You wouldn’t be wrong to conclude that logistics companies are making a nice buck, thanks to crumbling state-owned logistics company Transnet. But their prospects would be a lot brighter if Transnet were actually doing its job.
“I have a contrarian view to the freight industry benefiting from Transnet Freight Rail’s disruption,” Super Group CEO Peter Mountford tells the FM. “It is possibly one of the worst things that has happened to us.”
He says the price of coal isn’t high enough to justify moving it for extremely long distances on the road.
But the meltdown on the rail line to Richards Bay, from where coal is exported, has meant that only about half the capacity is used. The upshot is that South Africa lost out on an estimated R50bn last year in exports, as coal prices spiked globally.
It’s a huge missed opportunity for the country, and part of the reason various scalps have now been claimed at Transnet: CEO Portia Derby, CFO Nonkululeko Dlamini, Transnet Freight Rail head Siza Mzimela and the person responsible for the coal line to Richards Bay, Ali Motala, all resigned.
Miners, desperate to find an alternative way to ship coal, even asked truckers to help ship coal to the Port of Maputo, from where it can be exported.
“Not a week goes by that I am not called by coal companies,” says Mountford. “But it isn’t financially viable.”
It’s been a dramatic implosion in rail capacity. Bidvest CEO Mpumi Madisa tells the FM that while about 90% of the freight the company handled at the Port of Durban two decades ago was railed there, last year all the freight arrived by truck.
“That tells you how inefficient the system is,” she says.
Madisa, however, agrees with Mountford: “If we can move cargo on rail, [the county’s logistics] will perform much better.”
This is because a revitalised Transnet, able to shunt more ore from mines to ports, would mean more trucks would be needed to move ore from the mine to the “railhead” (where freight is loaded onto the rail system). That’s a shorter, but more profitable load for truckers.
As Mountford says: “Our vehicles will be more adequately used this way.”
Still, South Africans are nothing if not resilient. True to form, the largest logistics firms have come up with clever ideas to circumvent Transnet’s failings.
Grindrod, which manages the Maputo port, offers coal miners the option to rail minerals from Matsapha in Eswatini to the port in Mozambique, bypassing the inefficient eMalahleni-Richards Bay rail line. In its most recent financial year, Grindrod railed 500,000t of coal this way.
According to FirstRand CEO Alan Pullinger, the question we need to ask is: “Why are we making progress on energy ... and why are we not making progress on rail?”
Pullinger reckons part of the answer is that blackouts hit households and businesses alike, while the rail collapse hasn’t caused as broad a fallout. And, the suspicion is, some powerful people have interests in trucking businesses.
“If you drive out to Mpumalanga, you see a lot of coal trucks and a lot of new coal trucks,” he says. “That must be telling you something. Someone is making a lot of money here.”
And Transnet has seemed clueless to find a solution.
One option it piloted last year was to sell “slots” on different railway corridors to private sector operators. But on Monday, Transnet Freight Rail reversed its decision last November to award railway slots between Kroonstad and East London to Traxtion Sheltam.
The sticking points included “investment limitations”. Presumably, this alludes to the fact that these slots gave companies just 24 months’ access to the rail network — but analysts considered this unviable, given how much capital they’d need to spend.
It’s unclear if Transnet will again try to lease “slots” to third-party operators. For one thing, this plan has been superseded by the new “national rail policy”, contained in a new draft “freight logistics road map”.
If it does try again, the terms will have to be vastly different.
Madisa says Bidvest has shown interest in running freight on corridors which Transnet will lease to the private sector.
“We are very pleased by the progress that we see from Transnet in terms of private sector participation,” Madisa says. “We are still awaiting the adjudication of the [KwaZulu-Natal corridor] line. We’ve participated in that process, but we don’t have a result as yet.”
Others are less enthusiastic.
Grindrod CEO Xolani Mbambo was coy about the company throwing its hat into the South African railway sector. Rather, his company is focused on its rail operations in northern Mozambique, Sierra Leone and Zambia.
Transnet’s loss is someone’s gain
Still, it’s clear that while Transnet made a R5.7bn loss last year, the JSE-listed logistics companies are doing far better.
Bidvest’s freight division, which contributed R8.4bn to the group’s revenue for the year to July, grew almost 13%, while trading profit came in at R2.2bn.
Madisa says its Mozambican and Namibian operations “benefited from redirected bulk commodity cargo”, presumably from South Africa, as a result of Transnet’s failure.
