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Transnet looks to diversify earnings

As demand for commodity exports slows, opportunity lies in other rail freight – Siyabonga Gama, CEO – Transnet

HANNA ZIADY: State-owned ports and rail operator Transnet today posted modest growth in revenue and earnings off the back of lower coal and iron ore export volumes and a weaker global and domestic economy. The company grew revenue 1.7% to R62.2 billion for the year to March. Earnings before interest, tax, depreciation, amortisation, Ebitda –effectively a measure of operating earnings – increased 2.6% to R26.3 billion.

Siyabonga Gama is the group chief executive of Transnet and he joins us now. Siyabonga, thanks for your time today. Depressed demand for commodities certainly hurt Transnet’s top line growth. What does this mean for revenue streams going forward?

SIYABONGA GAMA: Yes, Hanna, we’re coming off subdued economic growth and we’ve seen quite a lot of commodity declines over the past year. As a result of the commodity decline there’s been subdued economic growth and therefore demand, especially for mining commodities, did come down and a lot of people that were supposed to make investments have deferred their investments and have really been working on trying to lower their cost base so that they can continue to sustain their businesses going forward.

HANNA ZIADY: Now Transnet plans to spend between R340 billion and R380 billion over the next ten years as part of its market demand strategy. The MDS will see an expansion in rail, ports and pipeline infrastructure. Can South Africans look forward to seeing more goods being transported by rail in South Africa – the implication being fewer large trucks on our roads?

SIYABONGA GAMA: Yes absolutely. The investments that we are making have now made R124 billion over the past four years of the MDS programme and with the R340 billion to R380 billion capital investment we will have spent over the next ten years just over half a trillion rand. And particularly telling where we are now investing is in the general freight business, which is largely all being non-mining sorts of businesses.

We’re looking at FMCG [fast-moving consumer goods], we’re looking at the manufacturing sector, we’re looking at basically broadening our footprint beyond the traditional mining which is what has sustained the railway so far. The key issue is to shift rail-friendly cargo away from the road onto the railways so people can expect – and in fact we have been experiencing – quite a lot of shift. You would see that in our results we posted today we grew container and automotive businesses on rail by 4.2%, despite the 0.6% GDP growth that was experienced over the past financial year.

HANNA ZIADY: Good news indeed. Are you seeing demand, certainly from the FMCG industry, for general freight business?

SIYABONGA GAMA: Yes, there will be demand but there are also quite a few investments that must still be made because, if you look at a lot of the distribution centres, some of them do not have railway sidings because they have depended on trucks for very long. But I think if businesses want to be competitive and they want to reposition themselves, the rail offering is an important aspect in terms of trying to bring down the cost of doing business.

HANNA ZIADY: Total expenditure under the MDS – you mentioned just more than half a trillion rand. How much of this is going to developing Transnet’s footprint outside of South Africa?

SIYABONGA GAMA: In that amount there’s not a lot that is going into the international market, but we are setting aside between R3 billion and R5 billion to assist us in terms of entering into some of the markets outside of the country. During the past financial year we earned R2.8 billion of revenue outside of South Africa, and what we want to do is to improve and increase that so that at least it is between 10% and 20% over the next three to four years.

HANNA ZIADY: And where are you seeing the opportunities primarily outside of South Africa?

SIYABONGA GAMA: There are a number of opportunities. I think what is important is to understand that a lot of the countries on the African continent are actually growing at a much faster GDP rate than South Africa. So if we look at East Africa, we’re looking at places such as Tanzania, Kenya, Rwanda, Uganda – and those are important markets. We’re also looking closer to home at Zimbabwe, Mozambique, Zambia and the DRC. But also on the West Coast we’re starting to look at countries such as Togo, Senegal and Côte d’Ivoire, there are certain opportunities that we will be chasing in those areas.

HANNA ZIADY: And what sort of goods in these countries are manufacturers or the like looking to transport by freight and rail?

SIYABONGA GAMA: In a lot of the countries it’s largely primary products in the mining sector. There is a lot of iron ore, there are a lot of coal products as well as containers that need to be moved. And some of the countries such as Zambia, there is a lot of copper that is currently on trucks that we believe could probably be better optimised if it could be transported via rail.

HANNA ZIADY: Is Transnet engaging with authorities and regulators in these countries?

SIYABONGA GAMA: Yes, Transnet is engaging with a number of authorities in different countries to assist us in terms of extending our footprint and we believe that there’s a lot that we can bring to bear in a relatively short space of time, given the expertise, skills and knowledge that we have in the transportation industry, in ports, pipelines and in the railway sector.

HANNA ZIADY: Let’s take a quick look at Transnet’s balance sheet. You have increased borrowings by about R25 billion since last year to around R134.5 billion. Your cash interest cover – in other words the amount of cash available to pay interest on debt – has also come down slightly. Are you comfortable, Siyabonga, with the company’s level of indebtedness and confident that it won’t require any further government guarantees to raise further funding?

SIYABONGA GAMA: Ja, in the past financial year we were able to raise R40 billion on the back of the strength of our balance sheet. We repaid about R27 billion of debt during that same period. The cash interest cover is under a bit of pressure. It has come down to 3.1 times, as you indicate, but we are quite comfortable that we are coming off the back of subdued economic growth. Our revenues were much lower than we had anticipated when the year started, as a result of the shrinking outlook in terms of GDP growth. We’re looking at 0.6% versus about 2.3% when the year started. But we believe that as we grow volumes we will continue to be largely cash-generative. Cash from operations was R27.7 billion in this past financial year.

So Transnet has an ability to generate a lot of cash and therefore, for as long as we will be able to do that, and given our diversification strategy, we believe that we should be able, going forward, to maintain levels of at least 2.8 times or more. But also you would see that the pressure is really largely from a deteriorating return on total assets which is brought about by the fact that the capital investment programme continued unabated, and yet we experienced a little bit of pressure on the volume side. So if we fix the volume side a lot of the financial ratios will fix themselves.

HANNA ZIADY: We are some months into Transnet’s 2017 financial year already – what is your outlook for the business in the year ahead?

SIYABONGA GAMA: We are beginning to see some signs of green shoots in certain sectors of the economy. However it’s not really back at the 2012/13 levels, but we have seen for instance commodity prices for products such as magnetite, manganese and chrome getting better. Also we’ve seen iron ore steadily growing and coal is stabilising.

So we should be in for an interesting year but obviously it’s still not where we thought we ought to be, because when we started the market-demand strategy we were forecasting GDP growth of around 5.5%. So as a country, Transnet needs to continue to invest in a counter-cyclical manner in products and sectors and segments where we believe there is likely to be some growth, such as FMCG and manufacturing, in order for us to capitalise on economic growth and create jobs in the economy.

HANNA ZIADY: Siyabonga Gama is the group chief executive of Transnet.

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