Our Research

PFG's profitability took a knock in FY20 despite reasonable revenue growth. We assess grains prices into FY20 and believe that PFG's Essential Foods portfolio may benefit from softer commodity prices. As the PepsiCo. buyout looms, the counter has stood at levels close to the offer price of R110.

Using our consumer wallet model we assess consumers’ funds available for retail and discretionary spend may have increased in 2019, and we forecast an increase in funds available for spending in 2020. Our analysis of SARS data shows that weak economic growth resulted in lower corporate tax and VAT contributions, with a greater burden falling on the individual taxpayer base. We consider the impact increased emigration may have on tax revenue. Our analysis points to a shrinking middle class which is not being replenished by younger, emerging middle-class taxpayers. We quantify the impact of load shedding on retail sales growth and determine which types of retailers are most impacted. The results suggest that load shedding may not result in lost sales, as customers sometimes defer purchases to a later date. This is encouraging as SA is facing growing uncertainty regarding reliable supply of electricity

With the overall SA population growing faster than 0-14 years age segment, we believe the change in demographics poses a risk to PPH's main clothing brands. Ackermans’ strategy to increase its ladieswear market share comes with increased risk. While the focus remains on value products, some element of styling will have to be introduced, and with that, an increased exposure to fashion risk. Our Summer Range shows that price is not an issue at Ackermans, and we believe that styling likely has to be improved.

The Competition Commission’s (Compcom) Inquiry into data services and ICASA’s Discussion Document on its Inquiry into Mobile Broadband heightens our concern of an impending intervention in the mobile data market. Both assessments appear to be thorough and reasonably scientific and highlight several aspects of the mobile market which tilt the market dynamics in favour of the incumbent MNOs. Even though the two reports seem to differ on the reasons for the high prices of data in SA, they agree that there are significant inefficiencies in the wholesale, roaming and site access markets which need to be addressed.

We attended the Annual General Meeting of Spur (SUR) and summarise key points from the shareholders’ meeting.

LEW appears to be back on track to sustainable growth as its various strategies put in place over the last few years start taking shape. Its traditional retail division’s operating profit margin is unlikely to return to the levels experienced five years ago, in our view. LEW has repurchased 18% of its total shares in issue over the last two years which has negatively impacted the liquidity of the stock. We are highly concerned in this regard as LEW plans to continue buying back shares in the current financial year.

Tiger Brands offered up another disappointing set of results as the few green shoots that emerged from its Consumer Brands division were insufficient to offset the poor Grains performance and the untimely weakness of TBS’ International business. In the report, we analyse TBS' BuySmart loyalty and reward platform, explain how it works and quantify the rate at which consumers can accumulate rewards. We like BuySmart, however, remain skeptical of whether TBS can pull it off. Considering the impending sale of VAMP, we estimate the current market value of the business.

Whereas previously growth was merely a matter of being the price leader and filling up their empty network, for Telkom growth going forward will necessitate capacity related capex investment over and above the capex required to build out the mobile network. We believe that Telkom is under pressure to scale the mobile business rapidly in order to secure itself as a sustainable mobile operator prior to the incumbents securing additional spectrum. Once the incumbents receive spectrum, they will be in a better position to compete with Telkom on pricing. We foresee a period of intense mobile capex (possibly at the expense of the fixed line business) as Telkom attempts to scale its network and onboard roaming traffic in support of margin. Telkom is prioritizing mobile at a time when the sector is under significant pressure to reduce pricing, particularly on data. The poor mobile sector dynamics and higher capex intensity is likely to exacerbate the squeeze on free cash flow which could result in higher gearing or a review of the dividend.

October vehicle sales gained 20bps y-y and manufacturing activity picked up in October as ABSA PMI gained 3.0 points. After a recovery in September, SACCI Business Confidence lost -0.7 points to 91.7 points. Nominal food and beverage sales held steady, growing by 5.2% y-y in September. Petrol is expected to rise by 10c/litre while diesel is expected to fall by -22c/litre. In October, CPI inflation declined by -40bps to 3.7% and PPI inflation moderated to 3.0%. The rand depreciated by -5.3% against the dollar y-y, closing the month of November at R14.65/USD.