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Ghost Bites (CMH | Karooooo | Kore Potash)

The Finance Ghost
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Ghost Bites (CMH | Karooooo | Kore Potash)

Listen to the latest episode of Ghost Wrap here, brought to you by Mazars:

The new car market is finally cracking (JSE: CMH)

This had to happen eventually

I’ve been shaking my head a few times in the past couple of years, not least of all at the state of the new car market in South Africa. With runaway inflation and new car prices that will make your eyes bleed while reading them, I couldn’t understand how so many South Africans can afford a new car.

Sooner or later, this little bubble needed to pop. I don’t think it’s popped yet, but signs of stress are there.

In the six months ended August, Combined Motor Holdings (CMH) reported a drop in HEPS of 12.9%. The dividend is 13.1% lower. We need to dig deeper to understand what is going on, but that certainly sets the scene.

Predictably, motor retail is where the real pressure sits. Global manufacturers are suddenly flooded with stock as supply chains played catch-up at the same time that demand fell away. This pressure flows down into the dealer network, with a requirement to push volumes. This can only mean one thing: great deals on new cars, which directly hits margin.

There isn’t exactly much margin to start with. In the comparable period, operating margin was 3.5%. Although revenue is up 7.2%, operating profit is down 25%. This means that operating margin is now just 2.45%. Ouch.

What isn’t helping is a weaker used car market, as well as the impact of lower mileage on service costs. Aside from hybrid working arrangements, a much higher fuel cost also incentivises less driving, with a direct impact on workshop revenue.

As a final point on the motor retail business, this operating profit number is before finance costs. With much higher interest rates, those costs have ballooned from R39.7 million to R72.2 million. Profit before tax has thus more than halved, dropping from R157.8 million to R77 million.

The car hire business has a much better story to tell, with profits up 12%. Revenue increased by 21% though, so you can immediately see that there is margin pressure, not least of all in terms of the cost of holding the cars. Interestingly, car hire is now making much higher profits than motor rental, with profit before tax of R137.3 million in this period.

To show you just how different the margins are, car hire is more profitable than motor retail in absolute terms, despite having revenue of R447 million vs. a whopping R6.1 billion in motor retail!

The financial services segment also helped offset some of the pain, growing profit from R30.5 million to R34 million.

The prospects section of the announcement doesn’t do much to inspire confidence, with no obvious improvements to operating conditions going forward. The company believes that manufacturers will take at least 6 months to balance inventory levels, so the pressure to push volumes isn’t going away.

Severe discounting isn’t good for the rental business either, as retired vehicle values (i.e. when they are sold at the end of their life as rentals) are under pressure. Encouraging signs for the upcoming summer tourist season are useful, but the entire business is clearly facing pressure at this point in the cycle.

Karooooo has remembered what it should be focusing on (JSE: KRO)

And guess what? The core business is doing well!

Karooooo (the owner of Cartrack) has released results for the second quarter. At its core, this business is all about selling subscriptions for fleet management, which means recurring income that should grow by double digits for a long time to come.

But for a while, I was worried that the company had lost its way.

After all, why on earth would you sell the market a growth story about global fleet management and then invest in building a local used car chain called Carzuka? Thankfully, they are taking the bazooka to Carzuka and getting out. It was a silly idea, but I’ll give them credit for giving up before destroying too much value. This is why investing in a founder-led company can be safer than one with professional managers who might be willing to roll the dice with Other People’s Money for far longer.

With Cartrack subscribers up 15% and total revenue up 17% on a constant currency basis (or 21% in ZAR), things are looking up for the business. Importantly, cash generated from operations grew by 26%. Although the revenue is recurring in nature and good for cash flow, the challenge is that the cost of devices fitted to vehicles can be a real drag on cash flow. It’s a bit like cellphone companies, which must buy the handsets up-front and recoup the cost over the period of a contract.

Group earnings per share grew by 14%.

