Blood in the stock market streets
The market is illiquid, share prices have plunged and it’s plausible that investors are buying stock to take dividend pay. However, this does not mean companies are showing much propensity to pay dividends
Although there are certainly some opportunities to buy undervalued stocks on the Botswana Stock Exchange (BSE), Jonathan Paledi, the Portfolio Manager at Inkunzi Investments, says impediments such as illiquidity, which affects investors’ ability to project investment views, persist.
Illiquidity, Paledi says, has also been compounded by delistings that have occurred over past years.
During the period 1 January to 30 November 2020, the Domestic Company Index (DCI) depreciated by 8.4 percent in comparison to a decline of 4.4 percent during the same period in 2019 while the Domestic Company Total Return Index (DCTRI) depreciated by 3.8 percent in comparison to an increase of 1.0 percent in the corresponding 2019 period. The Foreign Company Index (FCI) depreciated by 1.0 percent on a year-to-date basis in 2020 compared to a decline of 0.5 percent over the same period in 2019. Paledi observes that the index is trading lower than its previous highs but it has consistently been on a decline for the past five years or so.
There are 32 listed companies on the Botswana Stock Exchange. Of this number, 21 depreciated in share price, four appreciated in share price while seven experienced no share price change during the period 1 January to 30 November 2020. According to the BSE, the three companies that experienced the biggest declines in share price were Lucara, Tlou and Seed Co, which declined by 61.6 percent, 58.8 percent and 38.7 percent respectively. The companies that experienced increases in share price were Far Property Company (FPC), Letlole, Sefalana and Olympia, which gained 0.4 percent, 1.8 percent, 4.1 percent and 100.0 percent respectively.
Tapologo Motshubi, the Portfolio Manager at Allan Gray, says sentiment tends to be the key driver of share prices from day to day and that it is generally unpredictable. He notes that the preference is to focus on where share prices trade relative to any assessment of the real or intrinsic value of the underlying company based on an understanding of long-term operating factors like revenue growth, profitability and industry positioning. If share prices trade below this assessment, he says, it is a buy and vice versa.
There are several companies that experts believe are trading at attractive prices relative to their long prospects and other available local alternatives. There are also those that are believed to trade above assessment of their intrinsic value.
As at 30 September 2020, the market was trading at a historic price-to-earnings (PE) ratio of 10.8x versus the 20year average PE ratio of 13.9x, according to market information by Kgori Capital. Looking at this matrix one can conclude that the general market is undervalued, Tshegofatso Tlhong, Portfolio Manager at Kgori Capital says adding that this discount could be attributable to forward market expectations that earnings will decline and the PE ratio will expand going forward.
The impact of COVID-19 has undoubtedly been felt by most companies listed on the exchange to varying across industries, affecting profitability of most companies. Tlhong has noted that the banking sector fared better than expected, supported by the Bank of Botswana’s intervention. “The total portfolio at risk, which we define as the total value of restructured loans, for listed companies was 10 percent to 15 percent of total loan book on average,” says Tlhong, adding that given the increased provisioning by banks for this event risk, “we are confident that the sector will be able to absorb this shock”. She points out that results of the banking sector showed that credit impairments increased due to the prevailing economic environment while the cost of funding declined because of capital being released from Bank of BoB interventions.
The hospitality sector is one of the hardest hit by Covid-19 mitigation restrictions. Tlhong says the expectation is that the tourism sector will continue in the doldrums going into Q1 2021 as the local transmission curve steepens and cross-border travel remains minimal. “Local tourism should keep some providers who cannot go into care and maintenance afloat,” she says.
The property sector has also fared better than expected, and although revenues did take a hit and expansion plans were halted, sector profitability has remained broadly intact. Profitability in the telecommunications sector is under pressure due to the shift in consumer behaviour.
Paledi argues that a positive outlook on addressing COVID-19 and improvement of economies should result in improving company fundamentals, which could bode well for share price performances. “Over the long term (3 to 5 years and beyond), we believe the key determinants that drive share prices are the underlying operating characteristics of the business and how well they perform relative to the price that one is able to buy the shares at today,” Motshubi adds.
On the other hand, Tlhong says in the stock market, anything can happen. She explains that rebounds happen when investor sentiment turns positive on company earnings and prospects; as well as when households have excess disposable income that can be used to purchase assets. “These factors increase demand for assets and normally drive up prices.”
