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Ghost Bites (Bowler Metcalf | DRDGOLD | Lesaka | MTN | MultiChoice)

The Finance Ghost
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Ghost Bites (Bowler Metcalf | DRDGOLD | Lesaka | MTN | MultiChoice)

Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:

Bowler Metcalf with an operating leverage masterclass (JSE: BCF)

Investors love seeing this shape on the income statement

When you invest in a manufacturing business, the hope is that price and volume increases in the products will drive much better manufacturing margins thanks to the large fixed component of the cost base. In practice, this means that earnings growth should be higher than revenue growth, a concept known as operating leverage – the revenue growth is leveraged up into higher earnings growth.

When revenue drops, that works against you by the way. This is why industrials groups tend to struggle in difficult times or periods of low pricing power.

For the six months to December 2023, there are no such problems at Bowler Metcalf. In fact, the business did exactly what investors want to see. Revenue increased by 21% and profit from operations was up 47%, thanks to an increase of just 9% in the staffing cost.

A decrease in load shedding helped this result, along with the various contingency plans that the company had put in place. This is a classic South African story of resilience.

DRDGOLD only gets the tail end of a better gold price (JSE: DRD)

Literally!

DRDGOLD is a tailings business, which means it processes mining dumps and gets the last bit of gold out. This means the margins are far lower than for gold miners that get the stuff out the ground the first time. This makes DRDGOLD very sensitive to a change in the gold price (lower margin businesses are impacted more by price changes than high businesses), but also to the impact of inflation and what this does to operating costs.

For the six months ended December 2023, HEPS will only be 5% to 15% higher. This is despite a 12% increase in revenue, driven by a 22% increase in the rand gold price received. Gold sold decreased by 8% due to various issues ranging from lower yields through to community interference. This is a tough, tough business.

Cash operating costs were up 14%, with various inflationary pressures around energy and machinery costs. This is why the revenue increase hasn’t translated into a terribly exciting HEPS increase.

Capital expenditure skyrocketed by 177% but there’s a good reason at least, with a solar power plant scheduled for completion at one of the facilities this year.

DRDGOLD has no bank debt but has experienced a significant free cash outflow in this period. It was R1.5 billion in the bank.

Production guidance for the year ended June 2024 has been maintained, with the company warning investors that it is likely to only come in at the lower end of an admittedly tight range (165,000 to 175,000 ounces). Cash operating cost guidance has unfortunately been increased from R770,000/kg to R800,000/kg.

There was a time when I held DRDGOLD because I hoped to capture a really sensitive move to the gold price. This was a couple of years ago. I learnt two hard lessons from it. The first is that the gold price doesn’t behave in a predictable way, at all. The second is that mining houses aren’t great inflation hedges and tailings businesses are even worse.

Lesaka takes a step into the tavern industry (JSE: LSK)

This feels like a smart, complementary play

Lesaka Technologies is all about taking payments solutions to merchants in lower income areas, often serviced by more informal traders. Taverns are a feature of that landscape, serving as critically important outlets for fast-moving consumer goods companies.

Leska is acquiring 100% of a business called Touchsides from Heineken International. This is complementary with Kazang, bringing another 10,000 active POS terminals into the ecosystem. Tavern owners benefit from analytics like real-time sales activity, stock management levels and pricing. There are 45,000 licensed taverns in South Africa, so the growth opportunity is substantial.

Naturally, part of the business model here is to monetise the data with tavern suppliers, with Heineken having agreed to a long-term renewable contract with Touchsides as part of the deal. There are many opportunities here.

The deal value hasn’t been disclosed and the acquisition will be funded by internal cash generation of the group.

MTN and Mastercard finalise a Fintech deal (JSE: MTN)

The market was perhaps expecting something more impressive

The good news is that MTN has put together a deal with Mastercard that will see the payments giant take a minority stake in MTN Group Fintech, with obvious synergies around the commercial relationship and potential use of technology and infrastructure.

The less exciting news is that this is a relatively modest investment for Mastercard of just $200 million, based on a valuation of MTN Group Fintech of $5.2 billion on a cash and debt-free basis. Although this helps the market put a value on MTN Group Fintech and it suggests some alignment between the parties going forward, the reality is that this is a rounding error for Mastercard.

The TRP fires a warning shot at MultiChoice (JSE: MCG)

The regulator is bringing things back in line here

The Takeover Regulation Panel (TRP) is not to be messed around with. Takeover regulators are powerful thanks to the Companies Act, playing a very important role in the market to protect minority shareholders who can quite easily be steamrolled in the absence of regulation.

When announcements are made regarding takeovers, the TRP is generally involved. In an announcement released on Tuesday morning, the TRP confirmed that it had neither sanctioned or approved the announcements made by MultiChoice regarding the initial non-binding offer and the subsequent withdrawal of a cautionary announcement.

I did wonder about the aggressiveness of withdrawing the cautionary and it seems that the TRP didn’t love it either, advising the public to exercise caution regarding these announcements and shares in MultiChoice. The TRP is investing this matter on an urgent basis, with the focus surely being on whether Canal+ needs to make a mandatory offer to shareholders of MultiChoice.

Little Bites:

  • Director dealings:
    • The company secretary of Datatec (JSE: DTC) has sold shares worth R1.1 million.
    • Sean Riskowitz (acting through Protea Asset Management) has bought yet more shares in Finbond (JSE: FGL), this time worth R319k.
  • Fresh off the news of the Capespan disposal closing, Zeder (JSE: ZED) has announced a special dividend of 20 cents per share. For reference, the current share price is R1.78.
  • There’s a most unusual SENS from Argent Industrial (JSE: ART) that discloses a 5.09% stake held by an investor named Jason Holzer. We have no other confirmed details about him and a Google search is inconclusive. With a market cap of R907 million, this is a stake of less than R50 million. It’s easy for a high net worth individual to hold a stake this size with no intentions of any corporate activity around it.
  • Sable Exploration and Mining Limited (JSE: SXM) has agreed to put an additional R1 million worth of funding into the Dens Medium Separation beneficiation plant, structured as a joint venture with IPace. This gives Sable an additional 2.5% stake in the joint venture. IPace has the option to buy back that stake for R1.3 million before 31 October 2024. IPace has committed to fund the rest of its obligation to complete the plant and commence production on 15 March 2024.
  • Novus (JSE: NVS) has received exchange control approval for its special dividend. The payment date is 19 February.
  • At Tongaat Hulett (JSE: TON), the application launched by Powertrans (and subsequently joined by RGS Group Holdings) to interdict the business rescue practitioners from implementing the approved plan was struck off the roll for lack of urgency. Powertrans also has to pay the costs of the application, including the costs of the respondents. That’s an expensive and unsuccessful day in court.
  • Ellies (JSE: ELI) has appointed a business rescue practitioner and a notice of commencement of proceedings has been filed.

Turn Your Tax into Solar Power

Sponsored Content
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Turn Your Tax into Solar Power

Please note that this article has been paid for by Futureneers. The Finance Ghost does not have any involvement in this business. As with every investment opportunity in the market, you must always do your own research fully and you must refer to the Futureneers website for all details.

