Invest with Perspective

The Money Show | Many businesses face challenges in the current economic climate

• Old Mutual Investment Group

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Siboniso Nxumalo, provides valuable insights into Sasol's situation given its underwhelming performance. The discussion delves into whether Sasol's struggles are indicative of broader trends within the market, highlighting the challenges many businesses face in the current economic climate. The conversation expands to compare the performance of South African companies with their counterparts in other African nations. A deeper analysis reveals variations in growth, economic conditions, and the challenges faced by businesses operating in different regions of the continent.

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Bruce Whitfield  00:00

The latest company to point the finger for most of its troubles at state-owned enterprises is Sasol. Sasol underperforming, its shares falling sharply after a warning that its profits will drop by as much as 32%. Sasol says the government-run firms that have constrained our supply chains and resultant sales volumes are to blame for its underperformance. It blames disruptions at Transnet, and the state run rail network causing delays and influx of trucking and clogs roads. And of course, we know all of this, all of this stuff is affecting all companies, particularly in the business of anybody who's got to get anything from point A to point B, particularly if that point is to between a mine and a port. 

Siboniso Nxumalo is the Chief Investment Officer at the Old Mutual Investment Group. Do you think - I mean, what do you make of Sasol's results in an environment where oil - we traditionally see Sasol as an oil company, but yes, it's a chemicals company, and it's a lot more complicated than just taking coal, squeezing it, and turning it into oil nowadays. But it's an underwhelming performance, I think we can say, with $85 a barrel oil, Siboniso.

Siboniso Nxumalo  01:12

Yes, Bruce, good evening to you and good evening to your listeners. Yes, a very underwhelming trading statement. But Bruce, when we look at Sasol, we've got to break it down into its key drivers. Yes, the dollar oil price matters. But the Rand to the dollar also matters, and then the production. So, if we look at production, production in terms of Sasol has been disappointing over the last 18 months. They obviously - as they've come out and saying, hey, the government has constrained us here and there. But they themselves in terms of how they've run their facilities, actually, that's been really, really disappointing. So, they haven't delivered according to market expectation, and there's been a lot of failings along that. And so therefore, if you don't deliver the volumes, Bruce, whatever the Rand oil price is, is irrelevant. And so that's where we saw this trading update.

Bruce Whitfield  02:10

Is it a production problem, Siboniso, or is it a constrained environment as Sasol suggests it is? Is it that Sasol's not producing enough or is it that Sasol is producing plenty and simply can't get its product to market? Where's he gone now? Don't avoid me, Siboniso. Let's try and get him - oh, he's disappeared now. Yeah, these... where's Ralph Mupita when you want to shout at a CEO? We'll talk about MTN's results in just a moment. But we've got to have better ways of getting digital connectivity. We're going to talk to Arthur Goldstuck about the fact that more and more of us are making calls using digital channels, stable digital environments where you're in an office, for example, or at home, if you're lucky enough to have high speed broadband. And you can dodge the - I wonder if it makes a difference, the cell phone network versus making your call on a data network. Siboniso Nxumalo, we were having a chat all about Sasol and the underperformance of Sasol. Um, is it all about Sasol's lack of production or does Sasol have a point in pointing a finger at the likes of Transnet and at Eskom and other state-owned enterprises who are constraining, frankly, more than just Sasol?

Siboniso Nxumalo  03:28

Well, Bruce, there is a value chain. And so, whatever Sasol actually manufactures affects a whole value chain downstream. So, they have a point. But Bruce, I think if you look at the further analysis at their own production, we would say yeah, you know, they also could improve quite materially, especially at these particular prices. So, they have a point, but it's not the complete story.

Bruce Whitfield  03:52

Absa results, revenue's up, operating costs up a little. The big one is impairments; this is the fact that they're worried about certain payments that won't happen or might not happen into the future. That's up to over 8 billion Rand, they grew their profits only 3%. And that's concerning, their measure of profitability, return on equity decreased. If there is one upside it's they've got a cost to income ratio. In other words, what it costs to earn every Rand is below 50 cents now. That's one positive, but certainly there are some fairly negative indicators in the Absa results.

