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GHOST BITES (ArcelorMittal | Sabvest)

The Finance Ghost
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GHOST BITES (ArcelorMittal | Sabvest)

ArcelorMittal is still winding down the long steel business (JSE: ACL)

Thus far, nothing has emerged that could stop the process

ArcelorMittal is very begrudgingly winding down their long steel business. They fully understand the social impact that this has. The only way to stop this process would be through a funding package and agreement with stakeholders (including government) on measures to improve the economics.

In the meantime, the company has received various offers regarding the longs business and even the group as a whole. At this stage, nothing is a firm intention to make an offer as defined in the Companies Act.

Of course, this didn’t stop the share price from closing 7.7% higher on Wednesday as speculative punters took a stab at the thought of an offer coming through for the group.

Sabvest had an excellent year in 2024 (JSE: SBP)

NAV per share growth was well above recent averages

Investment holding company Sabvest had a particularly good time in 2024. The net asset value (NAV) per share grew by 20.8%. This is the right metric for an investment holding company to use. The dividend per share increased by 16.7% and I think we can agree that cash is a language that we all understand.

They have a long-term mindset at Sabvest, which means you’ll usually see them referencing things like the 15-year compound annual growth rate (CAGR) in the NAV per share. Sitting at 18.1% without reinvesting dividends, I would also make a noise about that number!

Things have been tougher post-pandemic, with the 3-year CAGR for NAV at 12.1% (still a solid number). You can therefore see that 2024 was significantly better than recent years. Importantly, this is due to growth in earnings in the underlying portfolio companies, as the multiples used to value the companies are unchanged vs. 2023 with the exception of two investments. In other words, the NAV growth isn’t thanks to valuation trickery.

The thing that makes Sabvest interesting is that most of the portfolio sits in unlisted assets that the market can’t get access to any other way. This is exactly what investment holding companies should do.

There were a number of underlying transactions in the portfolio in 2024, with one of the notable ones being the sale of the WeBuyCars shares received from Transaction Capital through the unbundling. Along with other sales, this led to a material decrease in debt during the period.

The NAV per share is R132.13 and the share price is R87.50, so there’s a material discount to NAV as per usual for investment holding companies.

Nibbles:

  • Director dealings:
    • A non-executive director of Discovery (JSE: DSY) sold shares worth R986k.
    • Des de Beer bought more shares in Lighthouse Properties (JSE: LTE), this time to the value of R434k.
    • A director of OUTsurance (JSE: OGL) bought shares worth R99k.
  • Sappi (JSE: SPP) successfully closed the raise of €300 million worth of 4.5% sustainability-linked senior notes due 2032, They will use the net proceeds to redeem €240 million in notes due 2026, with the remainder for general corporate purposes.
  • Sephaku Holdings (JSE: SEP) has followed in the footsteps of many other small- and mid-caps in moving its listing to the General Segment of the JSE. The idea is that this is a less onerous regulatory environment for smaller listed companies.

GHOST WRAP – Q1 winners on the JSE

The Finance Ghost
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GHOST WRAP – Q1 winners on the JSE

Earnings season is drawing to a close and it feels like we’ve all earned a holiday. In considering how the first few months of the year have played out, some surprising winners have emerged.

The performance in gold is simply a case of the sector carrying on where it left off in 2024, but what about platinum? And where did that telecoms rally come from? Also, have retail stocks continued their slide since the previous episode of Ghost Wrap that focused on that issue?

This podcast gives you great context to the year-to-date performance on the JSE. 

The Ghost Wrap podcast is proudly brought to you by Forvis Mazars, a leading international audit, tax and advisory firm with a national footprint within South Africa. Visit the Forvis Mazars website for more information.

Listen to the podcast here:

Transcript:

Where have the local wins been in 2025?

It feels like earnings season is nearly over. Well done – we survived! Personally, I feel like I need a holiday.

In the previous edition of Ghost Wrap, I looked at how the retailers really struggled in the first month or so of the new calendar year, so I suspect many of them felt like they needed a holiday as well. In literally the past couple of days, the stocks have finally stopped dropping and have turned higher. Still, some of these retailers are down more than 20% year-to-date, so the consumer-facing stuff has been ugly for local investors.

But what have the winners been? Where could you have really made money on the JSE thus far in 2025? Bearing in mind that we are roughly three months in, a reasonable annual return expectation means you should be smiling if you’re up 3% or so this year. But then why is a Top 40 ETF up 9.3% year-to-date? And how can this performance be so different to buying the S&P 500 as a local ETF, in which case you would be down 7% year-to-date in rand?

The answer lies in the constituents of the index of course, as well as the rotation away from US stocks this year. On that note, we better start with mining. After all, that’s where the action has been on the local market.

Gold is glittering

Gold. We simply have to start there. The glittering has continued this year, with the yellow metal going over $3,000 an ounce for the first time. This has allowed the gold miners to continue their run from 2024, with the likes of Gold Fields up 50%. It almost doesn’t matter where you look, as Harmony is up 41% and AngloGold Ashanti has done 43%.

But what of Pan African Resources? Why is that “only” up 17%? I think this is a particularly interesting one, as this is the long position that I added in the past few weeks. The company had a disappointing period in the six months to December 2024, with production coming in below expectations. Obviously, when the gold price is doing well, investors want to see production being as efficient as possible to really take advantage of that price. Now, whilst I agree that poor numbers need to be punished in a share price, the reality is that production guidance for 2025 was maintained by Pan African. In other words, they expect to claw back the issues in the second half of the year. Looking ahead to FY26, there are major projects coming on stream to boost production. To add to my bull case, there’s a gold derivative that expired at the end of February, so they are now seeing the full benefit of the gold price, and yet the share price reacted so negatively to news of production in the first six months – I just couldn’t help but put on a position on the basis of that sell-off.

Watch this one closely. I wouldn’t be surprised if by the end of this year, Pan African Resources is top of the pile if we use that post sell-off base for comparative purposes – and that was my in-price. Hopefully, it works out.

Platinum – is that you?