Seizing the Section 12BA Opportunity

In the world of investing, it’s not just about where you put your money, but how you leverage every opportunity. There’s a saying that’s been making the rounds on Twitter/X: “Regular people invest their own money. The wealthy invest via their own balance sheet.” As we cruise through February, this rings especially true for South African taxpayers facing their 2024 tax liabilities.

Welcome to the World of Section 12BA

Here’s a thought: What if your tax liability isn’t just a drain on your personal balance sheet but a gateway to profitable investment? Enter Section 12BA, a golden opportunity for South African taxpayers to turn their tax payments into gains by investing in solar energy.

Once-in-a-Lifetime Opportunity – Don’t Miss Out

This isn’t just another investment scheme. For the tax years 2024 and 2025 only, SARS is rolling out the red carpet for those who invest in solar energy. It’s a response to our nagging load shedding woes and a chance for you to get in on the ground floor of something big while doing your bit for the country.

South Africa is a “tax haven” if you invest in solar for the next two years.

So, How Does This Solar Dance Work?

Let’s break it down:

  • Your Move: Put R1,000,000 into our solar fund, we add a R520,000 loan to the mix, and we’re talking about a R1.52 million investment in solar assets.
  • The Tax Tango: With Section 12BA, that R1.52 million gets you a tax deduction of 125% – that’s R1.9 million off your taxable income. It could be a saving (provisional tax), or, it could be a refund (PAYE) of up to R855,000.
  • Minimizing Risk: This move smartly offsets most of your initial investment, leaving just R145,000 of your (after-tax) money really on the line.
  • Profit Time: We project generating R4,100,000 million from the solar assets by selling electricity (after all operating expenses and fees). After repaying loans and interest, the net cash distribution to you, will be around R3,000,000 over the duration of this investment, on which you will pay R1,600,000 in income tax on your profits. This leaves you with R1,400,000 in cash, and a tax saving of R855,000 with a total return of R2,225,000.

Tick Tock, The Clock’s Running

Just a heads up, though – to get this show on the road for the 2024 tax year, your solar assets need to be live and generating kilowatts by 29 February 2024. No pressure, right?

Why Futureneers Stands Out

Unlike other funds that raise capital first and rush to deploy it, Futureneers took a different approach. We developed the solar assets first, ensuring absolute certainty of their operational status by February, and now we’re raising our last batch of capital. Because of this deadline, and the operational assets in our portfolio, we work on a first come first serve basis. So, you can’t wait until the last week in February to make your investment (we only have R18 million left until the fund is fully allocated).

The Million-”Randela” Question

So, here’s what it boils down to: Would you rather just pay your taxes, throwing good money into the Government pot, or would you prefer to invest that money in private sector solar assets, earn some solid returns, and help SA get a grip on the energy crisis?

Visit the Futureneers website to get a personalised overview for a Section 12BA tax structured investment and reserve one of the limited tax deduction spots before 19 February 2024.

*Please note that all calculations and figures are based on a 45% tax rate.

Ghost Stories Ep28: The 2024 kick-off (with Duma Mxenge of Satrix)

The Finance Ghost
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Ghost Stories Ep28: The 2024 kick-off (with Duma Mxenge of Satrix)

Welcome to 2024!

An investing strategy can only be successful if there is money available to invest. In the first part of this podcast, The Finance Ghost and Duma Mxenge discussed concepts like:

  • The value of planning ahead and how this can save money (e.g. when booking holidays – especially to cheaper jurisdictions than South Africa!)
  • The usefulness of sitting with a financial advisor earlier in the year.
  • Dangers of living bonus-to-bonus each year.
  • The reality of middle-class inflation in South Africa and effective double tax.

After initially bouncing around these ideas, the conversation turned to financial concepts including:

  • Different financial needs at different stages of your life – with Duma giving a clear and succinct explanation that we can all relate to, followed up by a discussion on the need to achieve balance in life.
  • The importance of stress-testing interest rates when deciding to take on debt.
  • The financial and practical considerations of renting vs. buying a home.
  • Of critical importance: financial discipline doesn’t mean not having nice things!
  • Why “tax free savings account” is a misleading name and some of the strategies that can be used with these investing accounts.
  • Offshore vs. local strategies and what we can learn from 2023, along with various nuances like the true impact of a strong vs. weak dollar on global tech stocks.
  • The bad habit of South Africans wanting to send money offshore when the rand is at its weakest.

The podcast ended off with a discussion on the ETFs that should exist – with The Finance Ghost beating the drum once more for the JSE to have a proper retailers index!

There’s so much in here, underpinned by Satrix’s commitment to South African investor education. To find out more about SatrixNOW, visit this link>>>

Listen to the show here:

Disclosure

Satrix Investments (Pty) Ltd is an approved FSP in term of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision.

While every effort has been made to ensure the reasonableness and accuracy of the information contained in this podcast (“the information”), the FSP’s, its shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaims all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information.

Ghost Bites (Italtile | Mondi | MultiChoice | RCL Foods | Sun International | Vukile)

The Finance Ghost
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Ghost Bites (Italtile | Mondi | MultiChoice | RCL Foods | Sun International | Vukile)

Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:

Italtile can’t catch a break (JSE: ITE)

No signs of improvement in this sector yet

The building materials industry has been having a torrid time in this higher interest rate environment. Probably the only house improvements that I’ve seen anyone do for the past two years have been related to solar installations. After investing in homes during the pandemic, even well-off consumers have prioritised spending on travel and experiences after the world went back to normal.

None of this is good news for Italtile, which has seen HEPS for the six months to December 2023 fall by between 13.1% and 17.0%. This puts it on 65.8 to 68.8 cents.

The share price has lost over a third of its value in the past three years.

Mondi buys a small mill in Canada (JSE: MNP)

The deal is worth just $5 million, so it only gets a passing mention by the company

With a market cap of R143.5 billion, a transaction worth under R100 million really isn’t going to move the dial at Mondi. This is why the acquisition of the Hinton Pulp Mill in Canada only gets a voluntary announcement. Kudos to Mondi for even giving this level of disclosure.

The mill has the capacity to produce around 250,000 tonnes of pulp per annum. The seller is West Fraser Timber Co. and there’s a long-term partnership in place with the company. Mondi intends to invest in the mill, including for the expansion of the facility with a new kraft paper machine.

Will MultiChoice shareholders have multiple choices? (JSE: MCG)

The board is playing hard-to-get with Canal+

After the market celebrated the news of a non-binding offer from Canal+ for MultiChoice at R105 per share, the company stunned everyone with an announcement that the board feels that this offer underprices the company. This is perhaps a good time to point out that MultiChoice last traded above this level in May 2023, with a 52-week low of R62.31 and a 52-week high of R155.20. The volatility has been exceptional.

MultiChoice claims to have recently gone through a valuation exercise that puts the value “significantly above R105 a share” – but they don’t say by how much, nor do they give details of why. The company also points to public comments by Canal+ that there are many synergies in the deal, which MultiChoice believes need to be factored into a fair offer by Canal+.

The synergies point is highly debatable. There is zero obligation whatsoever for Canal+ to pay a cent towards synergies that it will bring to the table. It is an established principle in dealmaking that you don’t pay for the value that you are bringing. If they really want the deal, then they might share some of the synergies.

