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SA Budget takes a backseat, US reporting season, and more

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Anthea Gardner

The biggest news last week was NOT the SA Budget 2020… Although that was quite a surprise.

Stocks tumbled for a 7th consecutive day on Friday, with the S&P 500 index falling about 0.8%, bringing its loss for the week to about 11.5%, the worst weekly decline for stocks since the 2008 Global Financial Crisis (GFC). The local market started the week with a 4.5% sell-off, something we haven’t seen since December 2008… All because of Coronavirus fears and news agencies now calling it a Pandemic (notice that the WHO, World Health Organisation, are still not calling it a pandemic). It was. In early October that year, the S&P 500 fell about 18 percent.

It is estimated by S&P and Dow Jones that the market sell-off erased $6 trillion of market value, and the rush to safe haven assets saw Gold spiking and the 10-year US Treasury yield reaching 1.35% after being at 1.8% a couple of weeks before. Brent Crude dropped below $50/bbl, but has since recovered.

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US reporting season has all but finished now, and it’s a shame the market has sold off despite fourth-quarter profit growth for S&P 500 companies coming in at 3.1%, and if we exclude the energy sector, the growth rate was 6.0%.

Locally, Sasol reported results for the 6 months ended 31 December 2019 last Monday. The combination of weak oil and chemicals prices and heavy Lake Charles Chemical Project capex spending continued to pressure the balance sheet. Gearing is now at 65% and Net debt / EBITDA is at 2.9x (very close to the 3.0x guidance they had previously given). Unsurprisingly, the dividend has been cut for this period and a final dividend is very unlikely.

The share is cheap if one assumes a relatively normal environment for oil and chemicals prices and that Sasol should be able to generate R30 HEPS in FY2021. At R200 share price, that is 6.7x multiple on FY21 earnings and relatively cheap compared to where the share has historically traded, closer to 18x PE Ratio.

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Assore also reported its results for the 6 months ended December 2019. Assore has a 50% interest in Assmang alongside African Rainbow Minerals (ARI), which contributes the majority of Assore’s earnings. Unfortunately, earnings at Assmang were down 14% for the period; while Assore operations outside of Assmang were down 68% for the period.

Assore is currently battling commodity price headwinds. The share trades at a low earnings multiple of c. 5x but still does not appear attractive as commodity price headwinds seem likely to persist in the short-term.

BHP Billiton, alongside Anglo American, probably reported the best set of results out of the JSE-listed diversified miners; despite BHP Billiton having no help from any platinum group metal (PGM) exposure, which Anglo had over the six months.

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Free cash flow was down over the period due to higher capex but underlying cash generation remains good (net operating cash flows: +10%) and the improvement was mostly driven by iron ore. Iron ore volumes were up 2% over the period but prices were 41% higher as the market continues to be tight following Vale’s 2019 dam incident. Net debt / EBITDA sits at a comfortable 0.5x on an annualized basis.

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The market's reaction to Shoprite's results were initially positive (it was up 10% at one point) but global negative sentiment took hold and it finished the day 2% lower. It appears to be a very messy set of numbers with Hyperfinflation account IFRS16 causing some mayhem; but under proper scrutiny it was a reasonably strong result and it is nice to see a South African company growing at double digits (HEPS grew by 15.7% even if it is from a low base and with a lot of accounting funnies.

Their SA Supermarkets performed very well especially relative to competitors, while the Rest of Africa is still a struggle and loss making. At R100 a share and trading on a 14x forward PE, this quality retailer with a dominant footprint in many African countries would seem to be a good value.

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Anthea Gardner

Any opinions, news, research, reports, analyses, prices, or other information contained within this research is provided by Anthea Gardner,  founder of Cartesian Capital (Pty) Ltd as general market commentary, and does not constitute investment advice for the purposes of the Financial Advisory and Intermediary Services Act, 2002. First World Trader (Pty) Ltd t/a EasyEquities (“EasyEquities”) does not warrant the correctness, accuracy, timeliness, reliability or completeness of any information (i) contained within this research and (ii) received from third party data providers. You must rely solely upon your own judgment in all aspects of your investment and/or trading decisions and all investments and/or trades are made at your own risk. EasyEquities (including any of their employees) will not accept any liability for any direct or indirect loss or damage, including without limitation, any loss of profit, which may arise directly or indirectly from use of or reliance on the market commentary. The content contained within is subject to change at any time without notice.