Durban - Much as been said about the effects of Eskom's proposed price increases on economic growth, inflation and consumer spending. But for investors the electricity hikes also hit home where it hurts most - the earnings growth and ratings on a number of shares.
It's not only the large industrial electricity users and the mines that are going to be affected. Any business that needs electricity and depends on consumer spending is also at risk, including the large food retailers.
Independent investment analyst Mark Ingham has been keeping a close watch on the effects of Eskom price hikes on investments.
In a recent report, he uses Pick n Pay as an example of the impact of higher electricity bills on a food retailer. Much the same would be true for groups like Shoprite and Spar.
Ingham's conclusion is that trading profits and already slim margins could be halved following the proposed increases. That would certainly affect perceptions of a popular class of shares, seen as defensive by investors during the present downturn.
But that's only if food retail groups do nothing to offset higher electricity prices. Pick n Pay CEO Nick Badminton said this was certainly not the case, and that measures were already being put in place to deal with Eskom's higher prices.
"The issue really is that one must try and contain the cost as much as much as possible, and that means saving on electricity. The last thing we want is for our margins to halve - we can't allow that to happen."
Ingham's calculation, with which Badminton does not disagree, is that Pick n Pay will spend about R100m more on electricity this year than it did in 2008, taking the total group cost to about R290m.
"As a percentage of Pick n Pay trading expenses, electricity would go from 3.5% to about 4.5%, and if the 45% increases per year get implemented one is looking at a bill of R1.2bn, which is 14% of this year's forecast trading expenses."
Ingham said even if expenses grew in line with turnover, say 10% over three years, electricity would still be 10% of expenses. "Shoprite would be in a similar position and owner-managed Spar stores would be similarly affected," he said.
Ingham acknowledged that Pick n Pay has "vigorous efficiency enhancement measures under way" but that while these will increasingly benefit the group in coming years with trading margins in grocery retail being slim (around 4% or just 2% at the after-tax level), there is only so much that can be done to offset such a blow.
Food inflation danger
Badminton says though that while there's a new cost in the business, from an investment perspective Pick n Pay simply can't allow margins to be slashed.
He says initiatives under way include moving to centralised distribution which will lower costs and reduce capital in stockholding. Direct measures include electricity saving devices like lighting that switches off if no movement is detected, solar panels, and even a windmill in the Eastern Cape that provides 10% of the electricity for one store.
But that's only half the story. As the table shows, domestic users of electricity (in other words households) are already paying double what Eskom attracts from other users.
But if Eskom's increases come through that 50c-odd per kilowatt hour (kWh) could top 200c, meaning South African households would be paying for some of the most expensive electricity in the world. The bigger bill would have a direct effect on already depressed consumer spending.
"Consumers are more of a worry," said Badminton. "The big thing is for government to speak to Eskom. Understandably they need an increase but there must be a more palatable way of doing it, perhaps increases over 10 years."
What Badminton didn't say - but would happen if the 45% a year increases come through - was that part of the burden would be passed on to shoppers in the form of higher food inflation.
- Fin24.com