When you’re buying a broken car and you have the skill to fix it, do you make an offer based on what the fixed car is worth, or what it is currently worth? Exactly.

MultiChoice is so bold in its approach that they have lifted the cautionary announcement and said that they won’t even engage further with Canal+. This throws the door wide open to any other potential bidders, which is either the masterstroke of the year or a very silly move. If it works, perhaps shareholders will get a better outcome than R105 a share. If it fails, I suspect that the share price will move sharply lower (after the mandatory offer period below) and Canal+ will just keep building the stake by picking up shares at a cheaper price.

Another interesting twist to this tale is that Canal+ has breached the 35% ownership threshold in MultiChoice, which means that it may need to make a mandatory offer to shareholders based on the price recently paid for shares in the market. The TRP needs to rule on whether there should be an offer. Initially I couldn’t see a reason for there not to be, but then I remembered that this rule might be interpreted based on voting rights rather than economic interest. Due to the restriction on foreign voting rights in a local broadcaster, they may not be deemed to have breached the mandatory offer threshold!

There are many potential outcomes here, ranging from a hostile bid made directly to shareholders or another bidder emerging with a better price, right through to the whole deal falling over and MultiChoice directors being left with some egg on their faces.

Corporate M&A is many things, but it isn’t boring!

A brighter rainbow at RCL Foods (JSE: RCL)

Improved conditions in poultry have led to better earnings

Although RCL Foods has put in a substantial effort to diversify operations and be more than just a chicken business, the numbers at Rainbow still make a sizable difference. For the six months to December 2023, HEPS will be at least 30% higher than the comparable period, with the improvement attributed to Rainbow and the sugar business unit.

Despite having to deal with Avian Influenza in this period, Rainbow achieved better numbers as the turnaround plan was executed. In the sugar business, higher market prices helped them out.

In Groceries and Baking, performance was in line with the comparative period as volumes struggled.

Sun International releases the Peermont circular (JSE: SUI)

There are 11 properties in Peermont, with Emperors Palace as the clear flagship

For a transaction of this size, the release of the circular is a major milestone. In all its 158-page glory, you can see how corporate finance really works in practice.

The jewel in the Peermont crown is Emperors Palace, which has achieved an average EBITDA margin of around 40% in the past few years (excluding 2020). Sun International notes that this is in line with its largest casino operations, which shows that Emperors will slot right in beautifully.

There are 10 other properties in Peermont:

Peermont generated consolidated historical EBITDA of R1.056 billion in FY22 and R1.165 billion in FY23. The purchase price is based on an enterprise value of R7.3 billion. Based on the last twelve months to December 2023, this is EV/EBITDA multiple of 5.76x. That just shows you how ridiculously overvalued some assets are in South Africa, as you can pick up this group of casino assets on what feels to me like a rather modest EBITDA multiple.

The risk is on the balance sheet, with Sun International taking on R4.0 billion worth of debt in Peermont and borrowing the purchase price as well, so group debt will balloon from R5.9 billion to R13.2 billion. Sun International will pay reduce the dividend payout ratio to 50% for as long as the net debt to EBITDA ratio is above 2x and will pay 75% when it is below 2x.

So, it’s a risky gamble with strong potential upside. What else would you expect from a gaming group?

And in case you need a reminder of why people work extremely hard to break into the M&A advisory industry and then still put in incredibly long hours once they are in, here are the fees:

A bullish update from Vukile Property Fund (JSE: VKE)

The full-year performance should be ahead of even the upgraded guidance

The year ending March 2024 is proving to be a goodie for Vukile. This retail-focused REIT has unique exposure of 40% South Africa, 60% Spain. Total assets in the portfolio are worth R40 billion.

In South Africa, key metrics for November and December were positive and in line with expectations. Festive trading was particularly strong, with trading density up 7.6% in December. Township centres led the way with 13.2% growth, while rural centres grew 7.2% and urban centres only managed 4.5%. If we combine both November and December, we see township centres up 9.7%, rural up 3.3% and urban properties only 1.3% higher.

Fast foods were only up 5.4% in December, which is a modest performance that we’ve seen in other property updates as well. We know from the apparel retailer updates that clothing did well over this period, echoed by Vukile’s update that shows women’s wear sales up 14.5% in December and men’s wear up 8.1%. Notably, grocery sales were only up by 2.4% in December.

Moving on to Spain, Castellana (the name of the overall portfolio) achieved record footfall for the 12 months to December 2023, up 6.4%. Sales numbers grew 7.9% despite 2022 being a strong base. Unlike in South Africa, Black Friday was a relative winner with sales growth of 7.0% in November and 6.1% in December.

At category level, the winner in Spain was media and technology (up 19.5%), with health and beauty (14.2%) and food and beverage (12.3%) also putting in solid growth numbers. The leisure category finally moved ahead of 2019 levels, marking a full recovery from the pandemic (without adjusting for inflation, at least).

With nine months of the year now behind them, Vukile gave the happy news that full-year performance should be ahead of even the upgraded guidance for FFO per share (and cash measure) and dividend per share. It’s been an excellent year for the company.

Little Bites:

  • Director dealings:
    • The managing director of the Feed division at Astral Foods (JSE: ARL) has sold shares worth R1.2 million.
    • A non-executive director of KAL Group (JSE: KAL) has bought shares in the company worth R224k.
  • Renergen (JSE: REN) announced that the investment by Mahlako Gas Energy for a 5.5% stake directly in Tetra4 (the Virginia Gas Project) has met all conditions precedent. The R550 million should now flow. The market is waiting for helium to flow as well, so hopefully that isn’t too far away.
  • Zeder (JSE: ZED) announced that the disposal of Capespan Group (excluding the pome fruit primary production operations and the Novo fruit packhouse) to Agrarius has been completed. Zeder has received R511.39 million from the disposal. Agrarius is a JSE-listed special purpose investment vehicle that is Shariah compliant and focsed on the agriculture sector value chain. It operates a R10 billion Shariah-compliant sustainability-focused asset-backed note program and raised this funding through the Sukuk issuances.

Satrix launches Satrix JSE Global Equity ETF

Satrix
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Satrix launches Satrix JSE Global Equity ETF

This gives investors exposure to SA companies with offshore listings.

Satrix, South Africa’s leading provider of index-tracking products, will list a new exchange traded fund (ETF) during the first quarter of 2024, upon approval from the JSE. The Satrix JSE Global Equity ETF (STXJGE) will give investors an equity building block that upweights local companies that have their primary listings offshore. It will track the FTSE/JSE Global Investor Index.

Kingsley Williams, Chief Investment Officer at Satrix*, says “This new fund represents a shift in investment strategy, catering to the market’s evolving needs. It will provide an alternative option for investors who want to diversify their local equity portfolios and incorporate higher exposure towards rand hedge stocks, particularly in light of the upcoming harmonisation of the FTSE/JSE benchmark indices (ALSI and SWIX) in March 2024.