There are two return components of shares, being dividend payments and capital gains. Dividends offer partial return on investment which, although guaranteed, does not mean an investment will be profitable. Paledi argues that low prices could be advantageous because investors “buy low” with expected share price appreciation. Notwithstanding that, he says, it is not a foregone conclusion that it will translate into capital gains, which showcases the uncertainty of this return component.
Tlhong says investors look at balance sheet strength, which determines whether a company can weather the storm, and expected future cash flows which speak to whether the company can make a recovery and resume dividend payments. She says the pandemic has not affected all companies equally so opportunities still exist. “Some investors may choose to park their cash in fixed income or money market investments so that they preserve value until a turnaround happens,” she says adding that investors invest for different reasons therefore they will behave differently in environments like this.
In Botswana, given the market not being liquid and the fact that prices tend to be stagnant (hence little capital gains), some argue that investors could be buying stock for dividend pay. “Of course, it is plausible, given that even from a return perspective, the Domestic Company Total Return Index (DCTRI) has fared better than the Domestic Company Index (DCI) on a year-to-date basis,” Paledi argues, adding that investor preferences differ, which could be the reason for some investors’ buying decision. Tlhong supports; “in an environment where asset prices are declining, a dividend return is ideal to prop up performance on a total return basis”.
Motshubi adds that the trade-off to consider is whether those dividend reductions have caused declines in share prices to the point where those shares are now attractive, based on how the company is expected to perform over the long-term. “We consider the total return to be expected from owning shares in a company, not just its dividend. That said, an investor intending to buy a share for its dividend only may be well served to consider how sustainable that dividend will be over the long-term,” he says.
Covid-19 has cut a blistering trail across the economy, rendering many companies unable to declare a dividend payout as stocks fell on the bourse. To name a few, the Board of BTC had recommended that out of prudence no final dividend be declared in order to retain cash in the business. Sechaba said its associate companies had decided to delay dividend declaration to a future date to allow for liquidity management to weather the storm. Tourism and hospitality counters also halted dividend pay after suffering losses as a result of halted travel.
Market analysts agree that although dividend suspensions generally impact on investor confidence and can trigger sell-offs, it does not function in isolation. For example, Choppies barely paid a dividend at its peak. It was a growth stock and observers note that investors were happy with that. Companies are currently cautious about paying dividends due to poor performance and uncertainty associated with Covid-19. But it is true that neither inspires investor confidence. So, experts argue, poor performance (share price and profitability) and a direct impact on investor pockets through forgone income is what might have led to compounding the losses and selloffs.
Tlhong argues that a sell-down does present an opportunity to buy good quality businesses at discounts to their fair value. “It is not advised to make blind purchases however, analysis of a company’s prospects beyond the pandemic must be done to ensure that there will be a recovery in pricing and by extension a positive return on investment,” she says.
Between January and November, trading activity during the review period was lower in 2020 relative to the corresponding period in 2019. As at the end of November 2020, the BSE had recorded total equity turnover of P656.0 million from traded volumes of 373.6 illion shares. The month of March experienced the highest turnover of P117.7 million over 50.9 million traded shares followed by the month of June with P89.9 million over 33.9 million traded volumes.
The BSE had registered equity turnover of P1,652.3 million and a total volume of 582.3 million shares traded during the corresponding period in 2019.
The top three traded companies during the period under review were Letshego (P147.5 million), FNBB (P79.8 million) and Sechaba (P77.9 million). The total turnover from these three companies accounted for 46.5 percent of total equity turnover, with the leading counter Letshego, accounting for 22.5 percent of total equity turnover. In comparison to the same period in 2019, the top three traded companies accounted for 45.0 percent of total equity turnover with the leading counter, Wilderness, accounting for 17.1 percent of total equity turnover.
Local companies contributed 53.8 percent to total turnover or P352.8 million in monetary terms while local individuals contributed 8.7 percent of total turnover recorded during this period or P57.4 million in monetary terms. Foreign companies contributed 32.8 percent or P215.2 million to equity turnover while foreign individuals and brokers contributed 4.5 percent (P29.5 million) and 0.2 percent (P1.1 million) to equity turnover respectively.