The Money Show | A rollercoaster day in the markets

On this week’s The Money Show on Radio 702, Meryl Pick discussed Netcare’s resilience, Omnia’s cyclical challenges and Astral Foods’ battles against industry-specific calamities. 

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Transcript

Bruce: And on to Meryl Pick. Now, Meryl is a portfolio manager at the Old Mutual Investment Group. It's been a busy old day. We've seen the good, the bad and the ugly. Maybe we could divide it into that. Certainly, in the good column I would put Netcare, a very good set of results out of Netcare today. Meryl, good evening. 

Meryl: Good evening, Bruce. And good evening to your listeners. Yes, absolutely. And we've seen, perhaps despite the company guiding, they still managed to surprise the market. Looking at the share price performance today with good earnings numbers up 27%. And I think if we rewind to three years ago in the midst of COVID global pandemic health crisis and yet the irony being that hospital volumes were low. 

Meryl: So, hospitals became the anti-defensive and one of the losers out of a global pandemic because the way the business model works, a large portion of the revenue is made from surgeries. And I think what we're seeing now is the result of the steady recovery in hospital occupancies. Those are edging back up to the pre COVID levels, sitting just below 70%. And with that operating leverage, because hospitals are high fixed cost businesses, you've got to keep everything running, you've got to keep your nurses employed, and if patients don't come in, you still have those costs. So, we're starting to see revenue recover and absorb costs. Worth pointing out, though, that margins are still not back at pre COVID levels. And I think that is something which just highlights how tough, for example, it is to produce enough nursing graduates, et cetera, and really staff hospitals quite adequately. There's a lot of competition for that and I think that is reflecting in the margins, but quite a lovely recovery. And as you pointed out, the mental health hospitals or facilities have even better occupancy than general hospitals. 

Bruce: Tragic, isn't it? But I mean, these guys spotted that trend ten years ago and began to build out into that space and they're meeting a societal need. And we're a miserable bunch for lots of good reasons. If we go from the good of Netcare maybe to the bad of the explosives business and the fertilizer business of Omnia, the share price went up on the day because actually they're performing very strongly. It's just the prices of the commodities that they supply explosives into, and the price of fertilizers have plummeted as the world has sort of gone more and more crazy in the last two or three years. 

Meryl: Yes. So, I think this is a good example of a good management team making a difference in what is, at the end of the day, a cyclical industry. But I think Seelen and team are quite aware of the cyclicality and to some extent there was an elevated level of demand again over that COVID period. Very limited imports during that time because of all the supply chain disruptions. So really, any stock that local farmers or local mining companies could get their hands on, they were taking from local producers. Now, we know supply chain disruptions have, by and large, normalised, and at the same time, the commodities in question, prices have begun to normalise. So, it's a double whammy, both price coming off and volume coming off. It's a mixed bag. The agri division, well, revenues down across all the divisions. Agri division profits down quite a bit. Mining division actually profits up, which talks to the profitability and the work they've done to make that business less cyclical. And then the worst performer, but also the smallest in the group being the chemicals division, profits have all but evaporated in that division. 

Meryl: But I think the theme that has been driving Omnia and has made it more resilient because, really, given the pressure to come off with only a single digit move on the earnings line is quite impressive. So, I think they've managed their balance sheet much better than we've seen the company do in the past under prior management. They've managed their working capital very well, and they have been steadily working to decrease the cyclicality of the business by moving into more specialist products where they can actually charge a higher margin, and those volumes and the demand from those clients is stickier. So, it's a small portion of the business for now, but there is certainly an intelligent strategy in place to become less cyclical within a cyclical industry. 

Bruce: And then we've gone from the good to the bad to the ugly, and Astral Foods, for the first time in its 23-year history, seeing a loss and just the catastrophe of multiple negative events all happening at the same time. And really, what a dreadful period to have to trade through. 

Meryl: Yeah. So, there's very little, I think, that management can control in this industry. They can be operationally efficient, certainly, but, jeez, where do you want to start? You sell something which ultimately you don't control the price of. Your largest inputs are commodities that you don't control the price of in terms of the feed. You have a heavy reliance on electricity in terms of your broiler system. And we've had unprecedented levels of load shedding and having to make the tough decision between continuing your operations versus spending and therefore, spending a lot on diesel or actually just shutting and having smaller production levels. And then, of course, avian flu. So, I think it's been calamitous. You know, the question is, can it get any worse from here? For a speculative investor, you've got to probably just look and say, well, what is in the price at this level?

Bruce: Is it cheap enough, I wonder Meryl Pick?

Meryl: I don't find chicken a particularly attractive industry for all the things that I've described, so I tend to stay away from it. But for those who feel that they understand the industry, the commodity drivers and everything is cheap enough, just don't forget to sell something as cyclical as the chicken industry when it does recover. 

Bruce: Thank you. Meryl Peck, who's a portfolio manager at the old Mutual Investment Group.