By now, reading about a supply deficit in the platinum market is nothing new. It feels like this is the same story over and over again, usually accompanied by a chart showing how EV demand isn’t living up to expectations and thus demand for platinum in Internal Combustion Engine (ICE) cars must continue. Now, at some point, the supply and demand dynamics come true and there is a deficit. If prices stay depressed for a long time, investment in mining capacity is low or non-existent and hence supply shrinks. If you do then see an uptick in demand, inevitably the price spikes and this encourages investment in capacity, which then solves the supply issue and hence prices come down. This is why these are called cyclical industries. Platinum just has particularly tricky cycles to manage – and there’s a worry about structural decline in the market.

Thus far in 2025, the market seems to be believing something about the platinum story other than a structural decline. The price of Platinum Futures is up 9.5% year-to-date. Before you get too excited, it’s only up 12% in the past year and it’s been really range-bound over the period. Still, with prices of the commodity having gone in the right direction, we’ve seen quite a rally in the sector. Impala Platinum is up 37%, Northam Platinum is up 35% and Amplats has done 27%.

By the way, Sibanye-Stillwater is so downtrodden that the share price is up only 25%, below the platinum peers and the gold peers even though those are the major commodities at the group. Still, 25% up is a lot better than punters are used to seeing recently.

The variance over 12 months within the sector is astonishing though, showing how marginal the economics have been in this industry. It really does separate the better-quality companies from the ones that are struggling. Where companies are producing efficiently and lower down the cost curve, there’s performance to be enjoyed. For example, Impala Platinum is up 83% over 12 months, while Amplats is up just 7.6%! Timing and base effects make a difference here, but it’s very different to gold, where basically everything is up and by substantial margins. Platinum is far more volatile and riskier.

What about the rest of the market?

I’ve gotta tell you that things haven’t been great outside of the mining sector. For context, the Resource 10 index is up 27% year-to-date, so clearly the rest of the market isn’t shooting the lights out if overall JSE returns are in the single digits. If you look at the Small Cap index, you’ll clearly see the impact of the risk-off environment in equities that we’ve seen in the US, as that’s down 7.5% year-to-date. The mid-cap index is down 1.5%. The Financial 15 index is down 1%. This really leaves us with the industrials index to look at, which is basically the polony of the JSE – the index where they put everything that doesn’t have an obvious home anywhere else. And it has been doing well, which means we need to look at the constituents.

A good example of what’s in here would be Naspers, which has the largest contribution to the capped industrial index. Thanks to a resurgence in belief in China, it’s up 19% year-to-date. Prosus is up even more, with a 22% return. I’m invested in Prosus, a position I picked up in January when there was sell-off that didn’t make sense to me. Happily, that means I’m up 31%! I just wish it was a bigger proportion of my portfolio.

An area where I have no exposure at all is the telecoms space. Most of the time, I don’t feel like I’m missing out, as it hasn’t been a great performer over a long time period. But this year, that’s been another growth area on the JSE. MTN is up 26% year-to-date, Vodacom is up 14% and Telkom is up nearly 6%, well below the other two but still really good when you annualise that return. But the winner by far is Blue Label Telecom, up 34% this year as the market puts more belief in the Cell C strategy.

Why is the telecoms sector doing well this year? Some of it is probably related to a general outlook that 2025 will be a better year for African currencies. Honestly, they deserve a break, as recent times have been incredibly bad and have really hurt these businesses. A lot of it is also some of the recent growth in South Africa, which has been pretty decent by telecom standards. Of course, when you see moves like these, what it really tells you is that the valuation was so depressed that even a small amount of good news makes a difference.

What am I watching?

A lot of things – but what I will highlight on the local market is that some of the banking moves are worth keeping an eye on. For example, does it make sense that Standard Bank is up 8.4% this year, yet Absa – which also has major Africa exposure – is down over 2%? Absa is now on a trailing dividend yield of 7.9%. Sure, it’s certainly no rocket ship from a growth perspective and we do have the interest rate cycle to worry about, but that’s just one of the names that I’m keeping an eye on. They also have a new CEO coming on board, which is interesting.

The great thing about the markets is that they keep dishing up volatility and thus opportunity. Stay disciplined and stay alert to silly moves especially, like the gift that the market delivered in Prosus in January.

It’s going to be particularly interesting this year to see whether there’s follow-through in the mining and telecoms industries. They’ve both had a hard time for a long time. Maybe this is their year? Time will tell.

Who’s doing what this week in the South African M&A space?

Marylou Greig
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Who’s doing what this week in the South African M&A space?

Exchange-Listed Companies

Gaia Renewables 1 has acquired stakes in three renewable energy plants from the IDEAS Renewable Energy Fund which is managed by African Infrastructure Investment Managers (Old Mutual). The deal, funded with debt and equity, will see the Gaia fund acquiring a 10% stake in each of the Linde and Kalkbult solar photovoltaic plants in the Northern Cape as well as a 21% stake in the Jeffreys Bay Wind Farm in the Eastern Cape. The aggregate value of the transactions is said to be more than R700 million.

Patrice Motsepe’s Ubuntu-Botho Investments, the majority shareholder of JSE-listed African Rainbow Capital Investments (ARCI), has made an offer to minority shareholders valued at c.R5,9 billion following a drawn-out decision to delist the company and move the entity’s domicle from Mauritius to South Africa. The offer of R9.75 per share is a 21% premium to the 30-day VWAP and represents a discount of 22.8% to its announced NAV. ARCI’s stated business has an intrinsic value of R12.78 per share, translating into a valuation of R19,4 billion. The offer for the 40% outstanding stake values the fund at R14,8 billion. Shareholders will need to approve the delisting and re-domiciliation.

Thungela Resources has acquired the remaining stake in the Ensham Business via the acquisition of a 25% stake in Sungela from co-investors Audley Energy and Mayfair Corporations Group. Sungela’s only asset is an 85% stake in Australian Ensham coal mine. The aggregate purchase consideration paid is A$82,8 million – made up in the main of loans of $82 million and a cash payment of $862,500. There is a deferred amount of $7,8 million. In December 2024, Thungela Resources Australia acquired a 15% stake in the mine for A$48 million from Bowen Investment.

Saldanha Steel, a wholly owned subsidiary of ArcelorMittal South Africa, has entered into an agreement to sell two properties in Saldanha, Western Cape for an aggregate R134 million as the struggling steel and mining company looks to dispose of non-core assets.

In its interim results released this week, OUTsurance notified shareholders that the company will dispose of its investment in Merchant Capital. The sale, by way of a company share buyback, will be tranched over a period of 15 months with total proceeds amounting to R92 million.

