Month: September 2019

Average lifespan of companies is rapidly diminishing

September 19, 2019 / / 1 Comment

The average lifespan of the largest 500 listed companies in the USA, referred to as the S&P 500, has decreased from an average of over 35 years in 1980 to just over 20 years currently. It is projected to drop to below 15 years by 2025. Companies may fall out of the S&P 500 for various reasons. They could be replaced by other companies who exceed its size. Companies could be acquired or undergo a merger. Listed companies could go bankrupt. They could also be acquired by private equity firms. The 10 largest listed companies globally at 18 September 2019 were:

  1. Microsoft (US$1.048 trillion*)
  2. Apple (US$1.003 trillion)
  3. Amazon (US$899 billion)
  4. Alphabet aka Google (US$851 billion)
  5. Facebook (US$534 billion)
  6. Berkshire Hathaway (US$516 billion)
  7. Alibaba (US$464 billion)
  8. Tencent (US$417 billion)
  9. VISA (US$382 billion)
  10. JPMorgan Chase (US$378 billion).

* A trillion is a million million or 1,000,000,000,000

Microsoft is the only current top 10 listed company by value that was in the top 10 in 2009 and twenty years ago (1999). Facebook was not around 20 years ago – it was incorporated in 2004, which seems hard to believe given how ubiquitous it is. Alphabet and Tencent were founded in 1998. Alibaba, the Chinese behemoth, was started in 1999.

The composition of the top 10 has changed significantly over the decades. Today, it is dominated by technology and social media groups. Fifteen years ago, there was no particular trend. Back in 2004, General Electric was top of the pile at US$319 billion, followed by Exxon at US$283 billion and Microsoft (US$282 billion). My goodness, times have been tough recently for General Electric with all sorts of allegations of financial reporting scandals. This iconic group is in tatters and way past its glory days.

The above picture was sourced from www.visualcapitalist.com

What has been the primary driver of our changing business landscape? I believe the advent of the internet in the early 1990s and the launch of the iPhone in 2007 changed the world of business. Groups such as Alphabet, Tencent, Alibaba and Facebook would not be around in a universe without the internet. Arguably, Amazon would be a shadow of its self without connectivity. Smartphones have also been a game changer allowing all sorts of apps to make our lives easier and more efficient. Imagine a world without Uber or Netflix?

I wonder which of the current top ten listed companies will be around in twenty years time. How many will still be amongst the most valuable companies on the planet? I am guessing that Amazon, Alphabet, Apple and Microsoft will be. It is difficult to consider a world without Google and Amazon given their market dominance. Apple and Microsoft are probably going to be around given the sheer size of their war chests – Apple had US$237 billion of cash or near cash at September 2018 whilst Microsoft had US$60 billion. Apple will be able to sustain an iPhone flop or two with that type of money.

So what will be the driving forces of the next 5, 10 or 20 years? We keep hearing about the fourth industrial revolution (4IR). The advent of artificial intelligence, robotics, the internet of things, quantum computing, blockchain, virtual reality and 3D printing etc. are being touted as the next wave of technology disruption and change. It is hard to argue against this. However, there are other developments which may change the world of business. Cleaner energy sources such as solar PV may fundamentally disrupt the existing electricity generation industry. Pray this happens sooner rather than later. Self driving vehicles (arguably an aspect of 4IR) and electric vehicles could also profoundly change the automotive retail and fuel industries. I certainly will not be including shares in coal mines, petroleum companies, shopping malls or automotive retail groups in my meagre personal portfolio over the next couple of years. Exciting times are ahead and I look forward to watching the rise of new giants in the years to come.

 

Take care out there.

Regards from BeechieB.

