The macroeconomic outlook remains positive onto 2019 underpinned by the anticipation of sustained growth in the mining sector, particularly diamonds, as the global economic recovery ensues. At the same time, the non-mining sector is expected to drive growth, largely from the services sectors. The projected accommodative monetary conditions, expansionary fiscal policy, stable water and electricity supply, should all serve to add impetus to economic growth.
The country is set to go to the polls this year with the general elections marked for October. Notwithstanding increased factionalism within the ruling Botswana Democratic Party (BDP) we anticipate the party will retain power come elections. The new political administration’s approval of key legislation aimed at improving the business environment could serve to attract much needed Foreign Direct Investment (FDI) into Botswana.
The Bank of Botswana September 2018 Business Expectations Survey also highlights the positive prospects of 2019. Businesses have indicated positive expectations about 2019 business conditions, which they expect to improve further, with the main drivers being increased demand for consumer products and sustained growth in global demand for mining output.
Over the surveys of recent years, constrained domestic demand has consistently been cited as one of the biggest challenges facing businesses. It is particularly encouraging to note that increased demand for consumer products is now expected to be a key driver of growth. Furthermore, firms expect wages to increase in the first half of 2019, likely premised on the anticipated public service salary increment.
From a global viewpoint, the year has begun with much uncertainty. Key events, including Brexit, the US-China trade war, China’s economic slowdown and the Italy debt crisis, will likely result in investors shying away from equities and parking their money in safe haven assets. The outcome of these events will be pivotal in determining the direction equity markets will take and could influence whether liquidity from foreign investors will return to our local stock market. However, considering the positive domestic macroeconomic outlook, improved fundamentals and attractive valuations on the DCI, investors should see our local stock market as a good buying opportunity.
The Banking Sector
The performance of the banking sector is largely tied to the health of the economy. With ensuing growth anticipated for 2019, demand for credit should remain strong. 2018 saw a recovery in credit growth from the lows seen in 2017 in line with improved economic performance. We anticipate 2019 will be another year of solid credit growth, with businesses acting as the primary driver.
The aforementioned Business Expectations Survey indicates local firms expect a rise in domestic borrowing this year. Meanwhile, consumers are currently under pressure from constrained disposable incomes and there is the general perception of household debt being at high levels. However, the anticipated increase in wages should serve to provide some relief to households and increase their borrowing capacity, albeit to a limited extent.
With the economy only recently beginning to pick up steam and the subdued inflationary environment, we expect the Central Bank will maintain an accommodative monetary policy stance throughout the year. We therefore see the bank rate maintained at 5% in 2019. The monetary policy environment substantiates our expectations of decent credit growth.
Non-interest income growth remains a key focus for the banks. Increased development and enhancement of digital banking channels are driving transactional income growth, with self-service banking increasingly being utilized by customers due to its convenience of 24 hour access and mobility. On the brick and mortar front, banks appear to be adopting a model of leaner branches, with increased self-service access points.
FNBB, the largest bank and market leader in innovation, is well poised to continue driving solid non-interest income growth underpinned by aggressive rollout of digital platforms and initiatives aimed at increasing penetration of clients’ use of the bank’s products. FNBB has targeted particular business sectors for credit extension, while it intends to lend cautiously to households.
Barclays is set to experience a change in leadership with Managing Director, Reinette Van Der Merwe’s tenor coming to an end in the current financial year. The bank’s strategy of growing its fee income will result in ensuing investment in digital solutions in line with increased use of these channels by its clients. Barclays has made it clear it intends to grow its advances market share, with a strong focus on growing its book via client penetration and acquisition. The cost impact of the separation from Barclays PLC however, does bring some uncertainty.
Following the de-risking of its balance sheet, Stanchart should be positioned to drive growth that doesn’t compromise on asset quality. Given its elevated cost/income ratio of 95% as at June 2018, the bank finds itself under immense pressure to bring this metric down and grow its income lines. Newly listed BancABC will largely be focused on the rollout of new and enhanced product offerings and extensive marketing to drive its envisioned transactional banking proposition. The bank significantly lags its more established peers with regards to non-interest income contribution, currently at 16.4% of total income. This indicates the scope that ABC has to grow and diversify its revenue streams.
The Financial Services Sector
Blue chip financial services giant BIHL is set to launch a new strategy this year following the end of its 5 year twin strategy of growth and profitability in 2018. The group’s segmentation approach under the life business has made good in-roads and we believe this will remain a key part of the new strategy with innovation likely to play an ever increasing important role amidst the competitive environment. We anticipate that the affluent segment will continue to be a key driver of growth in value of new business given its low penetration and higher average size premiums.
