valuation needs to look like. We think there won’t be anywhere near the drops in value that some may be expecting.”

Laurence Rapp CEO of Vukile Property Fund

John Loos Property strategist at FNB Commercial Property Finance

Offshore diversification pays off

On average, offshore expansion strategies have benefitted local property investors, providing a good hedge against the struggling local property market over the last few years.

Smit cites exposure in Central and Eastern Europe (CEE) as an example.

“Retail in CEE performed very well over the last decade due to robust consumption growth and exposure to some of the best shopping centres in the region (especially Romania and Poland).

While things have been much more challenging this year due to trading restrictions imposed by governments, this has to be compared to the struggling local property market on a

Wynand Smit Real estate analyst at Anchor Stockbrokers

finweek 30 July 2020

35

in depth property sector relative basis, and I think on a net basis CEE diversification is still paying off for Reits.”

On the other hand, there are strategies that have struggled even before Covid-19, which were mostly centred around retail in Africa and the UK. For the most part, ventures into Africa have borne little fruit, in no small part due to a turning commodities cycle and lack of understanding of local conditions.

In the world after Covid-19 it is the logistics sector in Europe and the UK that have been the clear winners, with storage in the UK also being extremely resilient, says Smit.

Residential Reits

Few Reits have ventured into the residential sector. Ironically, it’s a sector expected to be more resilient.

Among those that have, is Emira Property Fund, the only SA Reit with US exposure. Its office-to-residential conversion, The Bolton, in Rosebank, Johannesburg is fully let and it has indirect residential rental exposure through its holding in specialist residential Reit, Transcend Residential Property Fund.

Attacq and Redefine too have dipped their toes into the residential space; Attacq with its Ellipse development in Waterfall and Redefine with Park Central, its luxury high-rise in Rosebank.

Perhaps because it is so management intensive, residential asset space comprises only around 3% of total listed property. And, says Growthpoint South Africa CEO Estienne de Klerk, “it’s difficult to get scale in that environment and the law is not really your friend in the resi space”.

Outlook

Hotel or hospitality property values are likely to experience the most downward pressure, Loos believes.

“This sector not only suffers from a more extended lockdown than other sectors, but I expect that many would-be tourists and holiday makers will run shy of future trips for a while, in part due to a knock to finances and fear of contracting the virus. In addition, I think that financial constraints on corporates, along with

5

the successful working of video conferencing and webinars, will lead to large reductions in corporate travel and conferencing … much of this declining on a permanent basis.”

Of the major property sectors, Loos thinks retail and office property are in line for the largest price corrections.

“Both have to take major economic hits, the retail sector via the consumer disposable income impact of a deep recession. Covid19 fears may linger, keeping a portion of consumers reluctant to frequent retail centres more than necessary, impacting especially on restaurants and entertainment. A greater portion of consumers may also divert some spend to online retail for this reason. On top of this, retail property has run the hardest since the 1990s, and its affordability for tenants has deteriorated.”

Remote working received a significant boost from the forced lockdown and Loos sees the long-term trend towards greater working from home as a key risk for office space. “I think it’s likely that in the next few years we will see many companies downscaling the amount of office space they occupy.”

Industrial space, along with residential, is believed to be less vulnerable.

“They don’t appear to have major technologically-induced structural changes coming their way after the recession. Industrial property is a more affordable property class than retail and office, so less threatened from that viewpoint too,” Loos says.

He expects property-buying attractiveness to improve in the next few years, based on the expectation of declining values and rising yields or capitalisation rates. He’s not convinced the buying opportunity is overly attractive at present.

“Price levels on average still reflect the better economic fundamentals of past years, with the far weaker economic fundamentals unfolding in recent years not yet reflected in price levels,” says Loos.

Perversely, the current crises could present one of the greatest investing opportunities of recent times, especially if investors gauge the low before the growth turn. ■

Estienne de Klerk CEO of Growthpoint South Africa

“It’s difficult to get scale in that environment and the law is not really your friend in the resi space.”

Keillen Ndlovu Head of listed property funds at Stanlib

editorial@finweek.co.za

INVESTOR TIPS

Keillen Ndlovu, head of listed property funds at Stanlib, shares some pointers that potential investors in the listed property sector should consider: 1. Distributable income (or profits) is likely to fall over the next year or two given the challenging environment.

2. Focus on total returns as opposed to just income. Reits are retaining some profits to help strengthen their balance sheets.

3. Reits offer 50% exposure to SA and 50% offshore (mainly Europe, the UK and Australia).

4. Physical property values are likely to fall by 10% to 20%. This is mostly priced in as Reits are trading at 50% below net asset value.

5. Volatility may continue in the short term and this can create long-term buying opportunities.

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finweek 30 July 2020

www.fin24.com/finweek

in depth property sector

Hunkering down at home Houses are no longer just homes. They are now also places of work and leisure.

One of the effects of the coronavirus pandemic is that House price growth, which has fallen steadily it brings different requirements for home spaces. in recent years, eased to 2.35% in May from 2.6% “There are signs of people opting to change their in the first quarter of 2020, according to the Pam living arrangements in response to the crisis, such Golding Residential Property Index. And 2020’s as wanting dedicated working spaces, outdoor final tally is likely to be ugly if Lightstone’s scenarios space or possibly sharing a house with other renters, (ranging from -3.9% to a shocking -14.5%) are friends or family rather than living alone in an anything to go by (see graph). apartment,” Dr Andrew Golding, chief executive of The housing market’s fate hinges predominantly the Pam Golding Property Group, tells finweek. on demand from buyers able to afford a home.

