Portfolio Manager, Siboniso Nxumalo, unpacks recent results from Vodacom and the resilience of the company and others like it, despite adverse conditions in the local environment.
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Bruce Whitfield 00:06
Disappointing close on markets, down about a quarter of 1% on the day. Siboniso Nxumalo is our market commentator, he's a Portfolio Manager at the Old Mutual Investment Group. You've just been listening to Shameel Joosub talking Vodacom. It's not a bad set of results. And it's a set of results hopefully positioning the company for greater growth into the future, Siboniso.
Siboniso Nxumalo 00:27
Yes, it is, Bruce. Good evening to you, and good evening to your listeners. But Bruce, I'm going to start somewhere else, and then we'll come to Vodacom. So, there are a series of trading updates, and one or two results that we're going to talk about this evening. And going through all of them, it reminded me there's a publication that we put out called "Long-term Perspectives". And in that publication, we've calculated that if you'd invested in South African equities for 92 years, you had a return of about 13.6%. And that's actually one of the best returns globally over the period of 92 years. Now, why am I mentioning this? I'm mentioning this because if you can run a business in South Africa, and run it well, and survive all that South Africa has, actually that is a job that should be recommended - that should be commended, actually. So, Bruce, with that, I look at all of these results. There's talk about higher interest rates, there's a Rand volatility, there's commodity prices up, there's oil prices up, there's loadshedding to deal with. With that then, let's come to Vodacom. So, Vodacom-
Bruce Whitfield 01:30
I want to just address a little elephant with you on this one here, Siboniso. So, I mean, 92 is a weird timeframe. And I mean, to be fair, and I mean, I accept your data and I accept you absolutely, and I agree with your principle that South Africa is actually a remarkable investment destination, and our recency bias that says, well, during the Zuma years, it was disastrous, and you know, the last year has not been great, and the 18 months before that. You can pick any timeframe and a timeframe that suits you to give you the outcome that you want. 92 years feels like one of those, oh, we can't go to 100, because it wasn't very good. 90 wasn't great, let's pick 92, that'll give us the best possible return number that we can do. You can pick any start date that suits you in these things, can you not?
Siboniso Nxumalo 02:15
That is true, Bruce. But the point that I suppose I'm trying to make here is that actually South African companies are fairly resilient. They've had a lot to deal with in our history. And actually, some of them are run by exceptionally capable people, who've got to adapt and actually still grow businesses in some really adverse circumstances. So, for me, I suppose I'm looking at the management of South African companies. And I'm clapping my hands. And I'm saying, these guys have got to deal with some extraordinary complexity.
Bruce Whitfield 02:45
Siboniso Nxumalo 02:46
And actually, they produce some decent returns.
Bruce Whitfield 02:48
I concur. Absolutely. Talk to me about Vodacom, your impressions.
Siboniso Nxumalo 02:52
Yes. So, Bruce, revenue on a normalized basis, a comparable basis, was up 5%, but operating profit down 5%. And we saw the dividend, the interim dividend, for the six months down 19%. And as you spoke to Shameel, increased debt levels, there are losses in their start-up in Ethiopia. And obviously, they spent 2 billion Rand on batteries in six months, just to think about that as pressure on a business, Vodacom does fantastic business, with some good growth prospects in Africa, especially in financial services. And so, it's a very decent result under the circumstances, but the market said no, it's down 6.1%. Tough times.
Bruce Whitfield 03:36
And nailing Telkom in the process as well. Of course, Telkom was the belle of the ball just a month ago, everybody wanted a piece of Telkom, or give themselves, a piece of themselves to Telkom. And Telkom's trading update not reflecting a very happy ship there either.
Siboniso Nxumalo 03:51
No, not at all, Bruce. And again, even that one has got quite a lot because Telkom came out with a trading update, and said, hey, we've got a few challenges here. So, if you look at Telkom's earnings, Telkom's earnings talked about, hey, we've got, um, earnings are gonna halve, they're gonna be between 45 and 55% lower. And that's not an encouraging outcome. Then they talked about how maintenance costs and service costs reflect an increased mobile network cost over the period. And so again, they're talking about cost pressure, and load shedding, and how much they had to spend, quite a lot of money keeping their network intact. Then talk about some savings, but those aren't that material. And so again, earnings are under immense pressure in South African companies.
Bruce Whitfield 04:38
Yeah. What about a couple of others today? I mean, if there was an exception to that, it's certainly Shoprite, it came out with a quarterly update and the market absolutely loved what Shoprite's getting up to, it certainly is the pick of the bunch in terms of delivering the sorts of returns to shareholders that they would like to see in that food retail space.
Siboniso Nxumalo 04:59
Yes. And as a happy shareholder, Bruce, this has been a fantastic one. Shoprite, now here, this is a quarterly update, up to September. So, July, August, and September. But now, the key about these numbers, they're comparing it to a period which had the riots last year. So, the numbers are going to be good. But nonetheless, the devil's in the details. The details actually are reflecting great numbers. So, if you look at what happened in Shoprite, they tell us that the retail segment is up 19.9% in South Africa. What they're saying their internal price inflation, this is food, Shoprite's a food business, is for the quarter up 8.2%. That's an incredible amount of money. An incredible inflation number. Market share gains, though, for the fourth quarter were 1.4%. Shoprite's been gaining market share in South Africa for 43 months; they've been winning in every single segment that they're in. And that's actually been brilliant.
Bruce Whitfield 06:02
What about Rhodes Food Group? Their biggest customer, of course, is Woolworths. And they produce the cows that produce the milk that goes into the bottles at Woolworths, they also make lots of the ready meals and things. Are they flying? They should be, considering the sort of business Woolworths does in its food division.
Siboniso Nxumalo 06:18
Now, in theory they are because the results are saying, hey, we're expecting earnings to be up between 54 and 59% than the previous period. But the comparable period was a period of some really poor results. And so therefore, that number doesn't paint the actual truth. But they themselves start talking about, hey, we were not able to price inflation. So, you got to think Rhodes Food Group is a food producer. And so, they go to the farmers, they agree with the farmers, they buy ingredients, they package the food, they give it to the retailers like Woolworths. They also supply some to Shoprite. So, what then happens is that you've got big retailers in South Africa, Shoprite, Pick n Pay, Spar, etc. These guys know that they've got power, and they've got dominance. And they squeeze companies like Rhodes Food Group. And so, their inability to price input cost inflation. And here, they'll tell you that's mainly in canned meats and vegetables and pies. That's the nature of these businesses. And so therefore, they always have a lag in trying to recover their margins. So, yes, the number deceptively looks good as a recovery. But actually, the business is under pressure and the higher inflation stays, the more pressure that there'll be here.
Bruce Whitfield 07:30
Always so interesting. Thank you, Siboniso Nxumalo. Let's leave it there. Portfolio Manager at the Old Mutual Investment Group.