To give some context to the core business vs. the rest, Cartrack reported adjusted EBITDA of R417 million for this quarter and Carzuka lost R12 million. Karooooo Logistics (which includes acquired group Picup) reported adjusted EBITDA of R8.1 million.

If you ever wondered what a range bound share price looks like, wonder no more:

Kore Potash’s quarterly report doesn’t have new news (JSE: KP2)

But if you want to get up to speed on the company, this is the way to do it

Kore Potash has released its quarterly report for the three months ended September. If you know nothing about the company, it’s a really good summary of the key focus areas. If you’ve been following the story, there doesn’t seem to be anything new.

Long story short, the company is fully focused on the Engineering, Procurement and Construction (EPC) contract for the construction of Kola. SEPCO Electric Power Corporation is the counterparty. SEPCO’s parent company, PowerChina, is required to provide typical guarantees for a contract of this nature.

In working towards this, PowerChina has subcontracted five technical groups for additional design and engineering work, as they need to be very sure about what they are committing to. This will cost over $10 million, with Kore Potash’s contribution capped at $5 million. An initial payment of $1 million has been made and the rest is contingent on further fund raises by the company and SEPCO delivering an EPC contract.

Moving on from the operations to the balance sheet, the Summit Consortium signed a memorandum of understanding all the way back in April 2021 to provide a debt and royalty financing proposal to Kore Potash. The commitment remains, with the company expecting to provide a financing proposal for the full construction cost within six weeks of EPC terms being finalised.

To add to all these moving parts, the company seems to enjoy the support of the Minister of Mines in the Republic of Congo – at least for now. That relationship hasn’t always been smooth sailing, so investors are always keeping an eye on this.

The company has $1.1 million in cash as at the end of September, which shows just how important the recent capital raise of $0.8 million was.

Little Bites:

  • Director dealings:
    • A director of ADvTECH (JSE: ADH) has sold shares worth R3m.
    • Des de Beer has bought shares in Lighthouse Properties (JSE: LTE) worth R1.2m.
  • PSG Financial Services (JSE: KST) has announced the appointment of Edward Gibbens as CEO of PSG Distribution. He has 30 years of experience at Santam and will join from April 2024 to replace out the outgoing CEO of the division who is retiring.
  • Discovery (JSE: DSY) also has some executive leadership changes to announce, with Dr Ronald Whelan taking over as CEO of Discovery Health (he is the current deputy CEO) and Nonkululeko Pitje appointed as CEO of Discovery Corporate & Employee Benefits, a new business unit that puts group risk, umbrella funds, HealthyCompany and whatever the “Strategic Client Solutions Hub” is into a single unit.
  • Anglo American (JSE: AGL) has appointed Matt Walker as CEO of the Marketing business, which is the primary interface with industrial customers. He replaces Peter Whitcutt who is stepping down after 33 years of service.

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

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

Exchange-Listed Companies

MiX Telematics and US-based Powerfleet have announced their intention to combine their businesses. MiX shareholders will be offered 0.12762 new Powerfleet shares for every 1 MiX share held. Following implementation of the deal, Mix shares will be delisted from the JSE and the MiX American Depository Shares will be delisted from the NYSE. Powerfleet will take a secondary inward listing on the JSE, retaining its primary listing on Nasdaq.

Following the September announcement that Nikkel Trading 392 has made a mandatory offer to Brikor shareholders to acquire their shares at 17 cents per share, the company announced this week that Nikkel had acquired additional shares in Brikor, taking its effective shareholding from 64.11% to 68.01%.

The Competition Tribunal has prohibited Sasol’s proposed sale of its sodium cyanide business to Czech Republic’s Draslovka. The deal was originally announced in July 2021. In November of 2021 the Competition Commission prohibited the merger on grounds that, amongst others, it would likely result in a substantial prevention or lessening of competition due to post-merger price increases which would be detrimental to customers ie gold mining firms. A number of mining firms had been granted leave to participate in the Tribunal proceedings following their applications for intervention.