And being able to work from home is prompting “SA has the advantage of a young population, some to consider moving out of urban centres to so the housing market has a fundamental peripheral neighbourhoods or smaller towns underpinning from a growing number of where homes are more affordable and the potential buyers,” says Golding. lifestyle more relaxed, he says.

But expected job losses will reduce Covid-19 may generate more the number of actual buyers. interest in freehold property as “Recent price corrections multi-generational living, workcoupled with interest rates at a from-home requirements and 47-year low will offset this partially, outdoor space needs come into play. making property more affordable to “While some people may prefer a more people with jobs or income.”

Andrew Golding freehold home in the post-Covid world, Chief executive of the Pam Still, with many households under Golding Property Group the fundamental appeal of sectional financial pressure, there’s likely to be title properties (better security, lower softening of demand and an increase maintenance costs and lock-up-and-go lifestyle) in homes for sale, placing downward pressure on is likely to remain. Also, shared amenities within a prices, he says. development and not the public at large may seem That means there are bargains to be had. safer in the wake of the pandemic.”

“Luxury areas above R8m to R16m like Cape These same requirements have created Town’s Atlantic Seaboard are offering the best increasing interest in estates since the onset of opportunity for bargain hunting in the post-Covid Covid-19, Golding citing, as example, higher demand property market as asking prices are expected to for estate homes in the Boland and Overberg decline by about 15% to 20% on top of being down regions. Estates accounted for 12.7% of all homes by about 20% since 2017,” Samuel Seeff, chairman sold in South Africa in 2010. By 2019, this had risen of the Seeff Property Group, tells finweek. to 14.7%, reports Lightstone.

“The sub-R1.8m market is generally where the But SA’s residential property market, already bulk of activity is right now, but it is also here where weakened by a pre-existing recession, is being you will find many motivated sellers. Hot areas to hard hit by Covid-19. look for bargains include Sea Point and the CBD in One house price growth winner is Steyn City in Gauteng.

The estate’s median house price grew 67.2% between January 2016 and May 2020, from R3.05m to R5.1m.

Cape Town priced below R2.5m,” he says.

Seeff also cites the KZN South Coast, Amanzimtoti and Shelley Beach with flats from R600 000 and houses from R1.2m while in Gauteng, Joburg North, Sharonlea and Olivedale offer flats under R800 000 and family houses for under R1.8m.

Low and mid-value segment homes are expected to perform best after the pandemic, according to Lightstone. First-time buyers, who comprise just over half the loans extended via mortgage originator ooba, continue to capitalise on zero transfer duty payable on homes priced below R1m.

Sectional title properties (favoured by first-time buyers and young professionals) and estate homes are also predicted to be more resilient.

Holiday home prospects are less promising.

“The latest ooba stats show limited demand for holiday homes, with just 0.2% of all mortgages extended this year for holiday homes. With the economy facing its worst recession since the Great Depression, demand for holiday homes is likely to remain weak for the foreseeable future,” says Golding.

Competitive pricing and a favourable exchange rate are drawing international buyers. Golding says several international buyer transactions on the Cape’s Atlantic Seaboard and in Somerset West have been concluded and there’s increased interest in Garden Route properties.

Muted national house price inflation could be a motivation for investors and home buyers who take a medium- to longer-term view on capital growth.

Still, Golding expects the sales market to remain subdued during the second half of 2020 with both activity and house price inflation levels remaining below levels seen in the early part of this year. ■

HOUSE PRICE GROWTH 2020

Scenario 1 GDP growth: -3% HPI: -3.9%

Scenario 2 GDP growth: -6% HPI: -8.8%

Scenario 3

%

GDP growth: -10% HPI: -14.5%

5 0 -5 -10 -15

Photos: Supplied

-20 National

Freehold

Sectional scheme

Mid-value

High-value

Luxury SOURCE: Lightstone

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indepth in depthxxxxxxxxxxxxxxxx pandemic

LOCKDOWN MODELS PROB

As South Africa faces the dreaded Covid-19 surge, many have questioned whether we entered lock globe, making any such determination is not clear cut.

Photos: Shutterstock | Gallo/Getty Images | stats.uct.ac.za | panda.org.za

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n 18 July, health minister Zwele Mkhize to stem the spread of sustained and widespread appealed to South Africans to stick to community transmission – the worst-case scenario the behaviour changes needed to curb – 23 600 South Africans were likely to die over the the spread of Covid-19, warning that course of a year.

South Africans were letting down their guard just as The problem is that it is virtually impossible to tell infections in the country were surging. how the impact of lockdown regulations feeds into the His remarks were extracted from an identical equation, and modelling is far from a perfect science, appeal made three weeks earlier, and unsurprisingly particularly when it includes human behaviour and did not make headlines. emotions.