He said over the past few years local equity indices using the All Share Index (ALSI) construction methodology have significantly reduced exposure to inward-listed global companies such as BHP Group (BHG), Compagnie Financiere Richemont (CFR), Glencore (GLN), Prosus (PRX), and Anheuser-Busch InBev (ANH), due to a combination of corporate actions, restructuring and index rules resulting in substantially reduced floats.

“This has exposed these equity indices more to local macroeconomic idiosyncrasies (often referred to as SA Inc. factors), which clients may wish to diversify away from within their local equity exposure.”

“Investors can blend the Satrix JSE Global Equity ETF with existing ETFs to gain increased exposure to dual-listed companies on the JSE, as historically offered by the ALSI indices.”

Rand Hedge and Offshore Revenue Exposure
“The new ETF has a significantly higher rand hedge profile than other broad local equity market indices, providing a potential cushion should the local currency weaken. It also offers a diversified source of revenue from its constituents, with higher earnings emanating from offshore markets across a variety of sectors. That makes it ideal for investors with a longer-term investment horizon who can withstand equity-like volatility,” adds Williams.

Blending Local Equity Exposure With Global Investment Appeal
Satrix says the Satrix JSE Global Equity ETF tracks the recently launched FTSE/JSE Global Investor Index, focusing on the 50 largest companies listed on the JSE. This approach diverges from broad local equity benchmark indices by using global free-float metrics for weight determination. Local equity benchmark indices typically reduce the weight of dual-listed companies, by only considering the proportion of shares held locally.

Key Features of this ETF include:

  • Diverse portfolio: Targets the 50 largest JSE-listed companies.
  • Global free-float weighting: Uses global free-float metrics, offering higher exposure to dual-listed companies.
  • Quarterly rebalancing: Ensures the ETF stays current with market changes.
  • Competitive TER: An attractive Total Expense Ratio (TER) of 0.15% makes it an affordable option for a diverse range of investors.
  • Easy access: The ETF will be available for trading on the JSE, making it accessible for a variety of investment applications.

Visit www.satrix.co.za for more information on the Satrix JSE Global Equity ETF.

*Satrix is a division of Sanlam Investment Management.

Ghost Bites (British American Tobacco | MC Mining | Pan African Resources | Sanlam | Vodacom)

The Finance Ghost
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Ghost Bites (British American Tobacco | MC Mining | Pan African Resources | Sanlam | Vodacom)

Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:

British American Tobacco settles with Philip Morris (JSE: BTI)

No money is changing hands under this agreement

British American Tobacco and Philip Morris have been battling it out over intellectual property disputes relating to the cigarette alternative products. These are key growth areas for the businesses – and the source of halfway decent ESG ratings.

The companies have now agreed to a settlement that puts literally everything to bed, including future claims against current products. Each party is allowed to innovate and introduce new product interations.

The amount changing hands? Zero. Nada. Niks. The fight was so damaging for both sides that there is no clear winner here.

In the official announcement relating to the settlement, British American Tobacco reminded the market that Vuse and glo are each £1 billion brands. There’s a valuable pie to fight over here, especially as these products become more profitable in years to come (provided all goes to plan). The parties have clearly decided to just move on now and focus on their respective businesses.

MC Mining has received the bidder’s statement (JSE: MCZ)

The recommendation at this stage is still to take no action

MC Mining has been waiting for the consortium of joint bidders (including Senosi Group and Dendocept – with all parties holding a combined 64.3% of shares in issue) to lodge a bidder’s statement in line with Australian takeover laws.

This has finally happened, so the independent board must now move ahead and consider the terms of the statement. The next step is that the board responds with a target statement that will include an independent expert report and the independent board’s recommendation regarding the bid.

Until then, shareholders have been told to take no action in relation to the bid.

The price is A$0.16 per share, which works out to around R1.97 at current exchange rates. The share price closed 20% higher at R1.80.

A shiny jump in earnings at Pan African Resources (JSE: PAN)

HEPS has jumped sharply – and that’s in US dollars

Pan African Resources has been on the receiving end of a gold price that increased 13.7% in dollars in the six months to December 2023 vs. the comparable period. Volumes of gold sold increased by 8.9%. Even before you take advantage of the weak rand, this combination is going to tell a good story for US dollar results.

Indeed, HEPS will increase for the period by between 41% and 51% in US dollars – the company’s reporting currency. The average exchange rate was 7.8% weaker for the period, so rand results would’ve been even better.

This is why the share price is up around 24% in the past 12 months.

A busy day of M&A news for Sanlam (JSE: SLM)

Assupol is the big news, with a deal in Morocco as well

I’ll start with the most important news, which is that Sanlam (acting through Sanlam Life) is making an offer for Assupol. If you go back to April 2023, two major shareholders of Assupol (Budvest with 46.11% and the International Finance Corporation with 19.36%) noted an intention to commence a sale process. Sanlam is now providing that exit and wants the rest of the company as well, hence this is being structured as a scheme of arrangement (a desire to get a 100% stake) with a standby offer as well.

This is an unusual structure, as it means that Sanlam is happy to get a piece of the pie at this price even if it can’t get the whole thing. For the standby offer to become applicable though, holders of at least 65% of shares in issue would need to accept it. At the moment, irrevocable undertakings are in place for holders of 69.81% of the shares, so it looks like the scheme is likely to go ahead anyway as they are very close to the required approval rate for a scheme. If the scheme somehow fails, the standby offer is on track unless an irrevocable undertaking is pulled.

Assupol is currently listed on the Cape Town Stock Exchange with a market cap just below R5 billion before this offer was made. The embedded value (an important metric for life insurers) is R7.07 billion. Sanlam sees Assupol as a strategic fit in the Retail Mass segment, particularly given Assupol’s strong customer base in Gauteng.

The price for the deal is quite a complex calculation, thanks to the existence of the B shares among other issues. Based on the assumed implementation date, it works out to R15.23 per share. This is a 32.17% premium to the closing price of the shares on the day before the offer was made. The offer works out to R6.5 billion in total, so that’s a lot closer to the embedded value in the business. An independent expert has opined that the scheme price is fair and reasonable to shareholders.

There must be some long faces at the Cape Town Stock Exchange. They don’t exactly have many listings and now one of the most important ones is set to disappear.

In much smaller (but still interesting) news, the formation of the SanlamAllianz Africa joint venture triggered a mandatory offer in Morocco for Sanlam Maroc. It seems as though shareholders were very happy with that outcome, as holders of a sizable 23.86% of shares in issue said yes to the offer.

The total price was R2.43 billion, funded by Sanlam Emerging Markets and Allianz Europe in line with their respective 60% and 40% shareholdings in SanlamAllianz. This increases the stake held by SanlamAllianz in the Moroccan business from 61.73% to 85.59%.

Vodacom now has 200 million group customers (JSE: VOD)

The deal for Vodafone Egypt has made the group substantially larger

When companies want to grow, they can either do it the slow way (organic growth) or the fast way (acquisitions). Now, getting bigger overall doesn’t mean that shareholders are any better off. If you acquire businesses in exchange for shares, then the number of shares in issue keeps going up. When wearing an investor hat, you always have to keep this in mind when looking at companies that have grown significantly through deals.