Futuregrowth Asset Management (Old Mutual) and Galloprovincialis have invested in logistics software platform Tripplo. The US$1,8m equity investment closes out the firm’s seed funding extension round.

Unlisted Companies

Private equity firm Harith General Partners has agreed to acquire a 46% stake in Mergence Investment Managers. Shandura, a wholly-women owned firm, will also acquire a 5% stake as part of the deal. Financial terms were not disclosed.

Adenia Partners has completed a majority investment in Enfin Energy Finance, a rooftop solar financing company for commercial and industrial clients. This is its first investment from the Adenia V fund. Financial terms of the investment were not disclosed.

Textile manufacturing group Ivili Group has secured a US$5m investment from gender focused investment fund Alitheia IDF. The Ivili Group is comprised of Ivili Loboya, a wool and cashmere processing facility in Butterworth in the Eastern Cape and Ivilitex, a garment manufacturing factory in Cape Town.

AI-driven customer service solutions startup, Cue, has raised US$500,000. The company did not disclose who the investors were but stated that the funding will be used to accelerate their product offering following rapid growth in the UK over the last year.

Ecentric Payments Solutions has acquired fellow fintech operator, Thumbzup. Financial terms were not disclosed. The Thumbzup IP, devices and technology will be fully integrated into Ecentric operations.

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

Weekly corporate finance activity by SA exchange-listed companies

Vanessa Aitken
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Weekly corporate finance activity by SA exchange-listed companies

Steinhoff International (in liquidation) shares will officially be delisted from the JSE on Monday 16 October 2023. The company has a primary listing on the Frankfurt Stock Exchange and a secondary listing on the JSE.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 2 – 6 October 2023, a further 4,088,088 Prosus shares were repurchased for an aggregate €109,8 million and a further 291,933 Naspers shares for a total consideration of R882,96 million.

Glencore intends to complete its programme to repurchase the company’s ordinary shares on the open market for an aggregate value of $1,2 billion by February 2024. This week the company repurchased a further 9,650,000 shares.

Gemfields has repurchased an additional 2,940,722 ordinary shares. The repurchased shares will be held as treasury shares.

South32 continued with its programme of repurchasing shares in the open market. This week a further 552,037 shares were acquired at an aggregate cost of A$1,9 million.

One company issued a profit warning this week: Famous Brands

Three companies issued or withdrew a cautionary notice: Tongaat Hulett, Trematon Capital Investments and Salungano Group

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

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

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

Mediterrania Capital IV Fund , the International Finance Corporation, and FMO are investing €57m in Morocco’s Cash Plus. The equity investment will enable Cash Plus to expand its fintech-driven branch network within Morocco as well as enhance its product offering, with a focus on developing its M-Wallet application. Mediterrania Capital IV Fund is investing €30m, IFC is providing €10m and FMO is supplying the remaining €17m.

ARM-Harith Infrastructure Fund is investing US$18,7m into Elektron Power Infracom (EPI). The financing is made up of equity, shareholder loans and loan notes. EPI is a Mauritius incorporated decentralised energy platform dedicated to the delivery of hybrid energy solutions across West Africa, with existing assets in Nigeria.

Tlou Energy, listed on the Australian Securities Exchange, the UK’s AIM and the Botswana Stock Exchange, has raised A$678,977 through the placing of 19,399,332 new shares with Australian and UK investors. The funds will be used to developing the Lesedi project in Botswana.

Egyptian insurtech Amenli has raised US$1m in equity funding from Alter Global and Digital Venture Partners. This is Alter Global’s second investment in Egypt. The funding will allow the startup to introduce new products for existing and new customers.

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

OFAC risks in Mergers and Acquisitions

Brandon Irsigler, Noushaad Omarjee and Davin Olen
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OFAC risks in Mergers and Acquisitions

Overview of OFAC aims and processes

As the war in Ukraine rages on, the Office of Foreign Asset Control (OFAC) of the United States (US) has imposed increasing sanctions on global individuals and entities. In a bid to avoid the increasingly aggressive enforcement activity of OFAC and the Bureau of Industry and Security (BIS), Russian and Belarussian entities have utilised intermediaries and various company structures to evade sanctions. This has led to further designations of entities across Europe, Africa and Asia.