DealMakers is SA’s quarterly M&A publication.
www.dealmakerssouthafrica.com

Weekly corporate finance activity by SA exchange-listed companies

Marylou Greig
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Weekly corporate finance activity by SA exchange-listed companies

The JSE has approved the transfer of the listing of Sephaku to the General Segment of Main Board with effect from commencement of trade on 24 March 2025. The listing requirements in this segment are less onerous for the smaller cap firms.

This week the following companies repurchased shares:

Thungela Resources will implement a share repurchase programme commencing 18 March and ending on 4 of June 2025. The repurchase of shares will take place on the JSE with the aggregate purchase price not exceeding R300 million.

On March 6, 2025, Ninety One plc announced that it would undertake a repurchase programme of up to £30 million. The shares will be purchased in the open market and cancelled to reduce the Company’s ordinary share capital. This week the company repurchased 1,964 of its ordinary shares at an average price of 145 pence.

In its annual financial statements released in August 2024, South32 announced that it would increase its capital management programme by US$200 million, to be returned via an on-market share buy-back. This week 352,304 shares were repurchased at an aggregate cost of A$1,27 million.

On 19 February 2025, Glencore plc announced the commencement of a new US$1 billion share buyback programme, with the intended completion by the time of the Group’s interim results announcement in August 2025. This week the company repurchased 11,500,000 shares at an average price per share of £3.19.

In October 2024, Anheuser-Busch InBev announced a US$2 billion share buy-back programme to be executed within the next 12 months which will result in the repurchase of c.31,7 million shares. The shares acquired will be kept as treasury shares to fulfil future share delivery commitments under the group’s stock ownership plans. During the period 10 – 14 March 2025, the group repurchased 842,367 shares for €48,43 million.

Hammerson plc continued with its programme to purchase its ordinary shares up to a maximum consideration of £140 million. The sole purpose of the buyback programme is to reduce the company’s share capital. This week the company repurchased 320,987 shares at an average price per share of 249 pence.

In line with its share buyback programme announced in March 2024, British American Tobacco plc this week repurchased a further 430,381 shares at an average price of £31.75 per share for an aggregate £13,67 million.

During the period February 10 to 14 March 2025, Prosus repurchased a further 6,551,068 Prosus shares for an aggregate €281,74 million and Naspers, a further 370,294 Naspers shares for a total consideration of R1,73 billion.

One company issued a profit warning this week: Astoria Investments.

During the week two companies issued cautionary notices: Tongaat Hulett and ArcelorMittal South Africa.

DealMakers is SA’s M&A publication.
www.dealmakerssouthafrica.com

Who’s doing what in the African M&A and debt financing space?

Vanessa Aitken
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Who’s doing what in the African M&A and debt financing space?

DealMakers AFRICA

Leta, a Nairobi-based logistics software-as-a-service provider has raised US$5 million in seed funding from Speedinvest, Google’s Africa Investment Fund and Equator. Leta is looking to double revenue in the coming months as it expands into more countries across Africa and the Middle East with clients such as KFC and Diageo, both of whom are existing clients.

Woodside Energy has elected not to exercise its option to farm-in to the Petroleum Exploration License 87 (PEL 87) project. PEL 87 governs the 2713A 2713B blocks in Namibia’s Orange Basin and is operated by Pancontinental Orange which has a 75% stake. Custos Investments holds 15% and the National Petroleum Corporation of Namibia holds the remaining 10%.

Egyptian healthcare and pharmaceutical solutions company, Grinta, has acquired primary healthcare service chain, Citi Clinic for an undisclosed sum. At the same time, Grinta announced a strategic investment in the company in a funding round led by Beltone Venture Capital and Raed Ventures. The size of the round was not disclosed.

Mirova Gigaton Fund has provided Kenyan climate technology firm, KOKO, with a carbon finance debt facility to scale up a new type of residential energy utility across Kenya and Rwanda.

Go Big Partners and 216 Capital Ventures have invested in Juridoc, a Tunisian legaltech company. The investment will support Juridoc’s expansion into the OHADA (Organisation for the Harmonisation of Business Law in Africa) region – a consortium of 17 West and Central African countries.

DealMakers AFRICA is the continent’s quarterly M&A publication
www.dealmakersafrica.com

PODCAST: Global economy: Recession or recovery?

Investec No Ordinary Wednesday
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PODCAST: Global economy: Recession or recovery?

Listen to the podcast here:

Recession risks, inflation pressures, and trade tensions – how is the global economy shaping up in 2025? Investec’s Chief Economists, Phil Shaw (UK) and Annabel Bishop (SA), take stock of the latest trends in No Ordinary Wednesday. From global growth forecasts to the economic outlook for Europe and South Africa, they break down what lies ahead.

Hosted by seasoned broadcaster, Jeremy Maggs, the No Ordinary Wednesday podcast unpacks the latest economic, business and political news in South Africa, with an all-star cast of investment and wealth managers, economists and financial planners from Investec. Listen in every second Wednesday for an in-depth look at what’s moving markets, shaping the economy, and changing the game for your wallet and your business.

Also on Spotify and Apple Podcasts:

Sweat Equity: legally toned and ready to flex

Vivien Chaplin and Phetha Mchunu
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Sweat Equity: legally toned and ready to flex

The amendments to the South African Companies Act, which came into effect in December 2024, include a long-awaited amendment to sections 40(5) and 40(6), which clarify the requirements in relation to structuring transactions using a version of prospective “sweat equity”, whereby future non-financial contributions, such as skills, expertise and time, may be exchanged for upfront equity.

“Sweat Equity” arrangements have long been used in global transactions, particularly in start-ups, where individuals and companies may be issued equity shares in a company based on their future non-financial contributions (such as time, expertise and effort) to the growth and success of the business. Unlike traditional equity arrangements that rely on financial investment, this mechanism recognises and rewards the value that people bring to a company through their hard work and skills. In the South African context, particularly in relation to black economic empowerment transactions, sweat equity is also an innovative way to enable individuals, especially historically disadvantaged individuals who may not have access to cash, to participate meaningfully in equity transactions, without requiring upfront financial investment.

