Frequent power outages have weighed heavily on the South African economy. To improve the situation, the government in Pretoria has decided to absorb up to two-thirds of the debt that national power company Eskom is struggling with.
US-based credit rating agency Moody’s welcomes the government’s move, but we are far more sceptical. As a result of the debt absorption, Moody’s is considering lifting the rating of Eskom’s outstanding bonds. Prior to the move, Moody’s had put Eskom’s bonds deep in junk territory, rating them at Caa1 or Caa2 depending on their maturities. Now Moody’s has changed the outlook for Eskom’s bonds to “positive” from “negative.” It said in a statement that it “recognises the commitment to address Eskom's unsustainable capital structure."
We, on the other hand, would like to consider the effect the government’s move has not just on Eskom, but on the South African economy as a whole. It’s clear to us that President Cyril Ramaphosa is admitting to international financial markets that the South African government is at a loss on how to fix Eskom and has decided on the convenient, short-term solution of nationalising its debt. We would much prefer that the government privatise Eskom via a listing on the Johannesburg Stock Exchange.
Another concern of ours is that the government in Pretoria wants to solve its political and economic problems, including those related to Eskom, by simply borrowing more money. To really get South Africa back on track, painful structural reforms are needed, including, in our view, an overhaul and privatisation of Eskom. But it’s clear that the government, led by the African National Congress (ANC), does not want to anger its political base of ANC voters.
According to the International Monetary Fund (IMF), South Africa’s national debt totals USD 130 billion or 82.8% of GDP. Although that level is significant enough, it would not be problematic if Pretoria increased borrowing to fund investments in infrastructure. Yet as Eskom reflects, that is clearly not the case. Instead, the government is rescuing the company from a crisis caused by incompetent management.
Still, the rating agency Fitch does not share our concerns. Despite the added strain on the national budget, Fitch has maintained South Africa’s local and foreign currency credit ratings unchanged at BB+. This is one notch below investment grade. Fitch further puts the outlook for the debt as “stable.”
Investors are switching to defensive stocks as the central banks for the US and the euro zone raise interest rates to combat inflation. Investors hope that these stocks can shield them from the current market volatility caused by the central banks’ actions. This is because defensive stocks like those from the utility, chemical, pharmaceutical, and consumer staple sectors have historically offered more stable prices and higher dividends.
There are also several defensive stocks to be found in Africa. One is Nigerian telecom operator MTN Nigeria (ISIN: NGMTNN000002, USD 9 billion market cap). Although MTN’s share has had zero performance between January and October, this is not that bad given the severe market correction in the period. It should be noted, however, that the share is down 27.2% if the May to October timeframe is taken into account.
Nevertheless, MTN’s share is currently trading at NGN 196 (EUR 0.4539) while offering a dividend yield of 9.6% based on the expected 2023 earnings. MTN’s price-to-earnings (P/E) ratio, at 8.7 times the estimated 2023 result, may also reflect an attractive valuation for the share.
Another defensive stock is Vodacom (ISIN: ZAE000132577, market cap USD 11.8 billion), Vodafone’s telecom subsidiary in South Africa. Its share is down a net 6.1% so far this year after losing 28.2% since April. Vodacom has rebounded a bit since the end of October, gaining 8%. The telecom company offers a dividend yield of 6.6% yield based on the estimated earnings for the financial year 2024 that will start in March 2023. Its P/E ratio stands at 11.5.
Meanwhile, Swiss food giant Nestlé has two subsidiaries in Africa that are publicly traded. One is Nestlé Côte d’Ivoire (ISIN: CI0000000295), whose dividend yield is 18.6% and Nestlé Nigeria (ISIN: NGNESTLE0006), which offers a 5.4% yield. Nestlé Côte d’Ivoire is up 38% so far this year, but this figure belies that fact that the share may have lost momentum. For the share price has fallen by 10% in the past four weeks. Shares in Nestlé Nigeria are down 22% since January and may lose further ground. But again, we do not recommend any particular stocks. This comment was merely intended to show that Africa offers investors looking for defensive stocks plenty of choice.
Do you remember? Last week, we reported on a surprising jump in Sucrivoire shares (ISIN: CI0000002028). Now, shares in Sucrivoire’s sister company, Société Africaine des Plantations d’Hévéas (Acronym: SAPH CI, ISIN: CI0000000196) are also jumping. SAPH CI’s share price has risen 7.3% to XOF 5420 (EUR 8.26) in the five last trading days on the BRVM stock exchange in Abidjan.
Sucrivoire and SAPH CI have the same big shareholder, namely Ivorian holding company Sifca which is owned by the businessman Jean-Louis Bouillon. Sucrivoire is one of the main sugar producers in the region. SAPH CI specialises in natural rubber sold as compact granulated rubber and centrifuged latex. To supply these goods, SAPH CI operates approximately 23,400 hectares of rubber plantations in the Ivory Coast.
The upward trend in SAPF CI’s shares is mainly driven by financial results. In the first nine months of 2022, the company’s sales increased by 13.8% to XOF 169 billion (EUR 257.6 million). Its net income rose 12.8% to XOF 14.6 billion (EUR 22.3 million). Impressive.
In late September, we wrote about the good performance of African bank stocks this year. However, investors should have a close look at each bank. For example, CRDB Bank (ISIN: TZ1996100305) posted TZS 235.6 billion (EUR 102 million) in interest income – an 18% hike compared with the year earlier period. Net income at CRDB rose 5% year-on-year to TZS 82.5 billion (EUR 36 million). NMB increased its interest income by 14.9% to TZS 240.4 billion (EUR 104 million) and net income by 53% to TZS 115.8 billion (EUR 50 million).
However, the market did not react at all to the banks’ respectable earnings for the third quarter. NMB’s share price remained frozen last week at TZS 2820 (EUR 1.22) and CRDB’s at TZS 380 (EUR 0.16). We believe that investors are not happy with another key statistic – namely that the non-performing loans (NPLs) on CRDB’s balance sheet rose 22% in the third quarter. They now amount to TZS 206.5 billion (EUR 90 million), or 88% of the bank’s interest income. We don't want to be prophets of doom. But it is correct that investors are paying close attention to the NPL figures among African banking stocks.