Last week’s earnings were mixed, pointing to some ongoing weaknesses in SA.

PHILADELPHIA -  Last week a number of South African companies released results as the first earnings season of 2010 rumbled on, and although not uniformly good, there were some encouraging numbers. Below, I pick out some of the important results and discuss how they point to broader economic trends.

Tongaat Hulett (JSE:TON)
The sugar giant reported headline earnings per share (heps) up 44% for the year ended December 2009, mostly thanks to strong sugar prices. These numbers can be understood as part of a general global trend; food prices are high, and in many cases rising, and well-run agri-businesses are set to benefit.

There are a few drivers behind the phenomenon of rising food prices. First, there is higher demand for food worldwide, the result of a rising global population and a growing middle class in many parts of the planet, like China. Second, there have been output problems in various agricultural production regions, arguably the result of climate changes that have flooded some places and left others in the grip of droughts, reducing supply and driving up prices. Third, the growth of biofuels, particularly in the US, has redirected a lot of food into fuel production, again impacting supply and putting upward pressure on prices. All of these promise to be long-term trends that will underpin strong food prices for the foreseeable future.

Tongaat recognises this; CEO Peter Staude said that in 2010 the company will focus on growing production aggressively, hoping to capitalise on what're likely to be record-high sugar prices this year, making this a share to watch.

Bidvest (JSE:BVT)
Diversified industrial group Bidvest, which has operations in auto retailing, freight, business services, food distribution, and many other areas, posted some growth for the six months ended December - earnings per share were up 9% for the period - and forecast more growth in the second half.

Bidvest is an interesting company. Its diverse portfolio of businesses and its broad geographic spread - it has operations in Europe, Asia and Africa - mean that its performance is an excellent indicator of broad economic trends worldwide. If the company is saying "better weather ahead", well, that's a good sign all round.

Steinhoff (JSE:SHF)
This furniture group reported a small dip in profits for the six months to December 2009, thanks to a combination of rand volatility and low consumer spending. As we've discussed previously, consumer spending is a key weakness in the South African economy, and Steinhoff's results underscore this, suggesting that we'll see similar weakness in other businesses geared to consumers.

In addition, the rand continues to be a bugbear, both for Steinhoff and for South African business at large. The rand has strengthened considerably from its late 2008/early 2009 levels, against a backdrop of instability in the eurozone and uncertainty about the global economic recovery. As always, predicting where it will go is a mug's game; Steinhoff anticipates continued strength in the currency, which will keep up the pressure on its business.

Group Five (JSE:GRF)
Over the last few years, construction companies have been the best performers in the South African market thanks to the sustained boom in economic growth and, of course, the World Cup, both of which spurred a number of construction projects. Things are anticipated to slow down some after the soccer, but government has committed to extensive infrastructure investment and Eskom has a lot of building to do, so it's not hopeless.

Backing up this analysis, construction giant Group Five reported an 8.3% rise in first-half heps for the six months to December 2009, thanks to various World Cup and transport infrastructure projects, and said it anticipates it will be able to maintain second-half earnings at last year's level.  This indicates that construction, while unlikely to repeat the stellar performance of the last five years, is not going to be a total disaster.

Standard Bank (JSE:SBK)
The big blue bank last week reported a depressing 20% fall in heps for 2009. This is broadly in line with what we saw from Absa (JSE:ASA) (a fall of 26% in heps) and Nedbank (JSE:NED) (a fall of 30% in diluted heps), and again underlines the serious problems facing consumers in South Africa. As we know, South African consumers are carrying high levels of debt while struggling with rising unemployment and falling personal income, and until these problems are addressed, this Achilles' heel will hobble general economic recovery.

Conclusion
As one would expect, the results we've seen so far suggest that 2009 was very challenging for businesses geared towards general consumer spending, while businesses geared towards recovery in other sectors managed to produce some encouraging numbers. As more reports come through, we'll get a fuller picture of what 2009 was like for South African businesses, and what 2010 is likely to hold.

Write to Felicity Duncan: felicity@moneyweb.co.za or follow her on Twitter at http://twitter.com/FelicityDuncan

*This article first appeared in Discovery Invest

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