Provided the increasingly wide net of sanctioned intermediaries, mergers and acquisitions (M&A) transactions require careful consideration by both seller and purchaser. This article considers the OFAC guidance and enforcement actions in the M&A context and outlines a South African (SA) perspective to mitigate OFAC risks.

Impact of OFAC listings

OFAC is mandated to enforce sanctions in order to protect US foreign policy and national security goals. It does so by identifying entities which may be engaging in activities subject to sanctions, based on US intelligence. Following an investigation into an entity’s activities, and necessary reviews by other government departments, OFAC publishes an entity’s details on the Specially Designated Nationals and Blocked Persons (SDN) List.

The consequences of being added to the SDN List (a Listed Entity) are significant, since a US person or entity cannot transact with a Listed Entity. If any goods are possessed by a Listed Entity in US territories, those goods must be blocked and reported to OFAC. As a result, OFAC listings have all US accounts and properties of Listed Entities blocked, along with most financial institutions, which block Listed Entities from accessing any US dollar (USD) denominated accounts or their accounts entirely, whether or not in the US. Further, USD transactions either by or for the benefit of Listed Entities are likely to be blocked by any bank, whether the bank is situated in the US or internationally.

Framework for OFAC Compliance Commitments (Framework)

In the regulation of M&A transactions, OFAC has published a framework in which it strongly suggests a risk-based approach to ensure sanction compliance throughout any M&A process. The framework encourages the engagement of a due diligence process to ensure that sanction-related issues are identified, escalated to the relevant authorities, and addressed before the closing of any transaction. Following closing, the framework also suggests additional post-closing risk assessments. These additional risk assessment processes need to be included in the due diligence process.

South African perspective

While the OFAC machine continues to churn on, it is important to understand that not all is doom and gloom. The fundamental point to understand is that an OFAC listing of a South African entity or individual has no impact or force under South African law. The entering into M&A transactions by South African entities with foreign entities that are listed on OFAC is not itself illegal under South African law.

Given that non-US persons or entities are free to transact with OFAC-listed entities, the risks can be mitigated in various ways to ensure that a transaction reaches completion.

Risk Mitigation in the M&A Process

It is important for the purchaser to conduct thorough due diligence, which includes an OFAC risk assessment analysis of a target company (the Target). The purchaser should also be well informed of the business of the Target and the regions where the Target conducts its operations and trade, as OFAC has imposed sanctions on various countries, government agencies and companies. A further measure to mitigate OFAC risks is to perform a deep dive into the existing ownership of the Target, as well as screening the Target’s shareholders and directors against the OFAC database. Provided that the Listed Entity will not be able to hold USD-denominated accounts, transactions will need to be in South African Rands or an alternative currency.

A prudent approach to contractual representations would include specific warranties and indemnities to negate the effect of potentially acquiring an OFAC-listed company. While this may not completely mitigate OFAC risks, it does signify that the purchaser has made an effort to conduct the appropriate due diligence and act in good faith.

As an additional measure, the parties may agree that the proceeds from the M&A transaction involving a Listed Entity can be ring-fenced and placed in escrow pending the Listed Entity’s removal from the SDN List. A further way to mitigate the risk is to request the US Department of Treasury to grant a specific license to proceed with the distribution of proceeds from the M&A transaction with a Listed Entity.

Conclusion

While an OFAC listing does pose a challenge to an M&A transaction, there are many ways to safeguard and mitigate the risks that are associated with it. However, due to the regulations and complexity of OFAC, removal from the SDN List and certain transactions with Listed Entities can be complex. This article does not purport to exhaustively address these issues. A very limited number of predominantly Washington-based attorneys, acting under general approval by the US Treasury, are best placed to assist clients on OFAC.

