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The boom continues

03 December 2004 Angelo Coppola

South Africans have surely learned to do one thing right and that is to spend cash, whether it is their own or the bank's.

Neels van Schaik at Alphen Asset Managers says that one should bear in mind that we are only catching up with the consumers from the rest of the developed world, who are already up to their eye balls in debt.

With South Africa's debt to disposable income measure sitting at close to 55% we, however, still have scope to extend ourselves a bit further. It is not necessarily the right thing, but it gives us indeed a bit more breathing space.

It is the growing confidence in the South African economy, as well as the increasing confidence in the sustainability of lower interest rates and lower inflation, which is fueling the current spending boom.

The tax cuts (around R35bn) over the last few years are definitely sitting in the base, but all of this money has not necessarily found its way into the tills yet. Another point to remember is the multiplier effect of the increase in the monetary base across the whole financial system, which might cause this spending boom to have more legs than expected.

Although one has to keep in mind that this sector remains cyclical, it is also unwarranted to get too pessimistic about the sector over the next year or two.

Edcon, is probably one of the best examples as a beneficiary of this sweet spot in the South African economy. Since 2002 the company has grown headline earnings by 360% and is expected to raise HEPS by another 60% for the 2005 financial year.

A large part of the improvement should also be attributed to a more efficient management team and a more productive workforce. One of the most important factors for the improvement in performance is the increase in stock turnover, which has improved to almost six times at the 2005 interim results.

This has had a major impact on the cash flow of the company, as less money is tied up in inventories. Management is confident that this ratio is sustainable, especially with CNA still expecting a significant improvement in its stock turnover.

This improvement in cash flow caused a drop in the dividend cover to two times. The dividend yield therefore remains attractive at 4.8% for 2005.

The debtor statistics remains healthy despite the growth in credit outpacing the total sales growth. The "able-to buy" accounts remain at a healthy 87%. This means that 87% of the debtors are current or one month in arrears.

This will, however, be a key number to watch going forward. The company sold another R1bn debtors, older than October 2002 to "On-the-Cards", which is the securitisation vehicle.

This is more proof of the quality of the company debtor's book and the way in which the company is improving the efficiency of the balance sheet. Although the retail sector has run hard in the short term there is no reason why one has to be too short of this sector, especially with the earnings visibility over the next two years.

Relatively attractive dividend yields still support the valuations, while we also have an underpin in the form of accelerating economic growth over the next few years.

It feels brave being so optimistic about a company (and a sector that has run so hard), but then again, if you want to walk on water you have to get out of the boat!

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