Finding Stability During Unstable Times

Energy parastatal Eskom, reported its results recently, with debt up to a staggering R441bn and net cash outflow for the year of R100bn. The Auditors stated that there was material uncertainty as to whether Eskom is a going concern. Added to this, in its outlook statement, Eskom said it expected results for 2020 to be similar to 2019 and reported expectations that “Government will continue to support Eskom as a going concern.”

The audit report is a depressing read, referring to irregular expenditure of R25bn. Likewise, fruitless and wasteful expenditure of R641m could not be confirmed. R1.7bn was lost because of meter tampering. Arrear debt owed by municipalities has grown to R20bn and Soweto residential arrears are up to R18bn.

Accounting for Dummies

The latest financials on the SAA website are only to March 2017 and show a loss of R5.5bn, debt of R16bn, and the audit report indicated a significant doubt on the company’s ability to continue as a going concern. Recent press reports indicate that the financial stress continues to the present. The most recent accounts available for the SABC are for March 2018, recording a loss of R0.6bn (prior year loss of R1bn), and the auditors noted significant doubt on their ability to continue as a going concern. Recently, we saw press reports that SABC was battling to find cash to pay salaries.

Regarding the municipalities, the Auditor General reported that in 2018, only 8% of municipalities had received clean audits. There was material non-compliance with legislation on implementing consequences at 60% of municipalities. He also reported pressure on the audit teams to avoid disclosure of irregular expenditure, including threats and intimidation.

There were increasing indicators of a collapse in local government finances, with 76% of municipalities having a financial health status that was either concerning or requiring urgent intervention. R48bn was owed to creditors by the municipalities, but cash of only R37bn was available.

Fraud and debt traps – Private Sector woes

The Private Sector has not been much better. As recently as December 2017, Steinhoff had a market capitalisation on the JSE of R340bn, until massive fraud was uncovered and 98% of this value disappeared. EOH, once the darling of the JSE, last month reported that “unsubstantiated payments” of R1.2bn were being investigated. Almost 90% of its peak market capitalisation of R24bn has been lost. Tongaat earlier this year lost 90% of its value, before announcing that its results had been materially overstated and the shares were to be suspended.

South Africa is not unique in experiencing stresses in financial markets. The Argentinian peso collapsed by 30% in mid-August, on news of election results that indicated a swing to left-wing populism.

Interest rates earned by investors on over $16tn of international bonds are negative, and Global Equity Markets have taken a recent dive.

Diversification: the key to prudent risk management

This all makes for depressing reading – however, investors need to find a stable home for their money. For investors who are nervous about markets, but still want a return above inflation, consideration should be given to investing in the Sasfin Stable Fund. This Fund invests in all asset classes, managing the balance between asset classes depending upon the outlook for markets, but always aiming to limit risk by having a maximum exposure of 40% to equities.

The Fund has no exposure to higher risk assets such as over indebted SOEs or municipalities, and by nature of its cautious management, is unlikely to do so until their financial position improves substantially. It has a core of low risk income producing assets, which currently produces an income yield on the total Fund of over 6%. While the stock market has declined over the last three years, the Sasfin Stable Fund has produced an annual return of over 7% to mid-August 2019.

About the Author

Errol Shear
Fund manager, Sasfin asset managers

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