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)
A squeaky and glittering metaphoric smile was the look reflected from the Pula against the greenback this week and money market researchers lean this on optimism following Monday’s announcement of another Covid-19 vaccine which is said to have boosted emerging market economies.
With other emerging market currencies, the Pula too reacted to optimism and fanfare on the new Covid-19 vaccine against the weakening US dollar which has been losing its shine since the uncertainty laden US elections.
After bouncing back into the Johannesburg Stock Exchange (JSE) last week Friday, following a year of being in the freezer, the Choppies stock started this week with much fluidity.
Choppies was suspended in both the Botswana Stock Exchange and its secondary listing at the JSE for failure to publish financial results. Choppies suspension on Botswana Stock Exchange was lifted on 27 July 2020. On Friday last week, when suspension was being lifted, Choppies explained that this came into fruition “following extensive engagement with the JSE.”
Choppies stock, prior to suspension, hit a mammoth decline in value of more than 60 percent, especially in September 2018. Waking from a 24 month freezer, last week the Choppies share price was at R0.64 and the stock did not make any movement.
However, Monday was the day when Choppies stock moved vibrantly, albeit volatile. Choppies’ value was on a high volatile mood on Monday, reaching highs of 200 percent. At noon, the same Monday, the Choppies share had reached R1.05. Before taking an uphill movement, Choppies stock slightly slipped by 2 cents. But the Choppies share rode up high and by lunch time the stock had reached the day’s summit of R2.00 and that was at 13:30 when investors were buying the stock for lunch.
The same eventful Monday saw gloom on the faces of Choppies rivals, when Choppies gained by 220.31 percent around lunch time its rivals in the JSE Food & Drug Retailers sector were licking wounds. Spar lost 2.94 percent, Pick Pay fell by 2.43 percent, Shoprite 7.52 percent and Dis-Chem 1.98 percent. The only gainer was Clicks by a paltry 0.51 percent.
In an interview with BusinessPost, Choppies sponsors at the JSE PSG Capital Managing Director Johan Holtzhausen explained that the retailer’s stock was in high demand after a long suspension. He said when a company list or a suspension is lifted the market needs to find itself on the pricing of the share.
“Initially when the suspension was lifted there were more buyers than sellers. As far as we could see this created a shortage of shares so to speak and resulted in the price at which the shares traded going to R1.20 and eventually R2.05 before finding its level around R0.80 sent from a JSE perspective.
This is marked dynamics and reflect that there are investors that are positive about the stock in the long run. This is a snapshot over a short period and one requires a longer period to draw further conclusions,” said Holtzhausen in an interview talking about the Choppies stock.
On Monday this week where the Choppies value grew by 200 percent, the stock took a turn looking down, closing the day at R0.87 from a high of R2.00. According to local stockbroker Motswedi Securities on Monday while there was no movement by Choppies in the local stock exchange as the retailer appeared on the board as 141,000 shares traded at P0.60 each.
However in Choppies’ secondary listing the stock price rallied to over 200 percent during intraday trading on Monday before losing steam and declining to around R0.87 share.
Before press yesterday Choppies opened the market with the stock starting the day at R0.80 then went flat for few hours before taking a slide downward, dropping 5 cents in 30 minutes. Choppies then went flat at R0.75 for 50 minutes yesterday before going up at 10:20 am where it nearly recovered the open day price of 80 cents, but was shy of 1 cent. From 79 cents the price went flat until noon.
Competition and Consumer Authority (CCA) has revealed that in its assessment of the Jet take over by Foschini, there were considerations on possible market rivalry and a clash in targeted classes.
According to a merger decision notice seen by this publication this week, high considerations were made to ensure that Foschini’s takeover of Jet is not anyhow an elimination of rivalry or competition or if the two entities; the targeted and the acquiring enterprise serves the same class of customers or offer the same products, to elude the anti-trust issues or a stretch of monopoly.
The two entities are South African retailers whose services stretched to Botswana shores. Last month local anti-trust body, CCA, received an acquisition proposal from South African clothing retailer, Foschini, stating their intentions to take-over Jet.
