3 Emerging Market Trends for Investors 🌎

With the first few weeks of 2023 behind us, there have been some significant themes emerging in the market. Telcos are under pressure from load shedding, retailers are reporting wildly different results depending on their strategies and Netflix is showing signs of life!

Tough times for telcos

Eskom has announced “permanent load shedding” for South Africa, which is what all of us feared was coming. At least this provides some clarity to businesses and allows them to plan, with the telcos (like MTN and Vodacom) needing to do some serious thinking around energy backup solutions for their towers.

MTN’s share price has managed to increase 3.4% year-to-date, although it remains down more than 18% over the past year. Vodacom is down 2.6% thus far in 2023 and has dropped 11% in the past year. Clearly, this isn’t the easiest sector in which to make money.

In a pre-close update in December, MTN laid out a plan for load shedding that includes a combination of generators, batteries and added security. This doesn’t come cheap, mirroring a story that we are seeing play out at Vodacom, where free cash flow came under immense pressure in the last reported period.

To help fund this investment, MTN will need to keep upstreaming cash from its African subsidiaries. This has always been a focus area at MTN rather than Vodacom, as the latter’s African investments tend to be in less risky regions. MTN managed to upstream R17.3 billion in dividends and management fees in the 11 months to November 2022. The cash position is strong, but issues like a significant tax dispute in Ghana are a constant reminder that Africa can be volatile.

I continue to hold my MTN stake, although I think it might take a while to give me the outcome I’m hoping for. In my view, Vodacom looks expensive.

MTN Group Limited 

A tale of two retailers.

It’s quite something to compare Mr Price and Woolworths at the moment, with festive season updates from the companies painting vastly different pictures.

At Woolworths, we have a management team that is delivering a strong turnaround in the Fashion Beauty Home (FBH) segment, where sales were up 11.2% in the 26 weeks ended 25 December 2022. Volumes grew despite such high inflation, with price increases of 10.8% in that segment. The most interesting part of the strategy is that trading space is being reduced, so the group is effectively shrinking into a better business in terms of actual floor space.

In Woolworths Food, competitive pressures are clear, as price increases of only 6.8% were put through vs. underlying food inflation of 8.4%. This is a feather in the cap of Checkers, as we all know that Checkers has been putting a lot of pressure on Woolworths and has taken a bite out of the high-LSM customer base.

Overall, Woolworths is trading strongly and the share price is already up 12% this year, adding to a wonderful 2022 that has seen the share price climb 50% in the past 12 months.

In stark contrast, Mr Price is really struggling in its core business. The acquisitions are doing quite well, with the likes of Yuppiechef and Power Fashion reporting double digit sales growth. Studio 88 is a critical acquisition for Mr Price, taking the group into a more upmarket setting where it will battle against some of the offerings from The Foschini Group. None of this can offset a tough situation in Mr Price’s traditional business, as the growth rate excluding Studio 88 was a sad 1.2% over the festive season. That number includes Yuppiechef and Power Fashion, so Mr Price itself is doing even worse.

With cash sales up just 0.6%, one might assume that consumers are under huge pressure and the economy is dead in the water. Aside from Woolworths, another clue that problems might be more to do with Mr Price and less to do with the economy is that Attacq reported very strong sales and footcount growth at its retail centres and especially Mall of Africa.

Mr Price needs to find a way to resonate with customers again, before it is too late.

Mr Price Group Limited and Woolworths Holdings Limited 

Netflix has bounced – will it last?

Netflix’s share price is up around 16% this year, which means the last 12 months have only seen a drop of 11.5%. The volatility along the way has been breathtaking though, with a 52-week high of $458.48 and a 52-week low of $162.71.

As always, content is what matters in this game. Netflix needs to keep delivering top quality content to justify subscriptions, so the success of Wednesday and Harry & Meghan helped. Paid memberships now exceed 230 million, with a very strong quarter of 7.66 million paid net additions.

Founder Reed Hastings has transitioned into the Executive Chairman role. There are now unfortunately two co-CEOs, which is almost never a good idea. Investors will keep a close eye on the succession story.

As tempting as it may be to think that the departure of Hastings has been the catalyst for a share price move, the obvious explanation is the growth in subscriber numbers. If the company adjusts for the huge swings in the dollar over the past couple of years, operating margin from FY20 to FY22 has been quite consistent, ranging from 19.9% to 21.6%. 

Can Netflix keep this up? Q4 does seem to have been a golden period of content for Netflix, so investors should be wary of buying after a jump like this. If the next quarter disappoints, those gains will evaporate. On the plus side, it shows that Netflix can still achieve proper growth numbers by resonating with customers, a critically important point as the company moves forward with a password sharing crackdown.

Netflix Inc

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Sources – EasyResearch, Finance Ghost.

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