Few South Africans were aware that the country’s “Sure, it’s a naturally evolving situation, but it death toll had just passed the 5 000 mark, or that seems that countries that went into a lockdown later, hundreds of people were fighting for their lives in after the virus was well-seeded into the population, Zwele Mkhize hospitals that had begun to be overwhelmed by a have seen closer adherence to government guidelines Minister of health sudden influx of serious Covid-19 cases. to stay at home,” said Dr Sheetal Silal, a member of The fact that SA had just clocked up one of the Modelling Consortium. the biggest daily spikes of recorded infections in “This could be attributed to an emotional It doesn’t help that response the world and was now fifth overall in its tally of to people in those countries being 364 328 cases also failed to get much airtime. more likely to have friends or family members the government’s Nearly four months into what began as one of falling ill or dying. Fear of the virus was perhaps a initial forecasts the most stringent lockdowns in the world, South strong motivator to stay at home,” she said in an Africans were exhausted, numb, and angered interview with the World Economic Forum (WEF) of fatalities from by a plethora of regulations that had become in June. confusing, contradictory, and often completely Nick Hudson, the coordinator of Pandemic Covid-19 are likely illogical.

Data Analysis (Panda), believes there is no to have been much evidence that lockdowns have been effective Despair over widespread loss of livelihoods and mounting evidence that the country is sliding into anywhere in the world, and says that his too pessimistic. its deepest recession in history has fuelled debate group’s projection of 10 000 fatalities by the over whether SA entered its lockdown too early end of September stands with or without any and eroded public fear over the threat posed by restrictions on social or economic activity. the virus itself.

But Panda’s forecasts end there, which It doesn’t help that the government’s initial forecasts is hard to swallow given that Covid-19 will pose a of fatalities from Covid-19 are likely to have been much serious health threat until an effective vaccine is both too pessimistic, given the fact that less than a fifth of developed and administered to millions of people the country’s population are over the age of 50 – the across the world. age group most vulnerable to serious illness or death.

Hudson’s view that lockdowns have no impact at When the lockdown began, the SA Covid-19 all on the spread of Covid-19 also flies in the face of Modelling Consortium projected that the death toll science. would reach between 40 000 and 48 000.

A study published in the weekly, peer-reviewed The jury is still out, given that lockdown restrictions British Medical Journal on 15 July found that five Dr Sheetal Silal were eased just as the exponential surge in infections physical distancing interventions widely introduced in Member of the Modelling began and that the behaviours which would stem 149 countries were associated with an average 13% Consortium the spread are increasingly being ignored, as Mkhize reduction in the incidence of Covid-19. pointed out.

“A greater reduction in incidence was observed Nonetheless, the World Health Organization (WHO) when restriction on mass gatherings was included in predicted in May that if containment measures failed the intervention combination, and when lockdown

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in depth pandemic

BED AS DEATH TOLL RISES

kdown too early. However, judging by the varied outcomes of lockdown measures around the

By Mariam Isa

was implemented earlier along with school and countries – headed by leaders who have belittled the workplace closures,” according to the study’s findings. impact of the coronavirus – sent mixed signals on how But the study noted that the effectiveness to cope with its spread and largely opposed lockdowns of physical distancing interventions was greater because of their economic impact. in higher-income countries, those with an older Global debate over whether the economic impact population, and those with health systems that were of lockdowns – which is more severe in poor and better prepared. middle-income countries – is a worse outcome than The authors (Nazrul Islam, Stephen Sharp et.al) the deaths itself, is likely to remain unresolved for years cautioned that only the short-term impact of lockdowns to come. had been assessed and further analysis over time would But the idea that the economies of countries that be needed to influence policy decisions. did not completely shut down to stem the spread of SA’s Covid-19 fatality rate of 1.5%, one-third the the virus fared significantly better than those which Nick Hudson global average of 4.5%, has surprised medical experts, did, does not really stand up to scrutiny.

Coordinator of Pandemic Data Analysis even within the context of the country’s young In June, the International Monetary Fund said it population. There is concern that many fatalities are expected Brazil’s economy to contract by 9.1% this unreported, particularly given the often piecemeal year, and the US by 8%. SA’s economy is also expected nature of health data released to the public. to shrink by 8%, but the country was already in Figures from the SA Medical Research Council recession when the pandemic struck. showed that excess deaths – the difference between Much has been made of the “Swedish experiment” historical averages and the current outcome – in which no prohibitions were imposed, and SA’s Covid-19 fatality rate of amounted to 10 994 between 6 May and 7 July, people were asked to observe social distance which is more than twice the number of SA’s voluntarily. But by early July the country had recorded Covid-19 deaths. notched up 5 420 deaths, which given its small Tracking excess mortality is one of the main population worked out to a mortality rate of 43 ways of calculating the full extent of deaths from deaths per 100 000 people – one of the highest is one-third the global average of the pandemic, as it includes people who died of in the world.

Covid-19 without having been tested, and those Sweden’s fatalities were more than 10 times who died of other causes after being unable to that of the death toll in neighbouring Denmark, get treatment in overstretched hospitals.

Finland and Norway, which did impose lockdowns. and has surprised medical experts, Two of the three provinces with the highest As of 22 June, only 6% of the Swedish even within the context of the country’s young population. confirmed infection rates – Gauteng and the population had developed the antibodies thought Eastern Cape – recorded 71% and 90% more to protect them against further outbreaks of the deaths than the historical average, respectively. virus and the epidemiologist who engineered the That seems high even accounting for deaths strategy admitted that mistakes had been made. that stem directly from the impact of lockdown At the same time, Sweden’s economy is restrictions, such as hunger. expected to contract by 4.5% – marking its worst India, a country similar to SA, except in the size of its recession since World War II. Norway’s economy much larger population, entered a strict lockdown at is likely to shrink by 3.9%, Denmark’s by 4.1% and almost exactly the same time and also has a very low Finland’s by 5.5%. ■ editorial@finweek.co.za fatality rate.

