The Finance Ghost: The lowdown on Thungela, Adcock Ingram, RCL, Sasol, Bidvest and Bidcorp

27 Aug 2023

If you turned the recent mining updates into a drinking game, you would only need to use ‘Transnet’ and ‘Eskom’ and perhaps ‘decreasing commodity prices’ to make sure you are having a great time by the end of the second announcement. When we take a macro view of the impact of these announcements, it doesn’t look good for the South African fiscus in terms of tax revenue.

Thungela is a perfect example, with prices suffering this year because of declining coal prices, causing headline earnings per share (Heps) to nosedive from R67.23 to R22.46. The interim dividend is even worse, falling from R60 last year to R10 this year. The adjusted Ebitda margin is at a healthy 31%. It just looks terrible compared to 64% in the previous year.

Thungela remains optimistic about coal’s long-term demand, citing underinvestment in global coal supply (except for China, India and Indonesia). However, challenges in coal transportation persist, with Transnet Freight Rail experiencing a 13% decline in the coal run rate.

Infrastructure pain in South Africa must be a major driver for the pending acquisition of Ensham in Australia for R4.1-billion. To give context to that number, Thungela holds R13.6-billion in net cash and is about to pay a dividend of R1.4-billion.

Adcock Ingram: Nothing to sniff at

Adcock Ingram’s recent performance was driven primarily by a robust flu season, including the eternally frightening and well-documented “man flu” strain. Despite this favourable factor, revenue and gross profit only saw modest increases of 5% and 4%, respectively. However, prudent cost management led to a 6% rise in trading profit. The improved operating environment instilled enough confidence for a 17% year-on-year increase in total dividends, although Heps grew by only 12%.

Delving deeper into the segments, over-the-counter and consumer segments put in solid performances, up by 11% and 6%, respectively, while the prescription and hospital segments both showed more modest growth at 2%. The prescription segment excelled in terms of trading profit, posting a 16% increase despite such modest revenue growth.

The biggest challenge for Adcock Ingram in an inflationary environment is strict medicine price regulation, with only a 3.28% increase in the single exit price in January 2023 and a recent 1.73% adjustment, well below inflationary pressures.

With Heps at 561.3 cents, Adcock Ingram’s price-earnings multiple is at roughly 9.8x with a 4.5% dividend yield. The share price closed 3.4% higher on the day of results and is up 11.3% this year.

Not-so-sweet news from RCL

RCL Foods initially forecast a 30% decrease in Heps for the year ending June 2023, but has now revised it to a more substantial decline of between 39.3% and 46.0%. This translates to a range of 64 to 72 cents per share. At the current traded level of R11, that’s a price-earnings multiple of around 16x at the midpoint of guidance.

Multiple factors contributed to this decline, including a special levy by the South African Sugar Association, unrecovered feed costs, and the impact of load shedding.

The company’s capital allocation strategy has also lost a few feathers, with the investment in the LiveKindly Collective (a plant-based eating business) suffering a negative fair value adjustment of R127.4-billion. RCL Foods is trying to get ahead of the next trend in food, with a risky investment that will hopefully deliver long-term gains despite short-term losses.

Sasol: A lesson in impairments

Sasol’s year ended June 2023 mirrored challenges faced by the majority of mining companies, including declining commodity prices and local infrastructure issues. Remember that drinking game? The complexity of Sasol’s operations is further highlighted by the significant impact of derivative contract valuations on earnings.

The difference in these valuations is striking, with a positive shift of R6-billion this year compared to a R17.6-billion loss in the previous year. This is noteworthy, considering an operating profit of R55.4-billion before impairments.

The impact of impairments is severe on the reported numbers. This is why Earnings Before Interest and Taxes (Ebit) fell by 65% and Heps increased by 13%, as the latter excludes impairments. The most significant impairment was the Secunda liquid fuels refinery unit, driven by lower planned volumes due to emission reduction efforts, increased electricity costs and reduced gas selling prices.

Sasol’s total dividend for the year reached R17, marking a 15.6% increase over the previous year.

Bidvest in full bloom

Bidvest is a perfect example of great pricing power in the industrial sector. When prices can be increased without demand falling away, the joy of operating leverage becomes clear to investors. In this environment, I think that these types of companies are probably the best option for your money.

With a positive share price performance this year of 28%, Bidvest also demonstrates that you can make money on the local market. You just need to know what to look for. This price growth has been supported by expected growth in Heps for the year ended June of between 22% and 26%. Normalised Heps excludes acquisition costs, among other things, and is a metric worth noting, with growth of between 15% and 19%. Either way, Bidvest is winning in this environment.

With a price-earnings multiple multiple in the mid-teens, the valuation looks pretty reasonable in the context of this growth.

Investors have appetite for Bidcorp

Food service group Bidcorp has been a story of exceptional growth since the worst of the pandemic. It’s particularly fascinating to compare pre-pandemic Heps growth to post-pandemic growth, with a clear acceleration in the last couple of years.

Like Bidvest, which unbundled Bidcorp a few years ago, the company seems to be doing well in an inflationary environment. It can pass cost pressures on to the restaurant and hospitality customers that it services, which helps drive better returns on the fixed asset infrastructure that warehouses and delivers the food.

For the year ended June, Heps increased by between 32% and 36%, eclipsing even Bidvest’s growth. Bidcorp does trade at a more demanding multiple though, coming in at nearly 20x.

Perhaps because of its more modest multiple, Bidvest is winning the year-to-date comparison with growth of 28% vs 21% at Bidcorp. DM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.

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Business Maverick

Adcock Ingram: Nothing to sniff at

Not-so-sweet news from RCL

Sasol: A lesson in impairments

Bidvest in full bloom

Investors have appetite for Bidcorp