48 of 2017


Newsletter No. 48                                                                                      15 December 2017

This is the final newsletter for 2017.

Thank you for giving me the opportunity to work with you this year. It has been an honour and a valuable experience for me. I wish you a happy holiday and a new year filled with all good things.

Next newsletter will be on the 19 January 2018.

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Retail sales far lower in October than analysts expected

By Sunita Menon

Investec economist Kamilla Kaplan says consumption growth is still constrained by factors including tax hikes, high unemployment and weaker income growth

The retail sector did not do as well as expected in October but still signalled stronger economic growth at the start of the fourth quarter.

Annual retail trade sales growth slowed to 3.2% in October from 5.4% in September, Statistics SA reported on Wednesday.

In rand, October’s retail sales grew to R82.2bn, down from September’s R82.3bn in current prices.

The retail sector is an important indicator of consumer spending, which drives growth in the economy.

The highest annual growth rate of 15% was achieved by retailers that Statistics SA classified as “other”, followed by pharmacies, which grew sales 5.7%, clothes retailers (5.5%) and furniture retailers (5.4%).

Seasonally adjusted retail trade sales decreased 0.1% month on month in October. This followed month-on-month changes of -0.4% in September and 2.6% in August.

Investec economist Kamilla Kaplan explained that decelerating inflation over the course of 2017 has provided some relief to households, but consumption growth continues to be constrained by a number of factors.

“These include tax increases, high unemployment, weaker income growth and modest rates of household credit extension. Moreover, persistently depressed consumer confidence has also impacted consumers’ willingness to spend, particularly for big-ticket items,” she said.

Both Kaplan and macroeconomics website Trading Economics projected retail sales at 5.1% year on year in October.

FNB chief economist Mamello Matikinca cautioned that there may be subdued growth in the sector as consumers probably deferred purchases in anticipation of Black Friday, which follows the US Thanksgiving holiday on the fourth Thursday in November.

Pep and Ackermans give Star a boost

By Robert Laing

CEO Ben la Grange says real market growth is likely to be subdued, but positive sales momentum is expected to continue as the company’s more affordable offer resoates with constrained consumers.

Ben La Grange – Picture Freddie Mavunda

Star, the JSE-listed holding company of Pep, Ackerman and other retailers unbundled from Steinhoff on September 20, released its first financial results as a standalone group on Monday morning.

“As communicated during the listing process, Star was only listed for 11 days during the 2017 financial year and thus no further dividend will be declared for the reporting period,” the company said in its statement.

Star’s first results compare 12 months against 15 months because it changes its financial year end to September from June.

Comparing the year to end-September 2017 against the matching period in 2016, Star said its revenue grew 13.2% to R58.6bn.

“Revenue growth was largely attributable to Pep and Ackermans, which, in aggregate, account for 85% of the discount and value division’s revenue,” Star CEO Ben la Grange said in the results statement.

“Like-for-like revenue growth of 6.5% was achieved by Pep and Ackermans in aggregate, influenced by a weaker fourth quarter. Within product categories, kids’ wear and cellular delivered standout performances. Home, adult wear and fast moving consumer goods also supported growth.”

The group’s stores outside SA in Botswana, Lesotho, Namibia and Swaziland contributed 5% of its revenue. Exchange rate volatility slowed its expansion into Angola.

Star’s revenue declined 5% if compared with the 15 months in the comparable period, but after-tax profit nearly tripled to R3.6bn from R1.3bn. Headline earnings per share (HEPS) grew 121% to 133.6c for the 12 months from 60.4c for the 15 months.

La Grange said the group intended to open 350 stores during its 2018 financial year.

During the reporting period, it opened a net 272 stores.

About 300 “uneconomical trading locations” were closed, while the acquisition of Tekkie Town added 308 stores to the group’s footprint. As at September 30, Star traded from 4,953 retail locations.

“While real market growth is expected to be subdued, positive sales momentum is expected to continue as Star’s more affordable offer and lower prices resonate with a constrained consumer,” La Grange said.