It is a fundamental principle in South African company law that shares may only be issued against payment of “adequate consideration”. However, in cognisance of the benefits of the sweat equity concept, the 2008 Companies Act included sections 40(5) and 40(6), which provided that shares could be issued for future benefits, future services or future payment, but that if the consideration was in the form of an instrument such that the value cannot immediately be realised by the company, or in the form of an agreement for future services, benefit or payment, then such “consideration” would only be deemed received when the value is actually realised / payment received. In the interim, the equity must be issued and then transferred to a third party, “to be held in trust and later transferred to the subscribing party in accordance with a trust agreement.” Although the inclusion of these sections was considered to be quite far-reaching and innovative at the time, the concept was not clearly captured.

The phrase “in trust” initially caused confusion in the South African market, given that this wording could lead to an interpretation that such arrangement required the establishment of a formal trust in terms of the Trust Property Control Act 57 of 1988 (TPCA), along with all the legal formalities and governance requirements required for trusts under the TPCA.

However, over the years, lawyers and transaction advisors came to the conventional and common sense view that this did not require a formal trust as contemplated in the TPCA. Some interpretations in the market likened the trust construct under section 40(5) to a debenture trust, which has been held in case law not to be registrable under the TPCA (Conze v Masterbond Participation Trust Managers (Pty) Ltd [1996] SA 786 (C)). Essentially, the market view became that section 40(5)(b)(ii) of the Act requires nothing more than that the shares be transferred to a third party other than the company or the subscriber, and the words “held in trust” are simply used to describe the nature of the holding of the shares in escrow.

The 2024 amendments to the Companies Act have given effect to this long held market view and now provide that such shares could be held in terms of a type of escrow arrangement by a “stakeholder”, to be held in terms of a stakeholder agreement and later transferred to the subscribing party in accordance with the stakeholder agreement. This welcome amendment now unequivocally confirms that, in terms of the TPCA, no formal trust is required to be formed in terms of this section. The amendment goes on to provide that a “stakeholder” means an “independent third party who has no interest in the company or the subscribing party, who may be in the form of an attorney, notary public or escrow agent;” and the “stakeholder agreement” means a written contract between the stakeholder and the company.’’ That said, it must be noted that these amendments to Section 40(5) are not available for JSE-listed companies as the JSE listing rules require shares to be fully paid up.

However, for private companies, replacing “trust” with “stakeholder” provides a significant and very welcome clarification, which may be very useful – particularly for the structuring of Black Economic Empowerment Transactions (although these will still require careful structuring in order to ensure compliance with economic interest and voting rights requirements).

In addition, although this amendment paves the way for more flexible sweat equity arrangements, prudent structuring will still be required; for example, to avoid insolvency risks, the parties must ensure that the stakeholder is a financial institution, trust company or attorneys’ firm, properly governed by laws that expressly require and regulate that such shares are held in escrow and are excluded from their personal estates. Furthermore, valuation will remain another key consideration. Sweat equity, by its nature, involves contributions that are often intangible, such as time, skills and intellectual property. While these contributions are valuable, assigning a monetary value to them can be complex.

All in all, this amendment creates additional flexibility for companies to drive transformation while unlocking new opportunities for collaboration and growth. By valuing contributions beyond financial investment, South Africa is paving the way for a more inclusive and innovative economy. The task now is to turn this vision into reality, ensuring that sweat equity becomes not just a tool for empowerment, but a cornerstone of sustainable business success.

Vivien Chaplin is a Director and Phetha Mchunu an Associate in Corporate & Commercial | CDH

This article first appeared in DealMakers, SA’s quarterly M&A publication.

DealMakers is SA’s M&A publication.
www.dealmakerssouthafrica.com

Bridging the valuation gap: A new era in private equity partnerships

Ndima Marutha
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Bridging the valuation gap: A new era in private equity partnerships

The post-pandemic landscape has transformed the relationship between private equity firms and business owners.

Gone are the days of inflated valuations. Instead, a more measured approach has emerged, focusing on businesses with robust fundamentals: sustainable earnings, healthy capital structures, and minimal capital expenditure requirements. This shift represents not just a temporary adjustment, but a structural change in how private equity evaluates and approaches potential investments.

Understanding the valuation disconnect

Private equity firms evaluate businesses through various distinctive measurable factors, seeking companies capable of achieving EBITDA growth while managing debt obligations. However, South African businesses face unique challenges: escalating fuel costs, persistent inflation, low economic growth, and policy uncertainty—all of which impact EBITDA, cash generation and, ultimately, valuations.

When evaluating their businesses, many owners integrate qualitative elements in addition to quantitative factors, which may include their company’s historical resilience through various business cycles, years of personal sacrifice, and emotional investment in building their enterprise. This divergence in valuation approaches often creates a valuation gap between buyer and seller expectations. Understanding this disconnect is crucial for both parties to reach mutually beneficial agreements.

The current market reality

The elevated cost of capital and subdued economic growth have led to more conservative valuations. Private equity firms thoroughly examine historical performance, customer relationships, management capabilities and growth forecasts, and they assess market position, operational efficiency and technology infrastructure as key value drivers. The lingering effects of COVID-19 have complicated valuations further, leading firms to apply lower perpetual growth rates to account for increased risk.

Risk assessment and mitigation

Today’s private equity investments require a nuanced understanding of multiple risk factors. Economic risks include interest rate volatility, currency fluctuations, and inflation impact on margins. Operational risks encompass supply chain disruptions and labour market challenges, while strategic risks consider competitive landscape changes and technology disruption potential. Successful firms develop comprehensive strategies to address these risks while maintaining return expectations.

Bridging the valuation gap through innovative structures

While independent valuation experts can assist, their assessments can vary due to underlying assumptions underpinning the valuation. This has led to the increasing use of innovative pricing mechanisms. Earnout structures or “agterskot payments”, including performance-based payments and milestone-linked considerations, help align interests.

The new partnership paradigm

Modern business owners seek more than just capital from private equity partners. They value cultural alignment, sector expertise, and strong B-BBEE credentials. Financial acumen and strategic input remain crucial, but equally important are the track records of successful partnerships and exits, as well as access to strategic relationships. Governance expertise and commitment to transformation have also become key differentiators in partner selection.