Asset management arm, BIFM, faces an increasingly challenging landscape. Ex-BPOPF pension funds have followed suit in adopting the measure of splitting mandates amongst asset managers. This development makes it more difficult to grow assets under management. Further, the entry of new asset managers will over time intensify competition for assets as these firms build track records and acquire mandates. On a group level, business development initiatives aimed at marketing BIHL as a “one stop financial services shop” should serve to further harness synergies between the underlying subsidiaries and associate businesses.
Letshego’s broad geographical footprint across Sub-Saharan Africa (SSA) has the group well positioned to scale its operations further. According to IMF statistics, GDP growth for SSA is expected to improve to 3.5% (2018: 2.9%) and 3.6% in 2020. Letshego appointed Smit Crouse as the new group Managing Director late in Q3 2018. Mr. Crouse has extensive experience in finance, commerce, and law, including advising on and managing African banking investments.
Access is the focal point for the firm in driving its strategic agenda of becoming the continent’s leading inclusive finance group. Letshego’s agency network, mobile digital banking solutions, strategic partnerships, new products and cross selling initiatives have substantially increased access and driven customer acquisition. We expect the continued rollout and promotion of these initiatives to drive further growth momentum going forth. With increased diversification into MSE lending, Letshego would do well to monitor the composition of its loan book in order to simultaneously drive growth and keep loan loss rates in check. 5
The Property Sector
The listed property companies are increasingly diversifying across our local borders. The Botswana property market has seen varied dynamics. Demand for retail space has been strong and is still rising with further mall developments and expansions having been recently completed and some underway. This sector is enjoying good occupancy rates and escalations. The industrial sector is seeing solid demand, especially in Gaborone. Developments have reportedly been low; however, demand for prime location space is expected to improve further.
The office market’s state of oversupply has put downward pressure on rentals. Considering the number of new developments and ongoing construction (particularly in Gaborone Central Business District) coupled with subdued employment creation, this sector is likely to remain under pressure. The residential sector has seen improved conditions for the low to middle income segment of the market, while the high end remains weak.
NAP, which has bucked the trend of diversification with an unchanged property portfolio, has nonetheless been a consistently solid performer. The retail property giant should see sustained top line growth from escalations. The weak economic conditions in Selebi Phikwe however will likely remain a drag, with the area currently accounting for 43% of vacancies across the portfolio.
The evolved dynamics of the hospitality sector have forced Letlole management to dispose of its hotel portfolio (which contributes 30% to rental revenues and 28% to the consolidated property portfolio) to related party and incumbent tenant Cresta, subject to unitholders approval. The BWP235 million to be raised from the transaction (a 10% discount to book value) is intended to be reinvested in new acquisitions. Given the length of time acquisitions normally take, investors will likely suffer the opportunity cost of the difference in rental yield and return on cash until the proceeds are utilized.
RDCP has been a significant benefactor of regional diversification on the back of its investments in South African based Capitalgro. South Africa is to be of increasing importance to the company as management has emphasized the number of opportunities being evaluated by Capitalgro. The Xai Xai shopping centre will give RDCP a foothold in Mozambique, while further developments there and in Namibia are still in early stages.
Turnstar has been experiencing prolonged tepid demand, and rightfully so given its challenges in Tanzania. Vacancies at the Mlimani office park have been a major drag on revenues, and pose a significant downside risk to performance. Locally, the expanded area of Gamecity is now largely occupied and should boost retail revenues.
Primetime’s regional and sectoral diversification has been bearing fruit. Three retail developments, Chirundu mall and Munali Mall (Zambia), and Design Quarter (Botswana) were completed late in the previous fiscal year. The revenue impact from these developments will largely be reflected in the current financial year, with management focusing on tenancies in Chirundu and Munali. A further 1,100 sqm extension of Pilane Crossing is currently underway, scheduled for completion in Q2 2019.
Brewery behemoth, Sechaba, has been under the torment of a harsh regulatory environment which saw its profitability decline over the years. The company’s fate has taken a turn for the better with the new political administration’s decision to reduce the alcohol levy from 50/55% to 35% late in 2018, a development which we expect will prove earnings accretive for the beverages giant. A further regulatory change was the extension of liquor trading hours, which should be positive for Sechaba’s volumes.