Business Day

If convicted, directors could be fined R1m each or be imprisoned for 10 years

By Graeme Hosken and Katharine Child

Embattled Steinhoff executives face hefty prison sentences and fines if allegations of multibillion-dollar accounting fraud are proven true.

The Department of Trade and Industry and the Companies and Intellectual Property Commission said they were working with international law enforcement authorities in a global investigation into the retailer.

The commission’s probe follows calls by parliament’s standing committee on public accounts on Monday for the Hawks, Sars, the SA Reserve Bank and Independent Regulatory Board of Auditors to investigate Steinhoff’s implosion and financial losses.

The commission’s senior manager, Lana van Zyl, said it was looking at allegations of accounting fraud. “We are looking into the numerous structures of Steinhoff International which are extensive.”

Van Zyl said because Steinhoff was operating both locally and internationally, the investigation would prove tricky. “We know there are cross-directorships between South African and international directors.

“We’ll work closely with our international counterparts and law enforcement authorities and the auditors to examine the allegations.

“What action we can take depends on where the alleged fraud occurred and whether any of the company’s SA subsidiaries were involved in it or not,” she added.

Van Zyl said the implications for Steinhoff, if the allegations were proved to be true, were huge, adding that, depending on what the company’s staff were convicted of, there could be a R1-million fine issued or the directors could be imprisoned for up to 10 years.

On Thursday last week Steinhoff, whose shares dropped from R50 to R8.70 a share on Tuesday, reported that R100-billion had disappeared from its European financial books.

Fund managers in South Africa were saying that until Tuesday the numbers on the stock market were looking reasonable. However, not everyone was buying this, with some Steinhoff critics questioning the company’s executives’ “loose accounting practices” and numerous red flags that were ignored.

Futuregrowth’s Andrew Canter said the asset manager stopped lending money to Steinhoff about eight years ago.

He said it avoided Steinhoff for multiple reasons, including its “horrendous complexity involving different brands and companies across different jurisdictions in multiple currencies, along with the never-ending acquisitions that rendered year-on-year analysis difficult and credit ratios unreliable”.

“If we can’t understand the business why would we lend to it?” asked Canter, a chief investment officer with the asset manager.

Canter said they were wary primarily of the way Steinhoff’s managers conducted business.

He said there were enough signs “which evidently some chose to ignore … From what we know today, Steinhoff’s management appears to have been playing fast and loose with the tax laws and accounting practices.”

Wits University governance expert Alex van den Heever said one needed to question why some investment and equity loan companies saw the red flags, but others didn’t.

Van den Heever said: “That some firms did not pull their funds despite other companies’ concerns points to a bit of an ‘old boys’ club’ operation with people just accepting the word of others in the industry.”

However, investor Karin Richards, who has looked at Steinhoff’s cash flow, said: “There is nothing here for me that says: ‘Oh my … here is a big problem’.”

Richards said that, as a former auditor, she had a better idea than the average person on how to “window-dress accounts. The numbers look reasonable.”

Fund manager Keith McLachlan said: “Everyone knew it was fraud, after the fact.

“Intuitively, if one ignores the complexity of the Steinhoff business, if it was obviously fraud, not only would the stock market have seen it, but the auditors would have picked up on it long before it even saw the light of day.

“Nothing in the Steinhoff financial statements really screamed fraud or deep obfuscation of the numbers,” he added.

“At best, it perhaps looked like a business that was growing a bit too fast. At worst, it showed a business whose fundamentals were not particularly great. Fraud by its very nature is subtle.”

Financial analyst Stuart Theobald said one big mistake was that investors trusted Steinhoff main shareholder Cobus Wiese.

“Wiese had a certain halo effect,” Theobald said. “People had committed faith in his abilities to manage complexity and stay on the right side of the law, while sometimes going close to the line.”

The Times


Did you know……..

Children dressed identically to adults until the mid-1800s, when the concept of children’s clothing took off.

What Americans consider “tuxedos” are called “dinner jackets” in Great Britain, as the word tuxedo itself refers to the white version of the suit jacket in British English.

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