Brandon Irsigler is a Partner, Noushaad Omarjee a Senior Associate and Davin Olen a Legal Professional Assistant | Dentons South Africa.

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

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

Navigating growth: assessing the potential of private equity investments in Southern African markets

Thandiwe Nhlapho and Roxanna Valayathum
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Navigating growth: assessing the potential of private equity investments in Southern African markets

Private equity is alive and well in Southern Africa. Activity in the private equity industry has grown sturdily over the past two decades, but not without challenges and risks in specific jurisdictions and sectors.

There have recently been trends to drive growth in the Southern African region which include, among others, portfolio diversification, legislative reform and environmental, social and governance (ESG) targets, and despite the challenges and numerous crises over the last couple of years, the region has proven resilient in most markets.

There is a heightened awareness of portfolio diversification, and local limited partnerships are looking to further understand private equity as an asset class as the industry grows. Among others across South Africa’s private equity market, one of the notable trends is acquiring and subsequently delisting struggling companies from the Johannesburg Stock Exchange (JSE). There have been a number of delistings from the JSE in the past 18 months, averaging about 25 delistings a year. These go-private transactions present further opportunities for the achievement of ESG targets that are not easily accessible for investors through listed or other structures.

There is a growing focus among private equity investors on green, low-carbon, and sustainable initiatives across Africa, and the 2022 SAVCA Report found that ESG risks and opportunities are more strongly considered by private equity firms in Southern Africa than globally, as a result of strong influence by development financial institutions. A significant number of private equity firms in Southern Africa consider and recognise the importance of ESG factors when making investment decisions.

From a pension funds perspective, recent trends include increased private equity asset allocation by adopting the ceiling amendments. For instance, South Africa and Zimbabwe have increased the maximum exposure limit in private equity from 10% to 15%, while Zambia revised its threshold for the private equity asset class from 5% to 15%. Although this development alone may not necessarily translate into increased pension fund appetite for private equity, what could contribute to growth is assisting governments with the necessary experience in private equity to allow pension funds to diversify into private equity, and creating investment opportunities for private equity.

Some sectors have seen more growth than others. The growing sectors in the Southern African region include energy, fintech (as portfolio companies have increased their presence due to a highly tech-literate population), and e-commerce, as the general adoption of digital technologies increases. Healthcare, financial services and insurance are stronger in some parts of Southern Africa than others.

The challenges and risks associated with investing in the region include political instability and a lack of trust in government in countries such as Eswatini, South Africa and Zimbabwe, though the perceived political risk in Africa is greater than the reality. Other challenges include small markets with limited investment opportunities, such as Botswana and Mozambique.

In some markets, these challenges and risks are being well managed. For instance, according to Deloitte’s Private Equity Review 2022, 41% of private equity firms in South Africa have prioritised risk management in portfolio companies.

The Southern African markets offer exciting opportunities for investors, and a recent AVCA survey showed that limited partnerships see opportunism in the private equity market in Africa for the medium-to long-term.

Thandiwe Nhlapho is an Associate and and Roxanna Valayathum a Director in Corporate & Commercial | CDH

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

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

Ghost Bites (Jubilee Metals | Markus Jooste | PSG Financial Services | Redefine | Rex Trueform)

The Finance Ghost
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Ghost Bites (Jubilee Metals | Markus Jooste | PSG Financial Services | Redefine | Rex Trueform)

Listen to the latest episode of Ghost Wrap here, brought to you by Mazars:

Jubilee reports record production figures (JSE: JBL)

But revenue could only increase by 1%

Jubilee Metals dropped 15% on Wednesday after releasing results for the year ended June 2023. The company is dealing with commodity price decreases and infrastructure challenges in its markets, an uncomfortable combination.

Despite this, there were record production figures across the PGM, chrome and copper operations. There were various technical breakthroughs in the operations. As the PGM prices fell away though (down 22% in US dollars), revenue from operations could only increase by 1%. Chrome saved the day here, albeit barely.

