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August 2020: Profits plunge, dividends are scrapped

| Market Forces

The month of August continued the trend of a handful of large tech companies showing phenomenal share price growth. Gold and other resources companies also continued to be lifted by the tide of strong commodity prices. Other sectors are still sailing against the wind, though, and several South African companies reported dramatic profit declines or outright losses.

US-China tensions continue
Early in August, Microsoft added 5% to its share price in one day after confirming that it is in discussions to buy booming social media platform TikTok in the US. A few days later, the US banned its residents from doing business with WeChat, wiping out $46 billion from holding company Tencent’s market value. The US president’s executive order also applied to ByteDance’s TikTok, raising concerns around the weakening US-China relationship and its impact on companies, economies and markets. Despite these upheavals, Tencent reported a profit exceeding even the highest analyst estimate, with net income increasing to 33.1 billion yuan.

Apple tops $2 trillion
Wall Street experienced a historic moment during August when Apple’s market value surged past $2 trillion, a first for any US company. This confirms Apple’s position as the most valuable company in the world currently. Saudi Aramco briefly had a $2 trillion valuation in December, but the shares of Saudi Arabia’s national oil company dropped along with the oil price decline of 2020 and its market cap is currently around $1.8 trillion.

UK job losses at 10-year high, economy in recession
Looking at the economic data that was released during August, it appears that the UK economy was particularly hard hit by the coronavirus lockdown. The country posted a 20.4% contraction in the second quarter, a record slump, after a 2.2% drop in the first three months of the year, officially placing Britain into its first recession since 2009. The number of people working in Britain fell by 220 000 in the three months to June, the biggest decline since 2009.

Japan GDP growth worst in 40 years
The world’s third-largest economy, Japan, saw its economy contracting by an annualised 27.8% in the three months to June, the biggest decline since comparable data became available in 1980.

Large global corporates feel the crunch
Two examples of international companies that saw their profits annihilated due to global lockdowns were BP and Toyota Motor Corp. BP cut its dividend for the first time in a decade after reporting a record $6.7 billion loss in the second quarter. Toyota posted a 98% drop in its first-quarter operating profit as the pandemic halved its global sales.

SA retail sales down substantially
Even though government has slowly been lifting lockdown restrictions, sales in South Africa are slow to pick up. According to Statistics SA, annual retail sales for June declined by 7.5% compared to the same month last year. Retail sales for the full second quarter of the year were down 22.8%, compared to the same quarter last year.

SA miners are having a field day
Some good news for 2020 is that SA miners are reporting phenomenal increases in their profits. Gold Fields announced that its half-year profits could rise by more than 300%, thanks mostly to an increase in global gold prices. Impala Platinum too flagged a more than 300% surge in annual earnings, due to an increase in metal prices and a weaker rand.

Alcohol prohibition halts investment
South African Breweries (SAB) announced during August that it is cancelling R5 billion of planned investments because of the revenue losses it had suffered due to the ban on alcohol sales. Glass manufacturer Consol also suspended the building of a R1.5 billion production plant in South Africa and Heineken confirmed that it had ceased work on a R6 billion brewery.

SA companies suffer substantial losses
The once giant South African fuel company Sasol lost R91 billion for the year to June. It announced about R112 billion in impairment charges, exceeding its market capitalisation at the time of the announcement. Financial services company Liberty reported an interim headline loss of R2.2 billion as it prepares for more death claims related to Covid-19. RCL Foods reported an annual loss reflecting a R1.5 billion impairment on its assets. Massmart, the owner of Game in South Africa, is expecting losses in headline earnings of between R1 billion and R1.1 billion for the period ending 28 June 2020. It lost approximately R2.3 billion in liquor sales in March and April. Sun International announced that it is planning to cut 3 300 jobs in South Africa and Chile as part of a restructuring plan to survive the pandemic, which took the firm into a half-year headline loss of R885 million.

Many SA businesses see large drop in profits, cuts dividends
Pick n Pay flagged a more than 50% fall in first-half earnings, due to restrictions on alcohol, tobacco and clothing sales during the lockdown, and the impact of voluntary severance payments. Glencore scrapped its dividend to focus on lowering debt as the pandemic forced it to book a $3.2 billion impairment charge. Standard Bank announced a drop in its half-year profits of 43%. Nedbank said that its headline earnings per share for the half-year that ended June would fall between 67% and 72% from the same period last year. Absa’s headline earnings declined 93% for the first half of 2020 and the group will not be paying an interim dividend.

World stocks continue their run in August
August was a strong month for most global stock market indices, led by large technology stocks. The MSCI World gained 6.1% in rand terms for the month, while – in contrast – our local stock market as measured by the FTSE/JSE All Share Index (ALSI) lost 0.3% on a total return basis. The battered Travel and Leisure sub-sector recovered by 8.1% during the months, but is still down 59.3% year-to-date. During August, SA bonds (ALBI) gained 0.89% and cash (STeFI) returned 0.39%. The beleaguered listed property sector (SAPY) lost another 8.6% during the month. The rand strengthened 0.5% against the US dollar and weakened 0.6% against the euro.

Year-to-date, resources companies are being lifted by strong commodities tide
Year-to-date, the ALSI has lost 0.9% on a total return basis, hiding the large disparity in returns from different sectors. Basic Materials have benefited from strong commodity prices and have returned 16.0% year-to-date, but Industrials and Financials are down an unsettling 34.0% and 34.3% respectively. Things look even worse for the listed property index, which returned -44.7% over the same period. The ALBI returned 1.87%, and cash returned 4.02%. Year-to-date the rand has weakened by 21.2% against the dollar and 29.1% against the euro. The MSCI World Index has delivered a total return of 27.6% in rand terms year-to-date.

Over five years, Basic Materials best performer
For the five years to 31 August 2020, the ALSI returned 5.3% annualised. Among the JSE’s main sectors, Basic Materials came out top with 17.8% per year, while Industrials and Financials lost 7.9% and 6.1% per year respectively. Listed property (the SAPY) returned -12.2% annualised, meaning that investors in this index would have lost more than 60% of their investment’s value over the past five years. The ALBI and cash returned 7.6% and 7.1% respectively. The MSCI World Index gave South African investors a 16.0% p.a. total return in rand terms. Consumer inflation averaged 4.6% per year over the past five years to 31 August 2020.

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