THE MYTH OF CORPORATE CASH HOARDING A study of the cash holdings - PowerPoint PPT Presentation

RESEARCH REPORT September 2017 THE MYTH OF CORPORATE CASH HOARDING A study of the cash holdings of South African companies Launch presentation Stuart Theobald, PhD, CFA. Head of research Orin Tambo, CFA. Senior analyst

THE MYTH OF CORPORATE CASH HOARDING OUTLINE • Background • Methodology • Findings • Some themes: • Total cash holdings have grown 17.4% per year • Growth is explained by inflation, weak rand, overall growth of companies • After inflation, the growth rate is 11% per year • In dollar terms, the growth rate has been 3.6% per year 2

THE MYTH OF CORPORATE CASH HOARDING BACKGROUND • A perception that businesses are hoarding cash - Bloomberg • No systematic assessment of companies’ balance sheets to test this claim • BLSA agreed to fund an Intellidex - Mail & Guardian research project 3

THE MYTH OF CORPORATE CASH HOARDING METHODOLOGY • Researched publicly available company financials captured by Iress • Examined the last 10 years of figures • Considered the 85 mining and industrial companies among the JSE’s top 100 companies. Financials were excluded 4

THE MYTH OF CORPORATE CASH HOARDING FINDINGS Graph 1: Nominal cash holdings by sector (Rbn) 1000 800 600 336 273 232 400 203 200 169 167 139 93 429 200 409 326 269 53 193 178 178 175 177 101 0 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Industrials Mining Total cash holdings has increased from R154bn to R765bn. A compound growth rate of 17.4% per year 5

THE MYTH OF CORPORATE CASH HOARDING THE LARGEST Graph 2: Top 10 cash holding companies (Rbn) HOLDERS 200 OF CASH 150 100 152 50 83 76 52 44 37 34 28 25 21 0 BIL AGL CFR SOL SNH BTI GLN MTN NPN SAB The largest cash holders all have considerable international operations 6

THE MYTH OF CORPORATE CASH HOARDING FROM A DOLLAR Graph 3: Cash holdings in dollars ($'bn ) POINT OF VIEW 80.0 68.6 65.5 57.7 57.3 56.4 55.4 55.1 60.0 52.7 50.6 37.0 40.0 20.0 0.0 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Cash holdings in $ In dollar terms, the growth rate has been 3.6% per year 7

THE MYTH OF CORPORATE CASH HOARDING FACTORING IN Graph 4: Cash holdings at current prices by sector (Rbn) INFLATION 1000 800 600 336 292 261 240 400 264 201 234 143 210 90 437 429 200 366 318 274 258 244 233 241 170 0 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Industrials Mining After inflation, the growth rate is 11% per year 8

THE MYTH OF CORPORATE CASH HOARDING WE NEED Graph 5: Cash to assets ratio vs real GDP growth (%) CONTEXT 12 10 8 6 4 2 0 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 -2 -4 Cash: assets ratio Real GDP growth The best way to understand cash holdings is as a % of total assets 9

THE MYTH OF CORPORATE CASH HOARDING PAYING OUT Graph 6. Nominal cash vs dividends (R'bn) CASH TO 1000 100% SHAREHOLDERS 766 800 80% 683 557 600 60% 472 377 362 342 400 40% 317 309 308 271 266 219 180 179 154 150 200 20% 135 124 118 0 0% FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Nominal cash holdings Dividends paid Dividend to cash ratio Dividends as a % of cash have been falling since 2012. Mostly mining companies coping with falling commodity prices. 10

THE MYTH OF CORPORATE CASH HOARDING SO The nominal growth in cash holdings is largely because of three factors: • Inflation • The weakening of the rand • Overall growth of companies The residual growth of cash reflects companies trying to cope with difficult economic conditions. Which is a good thing: • Very expensive if companies run out of cash • Could lead to distress, knock on to suppliers and employees 11

THE MYTH OF CORPORATE CASH HOARDING WHAT IS THE Graph 7: Theoretical optimal level of cash holdings THEORY ON CASH HOLDINGS? (This points to another reason companies hold more cash – they have become more leveraged. Means higher cost of raising new cash, so hold more liquid assets now) 12

THE MYTH OF CORPORATE CASH HOARDING WHAT IS THE Graph 10: Returns on cash compared to equity THEORY ON CASH HOLDINGS? 40% 35% 30% 25% 20% 15% 10% 5% 0% FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 JIBAR 12-month yield ROE mining ROE industrials Return on equity in mining is now below the interest earned on cash 13

THE MYTH OF CORPORATE CASH HOARDING WHAT IS THE Graph 13: Average Tobin Q ratios THEORY ON 1.40 HOW MUCH 1.20 COMPANIES 1.00 SHOULD 0.80 INVEST? 0.60 0.40 0.20 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Industrials Mining Overall Total market value of assets (shares + debt) divided by book value of assets If >1, should invest. Will make the company more valuable 14

THE MYTH OF CORPORATE CASH HOARDING SO HOW Graph 12: Capital expenditures at current prices (R'bn) MUCH ARE 1,200 COMPANIES 1,000 INVESTING? 800 644 463 600 428 454 512 441 400 364 331 240 237 244 155 90 189 200 49 109 53 79 58 201 217 226 190 181 167 149 128 125 129 52 0 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Replacement New investments Expansion cash @ current prices Expansion and new investment spending has actually remained strong though rate of growth has been declining 15

THE MYTH OF CORPORATE CASH HOARDING CONCLUSIONS There is no cash hoarding. Growth is explained by inflation, weak rand, overall growth of companies Companies are cautious. In poor conditions, build cash buffers to sustain through difficult times In mining, company value is damaged by investing in new assets Nevertheless the fact is that capital expenditure has remained strong It would be stronger if business confidence improved and prospects for returns on investment improved. Policy is critical 16