Gross profit fell because of inflationary pressures on costs and the need for back-up power systems. EBITDA fell nearly 40% in dollars!

Headline earnings from continuing operations is reported in pence and fell by roughly 35%. Probably the only good news here is that the balance sheet looks reasonable and the group was profitable despite tough conditions.

Those silver linings weren’t enough to save the share price, though.

Markus Jooste gets a R15 million fine from the JSE

This is barely a drop in the ocean for him, sadly

Back in January 2023, the JSE announced two public censures against Markus Jooste, both of which would carry the maximum permissible fine of R7.5 million each. Further to this, he would be disqualified from being a director or officer of a listed company for 20 years. I’m personally hoping that he will still be in jail by then, but I’m probably too optimistic.

Of course, he disagreed with this outcome and applied to the Financial Services Tribunal for a suspension and reconsideration. The wheels of justice slowly turned and eventually the Tribunal dismissed the reconsideration application on 10 October, so the censures and related penalties are enforceable.

This number is literally pocket change for him, but it was the maximum permissible amount. I’m not sure if it gets recognised as revenue for the JSE or if it is ring-fenced for a greater purpose. I hope it’s the latter.

It’s hard to find fault in PSG’s results (JSE: KST)

Dividend growth of 23% says it all, really

PSG Financial Services (previously PSG Konsult) has released results for the six months to August. They are strong to say the least, with return on equity of 22.5% (that’s better than local banks and up from 19.8% in the comparable period) and growth in recurring HEPS of 21% (that’s better than just about everything). The dividend per share increased by 23%, rounding off the excellent numbers.

It says a lot that assets under management grew by 19% in this period, with PSG’s powerful local distribution really coming to the fore here. PSG Insure increased gross written premium by 12%, another strong performance.

As a sign of the times, performance fees were 2.5% of headline earnings, down from 3.7% in the comparable period.

Although there were some major risk events in the insurance business, like the Boksburg earthquake (I swear I missed that one in the chaos of the past year) and the Western Cape storms, the reinsurance program did its job by protecting underwriting results against these events.

Technology and infrastructure spend increased by 12% (and they expense everything rather than capitalise the costs) and fixed remuneration also grew 12%. This is below core income growth of 15%, hence why recurring HEPS did so well.

And as a final tick in the box, all three underlying divisions posted strong growth in recurring headline earnings. PSG Wealth is the largest (65% of headline earnings) and grew by 18%. PSG Asset Management is almost 21% of headline earnings and grew 23%. PSG Insure is the smallest segment and also had the slowest growth, but was still up 12%.

This is a great reminder that there are high quality companies on the local market.

Redefine won the arbitration in Poland (JSE: RED)

Metro’s claims have been dismissed

When Redefine announced interim results for the six months to February, the company noted that a request for arbitration had been filed by Metro Properties against 11 Polish companies owned by M1 Group (which in turn is 50% owned by the Redefine Group). The claim was to reduce the rental payable by Metro under the lease agreements.

The International Court of Arbitration dismissed Metro’s claims against the M1 joint venture and this award is final and binding on all parties. That’s good news for Redefine.

Rex Trueform flags a significant jump in earnings (JSE: RTO)

Detailed results are due later this week

You might recognise Rex Trueform based on the recent news of the acquisition of a streaming group that has particular specialisation in school sports. There’s obviously a lot more to the group than that, with other recent acquisitive activity being focused on properties as well.

For the year ended June 2023, HEPS increased by 52.2% to 399.4 cents. Annoyingly, the company released a trading statement in the morning and results in the afternoon. Somebody there needs a tough talk about how a trading statement is meant to go out a lot earlier.

The increase in HEPS was supported by revenue growth of 35.1% and operating profit growth of 61.0%. Expenses were up 28.2%, thankfully well below revenue growth.

Gross profit margin actually declined from 54.7% to 49.3% and yet they still managed to increase operating profit margin. When you dig into the numbers, it’s because of a big spike in media and broadcasting income that sits below the gross profit line. In other words, that gross margin pressure doesn’t apply to all the revenue.

