After-tax profits: Resources to continue to lead
The writer of the report on after-tax profits for 2009’s Top 200 edition – Lauren Colem – made the following prediction for the next year: “With 13 of the top 40 placings belonging to companies residing in the resources sector – plus a further seven in the banking, business, investment and services support industries – I think it’s safe to say we can expect to see a significant degree of change when we review the Top 200 rankings this time next year.”
Her prediction was based in the first place on the assumption the commodities crash of 2008 that spilled over to 2009 (bar the gold price) would have eroded the 2009 earnings of commodity groups to a large extent.
Prices reached historic highs in first half 2008, with platinum prices peaking at US$2 254/oz in March of that year.
However, at the lowest point of the downturn the price for the metal settled around $1 000/oz.
All that glitters
Oil have similarly moved in a short space of time from its all-time high of $145/barrel to around $40/barrel.
The exception has been the fortunes of gold.
However, South Africa’s gold companies couldn’t make the most from the soaring gold price as they struggled to keep production steady.
Also, the recent gold price highs of around $1 200/oz wouldn’t have filtered through the accounting cycle of most industry participants.
As for the seven groups representing the banking, business, investment and services support industries the writer asserted the absence of consumer spending and negative trading conditions would have relegated those groups to the lower echelons of the Top 200 table.
Cole did punt telecoms giants Telkom and MTN to keep their top postings, as demand for telephony and communications were expected to remain buoyant despite the economic downturn.
“With the majority of consumers without access to fixed line networks, cellphone providers such as MTN remain well positioned to benefit from this ever-growing market.”
Did the writer’s prediction become a reality? Yes and no.
She was correct, as is now common knowledge, to assert the top performers of 2009 would have seen their earnings erased.
Profits took a beating
Looking at 2009’s tables, after-tax profit at log leaders BHP Billiton was slashed by 42.26%.
Sasol (fourth) suffered a similar fate, with profit down 39.88%. The same trend holds true for, among others, Anglo Platinum (sixth in 2009; profit down 12.40%), Impala Platinum (seventh in 2009, down 52.24%) as well as African Rainbow Minerals (17th in 2009, down 48.72%).
Furthermore, at least two top 40 resources listings of 2009 – Lonmin and Aquarius – don’t feature in this year’s Top 200 tables at all.
As for the financial services counters, profits at heavyweights such as Old Mutual, Liberty, Sanlam and Standard Bank came under pressure.
Communications and telephony groups MTN and Telkom experienced mixed fortunes, with MTN’s after-tax profit up 36% but Telkom’s dwindling by 24.75%.
However, 25 last year’s top 40 rankings count among this year’s top 40 list.
Although some smaller resources counters didn’t make the grade this year the biggest losers have been SA’s construction giants.
This year’s top 40 holds no construction counter, after both Murray & Roberts and Aveng have been relegated to more humbler positions.
(The industry’s prospects for the new financial year doesn’t bode well either. Most recent earnings have been on the wings of 2010-related projects, which have been drawing to a close. Although Government has committed more than R800bn to infrastructure spend it’s unlikely that will come on line within the next three years. In an already crowded market only few will manage to pick up the spoils.)
Still top of the pops
Despite the lower predicted earnings for the majority of 2010’s top 40 profit makers, the majority of last year’s best counters are still firmly entrenched in the higher rankings of this year’s tables.
There’s one major reason for that.
When it comes to ranking the overall profit-making performance of listed companies size will always count.
Bar the likes of MTN, resources and financial services firms are the major contributor to the JSE’s market capitalisation.
Therefore, even when those companies perform badly they’re still to rank among the best.
Seven resources giants count among the 30 top profit generators, with conglomerates BHP Billiton (first) and Anglo American (third) leading the pack.
The dominant drivers of the rebound in commodity prices last year were a combination of cheap money in developed markets and insatiable Chinese demand.
Apparent demand for most commodities within China remained strong throughout the crisis and even accelerated in some cases as its government sought to stimulate the economy through an increase in lending and infrastructure spending.
Most experts believe commodity prices will continue to strengthen in 2010, driven by the global economy and continued demand from China.
The only key risk factor will be “premature” monetary tightening.
Bigger is best
One can therefore be almost certain the JSE’s reputable resources companies will continue to lead the profits pack throughout 2010, due to growing demand for their products and the sheer size of many.
An exception is the gold industry.
SA’s gold miners are struggling to maintain production levels, while the gold price is also likely to retreat on the back of US dollar strenght and economic optimism.
Prevailing uncertainty about SA’s gold miners are reflected in the fact only AngloGold Ashanti makes it into this year’s Top 30, with Harmony and Gold Fields squeezing narrowly into the Top 40.
Sanlam (ninth), Liberty Holdings (10th), FirstRand (seventh) and Standard (sixth) were among the big profit spinners in the financial services sector.
However, investors shouldn’t expect major profit growth in those counters this year as consumers remain weak.
While inflation seems to be under control for the moment, recent job losses won’t be easily recovered.
Consumers appear also to be more concerned about lowering their debt burden than to start transacting.
Nevertheless, those names will again feature strongly in 2011 (bar perhaps Liberty, whose torrid 2009 will filter through the reporting cycle of the tables).
Expect the likes of Absa and Nedbank to also feature thereabouts.
In the ICT space, MTN (11th) has been joined by Vodacom (17th), which had surpassed its earstwhile shareholder Telkom (22nd) at its first attempt.
While recently reported data suggest those groups are struggling to effect continued growth in SA all three are carrying on their expansions into Africa and beyond.
2011 too soon
Once the investment cost of entering new markets start to morph into profits those groups are expected to move up the after-tax profit table.
But perhaps 2011 will be too soon for that.
Generally speaking, companies’ performance during 2010 will largely be determined by how fast confidence will return to SA’s economy.
The emphasis, both in public and private spheres, is still very much rather on cutting back than spending more.
Although Government and public corporations have identified some major spending priorities that should be a boon for, especially, constructors analysts’ remain sceptical whether those projects will come online this year.
Consumers seems to be keeping their wallets closed for now.
The Fifa Soccer World Cup may very well offer the injection needed for consumers to lower their guard, but the sustainability of such a move will remain to be seen.
The fortunes of SA’s economy will also be tied up with the rand.
Exporting manufacturers are proven job creators. And more people holding jobs will be the boon of the sustainable growth SA is craving for.
To view the After-tax Profits Table, click here