Future trends and considerations

The private equity industry continues to evolve, with increasing emphasis on ESG integration, digital transformation, and market consolidation opportunities. Environmental impact, social responsibility and governance structures have become integral to investment decisions, and technology adoption and innovation potential significantly influence valuations and partnership decisions.

The South African private equity landscape remains promising despite current challenges. Success requires a balanced approach that considers both quantitative metrics and qualitative factors, supported by innovative deal structures and a clear focus on value creation. Those who successfully navigate these challenges while building trust and alignment between parties will be best positioned to capitalise on the opportunities ahead.

By acknowledging and addressing the valuation gap while focusing on shared long-term objectives, both parties can create partnerships that unlock sustainable value and drive business growth. The future of private equity in South Africa depends on the industry’s ability to adapt to changing market conditions while maintaining its focus on creating sustainable value through genuine partnerships.

Ndima Marutha is an Associate | Agile Capital

This article first appeared in Catalyst, DealMakers’ quarterly private equity publication.

DealMakers is SA’s M&A publication.
www.dealmakerssouthafrica.com

GHOST BITES (African Rainbow Capital | Bytes | Libstar | Master Drilling | Old Mutual | Remgro | Resilient | Schroder European Real Estate | Super Group)

The Finance Ghost
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GHOST BITES (African Rainbow Capital | Bytes | Libstar | Master Drilling | Old Mutual | Remgro | Resilient | Schroder European Real Estate | Super Group)

African Rainbow Capital pulls the trigger on the delisting offer (JSE: AIL)

They’ve been talking about this for a while

Aah, what could’ve been. With all the excitement around the Tyme Group, I imagined a world where African Rainbow Capital (ARC) stayed listed and Tyme was one day unbundled and separately listed as a lovely growth asset on the JSE. I was clearly dreaming, or just confused for a moment about the difference between the local market and the US market.

Alas, what will happen instead is that shareholders will now have to contemplate an offer of R9.75 per share, which is a 21.0% premium to the 30-day VWAP and a 22.8% discount to the net asset value (NAV) per share that ARC just announced in its interim earnings.

As an aside, they are also looking to move the structure away from Mauritius. Many South African companies went and put holding company structures in place in Mauritius in the hope of getting some protection from South African risks, while being in a jurisdiction where it is easier to do business. In fact, Mauritius usually ranks top of the list on that “ease of doing business” index. It’s just a pity that the ocean around the island is a lot deeper than the capital pools, with ARC noting that absolutely no international funding was raised as a result of the Mauritian structure. In fact, they are now sitting with tax inefficiencies, so it really hasn’t worked out for them.

The ownership structure of ARC is a web that any spider would be immensely proud of. The TL;DR is that Ubunto-Botho Investments (UBI) controls 60.51% of the shares in ARC, so the offer to delist ARC is being made to the remaining ~40%.

Although the performance got very little attention in comparison to the news of the offer, ARC also released its interim results for the six months to December. The intrinsic NAV per share increased by 3.2% over six months. There were substantial net fair value gains, including in the financial services portfolio (Tyme Group Asia / Alexforbes / Sanlam Third Party Asset Management) and the diversified investment portfolio (Rain / ARC Investments / BlueSpec / Acorn Agri / Linebooker). As has been the recent trend, Kropz required more capital and saw a decrease in fair value of R229 million.

Rain may be the largest investment in ARC Fund, but I still think TymeBank is the most interesting. ARC actually took up proportionally more shares in TymeBank SA than in Tyme Global, so they are still keen for an SA growth story here. And why not? Deposits grew from R6.3 billion to R6.9 billion over just six months, while net advances increased from R1.9 billion to R2.3 billion. It’s a very impressive story. Despite this, the fair value of TymeBank actually decreased over the period, while the value of Tyme Global went up.

Perhaps shareholders shouldn’t be too irritated about losing out here. Tyme Group may be 16.3% of ARC Fund’s value, but problem child Kropz Plc is 12.7% of the value and therefore almost as important as Tyme. Cash flow shortfalls continue at Elandsfontein, with ARC having to chip in more capital during the period.

The ARC share price has doubled in the past year, driven by factors like excitement around some of the underlying assets (especially Tyme), improved SA sentiment under the GNU and perhaps most of all, the knowledge in the market that this delisting offer has been waiting in the wings for a while.

Will appraisal rights turn out to be the Achilles’ heel here? When the board has put out the NAV and the offeror has made an offer that is well below that number, I’m not sure how it can be argued in an appraisal rights scenario that the NAV isn’t the fair value that shareholders should be paid. There are some strong activist investors in the local market who have a deep understanding of how this works. Let’s see how it all plays out.

More double-digit growth at Bytes Technology Group (JSE: BYI)

The market absolutely loved this

Bytes Technology Group has had a tough year in its share price. At least the 12-month move is now a drop of only 10%, thanks to a strong rally of almost 13% in response to the release of a trading update.

Bytes is one of the UK and Ireland’s leading technology companies, so all the numbers are reported in GBP. Keep that in mind when you consider how impressive it is to have achieved double-digit growth in not just gross invoiced income, but also gross profit and operating profit.

One of the concerns at Bytes has been margins, which you can assess based on the difference in growth rate between gross invoiced income and gross profit. This is a challenge faced by IT businesses that are often resellers of products – it can become a race to the bottom for margins. I think it made a big difference to the market response to this announcement that the company included a note that gross profit growth was strong in the second half, putting some of the margin concerns to bed. Cash conversion was also solid, so that would’ve added to the positive sentiment around this announcement.

Finally, the company is telling a positive story around its growth prospects, including in an environment of a new Microsoft incentive plan. Full year results are due for release in May, so the market can chew on this narrative for a good few weeks until then.

Very little for Libstar investors to get excited about (JSE: LBR)

There’s very generic disclosure about “unlocking value”

Libstar already alerted the market to its troubles in a previous update, so the release of results for the year ended December 2024 simply confirms what the market already knew.

It’s very much a tale of two segments, with Ambient Products growing revenue by 5.4%, experiencing a decrease in gross margin of 10 basis points (not too bad) and seeing normalised EBITDA growth of 12.2%. Over at Perishable Products, revenue growth was 1.2%, gross profit margins fell from 16.7% to 16.1% and normalised EBITDA was 13.7% lower. Perishable, indeed.

