The Finance Ghost: Perfume on pigs, and Woolies local better than down under

17 Nov 2024

This week, we saw earnings updates from Vodacom and MTN. Let’s start with the former, where the interim dividend is down 6.6%.

Revenue at Vodacom increased just 1% for the period and heps (headline earnings per share) fell 19.4%, so shareholders should probably be thankful for the increased payout ratio. Of course, such changes to the payout ratio aren’t sustainable and eventually the dividend will move in the same direction as Heps. The company is just putting perfume on a pig here, especially in light of negative free cashflow for the period.

It’s little wonder that Vodacom has been trying to get a fibre deal across the line in South Africa, since this is one of the few growth opportunities. Alas, the Competition Tribunal had other ideas, blocking the deal with Remgro.

The situation is no better at MTN, where the currency depreciation and related impacts in Africa have been so severe that Nigeria is now operating at a lower earnings before Ebitda margin than South Africa.

The growth driver at MTN (and other South African telecommunications groups) is fintech revenue, as the distribution opportunities are substantial around services such as payments and insurance.

It was the only source of revenue in the green, up 8.5% as reported and 28.9% in constant currency.

That immense gap is thanks to the extent of currency depreciation in Africa.

Much like at Vodacom, MTN has a growth problem to solve. The South African business only grew Ebitda by 2.6% in this quarter. The “solution” for MTN is growth in the rest of Africa, which comes with all the currency problems.

Above all else, this sector needs a more favourable global macroeconomic environment for frontier markets. The jury is out on exactly how Donald Trump’s policies will play out. A strong dollar and risk-off approach towards Africa will take things from bad to worse for MTN and Vodacom.

Woolworths getting dragged Down Under

When David Jones was finally worked out of the system at Woolworths, it was cause for celebration. The deal had destroyed immense shareholder value and made Woolworths (and then CEO Ian Moir) the poster child for terrible offshore dealmaking.

Everything is easy in hindsight, of course. At the time of getting out of David Jones, the new executive team assessed Country Road Group and decided that it was a business that was worth hanging on to.

Sadly, it looks to be going much the same way as the previous Australian mess. In the 18 weeks ended 3 November, Country Road Group saw sales fall 8.8% overall and 13.8% on a comparable store basis. Operating margins have gone the wrong way, so the impact on profit is likely to be worse.

Thankfully, there are some improvements in fashion, beauty and home, the South African business that Woolworths was originally built on. Sales have moved 3.5% higher, with beauty living up to its name with an attractive growth rate of 20.6%. Online sales were up 36.5%.

And what of Woolworths Food, the business in the group with the widest moat?

Although Checkers forced Woolworths Food to sharpen up in recent years (and become more price competitive), Woolworths still has a great business that achieved growth of 9.6% excluding the acquisition of Absolute Pets. Woolies Dash grew 54.4%.

I quite like the Absolute Pets story, as I would far rather see Woolworths (and other retailers) doing smart deals in South Africa instead of offshore. There’s still plenty of growth here and it’s clearly an easier market than Australia. DM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.

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Woolworths getting dragged Down Under