The Finance Ghost: The market lowdown on Bytes, Balwin, Shoprite and Afrimat

29 Oct 2023

South African investors have a soft spot for companies that offer foreign earnings. If you aren’t sure why, drawing a long-term chart of the rand will quickly show you the answer.

Locally listed companies with offshore operations have been a mixed bag for investors, with arguably more disappointments than anything else.

This pushes investors towards global companies that are stable dividend payers, like British American Tobacco. The listing of Primary Health Properties looks set to tap into the same mindset, albeit by helping people rather than accelerating their journey to hospital.

Thankfully, there are other ways to play the offshore game. Bytes is one of them, operating in the UK and Ireland in high-growth sectors such as software, security, AI and cloud services.

These are hot areas with high revenue growth prospects, which means there’s no shortage of competition. This inevitably puts pressure on margins, especially when competing for large contracts.

For the six months to August, gross invoiced income shot up by 37.6%, but revenue was only 16.3% higher. Gross profit grew by 15%. That’s a solid outcome (especially in hard currency, as these numbers are reported in GBP), but they also reveal the pressure on pricing. It’s like a supersized pizza, just with fewer toppings.

Although the adjusted operating profit margin is lucrative at 31%, it’s heading in the wrong direction because of pressure on expenses along with the gross margin trend already noted. Still, Heps growth of 17% is juicy and the interim dividend per share increased by 12.5%. This is before considering rand weakness, of course.

With the share price up 40% in the past year and slowly trending downwards as market exuberance corrects, investors should keep an eye on this for an attractive entry point. The underlying story is strong.

Balwin’s sales nosedive

If you’ve learnt nothing else this year, I hope you’ve at least picked up on the impact of interest rates on the equity market and the broader economy. We’ve had a crash course in this over the pandemic, with a huge drop in rates and then a sharp increase, especially in developed markets. Even in South Africa, which is a structurally higher interest rate environment, the effect has been clear.

If you need any further convincing of the pressure on consumer affordability and the cost of debt, a 33% drop in property sales volumes at Balwin might do the trick. Thanks to the pricing mix, revenue for the six months to August fell by “only” 25% — a number that could have been a lot worse.

Kudos to Balwin for managing its profitability, with a major increase in gross profit margin helping to drive Heps 4% higher despite the revenue drop. That’s a good effort. I still wouldn’t have any exposure to this sector, though.

When will Shoprite take the fight to Clicks?

Clicks is always a hot topic among local investors. The company trades at an incredibly high price-to-earnings multiple (currently around 25x) and has a primarily offshore shareholder register. No matter what happens in the local headlines, those investors seem to stick around.

I’m genuinely not sure why they are happy with a five-year share price compound annual growth rate of just 5.9% in rands, or 0.4% in dollars. The dividend isn’t nearly high enough to turn that pedestrian performance into something worthwhile.

Clicks can’t control its share price. It can control its performance, which in the year ended August 2023 was pretty good. If you exclude insurance proceeds from the base period (which is an appropriate adjustment), then Heps was up by 11.5%. That’s a decent outcome.

The health and beauty market is incredibly lucrative. With Shoprite experimenting in just about every retail category around, how long will it be until it takes the fight to Clicks to really get a slice of this action?

The pharmacy licences will be Clicks’ main defence in that fight, as licences are hard to come by. Still, I wouldn’t bet against something like this happening.

It’s not impossible to imagine a Sixty60 delivery that has my prescription meds along with my food, saving me the frustration of 20 minutes at the Clicks dispensary.

Afrimat: where diversification isn’t diworsification

We end off with Afrimat, where Heps grew by 4.4% at a time when many mining companies are watching their profits disappear. Revenue growth of 9.6% in the six months to August was particularly assisted by the construction materials segment, where operating profit more than doubled.

All eyes are on the Lafarge acquisition. Afrimat knows a thing or two about acquisitions, so it should go well. DM

After years in investment banking by The Finance Ghost, his mother’s dire predictions came true: he became a ghost.

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

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Business Maverick

Balwin’s sales nosedive

When will Shoprite take the fight to Clicks?

Afrimat: where diversification isn’t diworsification