Shareholders approved of the related party transaction between Sechaba and AB InBev Africa BV which resulted in Sechaba shareholders (excluding AB InBev Africa BV) effectively retaining their financial interest in the sparkling soft drinks business. This segment accounts for roughly 30% of volumes and is thus a paramount part of the business. However, it remains to be seen what the implications of the restructuring of KBL will be following this transaction.
Ecotourism counters Chobe and Wilderness delivered excellent numbers for their interim reporting periods, which include peak season. This should translate to a solid full year performance for their respective reporting periods ended February 2019. The outlook for the Southern African tourism industry is robust and is anticipated to remain so over the medium term.
Locally, the government’s recent policy decision to simplify VISA applications is anticipated to expedite turnaround times and potentially result in increased tourist arrivals into Botswana, particularly from the Far East. We do have some reservations on the sector however, considering the uncertainty around several global events which could dampen consumer confidence in some key markets. The IMF has projected that global output will slow to 3.5% (2018: 3.7%). Risks to this outlook are largely tilted to the downside which could result in an even sharper slowdown in growth if outcomes to several events prove unfavorable.
The Retail Sector
With Choppies yet to release results and Sefalana being the only other listed counter in the retail sector, we have limited indication of developments in this space. Following a period of continued pressures on its local FMCG margins, Sefalana has posted positive performance under its Sefalana Cash and Carry Botswana unit. The improved performance has been attributed to a gradual uptick in consumer spending and confidence. Given the optimism amongst businesses with regard to consumer product demand going forth, we are cautiously optimistic that these improved dynamics will ensue.
Sefalana’s focus going forth will largely be on its core FMCG and supporting businesses. The group plans to open 3 further stores in Botswana this year and to continue its efforts to provide its customer base with a wider product and service offering. The group is also looking to expand its manufacturing business into bottled water and fruit juice manufacturing over the next 12 – 18 months.
The high level of dependence on government tenders remains a key risk for the manufacturing arm, as well as for the smaller Commercial Motors subsidiary. There is however, a general anticipation of a boost in government spending over this election year, which could act as a boon for these segments.
Choppies remains in limbo, yet to release its full year financial results, while its Dec interim results are due for release soon as well. Amidst this debacle, the group appointed a new Finance Director, Heinrich Mathiam Stander effective 15 December 2018. Shareholders recently found some relief following Choppies statement announcing that the Zimbabwe litigation issue has been resolved. The Mphokos, former minority shareholders, have disinvested from the subsidiary and have no further interests in Choppies. Given this was a legal matter; it is likely it was the largest impeding factor with regards to release of Choppies financials.
As the largest retailer in Botswana, Choppies is well positioned to benefit from a recovery in consumer spending. Meanwhile, the civil unrest in neighboring Zimbabwe has exacerbated the difficulties of conducting business, the country battling with foreign exchange shortages and exorbitant inflationary pressures. For now, the market waits with angst for release of the group’s financials to get an indication of the current standings of the business and management’s outlook. (Adopted from SBB Market Outlook for 2019)
The Bulb World Chief Executive Officer (CEO) and entrepreneur, Ketshephaone Jacob has been selected as a 2021 Top 50 Africa’s Business Hero.
Jacob was chosen from a pool of 12,000 applicants – many of whom are highly-skilled and accomplished entrepreneurs.
Africa’s Business Hero, sponsored by technology entrepreneur, Jack Ma, aims to identify, support and inspire the next generation of African entrepreneurs who are making a difference in their local communities, working to solve the most pressing problems, and building a more sustainable and inclusive economy for the future.
The initiative is as inclusive as possible and applications were open in English and French to entrepreneurs from all African countries, all sectors, and all ages who operate businesses formally registered and headquartered in an African country, and that have a 3 year-track record.
Every year, finalists are selected to compete in the ABH finale pitch competition and participate in a TV Show that will be broadcast online and across the continent.
The finalists will compete for a share of US $1.5 million in grant money.
The Bulb World, is home grown LED light manufacturing company, which was partly funded by Citizen Entrepreneurial Development Agency (CEDA) at the tune of P4 million, to manufacture LED lighting bulbs for both commercial and residential use in 2017.
The Bulb World operate from the Special Economic Zone of Selibe Phikwe. Early this year, The BulB World announced its expansion to South Africa, setting in motion its ambitious Africa expansion plan.
During the first quarter of 2021, production in Botswana’s economic nucleus- the mining sector contracted by 12 percent. This is according to Mining Production Index released by Statistics Botswana this week.
