Tight economy requires agile strategies

SOUTH Africa evaded recession by the skin of its teeth in the first half, but companies need to prepare for stern economic challenges ahead.

SOUTH Africa evaded recession by the skin of its teeth in the first half, but companies need to prepare for stern economic challenges ahead.

Liquidations rose 9.8% year on year last month, according to Statistics South Africa. And these numbers are expected to surge as the rescue efforts of some companies fail, resulting in higher unemployment.

Adrian Saville, head of Cannon Asset Management, said that for companies to be successful they needed to be agile enough to take advantage of economic growth and have enough capital to withstand lack of growth.

His views are shared by Craig Polkinghorne, head of commercial banking at Standard Bank, who said companies with annual turnover R300-million to R1.2-billion should focus on reducing risk through strong governance and trimming day-to-day costs.

Cannon Asset Management research shows that only a few companies in South Africa have generated uninterrupted real earnings growth significantly higher than GDP for 10 years.

These companies include Clientèle Life, Truworths, Mr Price, WBHO Construction, Bowler Metcalf and Famous Brands.

Saville said that attributes consistent with sustained growth included agility and stability. "Agility refers to a business's willingness to move fast enough," he said.

Corporate survival strategies included building a diversified business portfolio and making small and easily digestible acquisitions, which Famous Brands had been doing for several years, Saville said.

Several JSE-listed companies have reported lacklustre financial results recently, highlighting the pressure they find themselves under, especially in their home market.

South Africa's second-largest construction company, Aveng, announced recently that it will sell R2.5-billion in assets to reduce its debt burden.

The third and the final quarters would continue to reflect a downturn in the manufacturing, wholesale and transport sectors, Polkinghorne predicted.

The economy contracted by an annualised 0.6% in the first quarter as mining output fell 24.7% so it seemed the National Development Plan was unlikely to achieve its target of boosting economic growth to 5% by 2019.

The revised growth forecast for this year is 2.1%.