NEWS ANALYSIS: Diversified companies show how to cope in adverse times
A LACKLUSTRE economy, low commodity prices and high electricity costs pushed foreign direct investment (FDI) in SA down 69% to $1.8bn in 2015, the latest UN Conference on Trade and Development world investment report shows. Add dismal first-quarter 2016 job data from Statistics SA, and the International Monetary Fund’s (IMF’s) forecast of 0.1% growth this year, and Treasury’s claim the economy is not as sick as the IMF suggests, rings a bit hollow.
But amid ructions such as the minerals commodities rout, regional drought and Brexit, not all industry sectors and companies respond equally. Sectorally and geographically diversified companies appear better equipped to handle adversity.
The performance of Barloworld’s Russian equipment business, which serves mining and forestry interests in remote regions of the country, was the highlight of its results in the six months to March.
"While trading conditions remain challenging in certain of our businesses, the ... diversity of the group’s operations is providing some resilience through the cycle," says CEO Clive Thomson.
But SA’s volatile currency means domestic companies have to box smart in the global economy. Meanwhile, poor industrial relations and certain government policy demands add heavily to economic uncertainty.
There are also electricity outages, above-inflation wage increases, and some of the highest port tariffs in the world. Along with deteriorating municipal infrastructure, this has helped push sectors from metals and engineering, to construction and mining, into the doldrums.
Africa’s GDP growth has become much leaner since the most recent minerals commodities rout. With Nenegate, and now Brexit, the economic peaks and troughs may become even more acute.
But diversified industrial companies have coping strategies and revenue flows that help mitigate the fallout.
Construction and engineering firm Group Five has annuity income from toll concessions in Poland and Hungary, while Mondi’s world-class packaging and paper assets are mainly in central and eastern Europe, making the company globally highly competitive.
Hudaco Industries, which specialises in the importation and distribution of branded automotive, industrial and electrical products into southern Africa, saw operating profit plunge 15.8% in the six months to May amid "exceedingly difficult economic circumstances".
However, recently, the company has reduced its dependence on the mining and manufacturing sectors by further diversifying into the automotive after-market, power tool and security industry goods.
Research undertaken for the Manufacturing Circle shows overall manufacturing is doing better than it did a year ago. Based on market capitalisation, number of employees and net incomes of 14 large South African manufacturers, the data show that in 2010, the aggregate market capitalisation of these companies was R435bn, rising to R902bn in 2015.
Total employment numbers in these firms rose from 142,000 in 2010 to more than 205,000 last year. Overall net income for these companies shot up from R29bn to R49bn in the period.
Despite an "extremely tough economic environment", chemicals group Omnia ended the year to March with an ungeared balance sheet. CEO Rod Humphris says stringent capital management helped make this happen. He also says the group is well-diversified geographically and across the agriculture, mining and chemicals sectors.
Packaging maker Nampak’s operations in the rest of Africa now account for 47% of group trading profit, up from 38% last year. While its big beverage can production lines in Nigeria and Angola have been hit by foreign exchange losses, margins are much higher on the continent than in SA, boosted by revenue growth of 30% in the interim period to March from the period last year.
CEO Andre de Ruyter says the group’s foray into Africa has been vindicated.
In future, the group will focus on gearing levels as a key strategic objective in respect of volatile exchange rates.
In the year ended-March, Tongaat Hulett turned in record results for its value-added starch and glucose operations and its property-development business, as core sugar output withered in severe drought conditions in KwaZulu-Natal and poor growing conditions in Mozambique and Zimbabwe.
CEO Peter Staude says the group is "intensively" a sugar company that goes through "swings and roundabouts".