Vodacom now services 200 million customers across the group and is obviously making a big deal of this fact, with 75 million of those customers using a financial service. Revenue from “new services” – which includes financial and digital services – is targeted to reach 25% to 30% of revenue over the medium term. The contribution exceeded 20% this quarter for the first time. Mobile money is the cornerstone of this part of the business.

For the quarter ended December 2023, Vodacom’s group revenue grew 26.8% year-on-year. If you dig deeper, you’ll find that South Africa grew by 4.0% and International (which excludes Egypt) was good for 12.6%. This means that the bulk of the exciting growth came from the acquisition of Egypt.

The group reports a group normalised number for service revenue specifically. Without the normalisation, it increased by 29.7%. With the adjustment for the Egypt deal, it grew by 8.8% with Egypt and 3.2% without Egypt. So even when adjusting for the change in shareholding, the growth really is coming from Egypt. That business grew service revenue by 29.1% in local currency and there were 55.5% more financial services customers, so those are impressive numbers.

Little Bites

  • Director dealings:
    • An executive director of Argent Industrial (JSE: ART) has sold shares worth R1.5 million.
    • Sean Riskowitz has bought another R232k worth of shares in Finbond (JSE: FGL), acting through Protea Asset Management.
  • Life Healthcare (JSE: LHC) has completed the sale of Alliance Medical Group, receiving £845.9 million in the process. Net proceeds of R10.5 billion have been repatriated to South Africa after the settlement of international debt. The majority of these proceeds will be returned to shareholders – but we don’t know how much just yet.
  • BDO has opined that the Dis-Chem (JSE: DCP) related party transaction regarding the acquisition of the Midrand head office and distribution centre is fair to shareholders. Such an opinion is a requirement for a related party transaction.
  • Willem Britz has stepped down as a non-executive director at AfroCentric (JSE: ACT), having been on the board since 2015. He was one of the founders of Pharmacy Direct, a business that AfroCentric acquired.
  • AYO Technology (JSE: AYO) has renewed the cautionary announcement related to finalising the terms of the settlement agreement with the GEPF and PIC. There has been extensive engagement with the JSE to ensure compliance with listings requirements. The parties previously agreed to extend the long stop date for this to 30 June 2024.
  • Creating perhaps more questions than answers in the process, Grindrod (JSE: GND) alerted the market to announcements by Martius Limited and Redink Rentals Limited regarding an event of default. These companies are funders of Mokoro Holding Company, in which Grindrod has a 35.07% equity interest in the non-core private equity portfolio. Grindrod is not a guarantor on the funding arrangements but is considering the impact on the fair value of the investment. I suspect that this is very small in the grand scheme of things at Grindrod.

Ghost Bites (Glencore | Hudaco | MiX Telematics | MultiChoice)

The Finance Ghost
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Ghost Bites (Glencore | Hudaco | MiX Telematics | MultiChoice)

Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:

2023 saw a drop in production and commodity prices at Glencore (JSE: GLN)

Production guidance doesn’t look terribly inspiring either

Production at Glencore was in line with earlier revised guidance for 2023. Of course, being in line with guidance certainly doesn’t mean that it tells a happy story year-on-year. The second half was better than the first half, but it was still a year in which only gold and coal saw an increase in production from own sources. Metals like copper (-5%), cobalt (-6%) and zinc (-2%) were all lower.

Looking at production guidance, there is very little or no growth predicted across copper, cobalt, zinc, ferrochrome and coal. Nickel is expected to decrease due to a planned reduction in operations.

On top of all this, pricing achieved for copper, zinc and nickel was lower year-on-year in US dollars. Nickel faced particularly negative pressure, with pricing down 13%.

Glencore’s share price is down by around 13% in the past 12 months, with these numbers showing why the market cooled off on the stock. Of course, like all mining giants, Glencore is cyclical and the return to shareholders will vary dramatically based on the time period chosen.

Hudaco shows double-digit growth in the dividend (JSE: HDC)

The payout ratio has increased

Hudaco operates a variety of consumer-related products and engineering consumables businesses. Diversity is the name of the game, ranging from aftermarket automotive products through to fire detection.

The clever thing about the portfolio is that when the economy isn’t fantastic and the consumer-focused businesses are taking strain, the engineering consumables businesses can generally come to the party with pricing power and steady demand.

Turnover grew 9.1% vs. 2022 and operating profit was up 5.1%. This means that operating profit margin went the wrong way, contracting by 50 basis points to 12.0%. As mentioned, it was engineering consumables that saved the day, with revenue up 14.9% and operating profit up 23.7% vs. consumer products that could only achieve revenue growth of 3.7% and a profit decline of 10.4%.

HEPS increased by 7%, but the company points out that the base period included COVID-related insurance claims. Without the insurance, it increased by 10%. The final dividend was up 12%, so the full year dividend was 10.8% higher than the previous year. This means that the payout ratio moved higher even on an adjusted basis.

Return on equity came in at 19.9%, which is impressive. The share price is R159 and the net asset value per share is R115.71, with the premium to book value justified by the strong return on equity.

MiX Telematics grew revenue and profits (JSE: MIX)

The company is busy with a potential merger with PowerFleet

As the PowerFleet prospectus demonstrated, profits aren’t always easy to come by in tech businesses. MiX Telematics just released third quarter numbers and they reflect a profit at least, which might be interesting when shareholders consider this vs. a merged entity.

The net subscriber base at MiX is now 1,142,000 subscribers. Total revenue increased by 6% year-on-year in constant currency and adjusted EBITDA was up 13%. Sadly, the company reports in dollars, so earning most of its revenue in rands isn’t very helpful to a US investor audience. This is why they are trying to merge into something that US investors are likely to get more excited about.

Canal+ drops a bombshell on MultiChoice shareholders (JSE: MCG)

Despite laws that will make this difficult in terms of voting rights, there’s a take-out on the table

Groupe Canal+ SA has been building its stake in MultiChoice for a while now. Although anyone with experience in the markets knows that this is often a precursor to a larger deal, the nuance here is a South African law which limits voting control of a local broadcaster by a foreign entity. I find it unlikely that Canal+ is happy to pay for 100% of a company without having control over it, so they must have found a way to make it work.

Either way, anyone with a short position on MultiChoice was absolutely obliterated by this. The share price closed 26.60% higher at R94.95 on the news that Canal+ would be making an offer of R105 per MultiChoice share. The fact that the closing price is 10.6% below the offer price shows you that the market is expecting a fairly long process to conclude the deal.

The company released a separate announcement dealing with the funding of the new Showmax partnership with Comcast subsidiary NBCUniversal Media and Sky. As a reminder of the terms, MultiChoice contributed Showmax for a 70% equity stake in Showmax Africa and provides ongoing business support (including its portfolio of content). Comcast (through its subsidiary) has taken a 30% stake and is supporting the business through licensing the Peacock streaming platform and content from NBCUniversal, Universal Pictures, Peacock and Sky.

Funding is being provided by MultiChoice Group Holdings and Comcast in proportion to their shareholdings. $20 million has been invested thus far and another $30 million will be provided in February – in both cases in proportion to shareholdings. Another $127 million is expected to be needed for the remainder of the year ending 31 March 2024.

Long story short: building a streaming business is very expensive!

