Locally we have had a lot of results starting to hit the tapes and by and large the numbers have been better than expected on a relative basis. Risk assets remain poised for further upside (nosebleed tech not withstanding) with EM remaining in the limelight as long as US long bond yields do not get materially out of control from current levels of around 1,6.
We hope you enjoy this month’s read. SA equities continue to shine into 2021 and it is pleasing to see meaningful leadership relative to first world peers, not only in percentage improvement terms, but in hard currency as well.
By the Numbers
Don’t believe the index – the great rotation is real
This is very misleading, as below the surface we have seen a rotation into cyclical sectors, something we pointed out at the beginning of the year. The Energy, Financial, Industrial and Material sectors are up significantly year to date and are taking over leadership of the market.
As GDP growth begins its bounce back from the global pandemic induced recessions in 2020, it is becoming more ubiquitous, and investors appear unwilling to pay the handsome premiums of the past. The focus has now switched to value names and those that will benefit the most from a strong economic up cycle. Growth Investing has trumped Value Investing for the last 10 years and while we have seen some large outperformance from the Value Sectors of late, the trade still has a long way to play out.
This trend is supported by increasing evidence of the global economy bouncing back nicely, further supported by continued stimulus and numerous instances of economic data surprising on the upside. Rising yields appear to be reflecting the strength in the underlying economy, rather than just fear over inflation pressures. It is disingenuous to call the end of the stock market rally due to the poor performance of the S&P 500 index to date. The underlying cyclical sectors are outperforming, as they should be in an improving economy, and have delivered very attractive returns in 2021 so far. One thing for certain is that you need to be in the appropriate sectors and stocks to benefit from the rotation from Growth to Value.
The inflation debate
Recently US 10-year treasury yields have risen to 12 months highs as the market begins to discount the potential for rising inflation.
Enormous pandemic driven stimulus packages, ultra-low interest rates and accommodative central banks policies have seen monetary supply growth increased by more than 20%
Analysts who disagree that Inflation will be a problem note that inflation will spike in the short term as we lap easy comparisons between March and July last year when global lockdowns were in full swing and Oil prices collapsed.
By the Numbers
The budget balancing act
Rather than reiterate the long list of reforms required to change the economic trajectory, the speech focused on the four most critical economic reform priorities. While the focus was welcomed, execution remains the key demand from stakeholders. For business, the bottom line is whether the SONA signals the start of a bolder undertaking by the government to lift growth-enhancing reforms out of the bog of bureaucratic inertia.
Naturally and most pressing, more information on the vaccine procurement and rollouts were high on everyone’s priority list, with questions of how these would be funded.
The 2021 National Budget delivered by Finance Minister Tito Mboweni on 24 February walked an equally tight rope, balancing the need to support while demonstrating fiscal prudence. A combination of higher commodity prices and a decent economic recovery over the latter half of 2020, left him with about R100bn of additional revenues relative to the Medium-Term Budget estimates.
While the deficit and debt ratios are still well in excess of comfortable levels, the outcome of the National Budget was better than the market expected and allowed the funding of vaccines and extended COVID relief measures without additional direct taxes outside of the usual increases in the fuel levy and excise duties. The Rand and local markets gained in the aftermath
FirstRand Interim Results
FirstRand released their interim results for their first half ended 31 December 2020. As the first big bank to report the market enthusiastically awaited an update on how the banking sector had fared over the past few months given the COVID-19 pandemic and resultant economic pressure it created.
FirstRand did not disappoint showing a robust performance despite the tough operating environment. Normalised diluted earnings per share were down 21% YoY largely in line with market analyst expectations, impairments increased 59% YoY but decreased 46% compared to 2H20, and pre-provision operating profit was flat YoY and up 8% comparing the 2H20 to the 1H21. Focussing on topline revenues, performance was resilient with net interest income flat YoY and operational non-interest revenue down 1% YoY. It is important to bear in mind the comparative periods when looking at YoY figures as 1H20 was a pre-pandemic operating environment. This is further evidenced in the divisional normalised earnings performance. While from a YoY perspective, performance on the surface is weak, when compared to 2H20 the start of a recovery is clear.
The standout result was the announcement of an interim dividend. A figure of R1.10 per share at the bottom end of their target pay-out ratio of 1.8-2.2 times and coming in ahead of analyst expectations was welcomed by the market. The South African Reserve Bank has previously advised banks against dividend payments given the uncertain pandemic environment and only recently relaxed its view.