The country’s central data body revealed that Index of Mining production stood at 74.4 during the first quarter of 2021, showing a negative year on-year growth of 12.0 percent, from 84.6 registered during the first quarter of 2020.
The main contributor to the decline in mining production came from the Diamonds sector, which contributed negative 11.7 percentage points. Soda Ash was the only positive contributor in the mining production, contributing 0.1 of a percentage point. However Soda Ash’s contribution was insignificant to offset the negative contribution made by Diamonds.
The quarter-on-quarter analysis by Statistics Botswana experts shows an increase of 16.3 percent from the index of 64.0 during the fourth quarter of 2020 to 74.4 observed during the period under review.
Diamond production decreased by 12.1 percent during the first quarter of 2021 compared to the same quarter of the previous year. The decrease was as a result of planned strategy to align production with weaker trading conditions mostly linked to Covid-19 protocols restrictions.
Botswana’s diamond sector is underpinned by Debswana, the country’s flagship rough producer- a 50-50 joint venture between government and global mining giant De Beers Group. The other producer is Canadian based Lucara Diamond Corp through its wholly owned Karowe Mine which is a relatively small but significant production that has made a name for itself worldwide with rare diamond recoveries of unprecedented carat size.
On the other hand, quarter-on quarter analysis shows that production has improved, registering a positive growth of 17.5 percent during the first quarter of 2021 compared to the preceding quarter – 2020 Q4.
Though production was significantly lower in the first quarter, the two producers ended Q2 with rare diamond recoveries. Debswana early last month found the world’s third largest gem diamond – weighing 1098 carat at Jwaneng Mine, its flagship gem quality diamonds producer, also regarded the world’s richest diamond mine.
A week later Lucara announced its second biggest recovery, the 1174 carat clivage near-gem dug from its Karowe Mine. The diamond is the world third in carat size after the plus-3000 carat Cullinan found in South Africa back in 1905 and the 1758 carat Sewelo unearthed at its Karowe mine in 2019. Debswana and Lucara are investing billions of pulas in underground mining projects to extend the life of its mines, Jwaneng & Karowe respectively.
In terms of Gold which is produced at Mupani mine near Botswana’s second city of Francistown output decreased by 17.9 percent during the first quarter of 2021 compared to the same quarter of the previous year.
Similarly, quarter-on-quarter analysis reflects that production decreased by 21.4 percent during the first quarter of 2021, compared to the preceding quarter. The decrease was as a result of the deteriorating lifespan of the mine as well as the impact of COVID-19 which slowed down the mining activities.
Soda Ash production increased by 11.1 percent during the first quarter of 2021 compared to the same quarter of the previous year. In terms of quarter-on-quarter Soda Ash production also showed an increase, picking up by 2.1 percent during the period under review. The increase in production is attributable to the effectiveness of the plant following refurbishment which occurred in the third quarter of 2020.
Salt production decreased by 34.0 percent during the first quarter of 2021, compared to the same quarter of the previous year. Similarly, the quarter-on-quarter analysis shows that salt production registered a decrease of 32.9 percent during the period under review. Both salt and Sodash are produced by partly government owned Botswana Ash (BotsAsh) operating from Sowa town near Makgadikgadi pans.
Coal production decreased by 11.2 percent during the first quarter of 2021, compared to the corresponding quarter of the previous year. The decrease was attributed to the reduced demand from Morupule B Power Station following the remedial works being undertaken, as one boiler was in operation during the period under review.
Although production fell, Statistics Botswana says there was no shortfall in supply of coal due to stockpiling. On the other hand, the quarter-on-quarter comparison shows that coal production increased by 20.4 percent compared to the preceding quarter.
Botswana’s flagship coal producer is Morupule Coal Mine; a wholly state owned mining company located in Palapye producing primarily for Botswana Power Corporation (BPC)’s power generation plants Morupule A & B.
The other coal producer is Botswana Stock Exchange listed Minergy which operates a 390 MT Coal Resource mine in Masama near Media in the southwestern edge of the Mmamabula Coalfields.
Department of Mines in the Ministry of Mineral Resources, Green Technology & Energy Security has awarded mining licence to Tshukudu Metals-a subsidiary of Aussie firm Sandfire Resources ,giving the company a green light to start piecing the ground at its Motheo Copper Project near Gantsi.
Lefoko Moagi, minister in charge of mineral resources in Botswana confirmed to weekendpost on Tuesday. Minister Moagi revealed that “the licence has been approved , but Sandfire Resources as a listed company will report to its shareholders and investors then make an official public statement” he said.
