The biggest risk facing listed South African companies is neither the current geopolitical crisis nor a slowing global economy that may result. Instead, the biggest risk to their viability is the scandalous mismanagement of the country’s electricity grid. But are there also some winners in this crisis?
Capital News Africa: From the Trading Floor – Week 42-2022
It’s an intolerable situation: For almost 14 years, South Africa has been suffering from frequent and extremely annoying power outages. Bloomberg reported recently that breakdowns at plants run by state-owned utility Eskom Holdings had reached “unprecedented levels.” The US-based news service added: “The blackouts have caused disruptions countrywide, illustrating the challenges Europe could face as it confronts acute power shortages of its own.”
The consequences of the scandalous mismanagement of the country’s electricity grid are enormous. Farmers sometimes lack the power to run water pumps and hence cultivate their crops. The mobile phone network goes down when there is no power for antennas. Although mobile phone companies like Vodafone’s South African subsidiary Vodacom (ISIN: ZAE000132577) have invested in batteries and generators, the back-up electricity they provide is not always enough to keep the network up. The blackouts are so frequent that the batteries cannot always be fully charged.
Even worse, the power outages have led to an increase in the number of break-ins at homes, offices and factories. Electric security systems can no longer provide the protection needed. Burglars even exploit the blackouts to steal copper cable from the security systems. Such break-ins, in turn, hit South African insurers hard as claims regarding theft rise.
To ameliorate this terrible situation, many companies have acquired diesel generators to keep their businesses running – albeit at a higher cost. Some have also turned to solar energy to lessen their dependence on Eskom. Households, meanwhile, have turned to cooking with gas or coal instead of with electricity. Those that can afford diesel generators to keep the lights on are doing so.
A word about Eskom, the company responsible for South Africa’s unreliable power grid: While the state-owned firm has none of its shares traded on an exchange, some of its bonds are, including in Europe. Eskom produces 95% of South Africa’s electricity – even if the power does not always get where it needs to go. Indeed, Eskom is so big that it accounts for almost half of all electricity production on the continent.
Given the struggles that South Africa’s population faces, it may seem inappropriate to ask which companies are profiting from this terrible situation. But due to the inability of the government to deal with Eskom’s mismanagement, we believe that it is legitimate to look at the alternatives to it.
Sasol (ISIN: ZAE000006896), South Africa’s biggest producer of liquid fuel, gas and synthetic fuels, is one beneficiary from the electricity crisis. Although its share lost 17.3% of its value during the past three months, it has bounced back since the beginning of October, gaining 8% to ZAR 308 (EUR 17.40).
Another beneficiary is Exxaro (ISIN: ZAE000084992), known until 2006 as Kumba Resources. Although the share of this coal and minerals extractor lost 15% in the latter half of September, it too has recovered somewhat, rising almost 5% to ZAR 209 (EUR 11.81). A further coal producer worthy of mention is Thungela Resources, whose share, since January, has climbed 251% to ZAR 297.08 (EUR 16.94). However, Thungela has sank almost 11% since the beginning of October due to strikes in South Africa’s railway network. Investors are concerned about Thungela’s ability to deliver the coal it mines.
Finally, there is Renergen (ISIN: ZAE000202610), an investment company that acquires stakes in companies operating in South Africa’s alternative energy sector. Its share has followed the same trajectory as those of Sasol and Exxaro: While Renergen dropped 28% in September, it has regained 11% of its value recently to trade at ZAR 30 (EUR 1.70).
However, Renergen is planning a capital hike to finance South Africa’s first liquefied natural gas (LNG) project. As Renergen reportedly wants to raise between USD 150 to 200 million (EUR 153 to 205 million) from its investors, the move should depress its share somewhat. Renergen’s market cap is currently ZAR 4 billion (EUR 226 million), so its substantial hike should put its valuation in a new light – provided, of course, that the lights are turned back on in South Africa.