This is less relevant given that the country now has Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the the third-largest tally of infections and deaths in the UK and Sweden, covering topics ranging from war to oil, as well as politics and world, respectively reaching more than 1.12m and 27 514 economics. She joined Business Day as economics editor in 2007 and left in as of 20 July.

2014 to write on a wider range of subjects for several publications in SA and in the UK. Its grim tally follows that of the US and Brazil. Both

1.5% 4.5%

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finweek 30 July 2020

39

in depth agriculture

T S E V R A H R E SUMM R O F G N I N I L R E V L I AS THE ECONOMY

– second-biggest grain har vest ever the for elf its ing dy rea is tor sec ral The local agricultu should bring relief for consumers. if estimates are to be believed. This

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espite the contraction that impacted negatively on the agricultural sector even before the unremitting Covid-19 crisis struck, good summer grain harvests were among the most important factors that have put this strategic and robust sector back on the road to recovery. In addition to being the driving force behind sustained production, it is welcome news for consumers and the country’s economy.

It is estimated that the GDP attributable to agriculture will receive a boost of 10% in 2020 (year-onyear) – even though it’s off a low base.

This is, among other things, owing to the expected excellent harvests in the summer grain regions.

This is what Prof Ferdi Meyer, managing director of the Bureau for Food and Agricultural Policy (BFAP), as well as Dr John Purchase, CEO of Agbiz, said at a recent Nedbank Agri webinar.

According to Wandile Sihlobo, Agbiz’s chief economist, the agri-economy has already improved 27.8% in the first

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By Jacques Claassen

quarter of this year compared with the disappointing, according to Louw. Even last quarter of 2019. This turnaround has though the construction of local pressing followed on the contraction, which was plants has made South Africa more caused, among other things, by conditions self-sufficient with regard to soybeans, of drought and problems with consumption has increased over foot-and-mouth disease in the past two to three years, he says.

The maize harvest is substantially bigger cattle herds, which lasted for This means that soybean oil cake than the local annual four subsequent quarters. has already had to be imported for consumption of about use in animal feeds this year.

Good summer grain harvests Louw points out that the final Corné Louw, a senior harvest estimations will only be economist at Grain SA, known by September or October. tonnes (which leaves summarises the expected Owing to the late rains in the room for exports). good summer grain harvest interior, and large tracts of wet figures (2019/2020) as South maize on the lands, the grade or Africa harvests its second-biggest maize quality of the harvest is another risk factor crop ever (consisting of an estimated 9m that could affect the supply to the market. tonnes of white maize and 6.4m tonnes At the start of the new summer rain of yellow maize). The maize harvest is season on 1 May, only approximately 1m substantially bigger than the local annual tonnes of maize were available as surplus consumption of about 11m tonnes (which stock. “It was somewhat scanty, but still leaves room for exports), he says. adequate,” says Louw.

The estimated soybean harvest of 1.2m tonnes is in fact 7.8% up on the Benefits of larger harvests previous harvest, but production conditions According to a report by the South African (especially in the east of the country) were Human Rights Commission, access to food

11m

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in depth agriculture

Images: Shutterstock I www.wandilesihlobo.com I www.namc.co.za

The poultry industry would have been worse off had it been forced to import maize in the midst of the current economic crisis and a weak rand exchange rate.

is currently the country’s biggest challenge.

“The economy and consumers are under pressure, which led to the consumption of white maize as staple food rising to record levels,” says Louw. White maize consumption (which is subject to seasonal trends) increased by 16.4% to 1.419m tonnes in the three months from March to May this year, compared with 1.219m tonnes in the corresponding period last year.

In reaction to the good summer grain harvests, Boikanyo Mokgatle, executive director of the National Chamber of Milling, said: “Covid-19 has caused major uncertainties worldwide that have virtually paralysed international trade.

Also in SA it has had serious economic consequences. The processors of maize and wheat are important role players in the uninterrupted delivery of adequate volumes of maize and wheat flour as staple foods. The favourable maize harvest therefore leads to peace of mind in respect of food security – which is greatly welcomed by the chamber.”

Apart from better food security, the good summer grain harvests and lower grain prices also bring partial relief for livestock producers, including the broiler industry.

limiting effect on supply chains worldwide, which leads to the higher cost of essential input resources.

Furthermore, they point out that soybeans make up a considerable portion of poultry rations. Given the fact that SA must still import soybean flour using a weaker rand at import parity levels, the benefit of a larger maize harvest is further eroded for the poultry industry. In short, the mentioned factors have a negative impact on the price of animal feed – despite the second-largest maize harvest in SA’s history.

“Given that feed prices make up 65% of the cost of producing a broiler, the price of poultry will have to increase in order to recover the higher production costs. If the broiler industry is to remain sustainable and maintain its important role in respect of food security, the higher input costs in respect of feed must be passed on to the consumer,” say Crocker and Arnold.

Louw, however, points out that the poultry industry would have been worse off had it been forced to import maize in the midst of the current economic crisis and a weak rand exchange rate.

Impact on poultry industry

SA’s biggest food producer, Tiger Brands, points out that soybeans are not part of its grain portfolio and is insignificant in respect of its other portfolios. “In addition, the contribution of maize to Tiger Brands’ profitability is very small,” says Kanyisa Ndyondya, the group’s spokesperson.

