Covid-19 stressed local companies may be easy targets for investors

The Palace at Sun City (Supplied)
The Palace at Sun City (Supplied)

The Covid-19 economic slowdown has caused havoc on some of the country's companies in what could turn them into easy targets for investors looking to net a bargain in a time of crisis.

The unsolicited interest by a Chilean company, Nueva Inversiones Pacifico Sur (IPS) in troubled Sun International hotel group, which has been received with mixed feeling by shareholders, may indicate an appetite in local stocks decimated by Covid-19 lockdowns.

The hotel operator which is saddled with an R8.8 billion debt that is 6 times higher than its nearly R2 billion market capitalisation is staring into a financial abyss, with its hotels including the iconic Sun City resort having shut doors to travellers since late March when the hard lockdown began. 

It's a reality that many industries have had to contend with, as the government imposed restrictions on trade, which wrecked havoc on balance sheets. However, the crisis may present an opportunity for investors in pursuit of easy pickings.

According to Karl Gevers, director and portfolio manager at Benguela Global Fund Managers, the times ahead may see a change in the local corporate environment with more mergers and acquisitions likely to take place as entities fight for survival.

Gevers believes that distressed companies may find themselves targeted but some of the large and well capitalised businesses could have the financial space to keep suitors away.

"The environment has a lot of distressed businesses with elevated debt levels that could either sell assets or be targets of takeovers. We are certainly likely to see cases of mergers and acquisitions." 

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"What might put suitors off are high debt levels of some of the companies, but well capitalised businesses may have a bit of a runway and would rather try to wait out the difficult period," he said.

Gevers also pointed at planned capital raising strategies by local companies to either shore up their balance sheets or acquire opportunities as some of the indicators of potential deal making. 

Clothing retailer TFG looks to raise R3.95 billion through a rights offer to lower debt and protect its balance sheet, while Mr Price also announced a plan to raise up to 10% of the company's ordinary issued shares for growth opportunities. However, it is not yet clear in what form such opportunities may take place.

Companies cash-strapped

Retail analyst Syd Vianello said there was no indication that companies would have capital to pursue acquisitions, given the current economic climate. He described the unofficial bid for the majority of Sun International shares as an "exception rather than a rule".

"The recent company results show that companies have ran out of cash, the two months of lockdown have dramatically reduced cash flows. I don't see companies rushing to buy anything now until they get their own books in order," he said. 

"I don't see anything unless there is something opportunistic like the Edcon situation, if somebody can get Edcon for virtually nothing, then they will buy it."

"Companies are more cash-strapped than anything, especially when it is not known how long Covid-19 is going to last, therefore I do not see major acquisitions," he added. 

Even mining companies appear to have not escaped the debt spiral. Petra Diamonds on Friday announced that it seeking offers for the company, or for parts of the business or assets after conducting a strategic review aimed at finding ways to repay its $650m (R11 billion) in debt due on 1 May 2022. 

The company which has three mines in South Africa and one in Tanzania said it had not yet received any offers.

It's mines have produced rare gems including the 530.20 carats, Great Star of Africa which was discovered at the Cullinan mine in 1905. However, the Covid-19 slump which slashed the demand for diamonds as retailers in different parts of the world shut down contributed to challenges faced by mining companies.

While the coming months might see more companies in distress, it remains to be seen if investors would be lining up in large numbers for the country's corporate jewels.



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