Little Bites:

  • Director dealings:
    • Sean Riskowitz (acting through Protea Asset Management) has bought more shares in Finbond (JSE: FGL), this time worth R32.5k.
  • Southern Palladium (JSE: SDL) announced that the scoping study for the Bengwenyama project (which is 70% held by the company) has shown attractive economics. The pre-feasibility study is thus underway. The company is estimating a life of mine EBITDA margin of 43% and post-tax internal rate of return of 21%. The total estimated EBITDA over the life of mine is $5.2 billion. I must point out that the level of accuracy at this early stage is +-30%. The company still has a long way to go. The completion of the pre-feasibility study and associated resource drilling is scheduled for the second half of calendar 2024 and is fully funded.
  • Labat Africa (JSE: LAB) gave more information on why the cautionary announcement was recently withdrawn. It had originally related to potential adjustments to prior year numbers by the auditors. The company is comfortable that no adjustments will be needed.
  • Nikkel Trading is the controlling shareholder of Brikor (JSE: BIK) and has now made two appointments to the company’s board.
  • Rex Trueform (JSE: RTO) announced that the related party acquisition of two properties (announced back in September 2023) has lapsed as a shareholder meeting has not yet been held.

Ghost Wrap #61 (The Foschini Group | Mr Price | Truworths | Pepkor)

The Finance Ghost
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Ghost Wrap #61 (The Foschini Group | Mr Price | Truworths | Pepkor)

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

In this episode of Ghost Wrap, I covered these important stories on the local market:

  • The Foschini Group got the market excited about the sector, with strong growth in the local business and encouraging commentary on margins – but the offshore businesses have suffered.
  • Mr Price also put in promising revenue growth and has a positive gross margin story to tell, with the base effect making a big difference here.
  • Truworths has struggled in the local business (admittedly vs. a high base), with the UK-based business shooting the lights out – especially when translated to rands.
  • Pepkor is a perfect example of why credit sales are important for local retailers, with cash sales growth being hard to come by. 

Ghost Bites (Anglo American | Astral | Ellies | EOH | Hyprop | Impala Platinum)

The Finance Ghost
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Ghost Bites (Anglo American | Astral | Ellies | EOH | Hyprop | Impala Platinum)

Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:

Anglo American flags better diamond conditions at De Beers (JSE: AGL)

Things got shiny in the US over the holiday season

2023 was the year in which lab-grown diamonds really became a talking point. This impacted the De Beers business (part of Anglo American), with a significant drop in rough diamond prices and worries around demand.

The first sales cycle of 2024 seems to be back on track, with sales of $370 million. Although that’s down on $454 million in the first cycle of 2023, it’s a significant improvement from sales of $137 million in the final cycle of 2023.

The company attributes this to consumer demand in the US over the holiday season, as well as the restart of rough diamond imports into India. The company still believes that it will take some time for rough diamond demand to fully recover.

Astral Foods swoops back into decent profitability (JSE: ARL)

The “big bird era” is behind us – no, really!

Astral Foods had a truly horrible time in the year ended September 2023. Basically everything that possibly could go wrong, did in fact go wrong. The previous period had everything from load shedding agony through to the horrors of bird flu. The company uses words like “devastating” and “decimating” and the colourful language is entirely warranted.

Thankfully, things have improved substantially. Load shedding has decreased, which means lower diesel expenses than anticipated. Due to a normalisation of broiler age and live weight, the feed conversion rate is better. The company literally describes this as being a better environment after the “big bird era” – when the slaughtering programme was so negatively impacted by load shedding etc. that birds were bigger than they should be and thus more expensive to feed.

The company avoided chicken shortages by importing broiler hatching eggs during bird flu. The International Trade Administration Commission recommended an import tariff rebate based on shortages, despite Astral noting that there weren’t any shortages!

Excitingly, the poultry division has posted a marginal level of profitability in the first quarter of 2024. Group HEPS is expected to be between 647 cents and 654 cents for the interim period, a wonderful improvement from HEPS of 163 cents in the comparable period. The balance sheet is also in good shape, with debt trending lower.

The dream is over at Ellies (JSE: ELI)

The company couldn’t get the funding for the Bundu Power deal

I’ve written a few times before that the proposed acquisition of solar business Bundu Power was at a lofty multiple. With Ellies needing to raise debt for the deal (and with the rest of the Ellies business on fire), it was always going to be a long shot. Sadly, the company’s dream hasn’t worked out and the outcome is particularly painful, with Ellies now entering voluntary business rescue.

The share price closed 60% lower at R0.02 per share. This is a perfect example of what happens when a company takes too long to move with the times. A sad day for a household name.

EOH: sideways and disappointing for investors (JSE: EOH)

I really struggle to see a reason to be bullish here

EOH’s rollercoaster ride has been well documented. At some point, the company became a little bit boring. It did a rights issue at R1.30 and then had to knuckle down and find ways to grow. A year later, the share price is at R1.32. You don’t need to get the calculator out to figure out that your money was better off elsewhere.

There’s absolutely nothing in the “operating context” section of the pre-close update that will inspire bullishness in shareholders. The whole thing is just a reminder of how much the local economy sucks. The knock-on effect is pressure on IT budgets, particularly in the public sector where EOH is still playing. Large corporate IT investments are being spread out or delayed entirely.

The first quarter of this financial year saw the worrying trend in revenue continue. Things got better in the second quarter, although we have no idea by how much. There are also some vague comments around the company hoping for “some” revenue growth relative to the second half of the previous year. This implies that they might be lower year-on-year i.e. vs. the first half of the previous year.

At least gross margin is stable, even if revenue is struggling. Things could be worse. They are also working hard to save on overheads. Naturally, the interest charge comes down substantially thanks to the R600 million equity capital raise and the decrease in debt.

There are still a couple of legacy issues that the company is dealing with, including a PAYE dispute with SARS in one of the subsidiaries.

EOH hopes to make a living from public sector and large corporate head office IT work. In a country with almost no economic growth, I’m afraid that there is nothing to get excited about in that business model.

Hyprop had a merry Christmas across most metrics (JSE: HYP)

But as we’ve seen elsewhere, Black Friday was less inspiring in 2023

Hyprop (owner of various important malls in South Africa and elsewhere) released an operational trading update dealing with the festive season. The company says that retailers and shoppers have become “savvier” about Black Friday deals, which is a nice way of saying that Black Friday sucked in 2023. Thankfully, people spent that money in December instead.

In the South African portfolio, tenant turnover was up only 3.2% year-on-year in November, whereas the December growth rate was 8.1%. Trading density grew 3.0% and 7.5% for the two months respectively. Foot count was surprisingly consistent, coming in at 4.0% and 4.1%. Going to the mall and whipping out the credit card clearly isn’t the same thing.

In Eastern Europe, the properties are on the right side of an economic growth story. Turnover grew 16.8% and 15.2% in November and December respectively – measured in euros! This is despite foot count being up 2.7% and down 2.6% for those months respectively.

Moving on to Ghana where Hyprop has three centres, much of the focus has been on replacing Game as a tenant. Turnover measured in US dollars increased by 7.7% in October and 4.7% in November. Your eyes aren’t deceiving you – no December numbers have been given as they aren’t ready yet. Financial reporting clearly moves a bit slower in Ghana!