“This business has obviously benefited from poor performance within the Transnet environment,” says CFO Mark Steyn. “We’ve been building [capacity] around that; customers and suppliers continue to try to move product.”
Steyn says that, even when Transnet begins to improve its rail system, higher volumes are likely to flow through Bidvest’s system.
“One of the big frustrations of exporters in the current year is that the price [of commodities] supported good product movement, but we just haven’t seen those volumes flow,” says Steyn.
Super Group also had a corker of a year. Its African supply chain unit, which includes South Africa, saw revenue jump 38% to R17.8bn in the year to July, while operating profit grew 48%.
And as much as Mountford says it’s not practical to carry coal on trucks, it still hauled 12% more coal in volume terms than the previous year, which boosted revenue. “A lot [of this] is exports going through Maputo,” he says.
Grindrod, which manages ports and logistics in the rest of Africa, saw revenue grow 32% to R3.79bn in the six months to July — again, doing well from Transnet’s collapse.
Maputo had a scorching year: the port handled a record 1Mt of chrome and ferrochrome shipments in April and May this year.
“That is exciting,” Mbambo says. “What I’d like to see is that 1Mt being the norm.”
But while Maputo is pumping, the same can’t be said for the Richards Bay Coal Terminal, where most of South Africa’s coal is shipped from. That terminal is designed to export 91Mt of coal a year, but last year, it moved only 48.8Mt — 53% of its capacity.
The conveyor belt, which carries about 1,000t of coal an hour to the docks, burnt down. Mbambo says this played havoc with volumes. “We are moving trucks into the port to move our cargo,” he said. “We are working tirelessly with Transnet which has committed to, and actually started with, restoration of the belt.”
Perhaps the only company not thriving amid Transnet’s collapse is Unitrans, owned by the JSE-listed KAP (formerly a subsidiary of Steinhoff).
“Unitrans was a very disappointing result for us,” KAP CEO Gary Chaplin said in August, at its presentation of its results for the year to July. “We lost a major [food] contract in the prior year.”
The early termination of that R1bn contract, with “an undisclosed retailer”, meant Unitrans had to pay a R107m penalty. It was, Chaplin said, “one of our highest return contracts”.
Though Unitrans submitted a tender to regain that contract, at less than half the profit margin of the earlier contract, it failed.
This tells a story of the shrinking margins at which hauliers are operating.
“Most logistics operations work around margins of 6%-7%,” says Mountford.
That, says Road Freight Association CEO Gavin Kelly is due to the costs of fuel and lubricants, labour, international requirements relating to carbon emissions, intermittent electricity supply, dysfunctional ports, congested borders, crumbling road network and corruption and extortion in road traffic authorities.
No wonder analysts put Bidvest’s Steyn on the spot about whether his company’s freight division’s trading margin — of a whopping 28% — is sustainable.
“The opportunity to improve margins in this scenario relates to improved infrastructure in South Africa, and specifically rail,” he said. “[Transnet Freight Rail’s] performance has unfortunately not been good and we’re seeing it in our underlying businesses.”
What you need, Steyn says, is to move high volumes of commodities — minerals as well as grain — to rail. “You need to have an efficient rail system.”
Where to invest
What is clear is that investors have done pretty well from private sector logistics operators.
Shares in Super Group, which made R66bn in revenue, rose 26.1% over the past year. And it still seems cheap, trading on a p:e multiple of 6.8, with a dividend yield of 2.5%.
Shaun Bruyns, portfolio manager at Mazi Asset Management, says Super Group is undervalued, trading at just 0.69 times its net asset value.
“They’re buying back shares,” says Bruyns. “If your share is cheap and you have surplus capital, and there is nothing [else] to buy, and you’re quite disciplined as an asset manager or capital allocator, you can buy back your own shares.”
Bruyns says that if you take Super Group and split out its 57% holding in the Australian SG Fleet, “you’d probably get the rest for 50c in the rand”.
He’s just as happy with owning Bidvest, which has gained a remarkable 78% over the past three years, and 23% in the past year alone.
“If I look at Bidvest and I look at Super Group — they’re not pure plays in logistics,” he says. “Grindrod is more a pure play.”
But Bidvest, which trades on a p:e ratio of 14.4, isn’t as cheap as Super Group. “We do hold both Super Group and Bidvest in our portfolios,” says Bruyns. “We know Super Group is cheaper [but] we’re happy to hold both.”
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