“As mentioned in our 2019 integrated annual report, maize contributes about 8% to the income of our grain portfolio; so its contribution to the company’s overall profitability is even less. It is also worth noting that the cost of raw materials is but one element of production costs; other elements are conversion costs, expenses in respect of sales and distribution, as well as marketing costs that could negate the benefit stemming from raw materials.”

Also, Ndyondya points out that the surplus maize stock is relatively low compared with previous years, while the

Thanks to the expected good harvest, the price of maize has, according to Louw, dropped from import parity to export parity (therefore, theoretically, the lowest possible price at the moment). That being said, the rand’s poor exchange rate since the beginning of the year has eroded the abovementioned price benefit in rand terms.

Astral Foods, SA’s largest producer of broilers, points out that the rand exchange rate is still considerably weaker than a year ago, although it has firmed somewhat in recent weeks.

According to Andy Crocker, Astral Foods’ commercial managing director, and Gary Arnold, the group’s managing director for agriculture, two factors are influencing Astral’s production forecast. Firstly, there is the negative effect of the exchange rate on their inputs, and secondly, Covid-19’s @finweek

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How does it affect Tiger Brands?

Wandile Sihlobo Chief economist at Agbiz

Boikanyo Mokgatle Executive director of the National Chamber of Milling

expected good maize harvest could be smaller than the latest available estimate.

In addition, several factors, including the export of maize to neighbouring countries, could lead to a smaller internal surplus.

Where does it leave agriculture?

According to Agbiz’s Purchase, agriculture is an important asset for SA in terms of food security. “The output of the agricultural value chain is currently R1.9tr, while primary agricultural production contributes R248bn of this and represents 7% of the employment rate in SA.” He believes that if solutions can be found for the fault lines that pestered agriculture even before the Covid-19 outbreak, the sector could create 30 000 additional jobs a year and contribute billions of rand more to GDP. He also believes strategies to ensure growth over the medium to long term as well as job creation in the agricultural sector are now necessary.

As far as cultivating crops is concerned, 100 000 additional jobs have been created since 2011 and 25 000 new job opportunities in respect of agricultural exports, according to BFAP’s Meyer.

Grain SA’s Louw points out that local maize producers have been under great pressure over the past five years and adds that prices drop during times of good harvests. Although lower prices put summer grain producers under strain, in the same way that too small harvests do, this year’s harvests should once again put the agricultural economy on a better footing.

“But we need a few harvests such as these to get the (summer) grain producers back in the green.” ■ editorial@finweek.co.za finweek 30 July 2020

41

on the money

>> Personal Finance: How to create a trust for your kids p.44

CEO INTERVIEW

By David McKay

Flying the flag in a crisis

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David McKay spoke to Amplats CEO Natascha Viljoen about positioning the miner in an environment changed by Covid-19. hat makes a person want to be a CEO? “One reason is that there is a huge opportunity to have an impact,” says Natascha Viljoen, CEO of Anglo American Platinum (Amplats) since April. There’s also a tacit “trust in your own ability”, she adds.

It’s a question worth asking because most people might have been hemming and hawing given the introduction Viljoen has had. She hadn’t even taken her seat when a full-blown crisis ballooned. That was in February when the firm’s processing facilities in Rustenburg, finely-tuned technology that turns concentrate into refined metal, exploded. The back-up unit also failed.

The outcome was a one-fifth cut to 2020 platinum group metals (PGM) production – about 900 000 ounces. Amplats’ financial year was barely eight weeks old, and yet fullyear earnings before interest, tax, depreciation and amortisation (ebitda) were forecast to be a hefty R18bn lower (although expect that number to be modified in the coming weeks).

Meanwhile, in a Chinese city far, far away, Natascha Viljoen CEO of Anglo a virus had broken out from which none American Platinum were exempt. On the same day Amplats was warning investors that the dividend riches of the previous year might not be repeated in 2020, the most un-newsworthy of countries – Luxembourg – reported its first case of Covid-19 disease, caused by the coronavirus.

Several months on, Viljoen reflects that Covid-19 might be both catastrophe and a massive opportunity to get to know Amplats. “I knew it from outside in,” she says – a reference to her previous position as head of processing for Anglo American, the UK-listed group that owns 80% of Amplats. “Now, I got to know it inside

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out.” Meetings with some 200 senior staffers took place in the first two months.

Since then, the first of the damaged processing units has been fixed while the second is to be repaired before the end of 2020 – some three months earlier than planned. That means the financial impact of the blow-out will be reduced, especially as the Covid19 pandemic hasn’t been an end-to-end disaster for the PGM market. Prices for palladium, used in autocatalysts to filter out noxious gases from cars, and rhodium have been okay, and excellent in rand terms.

Given the present emergency, it’s only natural to think in bite-size terms. Yet, one wonders the kind of medium- to long-term impact Viljoen wants to have at Amplats: what does she bring to the party?

Mark Cutifani, CEO of Anglo American, told finweek Viljoen has the technical ability, a quite obvious requirement. Her predecessor, Chris Griffith, was a mining engineer. Viljoen is a metallurgist. But she also brings valuable experience from previous employer Lonmin, where she had oversight of sustainability.