Overall, that’s a decent set of numbers for the property fund.

Impala Platinum somehow grew production on a like-for-like basis (JSE: IMP)

This is despite the absolute tragedy in November that claimed 13 lives

Sadly, fatal accidents in the mining sector are still a reality. Usually, it’s a case of one or two incidents every few months, leading to the tragic loss of life of someone who simply arrived for work that day. That’s already unacceptable. What happened at Impala Platinum in November was so much worse, with 13 employees losing their lives and another 73 employees injured in a single accident.

Of course, a number of formal processes are underway in relation to that incident, including internal processes and investigations by the Department of Mineral Resources and Energy (DMRE). This is going to carry on for a while.

Repair work to the shaft at Impala Rustenburg has been making progress and the DMRE gave permission to use the rock winder on Tuesday 9 January. This allows a ramp-up in mined volumes to around 60% of production capacity in the coming weeks.

Despite all of this, the production loss associated with this catastrophe was only 30,000 ounces, with the loss of a further 30,000 ounces expected for the second half of the financial year. For the first half, Impala group managed to grow production by 18% to 1.9 million ounces. On a like-for-like basis, production increased by 2%. The difference between the two numbers is of course the acquisition of Royal Bafokeng, now called Impala Bafokeng.

Sales volumes were up 12% overall. They were down by 2% on a like-for-like basis. This isn’t helpful when PGM prices came off significantly for the period under review, with the group achieving revenue of R25,795 per 6E ounce sold. Irritatingly, they didn’t give the amount for the comparable period in the announcement, so I had to go dig it out. They achieved revenue per 6E ounce sold of R38,117 in the comparable period. I guess that’s why it was left out.

Group unit costs per 6E ounce are up 5% to R20,350. This doesn’t bode well for profitability, which is why HEPS is expected to be “at least” 20% lower than the comparable period. I suspect that it will be a lot lower than that. “At least 20%” is the minimum guidance required under JSE rules.

Little Bites:

  • Director dealings:
    • The Saltzman family has pulled off one of the biggest off-market trades you’ll ever see in this country, selling over R1.51 billion worth of shares in Dis-Chem (JSE: DCP) to Coronation. This takes Coronation’s stake to 29.83%, which is similar in size to what the Saltzmans still hold.
    • A prescribed officer of Acsion Limited (JSE: ACS) has bought shares in the company worth R26.5k.
    • The COO of Kibo Energy (JSE: KBO) has sold more shares, this time to the value of R486k.
    • The independent non-executive chairperson of RFG Holdings (JSE: RFG) has acquired shares worth R31.4k.
  • I have bad news for you if you are a Basil Read (JSE: BSR) shareholder. The company has been in business rescue since June 2018 and has been focused on completing construction contracts and pursuing contract claims. The business rescue practitioners believe that the business will not be compliant with JSE Listings requirements once the plan is fully implemented, so the company is engaging with the JSE regarding a potential termination of the listing. It hardly matters for shareholders, as there isn’t any residual value envisaged after creditors are settled.
  • As a reminder of just how far the PPC balance sheet has come (JSE: PPC), the company has repurchased shares to the value of R143 million between 6 September 2023 and 29 January 2024.
  • Resilient REIT (JSE: RES) and Lighthouse Properties (JSE: LTE) announced that the acquisition by affiliate Salera Properties of Salera Centro Comercial in Spain has now been completed. In good news, this is a month ahead of expectations.
  • Harmony Gold (JSE: HAR) has achieved strong shareholder support for the proposed B-BBEE transactions involving employee and community trusts.
  • MC Mining (JSE: MCZ) released an activities report for the quarter ended 31 December 2023. Run-of-mine production at Uitkomst was 31% higher year-on-year and sales were much higher. No lower grade coal was sold. Thermal coal prices have come down severely year-on-year, but premium steelmaking hard coking coal is trading well above the levels a year ago. The company is still waiting for Senosi and Dendocept to lodge their bidder’s statement for the A$0.16 per share offer.
  • Orion Minerals (JSE: ORN) has released a quarterly activities report for the three months to December 2023. As you might expect from a junior mining house, many of the points are highly technical in nature and relate to operational steps needed to make progress on the development of the three base metal hubs in South Africa. Having raised funding in 2023, the company is busy with trial mining at the Prieska Copper Zinc Mine. The feasibility study is being completed at the Okiep Copper Project. The Jacomynspan Nickel-Copper-Cobalt-PGE Project (a name that doesn’t exactly roll off the tongue) has been the subject of laboratory scale test work.
  • In case you follow African Equity Empowerment Investments (JSE: AEE) in detail, you may want to know that the audited financials have some differences to the reviewed results previously released. Among other issues, the changes include certain balances with AYO Technology (JSE: AYO). AYO also released a SENS announcement related to a few of these changes. Most of all, you’ll want to check out the circular dealing with an offer by African Equity Empowerment Investments to its shareholders (excluding Sekunjalo and certain directors) at a price of R1.15 per share. This includes a proposed delisting of the company.
  • There might be a sting in the tail for Tongaat (JSE: TON), with a company trading as Powertrans having launched an urgent application in the High Court in Durban to interdict the business rescue practitioners and the Vision consortium from going ahead with the implementation of the business plan that creditors approved. Powertrans has also applied for the business rescue plan to be set aside. Unsurprisingly, Tongaat, the business rescue practitioners and the Vision consortium will oppose the application.
  • Efora Energy (JSE: EEL) seems to be getting closer to rectifying its current status as a company that is suspended from trading on the JSE. They are currently working on 2023 interim results, having achieved a significant catch up. Operationally, the Alrode Depot is fully operational and they are selling diesel and other fuel products to bulk customers in various industries. The company has exercised its right under the lease agreement for that property to purchase the depot for R3.8 million.

Ghost Bites (Argent Industrial | MiX Telematics | Pepkor | Shoprite | Transaction Capital)

The Finance Ghost
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Ghost Bites (Argent Industrial | MiX Telematics | Pepkor | Shoprite | Transaction Capital)

Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:

A sale and leaseback at Argent Industrial (JSE: ART)

This is a handy way to unlock funding

There’s always a lot of debate around whether operating companies should own the properties they operate from. It usually comes down to how strategic the property is, as it is certainly easier to move an office full of people than it is to move specialised industrial equipment.

Like most industrial groups, Argent Industrial has a property portfolio. This is a source of potential funding, particularly through sale and leaseback transactions. In these deals, investors are found who want to buy properties and lease them back to the company.

Argent Industrial will execute such a transaction on the Phoenix Steel properties in Gauteng, unlocking R45.4 million in the process. The proceeds will be used to settle debt on the properties and the rest will be used for share buybacks. That sounds like a good application of the money to me!

MiX Telematics and PowerFleet release their circular and prospectus (JSE: MIX)

This is a great opportunity to learn more about corporate finance

As we’ve known for a while now, MiX Telematics and US-based PowerFleet are looking to implement a merger. The structure is that PowerFleet would acquire all the shares in MiX Telematics in exchange for shares in PowerFleet. The merged entity would then be listed on the JSE under the PowerFleet name.