It’s therefore clear to see that Perishable Products is where the damage was done. In case you missed it the first time when Libstar told the market about the problems, the major issue relates to a food service customer who was buying beef from Finlar Fine Foods, one of the many businesses within Libstar. This drove a huge impairment of R400 million in that business as well as a negative impact on cash profit generation.

The net result is that on a normalised basis, Libstar had a pretty flat year. Normalised EBITDA was almost identical to the prior year and normalised HEPS fell 6.5%. The dividend was maintained at 15 cents per share, with the group trying hard to give some support to a share price that is down over 18% this year. Remember, these normalised numbers exclude the impact of the impairment. You’ll see that come through in earnings per share, which swung sharply into a loss-making position.

One of the biggest concerns for me is that expenses were up 7%, which they attribute to consulting fees, the launch of a culture program and fees for divestment advisors. Libstar is clearly spending a lot of money on external help, which tells me that the management team is spending more time deciding where to place the various Lego blocks than actually driving growth within the business units. There’s more of this to come, with further restructuring activities within the group to shuffle the chairs.

There’s a chance of something big being announced, as Libstar has included some generic commentary around unlocking stakeholder value and potential strategic options that are being assessed. Could this mean a delisting? Or major disposals? Either way, the consultants certainly aren’t being paid with cheese. Cold, hard cash is leaving the group while they figure out what to do here.

Honestly, it’s anyone’s guess what could be coming. And the market doesn’t love guessing.

Master Drilling has flagged interesting numbers (JSE: MDI)

Impairments are a worry

Master Drilling released a trading statement for the year ended December 2024. On a HEPS basis, which excludes impairments, they look great! Reported in ZAR, HEPS will be between 16.4% and 26.4%. Master Drilling also includes USD earnings, in which case HEPS is up by between 17.2% and 27.2%. Either way, those are strong growth rates.

You may then wonder why the share price is up just 9.5% in the past 12 months. Aside from the negative impact of low liquidity in the share price, I think the market is concerned about the impairments due to expensive equipment not being used due to market dynamics. This is why earnings per share (which is net of impairments) has moved between 10.5% and 20.5% lower in ZAR. The Reverse Circulation equipment in the American business and the Mobile Tunnelboring Machine have both suffered impairments.

Detailed results are due for release on 25 March.

No real excitement at Old Mutual (JSE: OMU)

The underperformance vs. rivals like Sanlam continues

Old Mutual’s annual results announcement starts off with a “reflection on shareholder value creation” since 2018 – a surefire sign that the latest growth isn’t exciting, hence they need to remind you of the journey they’ve been on. The share price chart always does the best job of summarising the journey, with Old Mutual up 6% over five years (i.e. since COVID lows) and rival Sanlam up 60%. That’s 10x outperformance by their rival!

Old Mutual’s results from operations increased by 4%. Take out the “new growth initiatives” and the increase is 10%, so they are investing heavily in the business and it is impacting profits. I still cannot really understand why they are starting a bank, or what exactly it is going to do differently in South Africa.

It’s interesting to note that two-pot withdrawals were R3.4 billion and that net client cash outflows were R21.5 billion. Africa and Corporate saw much larger client withdrawals, a handy reminder of how important the big clients are vs. lots of small ones.

Sure, there are some pockets of growth, like funds under management up 10% and gross written premiums up 7%. It’s just clear that Old Mutual’s underlying exposure isn’t working as well as its rivals. With the bank only expected to break even in 2028, I can’t see a catalyst for this share price to close the gap to Sanlam.

CEO Iain Williamson is taking early retirement after five years in the top job and a career of 32 years with the group. By the time this bank breaks even, he would’ve made a great deal of progress on his golf – or whatever else tickles his fancy.

Remgro’s direction of travel is up (JSE: REM)

And if they would use a more helpful metric for trading statements, we would really know by how much

I really wish that Remgro would stop using HEPS for trading statement purposes. They are clearly an investment holding company at heart, so why not use NAV per share?

Shock and horror, there’s a huge move in HEPS (which always flaps around in investment holding companies that take this route) for the six months ended December 2024, impacted to some extent by significant corporate actions in the comparative period. It doesn’t really tell us much that HEPS is up by between 33% and 43% vs. the restated number for the comparative period. All it tells us is that NAV per share (the metric people actually use) probably went up as well, since the underlying businesses are clearly having a better time of things.

The restatement of the base period was significant by the way, driven by an error in how TotalEnergies South Africa was accounting for its investment in Natref. Remgro’s comparable HEPS has been restated from 381 cents to 485 cents. Again, none of this is actually very helpful for investors, other than to figure out that the direction of travel is up.

Resilient is living up to its name (JSE: RES)

Mid-single digit growth is the expectation

Resilient REIT released results for the year ended December 2024. With the total dividend for the year up by 8.4%, it was a very decent year for the group. As a reminder, Resilient holds a direct portfolio in South Africa and Europe, as well as a 30.4% stake in Lighthouse after supporting a recent equity raise and electing a scrip dividend.

The South African portfolio grew net property income by 7.5%, benefitting from the energy investment strategy that has helped keep energy cost inflation below in-force escalations on leases. The offshore investments contributed to growth, with forward exchange contracts helping to turn the Lighthouse Properties dividend from a 4.9% decline in euros into a 4.1% increase in rand. The French portfolio did the real heavy lifting in the offshore portfolio though, with net property income growth of 14.3%.

The South African retail portfolio increased sales by 3.5% for the year, an uninspiring result that was negatively impacted by the performance of the mining industry and the impact this had on some of the small town malls. Resilient’s portfolio is focused on lower income areas, which is a decent growth area when viewed over multiple years. This doesn’t make it immune to a slow year or two. Notably, the last quarter of the year saw an increase in retail sales of 5.5%, boosted by two-pot withdrawals.

The French portfolio was a story of vacancy reduction rather than underlying growth in sales. Comparable sales increased by just 1.8%, but a reduction in vacancies from 7.9% to 5.8% worked wonders. In contrast, the portfolio in Spain achieved comparable sales growth of 12.8% and had a vacancy rate of just 0.1%, so you can see why property funds are pushing into Iberia.

Looking ahead to 2025, the board is expecting growth in the distribution of 5.5%. As inflation protection goes, Resilient is doing a solid job.

