Bruce Whitfield 00:01

Meryl Pick, Portfolio Manager at the Old Mutual Investment Group, is with us on the line to us from Cape Town. Some very good results, and then some really tough results. Let's get the tough one out of the way. We'll talk to Chris Schutte, Chief Executive of Astral Foods after Eyewitness News at seven o'clock mirror. But, I mean, of all of the updates and results out today, certainly Astral Foods has taken the biggest blow from multiple state failures. They're certainly blaming that as the reason why their profits are down by nearly 90%.

Meryl Pick 00:53

Good evening, Bruce, and good evening to your listeners. Yes, reading the Astral results certainly makes for tough reading. And I think they are particularly impacted by loadshedding, but also by, you know, food inflation - feed inflation, rather, which is related to energy prices, fertilizer prices, etc. So, I think of all the results that we're receiving today, there is a common thread about the loadshedding expense going up six, seven fold versus the first half of last year, or whatever the comparable period was. But in the case of Astral, I mean, nearly a billion on loadshedding costs. And I think this does highlight the food inflation impact of loadshedding in combination with a weaker Rand, one can now understand why food inflation remains sticky. And you can see the knock-on impact. Yes, loadshedding is inconvenient, but it actually is having a material impact on food prices.

Bruce Whitfield 02:16

Yeah, it's coming through thick and fast. It comes through in Premier Foods, it comes through at all of the food companies, but Astral Foods is taking a really, really rough blow from loadshedding. I suppose the antithesis of that is Netcare, although they're spending a small fortune on diesel, they've been preparing for this sort of meltdown since... they said 2013 or 2014, 2013 when they started sort of putting in alternatives, because, you know, again, you've got to be able to read, I suppose, somehow read the future when it comes to insuring yourself against the failure of infrastructure?

Meryl Pick 02:52

Absolutely. I think hospital margins are probably somewhat healthier and more consistent than poultry modules. So, having the cash flow at your disposal to invest is another thing. But certainly, Netcare has been particularly proactive, it's quite encouraging to see a recovery and normalization in occupancy levels, post-Covid. Back in 2020, we did some work to look at pandemics and generally how long do they last. And since the Second World War, we haven't had a pandemic that's lasted for more than two years. Yes, at the time, it felt like Covid would last forever. But actually, it fell within that timeframe. And we are now in 2023, seeing a normalization of hospital occupancies, although with margin still somewhat under pressure because of higher inflation and particularly pressure on nurse wages. But it certainly is encouraging just to see the normalization of one of the sectors that ironically, were quite hard hit during a health crisis. I think the other lesson there is probably that, as I mentioned, at some point, it felt like Covid would last forever. And we would never get out of it. So, perhaps the lesson is right now, loadshedding feels like it will last forever.

Bruce Whitfield 04:25

It has, this loadshedding is 15 years old and well, Covid has weakened and slowed, I mean the power grid is weakening too, unfortunately, that has the opposite effect. But you're absolutely right, because at some point, there's a fabulous line: "this too shall pass", but this feels like a kidney stone passing, unfortunately. It's a deeply-

Meryl Pick 04:45

I think a solve would be that corporate South Africa is taking matters into their own hands.

Bruce Whitfield 04:49

No, but exactly right. That's what Richard Friedland's telling us, and I'm sure Chris Schutte must be doing the same sort of thing. So would Famous Brands, its franchisees having to spend a fortune on generators, but there's a recovery coming through in Famous Brands, there's a recovery coming through in Adcorp, I think Baldwin's trading update was welcomed today as well. There are some really positive coping stories coming through in lots of trading updates at the moment.

Meryl Pick 05:16

Yes, I agree. I think the level of earnings growth that we're seeing is encouraging. There are some base effects. You know, this is probably for those who are reporting a full year, in some cases, the first full year without too much Covid in the numbers, but there is still a little bit of that base effect. But I think it speaks to the resilience of South African companies, many of them have significantly de-geared or cut costs, those costs have not necessarily crept back up as revenues have returned. And consumer, you know, defenders moving around, I suppose, depending on the reaction to loadshedding, and it is having an impact on consumer behavior, as is continued hybrid work. So, you know, different segments would be impacted differently. But if... let's say there are some positive earnings and returns to be made, if one selects carefully, and that is encouraging.

Bruce Whitfield 06:17

Little less encouraging as prospects for a rate hike this week, where a 25 basis points is definite. Market seems to be looking at a 50 basis points as more than just a vague possibility.

Meryl Pick 06:31

Absolutely, I think what we've seen in the last week or two with the Rand going out even further than it already had year to date. The SARB certainly is under some pressure - yes, it's not responsible for the Rand directly, but the Rand does have a knock-on effect on inflation. As we've discussed, the loadshedding impact on the likes of food inflation, is likely to stay for several more months. So, whether it's 25, whether it's 50. The point is it's going up. And that will continue to be a negative theme for at least the next six months on new consumer spending and consumer wallets. [...] for the banks, but negative for direct consumer facing shares.

Bruce Whitfield 07:16

And just lots of international commentary talking about global inflation, saying you know, don't get excited. Inflation is maybe coming under control in many places like the United States and others, but don't expect it to fall. It's not... this isn't a return back to your 2% target in North America or the UK anytime soon. And that's a reality with which I think we've still got to get into our mind space, that we're in a 'high inflation for longer' environment.

Meryl Pick 07:44

Absolutely, I think energy markets are still quite fragile. And energy costs being quite a significant cost. But also, structurally, there are just a few drivers at play, for example, de-globalization, you know, the world manufacturing centre of China being in ongoing tensions with the US, so the fracturing of that globalization and the efficiency that it's brought, that in itself is inflationary, along with many other things such as aging working population. So, structurally, the world is facing headwinds when it comes to bringing inflation under control.

Bruce Whitfield 08:32

Thank you, Meryl Pick, who is a Portfolio Manager at the Old Mutual Investment Group, on the line to us this evening from Cape Town.