Sustainability is something of a broad church of concerns these days. In essence, being sustainable has come to embrace both environmentally-mindful practices as well as the habits, standards and qualities that give a mining company social legitimacy. Those qualities have been amplified by Covid-19 which, in presenting a common, unifying threat, has thrown the spotlight on the full spectrum of social inequality. For example, it’s impossible to separate the fortunes of employees from their communities.

“I think we have come a long way and we’ve still got a long way to go in really being very conscious in how we take our communities with us,” says Viljoen.

“It is all about our employees and our communities.

Are we on the beginning of the journey? Probably www.fin24.com/finweek

on the money spotlight

“I think we have come a long way and we’ve still got a long way to go in really being very conscious in how we take our communities with us.”

Photos: www.angloamericanplatinum.com I Gallo Getty Images

we’re a bit further on than that, but there is recognition that we need to step up in that area.”

Viljoen might know more than most about the interplay of employees and communities, and specifically of the dangers in mining companies treating both as silos. In August 2012, Viljoen was Lonmin’s head of sustainability when the Marikana atrocity took place: an event in which security services shot dead 34 protesting mine workers and injured 78 others at Lonmin’s Marikana mine near Rustenburg.

“Marikana could probably have happened in many places in the mining industry,” says Viljoen. “It did happen at Lonmin for various reasons; it’s a boiling over of a society that’s frustrated with their current circumstances.”

At the time of writing, South Africa had just registered its third successive quarter of negative economic growth. Although many of the lockdown measures have been relaxed, the country is barely yet in the foothills of recovery. The risk that social discontent could surge is, therefore, a significant one.

Cutifani acknowledges it. Marikana was a moment in time, but he also warned: “ ... we haven’t removed the issue that created Marikana and I’m talking about poverty and inequality (in SA).

So I’m still worried, but I also hope we’re all a lot wiser: government, unions and businesses, and we’ll talk and we’ll all try to make sure we don’t have that again.”

Says Viljoen: “I think that the economic recovery in our communities is going to be tough and we are certainly preparing ourselves for a high level of unhappiness in our communities that could show itself in many ways. It could show itself in protests, we could see that in increasing violence, we already see that to a large extent in the increase of gender-based violence, because there’s an underlying frustration with many of our community members.

“Are we going to see something like Marikana? I honestly hope we don’t go there again. I trust that we’ve learnt out of those processes and that we’ll keep that top of mind if we experience any kinds of similar upset conditions again.”

Interestingly, Viljoen thinks that the unions, including the Association of Mineworkers and Construction Union (Amcu), have played a constructive role so far in the Covid-19 crisis, establishing what might be termed cautious partnership. Amcu’s role in the @finweek

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Members of union Amcu and the Marikana community commemorate the fifth anniversary of the Marikana Massacre in August 2017.

Marikana protest of 2012 has been long discussed, but in ensuring this year its members had court-sanctioned protocols to manage Covid-19 infection risks, it demonstrated rarely-seen collaboration with employers.

One of the other potential impacts of the pandemic has been to focus attention on environmental sustainability. Again, Amplats can play a role given the use of PGMs in autocatalysts and in the hydrogen economy where platinum could come into increased use in fuel cell technology. Platinum in traditional internal combustion engine technology has been supplanted by palladium.

Viljoen thinks Amplats will come to take a yet more prominent role in pushing the potential contribution of PGMs in the green economy. It’s a potential direction government is also keen to take. The latest paper on how the SA economy could be given fresh life, from the ANC’s Economic Transformation Committee, latches on to beneficiation linkages to which the manufacture of home fuel cell batteries could play a part.

“Where I want to position us as a business is that we need to play in both areas,” says Viljoen of the need to supply a potentially burgeoning green economy while keeping Amplats rooted in its fundamental mining function from which an estimated 24 500 employees are sustained.

“The only way of doing that is to ensure that in setting up our business in the next couple of years we recognise important levers – whether it’s a green economy where we can play our role, or whether it’s driving the economy at all costs to make sure that we look after livelihoods as well as lives to make sure we can play our role.” ■ editorial@finweek.co.za finweek 30 July 2020

43

on the money personal finance

By Timothy Rangongo

Setting up trusts for children

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Experts weigh in on the ins and outs of creating a trust, with the aim to secure the wellbeing of children or grandchildren.

trust is set up when one transfers the ownership of their property, or ‘puts it in a trust’, which becomes an instrument with a separate legal personality. The transferred property is administered and managed for the benefit of specified beneficiaries such as children, in accordance with the Trust Property Control Act no 57 of 1988 — the law that governs trusts in South Africa.

The act states that trustees should be appointed, whose primary responsibility is to administer and manage the trust’s assets, for the benefit of the beneficiaries, which in this case would be the founder’s children.

The trust comes to life after it is registered with the Master of the High Court, which must subsequently issue a letter of authority to the appointed trustees, giving them powers to begin acting on behalf of the beneficiaries.

In instances where a minor inherits money without a trust in place, it will be held by the Guardian’s Fund, which is administered by the Master and invested with the Public Investment Corporation (PIC), until the child turns 18, explains Elmarie Neilson of Neilsons Attorneys.

“The child must then know that they must approach the Guardian’s Fund to claim what is due to them,” she says.

A trust averts the government claims process that tends to be lengthy and stymied by red tape, by allowing parents to elect and put in charge trustees who will hold money on behalf of the minor until they reach a certain age, for example.