Schroder European Real Estate’s valuations are still under pressure (JSE: SCD)

And no provision has been raised for the tax fight in France

Schroder European Real Estate has released its net asset value and dividend for the quarter ended December 2024. The financial year-end is September, so this is the first quarter of the new year. Alas, it’s not off to a great start, with the NAV down 0.6% for the quarter and up just 1.3% over 12 months.

The NAV decrease was driven by a 0.9% dip in the direct property portfolio valuation. I had to laugh at them referring to this as a “marginal” decrease – a 0.9% reduction in value over just 3 months in Europe is anything but marginal on an annualised basis!

They also aren’t applying any caution at all with respect to the French Tax Authority claim, with no provision raised – not even a small one. Maybe things are different in Europe, but tax disputes usually end in a settlement rather than absolutely no outflow. Schroder believes that an outflow is not probably and hence no provision has been raised.

At least the balance sheet is healthy, with the loan-to-value down from 25% to around 20% thanks to disposals.

Super Group expects to see improvement, but there are no guarantees (JSE: SPG)

The underlying exposures make it tough to judge where this one is going

Super Group has released results for the six months to December 2024. It wasn’t a happy time for them, with revenue down 7.6% and EBITDA down 5.2%. By the time you reach HEPS, the drop was a nasty 24.2%.

The underlying exposures are problematic. The supply chain business in South Africa is vulnerable to issues like border and port delays, as well as the state of the mining industry. It saw operating profit fall by 10.7% for the period. Supply chain in Europe was much worse, with terrible automotive production levels in the UK and a swing from an operating profit to an operating loss – luckily, a small one. If you can believe it, automotive production levels in the UK are now in line with 1956 levels. Astonishing.

The dealerships business in South Africa saw operating profit fall by 4% as the Chinese brands caused disruption. Super Group at least has some Chinese brand dealerships now, but probably not enough of them. Dealerships UK was a disaster, swinging into a horrible loss thanks to pressure on Ford, Hyundai and Kia. I’ll say it for the zillionth time: the Chinese are changing everything.

The only highlight in this period was the fleet business in Africa, growing operating profit by 8.7%.

They are hoping to have a better end to the year than we saw in this interim period. The underlying Super Group portfolio just doesn’t seem to be well positioned in the current market.

Nibbles:

  • Director dealings:
    • Acting through Titan Premier Investments, Christo Wiese executed a substantial purchase of R42.6 million worth of Brait (JSE: BAT) shares.
    • Des de Beer has his finger firmly on the buy button, picking up another R5.6 million worth of shares in Lighthouse Properties (JSE: LTE).
    • The chairman of NEPI Rockcastle (JSE: NRP) bought shares worth R583k.
    • The CEO of RCL Foods (JSE: RCL) bought shares worth R208k.
    • The CEO of Frontier Transport Holdings (JSE: FTH) bought shares worth R75k.
  • Here’s some good news: Grindrod (JSE: GND) announced that the deal to dispose of the North Coast Property Loans and Investments for R500 million to African Bank has met all conditions and will close on 20 March. That’s both a clean-up for Grindrod and a boost to the scale ambitions of African Bank.
  • Ethos Capital (JSE: EPE) released a presentation on its Optasia investment. This is a fintech company with a particularly strong footprint in Africa. It’s not the simplest business to understand, with the presentation available here if you would like to dig in.
  • Numeral Ltd (JSE: XII), one of the most obscure listings on the JSE, has appointed a non-executive director who brings significant experience in the corporate finance industry. Will we see some dealmaking here? On a market cap of R12.4 million, even acquiring your favourite local restaurant would probably be a categorisable transaction!

GHOST BITES (Absa – Standard Bank | Hulamin | MTN | RFG Holdings | Thungela)

The Finance Ghost
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GHOST BITES (Absa – Standard Bank | Hulamin | MTN | RFG Holdings | Thungela)

Another banking exec crosses the floor (JSE: SBK | JSE: ABG)

This time, Absa gets a new CEO at the expense of Standard Bank

The banking industry seems to be playing quite the game of musical chairs at the moment! Fairly recently, we saw Absa lose Jason Quinn to Nedbank as he switched out his red tie for a green one. Now, Kenny Fihla will pack away his blue tie and get a red one out, as he leaves the role of Deputy Chief Executive of Standard Bank Group (and Chief Executive of Standard Bank SA) to take the role of CEO of Absa Group.

This comes after 18 years of service to Standard Bank, so that’s a massive amount of institutional knowledge that is being lost by Standard Bank. This is quite the coup for Absa and pretty much every comment I saw online was very complimentary of Fihla.

As Standard Bank now looks for a replacement, we have to wonder whether the other banks should make sure they lock their doors at night! Internal succession planning seems to have fallen by the wayside in this industry.

Hulamin signs off on a rough year (JSE: HLM)

The share price is down over 22% in the past year

Hulamin has released results for the year ended December 2024. Rolled Products volumes were up just 2% and they had a fire that impacted higher margin export products, so that sets the scene for a period in which normalised EBITDA fell by 12%.

If you want to see a particularly shocking number, then take a look at cash flow from operating activities. It fell from R363 million to R46 million. Free cash flow (i.e. after capex) was much more frightening, coming in at negative R512 million. Net debt ballooned from R867 million to R1.35 billion.

The debt : equity ratio has increased from 24.5% to 35.6% and this is definitely worth keeping an eye on. I know it was a tough year, but operating cash flow of R46 million vs. stay-in-business capex of R274 million isn’t what you want to see. At least growth capex of R295 million is a strategic decision that can be tweaked. The same can’t be said for the other type of capex.

The constant currency vs. reported earnings gap at MTN remains huge (JSE: MTN)

Will the macro story ever improve?

When Standard Bank released earnings recently, they talked about an expectation for the African currency situation to improve in 2025. MTN shareholders will certainly hope that this plays out, as the gap between constant currency and reported earnings really does make for painful reading.

Simply, it doesn’t help much if you achieve a high growth rate in a country with a rapidly depreciating currency. Sure, the percentage looks fantastic expressed in local currency, but it doesn’t equate to much once you report it in a stable currency.

