Listed investments boost IDC to profit

Established in 1940 to ramp up SA’s industries for when the country’s vast gold deposits run out, the Industrial Development Corporation (IDC) is again performing well after reporting losses for two consecutive years due to pandemic-related disruptions in its operations as well as those of its underlying investments.

While subsequent market movements may again be putting it under pressure, group profit recovered to R6.3 billion in the year to end-March 2022 – compared with a loss of R33 million in its 2021 financial year and the huge loss of nearly R3.8 billion in 2020.

These losses, and the subsequent recovery, can largely be traced back to the performance of the IDC’s large holdings in three listed companies – Sasol, BHP Group and Kumba Iron Ore, all dating from investments made in the previous century.

The IDC was one of the early funders of Sasol, which became a world leader in the production of synthetic fuel and chemicals.

The BHP stake came from its early investment in General Mining, which developed into one of the biggest mining groups in SA before merging with Broken Hill Proprietary of Australia to form BHP Billiton.

And the IDC got its interest in Kumba Iron Ore from its early investment in SA’s first iron smelter, Iscor, following Iscor’s privatisation and the unbundling of its mining assets years later.

Equity-accounted earnings

The financial statements for the whole of the IDC group and the IDC’s company statements disclose that in excess of R3.2 billion of the recovery in pre-tax profit can be attributed to equity-accounted earnings.

Its other big investments also performed better, although the recovery in several was limited to reducing losses rather than earning profits.

The financial report shows that the Small Business Finance Agency (sefa) reported a profit of R98 million, an improvement of 118% from the previous year’s operating loss of R552 million. However, this was due mainly to higher grant income of R315 million, compared with R122 million in the previous year. The rest of the recovery was due to a decrease in operating expenses from R108 million to R47 million.

Foskor’s operating losses decreased by 78% from R2.2 billion in 2021 to R476 million in 2022 through cost efficiencies and a significant recovery of impairments on financial assets compared with the previous year. However, Foskor eked out a profit before interest, tax, depreciation and amortisation of R120 million in the recent financial year compared with a loss R1.65 billion in the previous year.

IDC group and company: A five-year view

Source: IDC annual results

Evaporated gains?

The sharp recovery in the IDC’s enterprise value came largely as a result of the recovery in the share prices of the listed investments. Ironically, the IDC’s largest assets are still commodity producers and the corporation is still very much exposed to the commodity cycle.

“The notable growth in assets from R144 billion to R174 billion is attributable to improvements in the share prices of listed equities that increased the value of investments by R13.5 billion to R65.5 billion at year end,” according to the annual report.

A note elsewhere in the report says that just about all these gains have evaporated since the last day of the financial year (end-March 2022).

By the time the figures were approved by auditors and the annual report was ready to go to print towards the end of August, the value of listed assets had decreased by close to R12 billion back to R55 billion.

“The group has significant exposure to the resources sector and has initiatives under way to diversify its portfolio and reduce volatility from share prices,” management says in the annual report.

Read: Industrial Development Corp to diversify equities investment after sharp losses – CEO [Oct 2020]

Recovery

IDC CEO Tshokolo Nchocho says in his review of the results that activities at the IDC recovered during the last year after the Covid-19 pandemic impacted operations.

“For the year under review, the IDC approved R16 billion in loans and equity support investments in an economy that was substantially depressed as a result of Covid-19 and had started to recover during 2021.

“The approval figure is a 145% increase from the R6.5 billion of 2020/21,” says Nchocho.

“The corporation disbursed R7.2 billion into the economy from its resources, with an additional R1.2 billion disbursed from funds that it manages on behalf of other partners.

“An additional R37.6 million worth of corporate social investment funds was disbursed to deserving causes.

“The funding has not only contributed to the goals of economic recovery, reconstruction and inclusive economic participation, but has saved jobs and restored livelihoods.

“More importantly, this impact will multiply as ventures grow and create employment off the back of IDC funds and support.”

Mandate

Management reminds its stakeholders that the IDC, as a development finance institution, approaches investing and risk differently.

“We seek to maximise opportunities for economic growth and employment by focusing primarily on supporting entrepreneurs, the establishment of new businesses/startups, as well as the expansion and growth of existing businesses,” says Nchocho in a statement accompanying the results.

“This commitment to growing and expanding the size of the ‘economic pie’ is a fundamental feature of our development finance,” he adds.

“As we seek out businesses deserving of capital and support to realise their potential for long-term sustainability, we remain fully aware of the investment risks and we are eminently equipped to assess and manage these through robust assessment processes and comprehensive post-investment client support programmes.”

Nchocho says the IDC remains committed to creating new businesses to expand industrial capacity with a significant portion of investments during the period under review including financing start-up ventures with good prospects of creating jobs and expanding SA’s manufacturing base.

Assisting others

Unfortunately, when reading the annual report, one gets the idea that the IDC is becoming a lender of last resort.

“The devastating riots of July 2021 further challenged the country’s resolve and resilience. We approved R2 billion and disbursed R1.5 billion to companies affected by the unrest and were able to restore more than 90 businesses to operation, saving 26 480 jobs in the process,” according to the report.

It notes that similar support to the tune of R900 million was made available following the recent foods in KwaZulu-Natal.

Read:

The list of notable investments provided by the IDC does little to dispel the notion of using its funds to fix others problems:

• A R1 billion facility to Transnet to enhance its capacity to get goods moving;
• R1.3 billion towards the scheme that will pump water from Lesotho Highlands to Gauteng; and
• R2 billion approved for energy sector investments, such as participating in the Risk Mitigation Independent Power Producer Procurement Programme aimed at mitigating load shedding.

Outlook

However, the IDC plays an important role.

“Against the country’s immense development needs, we plan to disburse R107 billion over the next five years,” says Nchocho, adding that over the coming three years this should create or save 112 000 direct jobs.

“By 2024/25, we aim to ramp up our support to targeted groups by deploying R18.8 billion to assist black industrialists, while black-owned companies will benefit from R30 billion in investment, with women entrepreneurs receiving R8.9 billion and youth entrepreneurs R3.9 billion.”

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