Blood on the JSE floor

Written by Ciaran Ryan. Posted in Journalism

Executive departures, forced share sales, cost overruns and weakening retail prospects have hammered selected stocks.

Recent share price drops are not limited to the likes of Old Mutual, Netcare and Sasol. An overall slide in stock values including the Top 40 Tradeable Index and the Health Care Index has investors weary. Picture: Bloomberg

Recent share price drops are not limited to the likes of Old Mutual, Netcare and Sasol. An overall slide in stock values including the Top 40 Tradeable Index and the Health Care Index has investors weary. Picture: Bloomberg

Last week was a shocker for corporate news. Peter Moyo was suspended as CEO of Old Mutual after barely over a year in the job over an apparent conflict of interest relating to his side project, NMT Group, in which Old Mutual was a substantial shareholder. The news spooked the share price, driving it down 12%.

Old Mutual chairman Trevor Manuel explained the suspension as a result of “a material break in trust and confidence” over Moyo’s apparent conflict of interest relating to his role as CEO of Old Mutual and his interest in NMT. Moyo told Reuters there was no wrongdoing on his part, but it is unlikely at this point that he will return to his former position. Chief operating officer Iain Williamson has been named as acting CEO. Manuel has been a stickler for greater accountability and transparency, so he could not be seen to be brushing this one under the carpet, notwithstanding the hit on Old Mutual’s market valuation.

Sasol also took a 27% pummelling last week after announcing a roughly $1 billion cost escalation on its Lake Charles Chemicals Project in the US, which is intended to diversify its sales mix and geographical footprint. The project cost is now nearly 50% more than the original budget. An element of investor fatigue over the ongoing mismanagement and cost overruns at the project are blamed for the sharp drop in share price, which is now at its lowest level in five years.

Netcare’s share price is down 23% after CEO Richard Friedland was forced to sell 10.4 million shares in the group, worth about R200 million, to cover finance costs incurred in their acquisition. The JSE has called for more transparency where directors use their shares as collateral for financial commitments. Netcare is having a rough time with sub-inflation growth in revenue and earnings, and the weak share price performance of the last two years seems to have pushed Friedland into a forced sale to cover his debt.

Tiger Brands is another share taking strain over the last month. The price dropped 18% in May after it was announced that a class action suit had been served on the company over the listeriosis outbreak in 2017 that claimed more than 200 lives. The case for the claimants is being led by class action specialist Richard Spoor, who successfully fought a previous class action suit on behalf of gold miners afflicted by silicosis or tuberculosis. Several mining houses last year conceded defeat and agreed to cough up roughly R5 billion on behalf of several thousand miners.

Tiger Brands informed investors that no specific damages were being sought at this stage. The first part of the case deals with the company’s liability, for which it has product liability insurance “appropriate for a group of its scale”. However, coverage is subject to the terms and limits of the policy, and it remains to be seen whether this will fully cover what may be a massive claim.

Tiger Brands announced last week that its unbundling of Oceana should bump up earnings by more than 20% for the current financial year ending in September. This appears to have done little to entice investors back to the shares, which are worth less than half of what they were at the start of 2018.

All the above share price drops are related to specific events. What is perhaps more worrying is the overall slide in stock values:

  • the Top 40 Tradeable Index is down 8.5% since the beginning of May 2019
  • the Health Care Equipment and Services Index is down 53% since 2016
  • the Health Care Index is down 63% since 2016
  • the Forestry and Paper Index is down 31% since October 2018
  • the Food Producers Index is down 41% since the beginning of 2018

In the platinum sector, Implats and Amplats are down 17% and 22% respectively in the last month after a sharp run-up in platinum group metal prices over the last year. Given the strength of this run, a breather is perhaps overdue.

Implats posted basic earnings of R2.3 billion for the six months to December 2018, reversing a loss of R163 million for the previous period. “While the near-term outlook for platinum remains suppressed, the medium-term outlook has improved. The current strength in both palladium and rhodium fundamentals are expected to persist for the foreseeable future,” said the company in a note accompanying its results.

Aspen and Life Healthcare are two companies taking a beating in what was, until a few years ago, a shining star on the JSE. Life Healthcare is down 17.7% over the last month. The company says its margins have been squeezed by new growth initiatives in SA and abroad, and costs incurred in driving efficiency programmes that will bear fruit later.

Aspen is down 75% since 2016, and recently announced it was reviewing its European and SA pharmaceuticals businesses. It will split the SA business into two units to optimise efficiencies. The future focus will be on emerging markets, and it expects quick results from the launch of women’s health products in the US.

Two other shares taking strain are Mr Price, down 18% in May, and Massmart, down more than 40% since January this year, the result of ongoing attrition in the retail sector. Massmart recently announced operating profit after restructure costs, non-trading items, foreign exchange movements and interest paid may be 60% below the prior period (June 2018: R271m).

Sappi is down 20% over the last month after it announced profits would fall for the year to September due to weak demand and over-supply of stable-fibres supplied by the group to the paper market.

Ciaran Ryan

The Writer's Room is a curated by Ciaran Ryan, who has written on South African affairs for Sunday Times, Mail & Guardian, Financial Mail, Finweek, Noseweek, The Daily Telegraph, Forbes, USA Today, Acts Online and Lewrockwell.com, among others. In between he manages a gold mining operation in Ghana, and previously worked in Congo. Most of his time is spent in the lovely city of Joburg.