“The role of trustees is not to take care of the minors, but to make financial decisions in terms of the trust deed,” says Neilson.

There are many reasons for setting up a trust for minors, says Claire Thomson, director at Witz Inc. She mentions some real-life situations that prompt people to set them up. These range from a grandparent who does not want the money to fall into the hands of the parents, but rather be spent on the grandchildren; or a divorced parent who does not wish the other parent to lay claim on money meant for the children; to parents who want to ring-fence assets for their children and protect the assets from creditors, for instance.

Benefits

The dominant theme and benefit of setting up a trust seems to be that of protection.

“Trust assets are protected from the creditors of the parents. Trust assets can continue growing 44

finweek 30 July 2020

without being subject to the vicissitudes of life that affect income earners,” says Thomson.

Remember that a trust has a separate legal identity. This means that in the event of a liquidation, sequestration (personal or business) or even a divorce, the assets which the said parent transferred ownership of to the trust, cannot be touched.

Creditors cannot come after the trust assets as they do not form part of the personal estate.

However, all is not sweet. By virtue of being a separate legal person, the trust, like other natural and juristic persons – is liable for taxes.

Another benefit is the ease with which funds for the maintenance and wellbeing of the children are made readily available to the minors when needed, as compared to the bureaucratic process of going through the Master of the High Court in the case of the Guardian’s Fund.

“The Guardian’s Fund does allow for withdrawals to be made for the benefit of minors for maintenance, for example: school fees, clothes, medical expenses, accommodation expenses and other needs if so motivated by the child’s guardian. The Master may pay from interest, as well as up to R250 000 from the invested capital in this regard,” says Thomson.

Nevertheless, by setting up a trust, invested capital and interest can be used for the benefit of the maintenance of the minor, she says. “Trustees are also able to make investment decisions about the funds held in trust that benefit the minor.”

Elmarie Neilson Sole practitioner at Neilsons Attorneys

Taxes and mistakes

Transferring assets into the trust does involve tax implications, as the trust either receives the assets as a donation (donations tax) or purchases the assets (for example, transfer duty and fees in the case of immovable property), says Neilson.

She says that for many decades, trusts were the perfect tax-saving vehicles. “However, during the past decade or so, the government has increased the tax rate for trusts to the point where trusts are taxed at the same rate as individuals.”

Although this has led many financial advisers to caution their clients against setting up trusts, Neilson says attorneys and financial experts still advise their clients to set up trusts as the benefits far outweigh the tax implications.

One of the common mistakes trustees make, according to her, is forgetting that tax returns might have to be filed.

July marks trusts’ filing season in SA, the month in which Sars urges representative taxpayers of

Claire Thomson Director at Witz Inc.

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on the money quiz & crossword

DO TRUSTEES BECOME THE LEGAL GUARDIANS OF YOUR CHILDREN? The guardianship of children is governed in terms of section 18 of the Children’s Act, whereas the role of trustees is governed by the common law and the Trust Property Control Act, explains Elmarie Neilson of Neilsons Attorneys.

The powers of trustees are set out in the trust deed, with reference to the Trust Property Control Act. “It usually involves purchasing, selling or mortgaging immovable property, investing cash, paying school fees and maintenance for the children,” she says.

While a guardian can be appointed to the child either in a will or by the High Court on application, Claire Thomson of Witz Inc. further explains that a trustee can be a legal guardian, but the two (trustee and legal guardian) are not synonymous. ■

trusts (trustees) to complete and file income tax return for trusts (ITR12T) forms. The Income Tax Act regards trusts as a legal person, and as such, is liable for paying taxes on income generated within a financial year.

Another common mistake she mentions is that founders of trusts often do not realise that a trust must be managed. “Resolutions have to be passed, authorising the trustees to do certain acts. For example, if a trust purchases immovable property, the trustees first have to pass a resolution, authorising the purchase of the property. If this is not done, the deed of sale could be invalid, and the trust can be sued for damages.”

Test your general knowledge with this issue’s quiz, which will be available online via fin24.com/finweek from 27 July.

1. True or False? South Africa’s foreign direct investment inflows fell to R29bn in the first quarter of 2020.

2. Fill in the missing city: __________is colloquially known as South Africa’s most windy city.

3. True or False? The National Command Council is chaired by President Cyril Ramaphosa and minister of trade, industry and competition, Ebrahim Patel.

4. Tanzanian small-scale miner Saniniu Kuryan Laizer recently became a multi-millionaire after uncovering two of the biggest of the country’s precious tanzanite stones ever found. What mineral group is tanzanite?

■ Clay ■ Hematite ■ Epidote 5. True or False? South African Airways (SAA) was split from Transnet in 2006.

6. In July 2020, retail clothing company TFG announced a rights offer aimed at raising up to how much?

■ R395 000 ■ R3.95 million ■ R3.95 billion 7. Gidon Novick plans to launch a new low-cost domestic airline in South Africa. What other local low-cost airline did he establish in 2001?

8. What is the largest passenger plane ever built?

9. True or False? Kumba Iron Ore is a subsidiary of Anglo American.

10. Princess Raiyah tied the knot in July with British journalist Ned Donovan, who is the grandson of which famous author?

