The South African companies making billions by just keeping their doors open

Some South African companies, particularly in the construction and retail industries, are experiencing significant topline and profit growth.

While these companies are well-run, these gains are not necessarily because they are booming themselves, but because they are picking up the pieces from competitors that have shut down.

By simply surviving in South Africa’s difficult economic environment, they have been able to grow revenue and profit to record levels as they take market share from collapsed competitors.

This trend is set to become more prominent in the years to come as cracks begin to show in some sectors where economic growth can no longer sustain the current number of players. 

Old Mutual Investment Group’s (OMIG) head of equities research, Meryl Pick, outlined this survivorship factor at the asset manager’s latest quarterly update. 

Pick explained that some of the companies OMIG is investing in are attractive purely because they can pick up the pieces from competitors that are struggling in a low-growth environment. 

Historic construction giant Wilson Bayly Holmes (WBHO) is a case example of this, having benefitted immensely from the collapse of many of its competitors. 

“Apart from companies that have historically delivered, there are those that have a very specific investment case like WBHO,” Pick said. 

“The company has a record order book, not because there are record levels of infrastructure spend or economic growth, but because all the other construction companies have folded.”

“So, at a company-specific level, they have just cleaned up market share and have seen tremendous growth on the back of it.” 

An example of a company that could benefit from a similar trend in the retail space is Woolworths. Some of its food competitors are coming under immense pressure, and clothing competitors are folding. 

“Woollies is fixing some of its own in-house problems, but they are benefitting from a company like Edgars shrinking quite dramatically,” Pick said. 

Woolworths is not the only company set to benefit, with other clothing retailers such as Truworths, Foschini, and Mr Price ready to pick up the pieces from Edgars’ decline. 

“So there is a market share story in the absence of growth. We are trying to find out who the best players are in the survival of the fittest world,” Pick said. 

“You cannot do a broad brush stroke in a specific sector or across the economy, because there is no rising tide to lift all boats.” 

Banking on growth

A historically well-run sector, such as banking, makes it far more challenging to find opportunities amid low economic growth. 

These companies are heavily sensitive to broader economic growth and are not benefiting from the collapse of a competitor. 

“We acknowledge that banks are broadly cheap, but we remain underweight as they need GDP growth to drive their South African businesses,” Pick explained. 

“Over the past decade, retail loan growth has remained in the single-digit territory in South Africa, significantly limiting revenue and profit growth.” 

As a result, across its flagship funds, OMIG is broadly underweight the financial sector, with it keeping exposure to companies with a history of delivery, such as FirstRand, or promising growth stories, such as Discovery with its bank. 

“We are now underweight financials, and if you looked at this picture at the end of 2024, we would have been overweight. So, there has been a shift where we have sold out of bank and gone into resources,” Pick said. 

“South Africa’s banks are extremely well run. They are not falling apart. There is no crisis in that sector. But, there is just no growth.” 

Over time, Pick said there will be a survivorship factor that plays out across economic sectors, with cracks now beginning to show at historically resilient companies. 

“We have seen businesses exit, and we are not seeing sectors where there is not enough growth to support the economy,” Pick explained. 

“Edgars has left the building, and then the remaining guys just get profit growth because they are there to pick up market share.”

In the case of the construction sector, the survivors such as WBHO and Stefanutti Stocks have been able to grow headline earnings at 30% to 40% year-on-year because their competitors have folded. 

“There is definitely competition in all of these sectors, and you are about to see the cracks,” Pick said.