South African government’s Business Rescue Practitioners earlier this year after finding out that Jet’s mother company, Edcon, is falling apart, made a decision that Foschini can buy Jet for R480 million. This means that Foschini will add Jet to its portfolio of 30 retail brands that trade in clothing, footwear, jewellery, sportswear, homeware, cell phones, and technology products from value to upper market segments throughout more than 4085 outlets in 32 countries on five continents.
However the main headache for the CCA decision which was released this week, is distinguishing the targeted and the acquiring entity businesses and services.
When doing a ‘Competitive Analysis and Public Interest’ assessment, CCA is said to have discovered that Foschini is classified as a “standard retailer” which targets middle-to-upper income consumers and it competes with stores such as; Truworths and Woolworths. The targeted entity, Jet, is on the lower league when compared to its acquirer, it serves customers of lower classes and is regarded as a discount/value retailer targeting lower income consumers or a mass market. This makes Jet to be in direct competition with Ackermans, Pepkor, Cash Bazaar and Mr Price.
“Therefore, a narrower view of the market is that Foschini through its stores trading in Botswana is not a close competitor to Jet. Additionally, there exist other major rivals who will continue to exercise competitive constraints on the merged enterprise post-merger,” concluded CCA this month.
The anti-trust body continued to explain that in terms of the Acquisition of a Dominant Position, the analysis shows that the acquisition of the target business by Foschini Botswana will result in an insignificant combined market share in the relevant market.
This made CCA reach to a conclusion that there is no case of an acquisition of a dominant position in the market under consideration or any other market on the account of the proposed transaction.
What supports the merger according to CCA is that it is in compliance with regards to ‘Public Interest Considerations’ because the findings of the assessment revealed that the transaction is as a result of the need for a Business Rescue by the target enterprise. This is so because in the event that the proposed transaction fails, it will translate into the loss of the employment positions at the target business.
“On that note the Authority (CCA) found it necessary to ensure that the proposed merger does not result in any retrenchments or redundancies. In light of this, the assessment revealed the critical need to protect the employees of the merged entity from possible merger specific retrenchments/ redundancies,” said CCA.
Before making a determination that the recently proposed transaction is not likely to result in the prevention or substantial lessening of competition or endanger the continuity of the services offered in the relevant market, CCA said it then moved into a concern for public interest which is a protection enshrined in the Competition Act of 2018.
CCA’s concern was mostly loss of livelihood or employment by 126 Batswana workers at Jet stores, stating that possible retrenchments or redundancies may arise as a result of implementation of the proposed merger.
Much to the desire of trade union or labour movements in Botswana and across Southern Africa where the Jet stores are stemmed-who also raised concerns about the retail’s workers job security- CCA subjects Foschini to keep the target entity 126 workers.
“There shall be no merger specific retrenchments or redundancies that may affect the employees of the merged enterprises. For clarity, merger specific retrenchments or redundancies do not include (the list is not exhaustive): i. voluntary retrenchment and/or voluntary separation arrangements; ii. Voluntary early retirement packages; iii. Unreasonable refusals to be redeployed; iv. Resignations or retirements in the ordinary course of business; v. retrenchments lawfully effected for operational requirements unrelated to the Merger; and vi. Terminations in the ordinary course of business, including but not limited to, dismissals as a result of misconduct or poor performance,” said CCA.
CCA also orders that Foschini informs it about all the details of 126 Jet employees within thirty (30) days of the merger approval date. CCA should also know information of when Foschini is implementing the merger, within 30 days of the approval date.
Other conditions include Foschini sharing a copy of the conditions of approval to all employees of the Jet or their respective representatives within ten (10) days of the approval date.
“Should vacancies arise in the target, the merged enterprise shall consider previous employment at one of the non-transferring Jet stores to be a positive factor to be taken into account in the consideration of offering potential employment,” said CCA.
According to CCA, in cases of any job losses, for the Authority to assess whether the retrenchments or redundancies are merger specific, at least three months before (to the extent that this deadline can be practically achieved and in terms of the prevailing and legally required employment practices) any retrenchments or redundancies are to take place, inform the Authority of: i. The intended retrenchments; ii. The reasons for the retrenchments; iii. The number and categories of employees affected; iv. The expected date of the retrenchments.