DealMakers - Q3 2024 (released November 2024)
Equity Capital Markets in South Africa: A resurgent force
by Dave Sinclair, James Rowson and Masechaba Makhura
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The South African Equity Capital Markets (ECM) landscape has witnessed a notable resurgence in 2024, marked by increased deal activity and a positive re-rating of equity prices. This has been primarily driven by a confluence of factors, including improving macroeconomic conditions, increased earnings expectations, favourable investor sentiment, and a pipeline of promising equity capital raises.
A year of growth and recovery
Despite the several challenges posed by the COVID-19 pandemic, high inflation and interest rates, loadshedding and grey listing, the JSE has rebounded in 2024, with the JSE All Share index delivering an absolute total return of 15.9% to 30 September. In 2024, the market has seen a surge in ECM activity, with 13 deals to 8 October totaling R33bn, and a pipeline of further deals expected before December close. This marks a significant improvement from previous years, with deal values in 2023, 2022 and 2021 reaching approximately R11bn, R33bn and R24bn, respectively.
Upward re-rating and secondary market activity
The upward re-rating of South African equities has created favourable conditions for both primary and secondary market activity. The MSCI South Africa index reported >15% absolute total return performance in USD for the last three months, making it one of the top performing world markets over the last quarter. At 12.5x 12-month forward consensus earnings, JSE All Share valuations are now only 5% below the 10-year average. Companies seeking to raise growth capital are leveraging the improved valuations to issue new shares. In addition, companies holding significant stakes in listed entities are finding opportunities to monetise their positions through secondary sell-downs.
Key catalysts for equity market performance
Several factors have contributed to the positive trajectory of the South African equity market:
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Interest rate easing: The Reserve Bank of South Africa (SARB) has recently adopted a relatively dovish stance, with a 25-basis point interest rate cut announced in September 2024. Market expectations point towards further reductions in November and the first quarter of 2025. The SARB cycle has often overlapped with the Federal Reserve (Fed) moves and, on average, cuts from the Fed have coincided with positive price performance from SA assets and equities generally outperforming bonds. We expect further positive price performance for South African assets, including equities.
Dave Sinclair
James Rowson
Masechaba Makhura
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​Declining food inflation: Food inflation, which reached a peak of 14% year-on-year in March 2023, has been on a downward trend, falling to 4.6% year-on-year in June 2024. Lower food inflation benefits low-income households and can stimulate real consumption growth.
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Corporate cost-cutting: Cost discipline and a general focus on shrinking overheads had been necessitated over the past five years in the face of the pandemic, followed by significant loadshedding. Combining top-line recovery with a leaner cost base supports an attractive earnings recovery story.
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Investor confidence and reform agenda: The outcome of the 2024 South African elections, which strengthened the reform agenda, has significantly boosted investor confidence. The newly formed Government of National Unity (GNU) has been well-received, contributing to the positive re-rating of equities and the reduction of a risk premium associated with potential political uncertainty. Still to come, it would appear, is a structural rebasing of the improved outlook for earnings and the country’s growth and debt dynamics.
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Increased weighting in MSCI Emerging Markets Index: South Africa’s weight in the MSCI Emerging Markets index has declined over the years. However, a positive reform agenda, coupled with improved GDP and earnings growth, could lead to an increase in the weighting. This could attract significant inflows from international investors.
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A robust pipeline of listings
In this year, we have already seen the listings of WeBuyCars, Rainbow, Cilo Cybin and AltVest, with Boxer expected to list before the end of the calendar year.
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There is also a promising pipeline of new listings in South Africa. Companies such as Coca Cola Beverages Africa, African Bank and Tyme Bank have publicly expressed their intentions to list in the near to medium-term. Furthermore, equity capital raises through placements and rights offers have been active, with a total of R34bn raised this year to date. Further activity is expected in the fourth quarter of this year as valuations continue to provide a compelling opportunity for equity capital raising.
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Use of proceeds and investment case critical to successfully raising fresh capital
Notwithstanding the favourable backdrop supporting the current uptick in equity capital markets activity, investors participating in primary equity issuance still require a clear and well-articulated use of proceeds and a generally attractive investment case before participating in these transactions. Investors want to clearly understand how the equity capital raised will be utilised to ultimately drive growth and company outperformance to create value for shareholders. Consequently, the optimal capital raise mechanism and structure for a company looking to raise equity capital would need to take specific shareholder objectives into account, while optimising the company’s capital structure and maximising value for all stakeholders.
The South African equity capital markets have experienced a resurgence in 2024, driven by favourable macroeconomic conditions, investor confidence, and a robust pipeline of equity capital market activity. We expect this trend to continue into the near future.
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Sinclair, Rowson and Makhura, Equity Capital Markets team | Rand Merchant Bank.
