The Finance Ghost: Transnet isn’t in control of its issues

Critical companies in our mining and resources sector have been sounding the alarm about Transnet for many months now. With ailing infrastructure and the usual failings of government, our ability to cash in on the global commodity boom has been hamstrung by the railways and ports.

In 2021, 58.3Mt of coal was delivered to the Richards Bay Coal Terminal vs. annual capacity of 77Mt. In other words, we missed out on nearly a quarter of export capacity.

Our economy has managed to keep the lights on despite Transnet. Export prices for coal and other minerals have been strong and we can see the benefits in our improved fiscal health and the strength of our currency.

On Thursday, Thungela and Exxaro announced that Transnet issued them with force majeure notices on 8 April. The factors “beyond Transnet’s reasonable control” relate to vandalism on the coal line and ongoing legal proceedings regarding irregular locomotive acquisition and maintenance contracts. I suppose we could have long arguments about exactly whose control that is under, but it won’t help the situation. Exxaro has already indicated that its lawyers do not agree with Transnet’s assessment of a force majeure scenario.

Transnet wants to get out of existing contracts with the coal exporters and negotiate new five-year deals by the end of June. Both Thungela and Exxaro don’t seem too perturbed, as the practical difference versus the existing position of underperformance by Transnet is limited. That didn’t prevent the Thungela price from catching a wobbly after an extended bull run, dropping around 8.5% intraday before recovering slightly to 5.7% down in afternoon trade. Exxaro traded slightly higher.

https://www.dailymaverick.co.za/article/2022-04-19-ramaphosa-vows-comprehensive-kzn-recovery-effort-zero-corruption-tolerance/

Corporate ratings

The importance of the macroeconomic operating environment for local companies can be seen in the credit rating announcements in the past week. Based on Moody’s change of the South African sovereign outlook from negative to stable, several local corporates and banks have enjoyed the same outcome.

When it comes to credit, leading companies cannot escape the problems plaguing the broader economy. A lower credit rating means higher borrowing costs, which has a negative impact on everything from job creation to shareholder returns.

Another financial disaster in KZN

The province of beautiful coastlines and a warm ocean just cannot catch a break. With the riots still etched in our memories, terrible floods have caused extensive loss of life and damage to the economy.

The announcements started on Wednesday, with Sappi first out the gate to announce that production at three mills had been stopped. Luckily, it doesn’t sound like there has been material damage to property.

Speaking of property, Fairvest got off lightly, with no structural damage to its KZN portfolio despite owning 16 assets in the province. Fortress REIT experienced some flooding damage at four of its properties, representing about 2% of its total portfolio.

Hulamin is based in Pietermaritzburg and has seen its supplies of liquid petroleum and compressed natural gas affected. It was a temporary issue thankfully, with supply restored and operations back to normal.

Pepkor wasn’t as lucky, with PEP’s distribution centre in Durban suffering significant damage. Of course, the riots taught retailers that supply chain contingency plans are critical, so PEP will find a way to make it work using the Joburg and Cape Town distribution centres.

Based on how long the riot insurance claims have taken to be settled, this will put more pressure on balance sheets. As usual, the most pain will be felt by small businesses.

Mr Price becomes Mr Aspirational

With a R3.3-billion acquisition of a 70% stake in Studio 88, Mr Price is moving into a new fashion segment that targets aspirational customers with branded apparel. The red-cap group wants to become the largest retailer in Africa, a goal that is impossible without acquisitions.

After acquiring Yuppiechef and Power Fashion, the latest deal for Studio 88 represents a substantial 6% of Mr Price’s market cap. The deal multiple isn’t demanding, at just over 6x EV/Ebitda based on the last 12 months’ Ebitda. Studio 88 is a cash-only retailer, so there is some strategic fit with Mr Price’s existing model.

Capitec running out of puff?

Capitec is now significantly lagging behind the other banks this year in terms of share price performance. It suffered a nasty sell-off in the past week despite releasing results with growth across key metrics, although investors would do well to watch the cost-to-income ratio, which has moved a lot higher. 

The trouble is that the valuation is absurdly high and a correction was long overdue. The net asset value per share is R308.88 and the share price traded at around R2,167 per share even after the correction. Regardless of how strong Capitec’s core business is, a price/book of 7x in this economy is very difficult to justify. BM/DM

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