Bidvest (BVT) – HY 2021 Results
BVT reported interim results recently which were a mixed bag at a divisional level, but which nevertheless provided some encouragement for shareholders for the road ahead. Their focus was on expense and balance sheet management while delivering efficiently into market demand.
Trading profit increased by 3.5%, enhanced by the consolidation of PHS for the full reporting period. Normalised HEPS from continuing operations came in at 651.6c per share, 6.1% higher and the group declared an interim dividend of 290c per share, up 2.8%. Cash generated by operations almost doubled to R6.2bn while free cash flow totalled R3.1bn. This allowed Net debt/EBITDA at the reporting date to decline to 1.7x versus 2.1x as of 30 June 2020.
BVT have optimised their cost base and improved efficiencies. They completed the sale of its 6.75% stake in Mumbai International Airport for R1bn and the cash proceeds received earlier this calendar year. They have also signed an agreement for the sale of its airports ground handling business, Bidair and is in the process of disposing of its Bidvest Car Rental business.
Following restructuring efforts in the prior period and these disposals of non-core assets more recently, together with the commissioning of the R1bn liquid petroleum gas storage facility in Richard’s Bay last October BVT appears well positioned for the reopening of the economy. Their businesses are future-fit and their operating models scalable, well placed for growth.
Given the unprecedented trading environment, management can be forgiven for serving up a commendable but not flawless result for the period. With BVT trading on a forward PE of 13x and a forward yield above 3% we remain buyers in our relevant portfolios.
Discovery’s interim results showed resilient performance over the first six months of their 2021 year despite the headwinds the COVID-19 pandemic created. Operating performance was robust, and the group reported a 19% increase in normalised profit from operations. Established businesses, being the main contributor to operating profit, showed a strong performance (+10%) while emerging businesses continued to gather steam (up over 80%).
Looking at operating performance from the underlying composites. The SA Composite held its ground with SA Health +6% YoY despite reduced total health lives as retrenchments increased. SA Life increased 3% being impacted by a 6% decline in new business from a deterioration in face-to-face sales activity and elevated group live claims. Discovery Invest saw a 3% decline in operating profits in part from prior year once offs in addition to a 3% decline in new business. Discovery Insure benefitted from reduced vehicle mobility increasing its operating profits by 43% YoY. Lastly Discovery Bank, while still small continues to show promise with retail deposits now at R5.7bn and advances largely stable at R3.8bn reflecting a conservative lending strategy over the period. The UK Composite delivered a strong performance +36% YoY in GBP and +56% in ZAR. Similarly, the partner composite which includes Ping An Health had a strong operating performance up +65% with total Revenue +62% and new business premiums +31%.
ANH reported their fourth quarter and full year 2020 results on 25 February. They posted a decline in underlying EPS for FY20 of 30.8% to 251 US cents per share. The results were mainly driven by the negative impact of COVID-19 restrictions. While the full year results were discouraging, we note positive signs of a recovery as restrictions are eased across its markets.
EBITDA fell 2.4% to $5.07bn in Q4 above an average market forecast of $4.8bn but was boosted by a tax credit in Brazil. Excluding this, the profit fall was worse than the average 1.0% decline expectations. Organic volumes and organic sales reflect a strong Q4 period where volume grew 1.6%. In Brazil, the company sold 11.9% more beer in Q4 than a year earlier. But in Europe, the Middle East and Africa, beer volumes fell 6% due to lockdowns, though ANH said it did increase market share in France, Germany, and the Netherlands. China grew only marginally, and the US market declined due to a COVID resurgence.
The geographically uneven nature of the rebound and the muted outlook on margins suggest limited upgrades, however, the world’s largest brewer forecast “meaningfully” better 2021 earnings predicting increased drinking and higher prices as countries emerge from the COVID pandemic.
We view ANH as the best in class and a leader in global beer market which offers investors access to high quality, defensive and globally diversified income streams. They benefit from having a broader portfolio in wider markets, better innovative and distribution capabilities compared to its peers. ANH is operated by a highly experienced management team, with a good track record of value creation. The debt reduction initiatives combined with innovation and costs management should support future earnings growth for this business.
Based on our forecasts, ANH is trading on a normalised PE of 15x and a target price of R1 250 is well within range and continues to attract a BUY recommendation for appropriate portfolios.
With the vaccine rollout gaining momentum across the globe, there are glimmers of hope that 2021 may well turn out to be a significant improvement on the hardships many faced in 2020. The first peg is in the ground from a South African investment case perspective, reasonable results. Next stop structural reform and some “light” (pardon the pun) at the end of the tunnel from the rolling challenges facing our SOEs in general and Eskom specifically.