This means that MiX Telematics needed to release a circular to shareholders to approve the deal. Separately, PowerFleet needed to release a prospectus giving full details of the merged entity. Go check out the two documents to learn more about corporate finance transactions like these.

The rationale for the deal is that both businesses are sub-scale, so combining their efforts will build a larger telematics and Internet-of-Things business. The companies are obviously hopeful that they might get more attention on the Nasdaq as well.

The deal certainly isn’t cheap to implement, with the prospectus noting astronomical fees of $16.6 million!

Annoyingly, due to the timing of the publication vs. financial disclosure, the last available numbers in the prospectus are for the year ended December 2022. That now feels very old. Perhaps it doesn’t matter, as PowerFleet is consistently loss-making:

Those advisory fees look even more gigantic once you’ve seen this income statement, don’t they? This is typical tech start-up kind of stuff, which works a lot better on the Nasdaq than on the JSE.

Pepkor’s core business put in a solid performance (JSE: PPH)

It’s also really good to see strong growth in Avenida

Before we delve into this, it’s time to draw a 12-month chart for this sector:

The reality is that Truworths is the only one you really wanted to own over the past year. The rest have ranged from bleh to bliksem.

Pepkor has reported decent numbers for the end of 2023. If nothing else, at least Ackermans seemed to turn the quarter with a gain in market share in December. It’s been on quite the downward trajectory, so it’s good to see the inventory strategy coming right there and a recovery underway.

Speaking of inventory, the group highlights port disruptions as a problem for stock inflows. This is a risk facing all local retailers to some extent.

Pepkor didn’t let that get them down though, with growth of 7.2% in revenue from continuing operations for the three months ended 31 December 2023. Like-for-like sales were up 4.1% for the quarter, with PEP Africa (17.9%) and Avenida (10.8%) doing particularly well – noting that those growth rates are on a constant currency basis. Core operation Pep only managed 3.3% like-for-like growth. The Building Company suffered a 0.7% decline, in line with the pressures we’ve seen across that sector.

The pressure on volumes (inflation was 6.5% in PEP, Ackermans and Speciality and like-for-like sales came in below that) means that store growth really helped to pull the result higher, taking group merchandise sales growth to 5.5%.

Things have improved in January with the back-to-school season. Like-for-like sales are up 7.8% in PEP and 8.7% in Ackermans.

And in case you needed any more evidence that local consumers are under huge pressure, group cash sales increased by 2.4% and credit sales were up 35.2%. Group credit sales as a percentage of total sales increased from 9% to 12%. The credit strategy comes through strongly in the Fintech segment in businesses like Tenacity and Capfin. This segment also houses the Flash business that serves the informal market, which achieved revenue growth of 16.8%. Flash contributes 66% to the Fintech segment. Total Fintech segment revenue was up 20.7%

There’s no stopping Shoprite (JSE: SHP)

This marks 58 consecutive months of market share gains!

Over five years, the Shoprite share price is up 65%. Pick n Pay is down 66% and SPAR lost 43% of its value. This has to be one of the very best examples of where stock picking within a specific sector can be profitable.

Supporting that share price move is 58 consecutive months of market share gains in Shoprite’s core local supermarkets business. This is an extraordinary achievement. If you can believe it, sales growth accelerated in the three months to December (the second quarter of the financial year) vs. the immediately preceding quarter. Q2 sales growth from continuing operations was 14.6% vs. 13.2% in Q1. Supermarkets RSA is driving the performance, up 15.8% in Q2 to take the six-month performance to growth of 14.6%. This dwarfs Supermarkets Non-RSA (up 6.2%) and Furniture (up 1.7%). Other operating segments jumped by 23.1%.

To get a better sense of performance, it’s useful to adjust for the impact of the stores that were acquired from Massmart. Taking those out of the mix shows Supermarkets RSA sales growth of 11.2% – still very good.

As we’ve become accustomed to, the stores resonate at all income levels. Checkers and Checkers Hyper grew 13.7% (with a shout-out of appreciation to Checkers Sixty60’s growth of 63.1%). Shoprite and Usave grew 13.1%. LiquorShop increased sales by 25.2%. Even OK Franchise within the Other segment is doing well, with group sales to franchisees up by 25%.

The big question is going to be around profitability. The group has given some clues here that the sales story is going to be the highlight and that the market should temper its enthusiasm around profits. The comparable period included non-recurring income of R244 million as a loss of profit insurance claim. They suffered R500 million in diesel costs in this half because of load shedding. They have also incurred a “notable” increase in finance charges due to higher interest rates.

Interim results are due on 5th March, at which point we will see how the sales growth is translating into growth in profits.

Transaction Capital to unbundle WeBuyCars (JSE: TCP)

Here’s the first major step in trying to rescue some value from this broken growth story

As a look at my brokerage account will quickly confirm, the fall from grace of Transaction Capital was rather hideous. What went up certainly came down. The company is now trying to engineer the best possible outcome, which is a bit like trying to sculpt a turd into something beautiful.

Deep within the excrement, we find WeBuyCars. I like this business and the way it put a liquidity floor into a used car market that was crying out for exactly that, with other dealers enjoying easy money for far too long. The market is cyclical of course, but the underlying business is solid in my opinion.

At this stage, the board of Transaction Capital has in principle resolved to unbundle the entire stake in WeBuyCars, which means a 74.9% shareholding. This is good news for market participants in general, as it means there’s a pure-play look at WeBuyCars.

Although WeBuyCars has been legally isolated from the impact of SA Taxi’s restructuring, the reality is that perceived group contagion is an issue that needs to be addressed. Unbundling the company and letting it build a profile away from Transaction Capital is the way to do it. Including the potential future financial obligation to SANTACO of R285 million, Transaction Capital’s net debt was R1.4 billion at 30 September 2023 and subsequently reduced to around R1.2 billion as per the integrated annual report. There’s a long road ahead and it would be better for WeBuyCars not to be caught up in that.

Importantly, the annual report notes that Transaction Capital has no intention of pursuing a rights issue. I suspect that the share price will show some love to the news of the WeBuyCars unbundling.

Little Bites:

  • Director dealings:
    • Aside from various management transactions related to share option schemes, there was also a disposal of shares by an executive of Richemont (JSE: CFR) to the value of R18.2 million.
    • Heriot REIT (JSE: HET), acting through a subsidiary, bought R22.8 million worth of shares in Safari Investments (JSE: SAR). Heriot Properties is an associate of a non-executive director of Safari. Heriot and its concert parties hold 58.8% of Safari shares after this trade.
    • The company secretary of Datatec (JSE: DTC) has sold shares worth R454k.
    • The Praesidium partnership, an associate of a director of Huge Group (JSE: HUG) that regularly buys shares in the company, has bought another R2k worth of shares.
  • Cash shell Trencor Limited (JSE: TRE) released a trading statement for the year ended December 2023. As a cash shell, it’s really about forex and other movements. HEPS will be between 71.4 and 71.7 cents.
  • Conduit Capital (JSE: CND) has renewed its cautionary announcement related to the provisional liquidation of CICL, the company’s main subsidiary.
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