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

▶

Mar 07, 2023 351 likes •524 views

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

SLIDE 1

RESEARCH REPORT

September 2017 Launch presentation Stuart Theobald, PhD, CFA. Head of research Orin Tambo, CFA. Senior analyst

THE MYTH OF CORPORATE CASH HOARDING

A study of the cash holdings of South African companies

SLIDE 2

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

SLIDE 3

THE MYTH OF CORPORATE CASH HOARDING

BACKGROUND

A perception that businesses are

hoarding cash

No systematic assessment of

companies’ balance sheets to test this claim

BLSA agreed to fund an Intellidex

research project

Bloomberg
Mail & Guardian

SLIDE 4

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

SLIDE 5

THE MYTH OF CORPORATE CASH HOARDING

FINDINGS

101 178 178 175 177 193 269 326 409 429 53 93 139 167 200 169 203 232 273 336 200 400 600 800 1000 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Graph 1: Nominal cash holdings by sector (Rbn)

Industrials Mining

Total cash holdings has increased from R154bn to R765bn. A compound growth rate of 17.4% per year

SLIDE 6

THE MYTH OF CORPORATE CASH HOARDING

THE LARGEST HOLDERS OF CASH The largest cash holders all have considerable international operations

152 83 76 52 44 37 34 28 25 21 50 100 150 200 BIL AGL CFR SOL SNH BTI GLN MTN NPN SAB

Graph 2: Top 10 cash holding companies (Rbn)

SLIDE 7

THE MYTH OF CORPORATE CASH HOARDING

FROM A DOLLAR POINT OF VIEW In dollar terms, the growth rate has been 3.6% per year

37.0 50.6 55.4 65.5 68.6 55.1 57.3 57.7 56.4 52.7 0.0 20.0 40.0 60.0 80.0 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Graph 3: Cash holdings in dollars ($'bn)

Cash holdings in $

SLIDE 8

THE MYTH OF CORPORATE CASH HOARDING

FACTORING IN INFLATION After inflation, the growth rate is 11% per year

170 274 258 244 233 241 318 366 437 429 90 143 201 234 264 210 240 261 292 336 200 400 600 800 1000 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Graph 4: Cash holdings at current prices by sector (Rbn)

Industrials Mining

SLIDE 9

THE MYTH OF CORPORATE CASH HOARDING

WE NEED CONTEXT The best way to understand cash holdings is as a % of total assets

2 4 6 8 10 12 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Graph 5: Cash to assets ratio vs real GDP growth (%)

Cash: assets ratio Real GDP growth

SLIDE 10

THE MYTH OF CORPORATE CASH HOARDING

PAYING OUT CASH TO SHAREHOLDERS Dividends as a % of cash have been falling since 2012. Mostly mining companies coping with falling commodity prices.

154 271 317 342 377 362 472 557 683 766 118 135 124 150 180 219 266 309 308 179 0% 20% 40% 60% 80% 100% 200 400 600 800 1000 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Graph 6. Nominal cash vs dividends (R'bn)

Nominal cash holdings Dividends paid Dividend to cash ratio

SLIDE 11

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

SLIDE 12

THE MYTH OF CORPORATE CASH HOARDING

WHAT IS THE THEORY ON CASH HOLDINGS?

Graph 7: Theoretical optimal level of 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)

SLIDE 13

THE MYTH OF CORPORATE CASH HOARDING

WHAT IS THE THEORY ON CASH HOLDINGS?

0% 5% 10% 15% 20% 25% 30% 35% 40% FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Graph 10: Returns on cash compared to equity

JIBAR 12-month yield ROE mining ROE industrials

Return on equity in mining is now below the interest earned on cash

SLIDE 14

THE MYTH OF CORPORATE CASH HOARDING

WHAT IS THE THEORY ON HOW MUCH COMPANIES SHOULD INVEST? Total market value of assets (shares + debt) divided by book value of assets If >1, should invest. Will make the company more valuable

0.20 0.40 0.60 0.80 1.00 1.20 1.40 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Graph 13: Average Tobin Q ratios

Industrials Mining Overall

SLIDE 15

THE MYTH OF CORPORATE CASH HOARDING

SO HOW MUCH ARE COMPANIES INVESTING? Expansion and new investment spending has actually remained strong though rate of growth has been declining

128 181 149 125 129 167 217 226 190 52 109 49 53 58 79 189 90 155 237 201 240 512 331 244 364 644 454 428 463 441 200 400 600 800 1,000 1,200 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Graph 12: Capital expenditures at current prices (R'bn)

Replacement New investments Expansion cash @ current prices

SLIDE 16

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