Siboniso Nxumalo  04:30

Yes, Bruce. I mean, very interesting results, because again, in here, the devils in the detail. So, when you look at the profit line, it looks like nothing really happened. But the key here, which I think we're going to touch on when we talk a little bit about MTN next, is that in South Africa, we saw bad debts - or credit impairments, as the banks call them - go up 68%. That's material. Whereas in Africa, those things, credit impairments, are only up 9%. So, Africa, in terms of Absa, actually grew strongly, South Africa underperformed and went backwards. A lot of that was driven by bad debts, home loans went up, I think the credit impairments were up like 260% or so. And then credit cards were up 70% and personal loans were up 50%. So, you can see, interest rates increased rapidly last year, the cost of living is very high. And now we're starting to see some bad debt. So, the revenue is looking good. But actually, the bad debts are there. But again, banks have been able to control costs amazingly well as they evolve into more technologically orientated company.

Bruce Whitfield  05:36

It's the crushing of the middle class ability to spend, of course, and that's hitting the banks, and I think also beginning to affect even the cellphone providers too.

Siboniso Nxumalo  05:46

Yes, that is true, Bruce. So, for me, when I was looking at these results today, what was interesting was how we talk about Africa and how hard Africa is. And here in this instance, we've got two companies, which have both got material businesses in Africa. So, in Absa, South Africa didn't grow and went backwards. And then an Africa group, in Nigeria - I mean, in MTN, we look at the revenue, revenue was at 16.6%. South Africa did 2.6%. The rest of those other regions, especially the Africa ones, were up there in the 20s. So, that's quite good. If we look at Nigeria's profitability, the EBITDA as, they call it, South Africa's EBITDA is down almost 7%, Nigeria's EBITDA is up 23%. So, again, yes, it's hard to do business in Africa. But here are two companies that are big in South Africa and material, and actually, you can see the pressure on the South African economy and the South African consumer.

Bruce Whitfield  06:46

And it's not just the South African economy, of course. If you just got to look at the platinum producers, for example, Impala is down, Impala and Anglo American Platinum is down by a half this year. Northern is down by a third. We've seen big declines across the platinum belt, of course, as the underlying commodity prices, the platinum group metals prices have plummeted over time. Today was a Northern update, it was disappointing, the share price was down, platinum shares generally taking a beating. It's a tough environment to be in, but at some point, Siboniso, and I'm wondering if you know when that point is, surely these things start to look attractive again, at some point?

Siboniso Nxumalo  07:26

Yeah, Bruce. So, I think what's gonna make them attractive. So, today, I mean, you saw if you just go to the companies: Impala was down close to 10%, Anglo American Platinum was down 9%, and Northern was down 7.5%. And, again, big down day. Yes, a disappointing trading update from Northern but they had flagged it. Now, the key though, with Northern is that actually, because of their disposal of the Impala stake that they had, now, basically, they don't have any debt. So, actually, at this price, Northern looks very attractive, because they still have a growth profile. 

So, then why is the market busy selling these platinum companies? Well, platinum companies are used primarily in auto catalytic converters. These are the things that go in our cars, they obviously purify the air that comes out. But Bruce, if you look ahead, are we going to be using cars with combustion engines? Well, maybe in South Africa, we will, but the rest of the world is going electric. And so, if you look far ahead, you've got to be saying, well, actually, who's going to be the primary user outside of jewelry, which isn't a material part of platinum demand? And so therefore, the questions are valid, but the balance sheets in terms of Northern are actually quite good. So again, when you value a business boost, you look far ahead and you say, oh, I don't know whether in 2030 we'll be talking too much about these companies growing. But actually, in the interim, from a Northern perspective, you're saying, hey, I like this balance sheet. They could buy back shares; they could pay out a big dividend. That's interesting.

Bruce Whitfield  09:01

Siboniso Nxumalo, thank you. He is the Chief Investment Officer at the Old Mutual Investment Group.