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Negative outlook for SA corporates - Moody's

Dec 19 2017 18:57
Carin Smith

Cape Town - South African corporates have a negative outlook due to a weak operating environment, which poses downside risks, according to a research report on non-financial corporates released by ratings agency Moody's on Tuesday.

According to the report, SA companies are impacted by a macro economic environment where persistent weak gross domestic product (GDP) growth of less than 2% leads to depressed business and consumer demand.

On top of that, political and policy uncertainty heighten downside risks for SA companies, according to the report. SA corporates with debt in hard currencies and local currency cash flows remain vulnerable, it said.

Moody's, however, foresees that rated companies will remain resilient largely due to diversification, market dominance and healthy credit profiles. It pointed out that negative outlooks and ratings under review of these companies are mostly a result of downward pressure on sovereign ratings.

The agency foresees that companies' capital allocation outside of SA will continue.

What could turn the outlook for corporates in SA to stable, according to the report, would be GDP growth of between 2% and 5% that is underpinned by structural reforms as well as an improved labour market and supportive commodity prices.

Commodity companies

Commodity companies - Anglo American, AngloGold, Gold Fields, Petra Diamonds, SibanyeGold and Sasol - are impacted by bulk commodity prices having stabilised due to supply cuts. Furthermore, diamond and gold prices remain resilient.

Platinum Group Metal (PGM) prices remain weak but stable and a strengthening of credit profiles has enabled reinvestment in operations.

The political environment and the reviewed Mining Charter create uncertainty, however, delaying investments in expansions in SA, according to the report.

Labour remains a key business risk in the mining industry due to above-inflation wage increases and uncertainty regarding the ability to challenge the collective bargaining process.

Reits

Real estate investment trust (REIT) companies - Growthpoint, Redefine, Hyprop and Fortress Income Fund - are seen as remaining robust thanks to their high-quality and diversified property portfolios.

"Low to moderate vacancy rates remain driven by tenant retention strategies, but at the cost of higher tenant retention costs and below inflationary rental renewal growth," the report states.

"Moderate leverage metrics provide some headroom against a weakening operating environment and creates flexibility to grow via debt-funded acquisitions."

There is also capital allocation outside SA to diversify income streams and property exposures, but the operating track record yet to be demonstrated, in Moody's view.

Telecoms companies

Telecommunication companies - Cell C, MTN, Telkom and Liquid Telecom - are seen as having strong data and digital services revenue growth that will help against a decline in voice revenues.

Higher data consumption driven by higher smart devise penetration will be offset by lower tariffs, in Moody's view.

Another trend it sees is "negative free cash flow due to high capital spending to roll out next generation technologies (4G/LTE)".

Delays in new spectrum allocation is also regarded by the agency as negative for larger telecom operators.

Another trend is investment in fibre networks to meet growing broadband traffic demands.

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