CORPORATE South Africa appears to be riding out the global economic slump in style, with more than 60% of companies exceeding analysts' forecasts in their most recent results.

 

This is according to an analysis of quarterly results published by Profile Media's Results & Earnings, which shows that companies exceeded analysts' forecasts by an average 3.4%.

 

The results show the benefit of the rand's depreciation last year, a factor cited by many of the stronger companies.

 

Many seized the pricing advantage of a weaker rand to grow exports, while others wrung costs from the system through restructuring or the sale of under-performing businesses.

 

Says Martin Jankelowitz, head of economic and market research at Investment Solutions: "We've seen relatively little negative impact of the three hikes in interest rates over the past year, though I expect we'll see this wash through the system in the second half.

 

"What we're seeing in the US is the pricking of the financial bubble which developed over the past decade. We never had a financial bubble other than in technology and small-cap stocks, which crashed after the Asian and Russian financial crises of the late 1990s. Our valuations are much more realistic than those of the US, even after the recent drop in equity prices there," says Jankelowitz.

 

The biggest upside earnings surprises came from Energy, Dorbyl, Omnia, Datatec, Ozz and HLH. Heavyweight companies AngloGold, SABMiller, Remgro and Investec performed slightly ahead of analysts' expectations, which augurs well for the coming year, according to Profile Media director Nic Oldert, who compiled the analysis.

 

"Medium-cap shares like Edcon, Alexander Forbes, Pick 'n Pay, ABI, Illovo, and Foschini also beat the forecasts."

 

Analysts have continued to lower earnings expectations for the seventh quarter in a row. Average profit forecasts for the 145 companies analysed were lowered by 2.9% in the last quarter. Comparing consensus forecasts at the beginning and end of the second quarter, forecasts were reduced for 80 companies and increased for 65.

 

Despite the pleasant surprises, South Africa is unlikely to escape the meltdown scorching the US, says David Shapiro, managing director of SG Securities: "What's saved our market is the heavy weighting in resources, which benefited from the weak rand. We're now reversing some of these gains, and though the valuations look cheap, it's too early to re-enter the market."

 

Strip out the resources and rand-hedge effects and the performance looks decidedly flat, adds Shapiro.

 

The retail sector performed strongly, with Edcon reporting a 42% rise in headline earnings for the past financial year. "Part of the retail sector's strong performance seems to be funded by credit, but it shows healthy consumer spending," says Shapiro.

 

The most severe earnings markdowns were for BJM, Durban Roodepoort Deep, Homechoice, Grintek, Didata, Avgold, Comair, Servest, Brait and Iscor. Among stocks to enjoy improved expectations were Metorex, Datacentrix, Liberty International, Wooltru, Edcon, Sun International SA, Prism, Africa Life, Harmony and Capital Alliance.

 

Of the nine economic groups analysed by Results & Earnings, profit forecasts have been marked up for only two sectors: non-cyclical consumer goods and non-cyclical services.

 

General industrials have been reduced by 7.4%, including more pessimistic forecasts for Altron. Basic industries have been marked down 5.5%.

 

Analysts are less optimistic about certain construction and steel stocks, and Sappi has also been marked down.

 

The financial and information technology sectors also had lowered expectations. Companies with large exposures to the weakening dollar and sagging US markets are likely to find earnings under some pressure.

 

Oil and exploration company Energy headed the list of upside surprises, delivering headline earnings a share of 228c against a forecast of 148c for the year to March. This was 53.7% ahead of expectations.

 

Energy's oil production increased 21% over the year, which helped offset an 18% decline in oil prices. Energy's share price responded, gaining 55% over the past year. Dorbyl surprised the market with headline earnings a share of 334c against a forecast of 227c, 47% ahead of forecasts. The weak rand boosted contributions from foreign operations and exports, and the closure of loss-making businesses improved margins. Headline earningsfor 2002 jumped 67% to 334c after a sharp slump in 2001.

 

HLH, Omnia, Datatec and Ozz exceeded forecasts by between 35% and 46%. After several years of losses in the late 1990s, a resurgent HLH reported HEPS of 90.6c for the year to March, 37% up on 2001, and 46% ahead of forecasts.

 

Omnia showed a more than fivefold increase in headline earnings for the year to March. Headline earnings of 284.5c compares with 51.2c for the previous reporting period. Omnia's share price gained 125% over the past year.

 

Datatec's headline earnings declined by 18% to 365c for the year to March, but still exceeded analysts' expectations by 35%. However, its share price is less than one-tenth of its peak value of R141 achieved in March 2000. The company says it does not expect a recovery in the technology sector before 2003.

 

A revitalised Ozz reported headline earnings of 303c for the year to March, 32% ahead of forecasts, and 48% up on the 210c for 2001. It has shown a 130% share price rise since April 2001.

 

Oldert says trends in analysts' forecasts can be used to guide investment decisions, as rising earnings forecasts usually push stock prices higher. An earnings surprise, the difference between consensus forecasts and the company's reported earnings, can also move a stock's price up, while the reverse is true of negative surprises.