The JSE Ltd — the financial services company that, among other specialist offerings, operates the local bourse — might just be worth stocking up on at this point in the local investment and economic cycle.
Last week it issued interim results to end-June, where the 26% decline in bottom line might be viewed as a realistic pronouncement on dour (and jittery) local investment sentiment. But as JSE CEO Leila Fourie remarked at the investment presentation, "South Africans are congenitally negative".
She might have a point in terms of investors overlooking, or simply disregarding, the more subtle narrative around the group’s longer-term growth aspirations.
While the all share index (buoyed by large global stocks including Prosus/Naspers, Richemont, and the mining giants) looks sound enough on a graph, the JSE has not been a vibrant market among the bulk of the second-line, mid-cap and small-cap shares.
Not only was there lower capital markets activity (albeit off a high base and also partly offset by growth in some derivatives markets) with equity transactions down, but the JSE is shrinking, with another 15 company delistings in the first half of 2021.
It could lose further mid-cap listings with companies including Distell, Imperial Logistics and Adapt IT all likely to be bought out. And with SA Inc regarded as cheap, further buyouts and delistings seem a distinct possibility.
Fourie noted research that indicates that SA companies are undervalued by between 30% and 50% against the world’s emerging markets.
Of course, a shrinking market won’t really play havoc in the short term while most trading and value is derived from the handful of large global stocks listed on the exchange.
This is evident in the JSE’s collective market capitalisation, which grew 11% to almost R19-trillion at the end of June — mainly thanks to the mining giants, which are reaping the benefits of a global commodity boom. But a smaller universe will eventually hit JSE activity, and a longer-term worry will be the relative relevance of the basket of large global stocks on the JSE if exchange controls are ever lifted and investors can trade shares freely on other global bourses.
The London Stock Exchange also suffered a wave of delistings in recent years but, after re-examining what would make the market more attractive, seems to have turned things around.
For its critics, the JSE’s regulatory red tape is a big problem.
Several executives of listed companies (including Piet Mouton, the CEO of PSG Group) have recently bemoaned the costs associated with maintaining a JSE listing, arguing that it’s detrimental to driving entrepreneurial participation on the bourse. Fourie, in fact, revealed that the government had contacted the group to discuss the bourse’s approach to regulation.
A key slide in the JSE’s presentation showed the monthly billable average daily value traded shifting down 9% in the first half of 2021 against 2020. There are, however, three months where this year’s trading volume beat last year’s volumes — which might suggest the interim pattern might not be extrapolated easily into the second half of the financial year.
Still, the JSE is hardly in a sweet spot, and a 40% share price decline over five years testifies to the market’s jaundiced outlook. A dividend yield of over 7% reinforces an ex-growth tag.
Opportune Investments chief investment officer Chris Logan says investors need to have a lot of empathy for Fourie, who was appointed CEO in October 2019. He points out that the negative trends affecting the JSE — such as delistings, falling returns, price competition, SA’s continually worsening macro environment — date back to at least 2015 when the JSE’s ROE (return on equity) topped out at 30%.
"In rugby terms it’s fair to say Leila received a hospital pass and conditions have only deteriorated further since then."
Still, argues Logan, exchanges play a "vital" role in promoting economic growth via new listings, which create new jobs and embrace new technology and innovation. And while the world has experienced an unprecedented global IPO (initial public offering) boom and commodities supercycle, the JSE has gone backwards, "so bold solutions are desperately needed, urgently," he tells the FM.
But, says Fourie, "neighbourhood does matter … the real economy has contracted severely". In other words, it’s impossible to divorce the JSE from the environment in which it operates.
Thankfully, the JSE generates a heap of cash and maintains a robust balance sheet.
While cash generated from operations in the interim period was R472m (10% down on last year), it is equivalent to a reassuring 548c a share. The balance sheet, meanwhile, holds a net cash balance of R2.1bn — which should comfortably sustain the JSE’s dividend regime and allow it to pursue revenue-diversifying growth opportunities.
In terms of the immediate strategic focus, the JSE is pressing ahead with its private placements market (which could capitalise on the healthy private equity sector) and inroads have been made in listing social bonds as part of an effort to build a sustainability segment.
A more immediate impact at bottom line, however, may be felt from the new JSE Investment Services (JIS), which will build annuity streams from its registry services and variable revenue from corporate actions.
The JSE bought 74.85% of Link Market Services in November 2020 for around R225m, and snapped up the remaining stake for R75m in June this year.
Link SA ranked as the second-largest share registry business in SA and boasts a client base that includes six of the top 40 issuers. Newly formed JIS offers mainly transfer, secretarial and registry services as well as treasury services (like calculating and managing the payment of dividends and distributions for companies) and corporate actions (planning and managing rights issues, elections and dividend payments on behalf of companies).
Fourie says JIS currently holds a 20%-25% market share, but expects to grow this markedly with new clients already secured and a strong pipeline of new business possibilities. "We are taking a growth lens to this business and intend growing market share, which will make a material difference to revenue," she says.
There are new opportunities for JIS as well. These include asset reunification and share register clean-ups as well as share register analytics, BEE training and extending the offering by administering executive share schemes.
Taking a view that sentiment for the JSE Ltd can’t go much lower and that the group can easily endure a few more years of leaner activity, longer-term investors would do well to keep a closer watch.
At around R100 there could be a good opportunity to snatch a slice of a financial services group that — despite the emergence of a handful of new (but small) stock exchanges in SA — effectively still enjoys a monopoly.
Even though it may seem optimistic at this point, the benefits of a friendlier regulatory environment in the mining sector (which could resuscitate the once-vibrant mining exploration segment) and a long overdue re-rating of the small and mid-cap sector (perhaps courtesy of more international entities swooping in on bargain counters) could be huge swingers for the JSE in the medium term.
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