The best and the worst of JSE Top40 index in 2020 thus far

In summary

• Naspers and Prosus combined weighting props up South Africa’s Top40 Index
• Sasol rebounding in wake of turnaround strategy
• Gold is the best performing sector
• SA Inc. (Financials and Industrials) remain under pressure

The below graph highlights the performance of each of the Jse Top40 Index constituents from the close 31 December 2019 to the close of business on the 30^th of June 2020.

Sasol the worst performer

While being the worst performing Jse Top 40 stock in the first quarter of 2020, the share price of Sasol Ltd has rebounded to be the best performer in the second quarter of 2020.

Despite the rebound, Sasol remains the weakest blue-chip counter over the first half of 2020. High levels of debt, cost and time overruns combined with mismanagement of its Lake Charles project have all contributed to the internal reasons for the demise in the company’s value. While battling these internal issues, the macro picture has weighed further as a massive supply glut meets halted demand from a locked down global economy.

The Sasol turnaround strategy is however in full flight. The group has managed to create more balance sheet flexibility with lenders, will retain earnings where possible (i.e. no dividend) and will not embark on further acquisitions until the company has deleveraged itself by reducing net debt sufficiently.

To allow some price stability and protect liquidity in FY21, Sasol has hedged its exposure to the price of oil. The group has also accelerated its asset disposal program to further reduce debt on the groups balance sheet and help focus on core operations and their efficiencies.

The interest in the company’s assets have assumed a diminished prospect of a need to recapitalize through a rights issue which has seen positive sentiment starting to renew among investors.

Naspers and Prosus prop up the Top40 Index

A more than 38% gain in Naspers Ltd and nearly 53% gain in Prosus NV for the first 6 months of 2020 has done well to prop up the JSE Top 40 Index over the period. These two stocks which together account for more than a 25% weighting on the blue-chip index, have shown more than just a resilience to the current pandemic induced market environment.

Naspers

Naspers in its FY20 results saw revenue increase by 23%, in line with the 23% revenue growth in Prosus in which the company has 72.63% holding (after the unbundling in September 2019). Group trading profit added 17% over the period. Naspers is seeing growth in its ecommerce investment now accelerating to better profitability and creating a much-improved cash flow for the business.

Prosus

The 31% Prosus stake in Tencent Holdings has continued to support results for both Naspers and Prosus. Tencent Holdings the Chinese internet giant has managed to track to new all-time highs this year boosting the portfolio of these two companies. Naspers continues to believe that it is ‘well-positioned to navigate the Covid-19 uncertainty ahead’.

Gold miners’ outlook

In terms of sector gains, locally listed gold miners have led list. These companies have benefited from a near 20% gain in the gold price while the rand has weakened by more than 20% against the dollar over the interim period.

While spot prices have been moving in the right direction for companies like AngloGold Ashanti Ltd (ASX), Goldfields and Harmony Gold Mining Co Ltd , upcoming earnings are likely to reflect some output disruption by lockdown measures as well as increased safety costs related to reopening of mines.

Harmony is set to become South Africa’s largest gold producer after it completes the acquisition of AngloGold Ashanti’s South African assets. AngloGold is to exit operations in South Africa and focus on less cost intensive operations in Ghana, Australia and America (north and south).

SA Inc. remains under pressure

Companies whose fortunes are primary linked to that of the South African economy have had an understandably torrid time in 2020. The South African consumer is hard pressed as pre-covid data has shown unemployment to have breached the 30% mark, while GDP continues to contract (Q1 2020).

While well capitalised, local banking counters FirstRand Ltd, Standard Bank Group Ltd, Nedbank Group Ltd and Absa Bank Limited have seen rising impairments from both the retail and corporate banking divisions. Capitec Bank Holdings Ltd would be under threat from the risk of non-performing loans / credit in the retail space. The rising impairments for these counters have been noted in the periods leading into lockdown. In turn it is expected that the levels of non-performing issuances will worsen significantly from the impact of Covid-19.

Most banking counters are now looking to retain earnings by withholding dividend payments and decreasing capex spend. These counters have however discounted heavily in the wake of pandemic fears to levels which might be more attractive to a far-sighted investor.

Industrial counters more specifically local retailers of clothing and apparel with a large bricks and mortar presence in the country have also been amongst the worst hit of the Top40 counters in 2020. Lockdown restrictions have halted and then limited sales activities from the likes of Woolworths and Mr Price (Foschni and Truworths have since fallen out of the Top40 Index).

While food and drug retail has proven to be more defensive and resilient over this period, high volume on low margin goods, coupled with the expense of increase sanitary and safety costs, whilst limiting the higher margin product offerings is unlikely to equate to earnings growth for these counters in the near term.

The weakness in retail which commands a lot of floor space has negatively affected Real Estate Investment Trusts (REITS). Commercial property owners are in a dubious position whereby support for the businesses which rent from them is required by wavering, pausing or reducing rentals while the valuations of these properties is expected to decline in the short to medium term. Growthpoint properties has warned that commercial property values could fall between 10% and 20% over the next two years.