Investing some investible funds offshore is prudent
As we all know with government “open door” policies, they rarely are.
In the event, it seems we will continue to try to burn coal as our primary energy source for many decades, likely international environmental pariah status notwithstanding. One or two small nuclear plants may be built or borrowed and we will likely see more wind power, solar plants and biofuels plants generating power for the grid, we just don't know when.
There is a gap between electricity supply and demand for the next four years at least, and even longer if you believe Medupi and Kusile will never really come into full capacity. Energy technologies wind and solar generation are the quickest to bring online and may be the way to go.
Nevertheless, given Eskom's financial problems, and those of its parent, further electricity price increases well above the inflation rate seem inevitable in the years ahead.
All one can do is hope that Eskom management get their act together and keep the lights on, which, as my new Zimbabwean neighbours tell me, is also what most people live on in Zimbabwe, where it has become normal to only get a few hours of electricity a day, often only two hours.
They too once believed that hope springs eternal.
However, if one were considering building a robust long-term share or investment portfolio right now, one might consider choosing some investments to mitigate against the risk of future power failures. There are many ways to do this.
The best hedge is to invest in good shares that have little to zero exposure to South Africa, ie invest offshore. Lets face it, the local stock market has delivered poor returns over the past five years, never mind the many corporate disasters and uncertain outlook.
While investing should never be a knee-jerk reaction to bad news, this bad news has been with us for many years, and it is not unrealistic to expect that the government and Eskom’s financial woes will be with us for many more years to come, and that this will effectively hobble economic growth at the same time.
If one considers the small investing market that South Africa offers in a global context, investing some of one’s investible funds, or long-term savings, offshore, is prudent.
Get the advice of a broker or financial adviser before you head off into foreign markets.
One listed group that benefits from the Independent Power Producer Procurement Programme (IPPPP) is diversified construction group Raubex.
Some 27 new IPPPP renewable energy projects were approved by the government in April last year, and Raubex secured four projects for its infrastructure business worth R729million, and other project may be in the pipeline. Raubex’s diversification, from road construction to quarrying, offshore work and affordable housing is paying off. Its share price closed 1.2 percent higher at R20.18 on the JSE on Friday, on a relatively high * :e of 34.2.
Another company benefiting from the IPPPP is Nedbank, which has been the major debt funder of these projects, among all the financial institutions in the country, and has built up a solid bank of expertise in this field. It is working hard on digital banking too.
Its share price was trading 2.17 percent lower at R232.69 at the close on Friday, and considering the upward trend of the share price over 10 years, the * :e seems low at 8.17.
Another local share I would consider an Eskom failure hedge is Hudaco, importer of consumer and industrial power and consumable products.
It was closing 1.41 percent higher at R107.82 on the JSE on Friday, well off the R170 that it was trading at in April last year. Nevertheless, the share price trend of 5 and 10 years gives one a sense of a steady performance by this mid-cap.
At Friday’s price the * :e was low at 8.2. Hudaco never shoots the lights out in terms of performance, but turnover has risen steadily every year since 2012. Most of its products are imported, and yes, one of its businesses is to sell diesel and petrol electricity generators.
It is very difficult to find a listed company, with operations in South Africa, that would not be severely affected by extended power outages, if such a thing were to occur.
To my mind, the sugar cane, deciduous fruit, macadamia nut and relatively small housing development company Crookes Brothers may be the least affected. Its share price was up 4.75percent to R46.30 yesterday, trading at a relatively high * :e of 31.95.
While it is true that commercial farming operation can't operate without electricity these days, Crookes’ long growing products are unlikely to be affected by periods of no power, and the farms, in South Africa and the broader region, could also provide the feedstock for alternative power generation should the need arise.
Also, the sugar industry is in a state of flux, with the noose seemingly finally tightening around illegal importers, some of the traditional big importing firms no longer servicing this part of the world and the government revising some of the supports it provides the South African industry.
In the longer term, Crookes should benefit.