Wednesday, September 23, 2020

Will the BSEL turn the thin red line THICK before year-end?

BY PORTIA NKANI

The local bourse is on its way to a three year long bear run with cumulative losses on the Domestic Company Index (DCI) from 2016 amounting to 28.6 percent as at the end of third quarter (Q3) of 2018.

There has however been an overall positive earnings season, and a number of counters seem to offer value.

With the positive macroeconomic outlook stemming from a recovery in mining, the projected accommodative monetary conditions, expected increase in fiscal stimulus going into the 2019 election year, and increased business confidence, the outlook for the economy is much improved. This is according to Stockbrokers Botswana firm.

The firm’s Research Analyst, Donald Motsomi shared in his research that, “sluggish formal employment and wage growth will however likely remain a challenge for the local operations of our listed entities. Given all the aforementioned factors, we anticipate to be at or near the end of the bear run; the market should be poised to bounce back in 2019.”

Looking on the counters, Sefalana delivered an excellent set of numbers for their full year reporting period underpinned by increased non-core income and the group’s preference share investment in the South African (SA) consortium. Revenue grew 12 percent to P4.79 billion from P4.27 billion in 2017; however gross profit declined 1 percent to P294.5 million from 2017’s P296.8 million as a result of continued pressure on margins on the local FMCG operations.

Other income and gains, mainly comprising of commission from the Botswana Railways contract, rental income, higher forex and investment property revaluation gains led to a 14 percent increase in EBITA to P198.6 million P173.5 million in the previous reporting period.

On a positive note, Sefalana is making gradual progress in its regional diversification. What is left to be seen is further progress in this regard so as to reduce the impact of local FMCG operations on margins.

Choppies brought the market to its knees, following failure to release its financial results within the stipulated time and announcements which brought about much uncertainty around the quality of the group’s financial statements.

The biggest retailer which was this week suspended from the Botswana Stock Exchange Limited (BSEL) had previously given guidance that it has reasonable certainty that its full year profit after tax will be at least 20 percent lower than its prior year’s profit attributed to adverse trading conditions in South Africa, Mozambique, and East Africa and a material increase in inventory losses identified through improved stock count procedures.

Reassessments of multiple past accounting practices and policies are ongoing. The researcher’s prediction is that, possible restatements of prior financial periods and accounting for transactions still being verified may further impact results. Furthermore, the group has stated it has sought independent verification and expert legal analyses regarding the Zimbabwe subsidiary shareholder dispute and certain acquisitions completed by the South African subsidiary over the 2017 and 2018 financial years.

“This is quite the conundrum and has us questioning if and how aggressive Choppies accounting practices have been. Investors are highly averse to such levels of uncertainty, which was reflected in the punishment of the group’s share price, as it tanked 76 percent on the last trading day of the quarter, which had brought the DCI below 8000 points to its lowest level since March 2013,” atleast according to Motsomi’s research observations.

On the property counters RDCP and Letlole saw increases in profits, while FPC results were sharply lower owing to negative investment property fair value adjustments. RDCP and Letlole both made good progress on their diversification drives.

RDCP revenue rose 51 percent to P66.5 million from P 43.9million in 2017, while net profit was up 26 percent to P35.6 million.

The company’s strong performance was underpinned by its South African Capitalgro portfolio. During the reporting period, RDCP partially funded Capitalgro’s acquisition of the Edge building, an 11, 132 sqm commercial property via participation in a rights issue, which saw its shareholding increase from 35 percent to 63 percent. South Africa is set to be of increasing importance to RDCP with management indicating that there are further investments being considered by Capitalgro. Further, multiple regional developments plans are underway.

Letlole’s contractual revenue increased 10 percent to P80.9 million P73.3 million in 2017 on the back of annual escalations upon renewal of leases.

The company’s acquisition of the Watershed Piazza retail property was concluded towards the end of their financial year. The revenue impact will be fully reflected in the current financial year, the property is estimated to add BWP12 million to the top line. Letlole is currently trading under cautionary with regards to potential property acquisitions.

With FPC, the revenue increased 11 percent to P134.8 million P121.8 million in 2017. Net income from operations was 6 percent higher to P82.4 million.

Sechaba’s financial performance continued to be hampered by the regulatory environment.  What is however encouraging in the half year results was an 8 percent increase in KBL volumes indicating growing demand. All categories registered an increase save for opaque beer. KBL profit before tax rose 10 percent to P104.7 million from P95.4 million in the previous reporting period, however profit after tax fell 14 percent to P75.7 million due to increased alcohol levy and an additional deferred tax charge.

Following a prolonged period of uncertainty stemming from The Coca-Cola Company’s notification to acquire the sparkling soft drinks business segment of KBL, and extreme pressure on profitability from the regulatory environment, Sechaba’s outlook has greatly improved.

Shareholder approval of the related party transaction between Sechaba and AB InBev Africa BV will result in Sechaba shareholders (excluding AB InBev Africa BV) effectively retaining their financial interest in the sparkling soft drinks business. A further positive development was the new political dispensation’s decision to reduce the alcohol levy to 35 percent, which researchers say should translate to increased profitability for the brewer going forth.

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