To give you an idea of the difference, MTN group service revenue was up 13.8% in constant currency, yet it fell 15.4% on a reported basis. To show you the difference, fintech revenue (which is still growing quickly in the stable economies, not just the problematic ones like Nigeria) was up 28.5% in constant currency and 11% in reported currency. You can therefore see how the more traditional telecom services suffer even more than the new-age stuff. This is a direct result of the product mix across the different markets.

With all said and done, EBITDA margin fell 890 basis points to 32% on a reported basis. It was only 80 basis points lower year-on-year on a constant currency basis, coming in at 38.2%. Again, the more difficult economies offer structurally higher margins.

By now, you get the idea of the theme here. HEPS fell by 68.9% to 98 cents, so shareholders have seen things go the wrong way thanks to the macroeconomic realities in Africa. The highlight is the ordinary dividend, up from 330 cents to 345 cents. This has been supported by a number of corporate actions at group level that have improved the balance sheet.

There has also been a process of localisation in the African subsidiaries in which in-country shareholders are brought onto the register. For what it’s worth, I think localisation is the right strategy in these countries as it creates a shared outcome rather than an “us and them” situation.

As a final comment, it’s not just the macroeconomic picture that is hurting them. Conflict in Sudan also had an impact on earnings, albeit to a far lesser extent than the currency issues in Nigeria.

RFG Holdings hurt by international markets (JSE: RFG)

Pain and pineapples (or lack thereof)

RFG Holdings released a trading update dealing with the five months to February 2025. The regional (i.e. local) segment did pretty well, with revenue up 5.6% thanks to an 8.7% increase in volumes that more than offset pricing and mix pressures. Alas, the international segment can’t say the same thing.

Due to volatile offshore markets, a number of deciduous fruit contracts were not honoured by customers. This forced RFG to redirect them to other markets, which had a negative impact on pricing and sales volumes due to delayed shipments. Even more irritatingly for investors, volumes were further impacted by lower pineapple volumes based on drought conditions in the prior year. The net result is a 19.1% decrease in revenue in the international segment, with price down 1.5% and volumes down a nasty 15.4%. Even forex misbehaved, contributing a 2.1% decline.

This certainly took the shine off the regional result, leading to group revenue being 2.1% higher for the five months. At least the international segment is much smaller than the regional segment – and certainly a lot smaller than it was before.

Sadly, due to the pressure in the international segment, the group doesn’t expect to meet its operating profit margin target for the interim period. Looking ahead, they expect momentum to continue in the regional segment (with a strong caveat around consumer spending pressure) and revenue in the international segment to start recovering from March onwards. This implies a recovery in volumes, with inventory levels expected to normalise by the end of the year as they catch up on missed shipments.

Interim results are due for release on 21 May.

Thungela: dividends, buybacks and deals (JSE: TGA)

This is a great way to learn about capital allocation

Thungela has been keeping SENS pretty busy lately, with deals announced to get the other investors in Ensham (the Australian coal business) out of that structure. They had to do it at two levels, as there were minorities directly in Ensham as well as in Thungela’s Australian subsidiary.

Now, the company has released results for the year ended December 2024. It wasn’t a pleasant year in the cycle, with revenue up 16% and yet HEPS down 27%. This is because prices came down year-on-year, so they had to work much harder to achieve that revenue and the margin impact is clear to see.

It’s incredible that on this chart, you can barely see the year-on-year impact, such was the peak in prices during the pandemic:

From a cash generation perspective, the downturn in profits obviously had an impact on cash coming into the group. Net cash from operating activities came in at R5.3 billion, well down from R8.5 billion in the prior year. Capex was R4.6 billion, so the difference between cash from operating activities and capex (i.e. free cash flow) wasn’t enough to offset the impact of paying dividends and executing buybacks during the year. The net cash balance therefore ended at R8.7 billion vs. R10.2 billion the prior year.

This won’t stop them from further dividends (the full year dividend is R13 per share, of which the final dividend is R11 per share) or share buybacks for that matter, with a programme of up to R300 million announced. This is in addition to the Ensham deals and other major capex projects.

Looking ahead, the numbers will be positively impacted by a higher proportion of Ensham being attributable to investors in Thungela. Although Ensham runs at a considerably higher cost per export tonne, it is also in a far more dependable country (the trains actually work in Australia) and has better proximity to key Asian markets. The benchmark export prices are very different, making up for a chunk of the gap in costs of production across the two markets.

Nibbles:

  • Director dealings:
    • You guessed it – another purchase by Des de Beer of shares in Lighthouse Properties (JSE: LTE), this time to the value of R2.86 million.
    • A director of the South African subsidiary of Sappi (JSE: SPP) bought shares worth R190k.
  • Montauk Renewables (JSE: MKR) is pretty light on liquidity, so it’s not uncommon to see large moves in the share price on a single day. While a 17.9% drop on the day of earnings looks like a clear message from the market, it actually happened in the morning and results were released in the afternoon! The numbers weren’t pretty though, with revenue only up 0.5% for the year to December 2024 and HEPS down by 27%.
  • For the budding geologists among you, AngloGold Ashanti (JSE: ANG) released a presentation that was delivered at a recent site visit to the Obuasi mine in Ghana. It focuses on the pathway to 400koz in annual production and is full of some very impressive graphics that will mean absolutely nothing to you unless you have mining experience. If that sounds like you, then enjoy it here.
  • Emira Property Fund (JSE: EMI) announced that its shareholders approved the proposed transaction that sees Emira subscribe for further shares and notes in DL Invest, increasing its stake to 45%. There are call options running around in this structure as well. This is also of relevance to Castleview Property Fund (JSE: CVW) shareholders, as Emira is a 57.88%-owned subsidiary of Castleview.
  • Anglo American Platinum (JSE: AMS) announced that three non-executive directors have stepped down from the board. Before you panic, this is related to the planned demerger from Anglo American (JSE: AGL) and the need to have an independent governance structure.
  • Here’s something you won’t see every day: Pepkor (JSE: PPH) announced that the SARB has blocked any trade in the shares held by Ainsley Holdings. That name probably won’t mean anything to you. How about Ibex? How about Steinhoff? Makes more sense now, doesn’t it? The 13.7% in Pepkor that is held by Ainsley is the legacy investment of Steinhoff (now held by a structure called Ibex) and the authorities are continuing with their investigations. Pepkor just happens to be caught up in this, as Pepkor shares are the asset in question. This doesn’t impact Pepkor itself.
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