 

 

 

 

Can Eskom trade its way out of debt? Not in this century or the next according to my analysis

Finally someone speaks the truth about Eskom’s financial woes

September 11, 2019 / / 2 Comments

The Business Day reported yesterday that Jabu Mabuza, the chairperson and acting CEO of Eskom, told parliament yesterday that Eskom cannot survive without state support. Well, that was common knowledge unless you happened to be living off the grid at a meditation retreat in the deepest darkest Africa. Ramaphosa appointed a task team in late 2018 to assess the problems at Eskom and devise a turnaround strategy amongst other things. The task team included some heavyweights with tremendous know-how and knowledge (yes, these are different things, know-how and knowledge) including the legendary Sir Mick Davis (who was the Eskom CFO back in the 1980s and early 1990s before he became a mining billionaire). There has been rumors in the press that the task team is suggesting that Eskom move towards renewable energy rather than continue with its obsession with mega coal fired power stations. Finally someone is talking sense. I know because I have a client in the solar PV sector and apparently the cost of solar power per kW is already below that of Eskom’s. Damn, that is bad news for Eskom! Imagine having a competitor that produces power at lower cost in beautiful, sunny South Africa and that’s also much, much, much more environmentally friendly. That’s similar to outdoor billboards trying to compete with online advertising platforms over the next decade.

I am not an expert in the field of electricity generation and distribution. In fact, what I know is dangerous. However, I do know something about finance and numbers. In fact, I am being modest. I know a lot about financial matters and am a published author in the field. Reading about Mabuza talking financial ratios yesterday was enlightening. I was worried that Ramaphosa was going to play the ‘slow game’ again at Eskom. But this cannot happen as the crisis at Eskom needs a clear action plan within the next 6 months and then it’s going to be a long haul to survival. So Mabuza mentions that Eskom’s debt to EBITDA ratio needs to be 5 times or lower in order for the entity to be financially sustainable. For those of you who do not know what EBITDA means, it is the profits of a business/SOE before considering interest income, finance charges, depreciation and amortizations (I may explain this concept in another post). The lower the debt is relative to EBITDA, the more financially stable an entity is. The international credit agencies regard corporates with debt to EBITDA ratios of 5.5 times or more as ‘junk’. I wonder if the Eskom board of directors noticed that in the financial year ended Match 2019 (FY2019), Eskom’s debt to EBITDA ratio was a whopping 15.5 times.

I compiled a case study on Eskom earlier this year and used it in the classroom. I was doing some training within a large corporate to upskill their staff in financial analysis. The delegates, without exception were horrified, at the financial mess Eskom is in. I have attached an Excel model to this post that contains Eskom’s summarized financial history from 2009 to 2019. Read it and weep for our beloved country.

Eskom reported a loss before taxation of R29.1 billion in FY2019. But that was a little naughty on their part. The loss was actually R48 billion if you add back the R15.4 billion of interest expense and R3.4 billion of staff costs that were capitalized to plant & equipment. The Eskom annual financial statements read like a train wreck:

  • Revenue of R177.3 billion
  • Primary energy costs of R99.5 billion (up from R85.2 billion the previous year)
  • Operating costs of R57.8 billion, staff costs (R36.7 billion) being the highest category
  • Almost 47,000 employees each earning an average of R785,557 (oh my goodness that is high even if all employees were well skilled, suitable for the job, productive and competent)
  • Net interest expense of R42.9 billion
  • R438.6 billion of net interest-bearing debt
  • Negative cash flow, before raising more debt, of R37.2 billion (Eskom needs to keep borrowing to balance the ‘books’, a bit like most governments)

I am about to sneak into the kitchen and find a cold refreshment as it is past noon and I am getting very scared about the lights going out. So how is Eskom going to trade out of its current predicament? Thats the billion dollar question! In the corporate world, there are simplistically three ways to improve profitability.

  1. Increase revenue (In Eskom’s case, I estimate that they would need to increase revenue from R173.1 billion to over R280 billion just to breakeven)
  2. Improve ‘gross profit margins’ being revenue less primary energy costs (The margin would have to increase from 45% to 70% within the next year to avoid incurring a loss)
  3. Reduce operating costs (Costs would need to decrease from R57.8 billion to R12.8 billion)
  4. Or a combination of the above initiatives

I am not sure if you still believe in the tooth fairy. Even if you do, you would be hard pressed to conceive of any scenario whereby Eskom could in the next year, or three or ten, return to profitability and generate positive cash flow. It is not going to happen based on the existing strategy. I would be most interested to read what Ramaphosa’ experts think.

Eskom Analysis (August 2019)

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