FIVE SHARES: Government tariff increases, import bans boost SA share prices
CAPE TOWN – There’s nothing like a little bit of help from the government to leverage a share price.
Chicken product producer RCL’s share price gained a healthy 3.8 percent to R11.47 on Thursday, bringing its gains over a week to 4 percent.
Given that this share’s price has slipped 32.5 percent from R17 per share over a year, recent strength, if maintained, may indicate a reversion of the price trend.
The Emerging Black Importers and Exporters Association put it succinctly recently that the collaboration between the government and the South African Poultry Association (Sapa), which ensures that the poultry industry, dominated by RCL, is protected with high import tariffs and duties, will ensure that “it's business as usual for another 10 years” in this sector.
This kind of protection, which ensures that all the big producers stay in business by charging people more for chicken and keeping cheaper chicken out of the country, means that RCL’s share must surely have turned the corner.
This writer has no doubt that Sapa’s request to the government for a really big increase in tariffs to 82 percent, from between 37 to 12 percent, will be acceded to at the end of August, so that chicken can become more expensive for all of us, and the future of RCL is now much more secure. Viva!
Which brings us to that other very protected essential in every poor man’s diet: sugar.
The Sugar Africa Producers Association also recently asked for another whopping big increase in sugar import tariffs and duties, to make sure that sugar mills keep making a profit, and thousands of jobs are protected.
The fact that the government supports this protection means it is quite happy to let consumers pay almost double the price of sugar, than it is landed at at the port.
Nobody is suggesting that perhaps somebody should at least re-skill some of those sugar mill workers, or that perhaps the sugar producers should find some other products to become more competitive. They don’t need to, because the government will protect them.
It would be great news for the share prices of sugar companies. But Illovo Sugar will soon be delisted and it seems that not even government protection was enough to prevent the country’s other big sugar group Tongaat Hulett from collapsing and being suspended from the JSE in June, mainly due to mismanagement.
Tongaat is in such big financial trouble that it even had to sell its game farms in Mozambique.
But don’t despair. There are other shares where you can gain some shelter from the strong winds of international competition and let the government force us as consumers to protect at least some of your risk as a shareholder.
For instance, The Concrete Institute will this week be making representations to the government to ban (yes you read right) the import of cement to South Africa for a period. Apparently the market is flooded with cheaper imported concrete.
To get a concrete fix in your share portfolio, consider some of the listed producers such as PPC, AfriSam or Sephaku. These shares also offer value considering the extended downturn in the construction industry, which has reduced local cement demand considerably, and which is bound to recover eventually.
Another share’s value that is at least partly protected by the government is Sasol. The government keeps tight control over fuel prices, taxes, duties and various subsidies of the local petroleum industry, and Sasol is a major player through its oil refinery and coal-to-liquid synfuel operations.
These are facing headwinds from global and local clean air emissions standards and lobbyists, but don’t expect any change soon on this front. The government needs an uninterrupted flow of rising fuel tax revenue and Sasol needs to protect its employees in South Africa, as well as manage, and fund, massive overseas expansion.
Sasol’s share price has slipped 32 percent in the past three months and was trading at R294.37 on Thursday, after declining more than 3 percent over a week.
There is value to be had here. The enduring strength of Sasol’s underlying profitability should be gauged from the fact that its share price was only R50, 19 years ago. In South Africa’s tiny market, Sasol is a bit like Eskom, it is too big to be allowed to fail.
Which bring us to Tsogo Sun, the last share the operates in an environment that it tightly protected and controlled by the government.
Its share price shed 3.89 percent to R14.10 on Thursday, but the price has generally been volatile since Tsogo recently separately listed its hotels from its casino operations.
Many economists have reminded us of late that consumers no longer have much disposable income to play around with.
So while import protection might seem like a good idea in the short term to boost share prices, remember that in the longer term, markets can’t reward uncompetitive companies.