The Rand has been strengthening, so of course analysts are now turning bullish on it (FirstRand turns more bullish on SA’s economy, rand). How long and how much are anyone’s guess, but the Rand’s trend is currently certainly towards strength.
Ironically, though, this hurts large swathes of the JSE’s listed companies, from miners that export to global groups that are accidently listed here. That is the thing being in an export-orientated country, the currency can cut like a knife into profits.
But which companies does this stronger Rand benefit?
Simple: the importers.
Medicine Importers: Not really big beneficiaries…
In medicine, most of the IP lies within what is referred to as the “Active Pharmacuetical Ingredient” (or “API”). Even locally, giants like Aspen Pharmacare (code: APN) are material importers of APIs that they then combine and package into the medicines they sell locally.
Aspen is a complex one, as it operates across multiple territories, currencies and, indeed, even trades amongst itself and exports from South Africa… Thus, perhaps a bad example of a “clean” importer to start with.
A much cleaner importers is Adcock Ingram (code: AIP), that imports some APIs, other medical items and only operates in South Africa. Indeed, Adcock Ingram’s FY 23 integrated report shows that its sensitivity to a 10% stronger Rand would have boosted FY 23’s profits by c.R31m or c.4% (before tax).
Perhaps not gigantic, but this likely due to hedges in place that will roll-over in time. Thus, if the stronger Rand exists for an extended period, then these medical businesses could become nice beneficiaries. Though, Single Exit Price may work against them here… I.e. This is complex and I would not call these investments based solely on Rand movements.
Clothing Importers: Somewhat benefitting but diluted down by exposure to credit & offshore…
Typically, clothing retailers import cheap clothing from (lets be honest, mostly Asia), add a mark-up and sell it to consumers for cash or with high-interest rate loans.
While Truworths (code: TRU) and The Foschini Group (code: TFG) partake in this, both are mostly credit-orientated with large offshore operations. Also, The Foschini Group has gone through a period of localisation of their supply chain.
For these reasons, I doubt that these two groups will be major beneficiaries of any strong Rand scenario.
Rather, Mr Price (code: MRP) runs operations that are exclusively in South Africa, mostly imported stock and mostly cash-based sales. These attributes means that it could benefit substantially from a stronger local currency.
That said, digging into the detail reveals that this may not be very true in the short-term. In Mr Price’s FY 24 integrated report, it reports that a 10% strengthening in the Rand would see its foreign trade creditor balance improve by R58m and forward exchange contracts by R122m or c.3~4 of pre-tax profits.
Also, not massive in the short-term.
Technology Importers: Major direct beneficiary!
Finally, South Africa is a net importer of technology. While software is imported, most software license models work on monthly or annual licenses and reset themselves to different forex levels quickly. Also, software does not carry inventory and, thus, has less real-world forex exposure than hardware importers.
Thus, the most exposed to currency in the tech-space is the hardware importers (so-called, “hardware distributors”). While Alviva and Datacentrix have both delisted from the JSE, the remaining hardware distributor on the local bourse is Mustek (code: MST).
Furthermore, digging into Mustek’s FY 24 integrated report shows that a 10% strong Rand (versus USD and EUR) would have increased Mustek’s profits by R162m.
Is that a lot or a little?
Mustek’s FY 24 pre-tax profits were only R40.1m! A 10% strong Rand alone would have increased Mustek’s profits by multiples of its reported number.
In the last twelve months, the Rand is +c.8% strong to the USD and +c.6% strong to the EUR. Yet, Mustek’s share price is -9% over the same period!
EOH Holdings (EOH) and Datatec (DTC) may also somewhat benefit from a strong Rand here, but the former is diluted by its majority services turnover and turnaround dynamics while the latter is really a global player and South African is small in their lives.
Summary
While a stronger Rand is generally good for our importers (and our consumers), most importers have (rightly) managed this risk carefully with hedges in place and are unlikely to benefit strongly in the short-term. If the stronger Rand persists, then these hedges rolling-over to lower levels should benefit them but this is harder to call or quantify. The exception to this may be Mustek, whose near-term profits could see a significant kicker from the strong Rand, assuming that Mustek’s volumes, margins and the logistics/port troubles can be navigated successfully.
ORIGINALLY APPEARED IN MONEYWEB.