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A busy day on the financial results front: Chris Gilmour – Absa Wealth & Investment Management

Delta’s high-growth strategy yields positive results.

SIKI MGABADELI: Good evening and welcome to the SAfm Market Update with Moneyweb. My name is Siki Mgabadeli.
    A busy day on the financial results front today. We are speaking to Famous Brands. You’ll know they own restaurants like Wimpy, Tasha’s and Steers. They reported a 16% rise in revenue, and also opened a record number of new restaurants across their brand portfolio to the February year-end.
    Meanwhile, Tongaat Hulett says their operating profit declined by 12% in the year to March 31.
    We are also going to be speaking to direct retail group Verimark. They saw a drop in revenue from their continuing operations during the period for which they are reporting.
    Chris Gilmour of Absa Wealth and Investment Management is watching the markets for us today.
    And, looking at those markets, a pretty quiet day. We had public holidays in the UK – a bank holiday – and also the US in holiday mode. So you know what happens. All our dual-listed stocks see very little action and then of course that means that our market sees very little action as well.
    The all-share was down about 0.1%, at 53 985. The Top 40 was also flat to negative.  The rand is trading at R11.93/dollar, R18.43/pound and R13.10/euro. Gold is at $1 206.06/oz, platinum at $1 148.56/oz and Brent crude oil at R65.43/barrel, creeping down yet again.
    Hi, Chris. I guess it’s a very strange day, very busy locally with a lot of companies coming out with results today. But of course without those volumes and the momentum from overseas markets we do see a bit of slowness.

CHRIS GILMOUR:  You are right. Look, I think what we are also seeing is the backwash from what happened in the US on Friday. We got an interesting set of CPI figures coming out of the US. We also had Janet Yellen talking – I think it was on Rhode Island – and saying that, contrary to what most people had thought she was going to say, we probably are going to start seeing interest-rate hikes in the US as the year progresses. Again, she wouldn’t be drawn on exact timing. But I think that made the dollar go stronger – and you just mentioned there the cross-rates, the rand definitely weaker against the dollar. Interestingly, not as weak against some of the other currencies like the pound and the euro, for example.
    And then of course this week is going to be fascinating because we are going to get GDP figures coming out. Notably in South Africa at 10:30 tomorrow we get first-quarter GDP and that will give us an indication of just how much damage has been wreaked on the economy by Eskom. And of course, as the week progresses, we’ll also get US first-quarter GDP. I don’t think we get too excited about that.
    But we are getting a lot of data, both on the economic front and on the company front, and it gives guys like me an awful lot to digest.

SIKI MGABADELI:  And of course talking about load-shedding, that is a scene that is coming through across lots of the results that we’ve seen from companies. The impact is quite direct.

CHRIS GILMOUR:  Ja. Every single one today mentioned the impact of load-shedding. So I think if we see a broad economic figure for Q1 GDP that says the Eskom situation hasn’t been having much effect, than it’s probably not capturing what’s really going on out there in the real world.
    So, for example, talking to Famous Brands today, I asked what portion of their outlets would have generator capacity, and they reckon maybe about 30% – and it’s growing. The same thing with Spur. I spoke to Pierre van Tonder a few months ago about that. If you talk to Verimark, the same type of thing. So I think all retailers are having to contend in a big way with the impact of power outages and any benefit that many of them would have had earlier in the year from the lower oil price has been more than negated in terms of the sheer cost of trying to maintain their operations in the face of rolling blackouts.

SIKI MGABADELI:  All right, let’s have a look at some of the results. We are going to be speaking to Michael van Straaten, CEO of Verimark a little later on the programme, and we have already spoken to Kevin Hedderwick at Famous Brands. We are going to play you that interview in a few minutes’ time. Doing well, but they had to pull out of India – again.

CHRIS GILMOUR:  India – that’s a hideously difficult country in which to do business. SAB kind of manages it there, Shoprite had to leave it. So India’s a very, very difficult indeed place to do business. But if you look at the rest of Africa, it’s relatively small but that’s chugging along quite nicely. Profit margins there are static compared to last year. It had a little bit of a hiccup in some of the areas, but nevertheless is still looking very good. Overall you make very, very good profit margins in the rest of Africa, and if you look at the operation in the UK, the Wimpy operation, which they were criticised for going into a few years ago, now that appears to have turned. And then across the board I think a total operating profit margin of 20.5%. That really is quite phenomenal. This is a company that is quality throughout, and it’s incredibly consistent. I think that bears testimony to the fact that they’ve got such a huge diversity of different types of outlets, and maybe if one’s not doing quite so well, the other one is doing extremely well. And there is a very small amount of cannibalisation between the different types of bands.

SIKI MGABADELI:  You also had a look at Rhodes Foods.

CHRIS GILMOUR:  Ja. That’s an interesting one. That was listed back at the end of last year. When it came onto the market it was trading about R13, and a lot of people said wow, it’s kind of expensive. Well, in the intervening period it has been a high as R21, R22. It’s currently a little less than R20. It’s in very rarefied territory, round about 40 times PE. They supply to Woolies, they do a lot of exports. It’s quality, quality food, and it’s a nice split between long-life and fresh. So I think if you look at the kind of balance this company has got, it has a lot of balance between those different types of food, between the kind of outlets they go for. They suffered a little bit of a loss in the US operations because of a packaging loss, R8.5m. But look, they’ll probably recoup that on the insurance front – that’s not a huge nightmare for them. And I think as the year progresses it has become very much a favourite among analysts who cover the food sector, and it’s gaining popularity all the time. But very much priced for precision at 40 times p/e. You can’t afford to make too many mistakes.

SIKI MGABADELI:  Goodness. We also spoke – and I’m going to play a clip in a moment – to specialist black-managed and black-owned property fund, Delta Property Fund. They went and changed their capital structure, converted to real estate investment trust status – so that’s of course very good for their shareholders. And then of course for them as well to be able to attract, I suppose, international shareholders. Earlier we spoke to Sandile Nomvete, who is CEO, and this is what he had to say.

SANDILE NOMVETE: It’s been an extremely challenging year. It’s been a year of consolidation for us. I think we’ve been very much focused internally on getting our efficiencies correct. If you mention a figure of 23.7% by which we manage to grow our portfolio from R6.9bn to R8.4bn, this is understated given that when we listed in November 2012 we came onto the market with a portfolio of R2,1bn. So as we grow bigger the base from which we are coming is obviously stabilising and we are obviously focusing more on cost-to-income ratios, which have slightly gone up. We basically are looking at our average rent per square metre. Historically we’ve had an average rent per square metre of just over R105/sq m. That has dropped slightly this year to R95.84.
    Now, just going forward we obviously have been very, very cautious and conservative in terms of our estimate in terms of our targeted growth. We are basically giving the market an 8% target in terms of the growth in distribution. This number, I must just add, Siki, does not include any potential new acquisitions or any movement in the rand vis à vis the dollar-based Delta International that we have a 35% shareholding in.

SIKI MGABADELI:  That was Sandile Nomvete, CEO of Delta property Fund. For the full discussion click here.

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