Weekly Earnings Outlook

Update 29 April

Sasol Update Reveals Challenges, Investor Confidence Shaken

Sasol’s production update caused a meltdown. Share prices plunged after news of lower production (down 3%), weak chemical prices (down 20% YTD), and safety incidents (5 fatalities). Despite initial hope from high oil prices and a weak Rand, the outlook is shaky. While fuel and gas may hold steady, chemicals are struggling, and mining’s productivity gains (up 4%) are overshadowed by safety concerns. Hedging offered mixed results; success with currency (gaining R531 million) was offset by losses on oil price hedging (R819 million). CEO Baloyi expects continued challenges due to economic and political factors, along with disruptions from South African utilities. Sasol is focusing on internal improvements to weather the storm, but investor confidence is shaken.

Capitec Bank Holdings Ltd. (JSE: CPI)

Capitec Bank emerged from the year with a celebratory 16% profit increase, thanks in large part to a digital revolution in the latter half. Customers enthusiastically embraced the bank’s online offerings, leading to a 30% surge in transaction and fee income. This digital wave propelled Capitec forward, demonstrating the growing importance of user-friendly online banking services.

However, the path to profit wasn’t entirely smooth. In late 2021, anticipating a robust post-pandemic economic recovery, Capitec loosened its lending criteria. This optimistic move backfired when the Russia-Ukraine conflict sent shockwaves through the global economy. Inflation skyrocketed, and interest rates climbed, making loan repayments a burden for many borrowers. As a consequence, unpaid loans experienced a concerning 38% rise. By February 2023, the bank observed a worrying trend of delinquencies and an increase in customers resorting to debt review programs.

Despite the challenges on the lending front, Capitec found success in other areas. Their insurance division enjoyed a healthy 12% profit increase, showcasing the bank’s diversification beyond traditional loan products. Similarly, the business banking unit thrived, boasting a remarkable 23% profit jump. These bright spots demonstrate Capitec’s ability to generate revenue beyond consumer lending.

Alphabet Inc (NASDAQ: GOOG)

Alphabet, Google’s parent company, beat analyst expectations with a strong earnings report. The growth was fueled by a surge in Google Cloud revenue (28%), which reached $9.6 billion. This impressive rise is attributed to the company’s focus on integrating AI into its cloud offerings, helping them compete with industry giants like Amazon and Microsoft.

However, a looming challenge exists. Google’s core business, search advertising (generating $46.2 billion), faces potential disruption from AI chatbots like ChatGPT. These chatbots offer information in a conversational way, potentially threatening Google’s traditional search dominance. Further uncertainty comes from an ongoing antitrust lawsuit.

Despite these concerns, Alphabet expressed optimism. The company announced its first-ever dividend (20 cents per share) and a hefty $70 billion stock buyback program, demonstrating confidence in its future. Investors echoed this sentiment, sending Google’s stock price soaring.

Balancing investment in cutting-edge AI with the profitability of its search business is a crucial task for Alphabet. To free up resources for AI development, the company has implemented layoffs across various departments. While AI presents both risks and rewards, it’s undeniably a central focus for Alphabet’s future trajectory.

Sources: MoneyWeb; Bloomberg.

Piece written by Trive Sales Trader, Kealeboga Molefe

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