Based on a forecast copper price of US$3.16/lb (reflecting current long-term consensus pricing) the Base Case 3.2Mtpa – Ghantsi copper project is forecast to generate US$664 million (over P7 billion) in pre-tax free cash-flow and US$987 million (over P10 billion) in EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation), at a forecast all-in sustaining cost of US$1.76/lb over its first 10 years of operations.
In December 2020, the Board of Sandfire Resources approved the commercial development of the Motheo Copper Mine located in the Kalahari Copper Belt in Botswana, marking a key step in its transformation into a global, diversified, and sustainable mining company.
Tshukudu Metals Botswana (Pty) Limited (Tshukudu) a 100% owned subsidiary will be the owner and operator of the Motheo Copper Mine which is scheduled to produce up to 30,000 tonnes per annum of copper in concentrate over a 12 year mine life.TMB is targeting development of its Motheo Copper Mine in 2021 and 2022, with its first production in 2023.
GOVERNMENT NOT TAKING UP 15 % STAKE ON OFFER
Beginning of this year presentations were made to the Department of Mines as part of the Mining Licence approval process and to the Ghanzi Regional Council, additional information was requested by Department of Mines in April and was duly supplied by the company.
As part of the Mining Licence approval process, the Government of Botswana has a right to acquire up to a 15% fully contributing interest in all mining projects locally. Quizzed on whether government through Mineral Development Corporation Botswana (MDCB) would be taking up stake in the project Minister Moagi said, “No consideration is being made on that regard”.
“Government is not considering taking up a stake in the Ghantsi Copper Mine project, every opportunity is assessed on all risks, but Government makes money all the while from leases, taxes and royalties, remember if you take stake you are liable for liabilities of the project as well,” Moagi said.
Last month Sandfire announced that it has awarded over P5 billion worth mining contract to African Mining Services (AMS), a subsidiary of Perenti, to deliver the open cast operation.
The contract, which has an estimated value of US$496 million (over 5 billion), is the largest single operational contract for the new Motheo Project covering a period of 7 years and 3 months, with provision for a one-year extension.
The contract according to Sandfire Resources was awarded following a competitive 3-stage tender process which saw a number of key factors taken into consideration when selecting the preferred contractor.
These included Citizen Economic Empowerment, safety culture, equipment suitability and availability, commercial terms and identified improvement opportunities. Under the terms of the contract, AMS has agreed to form a 70:30 Joint Venture with a suitable local Botswana partner or partners.
The JV is expected to be finalized ahead of commencement of mining in early 2022. African Mining Services has been operating in Africa for over 30 years. AMS’ parent company, ASX listed diversified mining services group Perenti, already has a presence in Botswana through Barminco, their underground mining division, at the large-scale Khoemacau Copper Mine located 200km north-east of Motheo.
Last month Sandfire executives said the award of the open pit mining contract represents another key milestone in advancing the Motheo Project towards production, with all components of the contract in line with the key parameters outlined in the December 2020 Definitive Feasibility Study (DFS).
The company said full-scale construction of the US$279 million (over P 3 billion ) mine development is expected to commence immediately upon receipt of the Mining Licence, with mining scheduled to commence in early 2022 ahead of first production in early 2023. This week Sandfire Resources advertised over 10 positions in calling on applications from geologists, mining engineers and geotechnical engineers.
The Motheo mine has an initial mine life of 12.5 years based on production from the T3 pit. The initial development is expected to generate approximately 1,000 jobs during the construction phase and 600 direct full-time jobs during operations, with at least 95% of the total mine workforce expected to be made of up of Botswana citizens.
Later in the week Sandfire Resources announced in the company website that it has received the licence. Sandfire’s Managing Director and CEO, Mr Karl Simich, said the award of the Mining Licence represented a major milestone that would see a significant increase in construction and development activities on site.
“We are absolutely delighted to now be in a position to move to full-scale construction at Motheo, with our construction crews expected to mobilise to site over the next few days. I would like to thank the Government of Botswana for their support throughout the approvals process, which will see Motheo come on-stream in 2023 as one of very few new copper mines commencing production globally.”
Simich said the project is expected to generate approximately 1,000 jobs during construction and 600 full-time jobs during operations, and represents the foundation for Sandfire’s long-term growth plans in Botswana.
“Our vision is that Motheo will form the centre of a new, long-life copper production hub in in the central portion of the world-class Kalahari Copper Belt, where we hold an extensive ground-holding spanning Botswana and Namibia,” he said.