■ Stephen King ■ Charles Dickens ■ Roald Dahl

CRYPTIC CROSSWORD

ACROSS

1 Join in a sport, taking time off (4) 3 Empty comment at bar confused laymen (8) 9 Start to manage food energy value of the body (7) 10 Silly from the start, such a large number (5) 11 When taken for granted our stand does badly (2,10) 13 The French tree and English vegetable (6) 15 Painter first time out with a beard (6) 17 Drinks defensively? (6,2,4) 20 Gang to be put away, we hear (5) 21 Say nothing to start with at first – he’s a bighead! (7) 22 Be reportedly not involved in lion expedition (8) 23 Sharp-edged end of hammer used backwards to extract turnip (4)

NO 757JD

DOWN

1 Appear with university associate in person (8) 2 Three of you said to be alternately within hour of freedom (5) 4 Hardy’s partner radiating charm (6) 5 Prime contractor involved in reshaping row (11) 6 Iniquitous rogue has a string of debts (7) 7 Repeatedly change toy (2-2) 8 A dicey camera needs fixing to record scholastic calendar (8,4) 12 Something that supports pots (8) 14 Enlarge distribution worldwide (7) 16 In a way pleased with agreement (6) 18 Stimulated in discovering a fir endemic to Antarctic region (5) 19 Good taste from a young person short of understanding (4)

Photos: Supplied

Appointing trustees

Neilson advises clients to never have only one trustee, for the sake of accountability. Nor does she advise them to have two trustees, to avoid a deadlock should they disagree in decision-making – she advises to have three trustees.

“One trustee should be financially astute; another trustee should focus on the best interests of the children and the third trustee should be morally and ethically beyond reproach. This third trustee can be the moral compass.”

Thomson says trustees must be trustworthy.

They must be individuals who have the best interests of the child in mind and will be able to make good decisions for the benefit of the child as far as the use of funds for the child is concerned.

The trustees “should also have sound financial knowledge, or be confident to use the services of a financial adviser to guide them to make the appropriate decisions to benefit the child by making sound financial investment decisions,” she says. ■ editorial@finweek.co.za @finweek

finweek

Solution to Crossword NO 756JD ACROSS: 4 Screech; 8 Iguana; 9 Aladdin; 10 Anthem; 11 Beacon; 12 Largesse; 18 Berceuse; 20 Menage; 21 Flotel; 22 Slide in; 23 Disown; 24 Endlong

DOWN: 1 Miracle; 2 Bustard; 3 Annexe; 5 Cold beer; 6 Endear; 7 Chinos; 13 Siberian; 14 Auction; 15 Decline; 16 Berlin; 17 Sandal; 19 Calcic

finweekmagazine

finweek 30 July 2020

45

Piker

On margin Dark magic

This issue’s isiZulu word is thakatha.

Thakatha is bewitch – cast a spell.

Covid-19 really feels like witchcraft. But this time around, it’s not your jealous neighbours and colleagues that have thakatha-ed you because they cannot stand all your winning. It’s not even your spouse who has thakatha-ed you so you never leave them.

While we are on the matter of spouses that thakatha each other, there was a morning when I was driving to a meeting while listening to the radio – Ukhozi FM. They were discussing using imithi (medicines/ potions) to keep one’s marriage strong, and they even had a medicine man in studio, talking about the various spells one can cast.

The presenters then opened up the lines to callers. To my surprise, and to that of the presenters, the bulk of the callers were men. These men came on air and spoke about

how they use imithi to keep their wives in line and their marriages strong. I was blown away. For as long as I have been alive, I have been led to believe it is women who do this thing. This was a revelation, and even the medicine man confirmed that the bulk of his clients were men. So, ladies, you are not in love. You have been thakatha-ed.

Anyway, back to the witchcraft that is Covid-19. Seeing as this disease is wreaking havoc across the globe, the spell must have been cast by someone or something that hates us all.

My money is on Uranus. Yup, it is Uranus that is thakatha-ing us. A tweet by a certain president, whose country has a space force, probably triggered this. We were worried that he would plunge us into World War III – nuclear war. But no, he plunges us into the 1st Solar System War. Uranus is winning.

– Melusi’s #everydayzulu by Melusi Tshabalala

Verbatim

Khaya Dlanga @khayadlanga First-borns deserve tax breaks and a grant.

David Scott @TheKiffness Was really hoping that Eskom took this 3-month holiday to reflect and become a better person.

Sarah Cooper @sarahcpr My advice to the younger generation: Make your mistakes now. Because by the time you’re 40, you’ll barely even remember them! And then you get to make the same mistakes all over again, it’s really fun.

Monica Lewinsky @MonicaLewinsky uhhhmmmmmm.

Delphine Govender @Delphine_DG FOVID-20: In year 2020, the suffering of Fatigue Of VIDeo calls of all manner; webinars; virtual conferences; and more webinars; did I mention webinars....

Dean @Herne_TheHunter • I’m 39-years-old.

• I have two degrees.

• I’m a doctor.

• I’m a member of a Royal College.

• I have had, unbeknownst to me, a sock up my shirt sleeve all morning.

Chester Missing @chestermissing I am not saying Satan works in advertising, I am just saying that if he went for career guidance counselling that’s where they would send him.

Yusuf Abramjee @Abramjee #Lockdown The strangest loophole I heard today: The regulations say I can’t meet my family. So, I will hire a taxi, pick them all up, fill it 100%, open the windows, and drive around to socialise.

“Quality is not an act, it is a habit.”

— Aristotle, Greek philosopher (385 BC - 323 BC)

46

finweek 30 July 2020

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