And in case you’re wondering, given the recent activity around properties in the group, property revenue is 7.8% of group revenue. Media and broadcasting significantly higher at 14% and looks set to be a focus area based on the recently announced deal.

Related listed group African and Overseas Enterprises (JSE: AOO) reported HEPS growth of 78.2%. The company consolidates Rex Trueform as this is the holding company, so the underlying results are much the same.

Little Bites:

  • Director dealings:
    • A director of Sabvest Capital (JSE: SBP) sold shares worth R641k. The sale was by Lindiwe Mthimunye, not Chris Seabrooke, in case you’re wondering.
    • In a surprise to absolutely nobody, Des de Beer bought shares worth R116k in Lighthouse Properties (JSE: LTE).
  • Anglo American (JSE: AGL) is pushing the ESG angle hard at the moment. This is leading to SENS announcements that actually say very little of relevance to investors. This isn’t because environmental stuff isn’t important, but rather because this is the kind of thing that is effectively business as usual and that belongs in the normal reporting cycle. The latest example is Anglo American and Mitsubishi Materials collaborating on a responsible copper value chain. Well yes, I should hope it’s responsible!
  • Northam Platinum (JSE: NPH) announced that GCR Ratings reaffirmed the long-term and short-term credit ratings, with the outlook maintained as stable.

Ghost Stories #22: Optimal Investment Growth Basket promoted by Investec

The Finance Ghost
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Ghost Stories #22: Optimal Investment Growth Basket promoted by Investec

Structured products have come a long way. From a specialised, exotic investment tool, they are now mainstream, and financial advisers are now more comfortable about investing in them on behalf of clients.

Having covered the Investec USD S&P 500 Autocall on a previous podcast (Episode 19 of Ghost Stories), we now move on to the Optimal Investment Growth Basket Limited promoted by Investec. This product offers a maximum annualised return in USD of 9.8% per annum over five years, with 100% capital protection at maturity in US dollars. The minimum investment amount is $12,000 or £10,500. This is a limited offer that closes on 24 November 2023. T’s and C’s apply and full details can be found on the Investec website at this link and the brochure can be found here.

To unpack this opportunity in detail, Japie Lubbe joined The Finance Ghost on this episode of Ghost Stories.

Topics covered included:

  • The importance of global diversification and exposure for South African investors;
  • The strategy of tracking a basket of global indices as opposed to a single index;
  • The methodology used in this instrument to achieve the potential return profile for investors;
  • The look-through credit exposure in the structure;
  • Liquidity in the structure; and
  • How to invest in the product.

Ghost Bites (Equites Property Fund | MiX Telematics | Brikor | Sappi | Southern Palladium)

The Finance Ghost
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Ghost Bites (Equites Property Fund | MiX Telematics | Brikor | Sappi | Southern Palladium)

Listen to the latest episode of Ghost Wrap here, brought to you by Mazars:

Equites is focused on “portfolio optimisation” (JSE: EQU)

And in the meantime, the distribution is heading lower

With a share price down around 25% this year, it hasn’t been a happy time for Equites. The logistics-focused fund has been hurt by the interest rate cycle and these types of funds were generally trading at lofty valuations coming into this year, unlike office funds that had been decimated during the pandemic.

The strategy with the portfolio is to reduce exposure to land holdings (down from 8% of portfolio value to 5%) and dispose of the UK development pipeline, while also selling non-core assets with sub-optimal sustainability credentials. Equites owns 60% in the ENGL development platform in the UK and the idea is to sell non-income producing assets in favour of income-producing assets. The long term impact is a smaller land bank, which may hurt growth down the line. For now though, the focus is on reducing the loan-to-value ratio.

The results include this creatively named “LTV flightpath” that reflect the target of 35.6% by February 2024:

The SA and UK portfolios are performing “in line with expectations” – and those expectations were clearly for a drop, as distributable earnings fell 19.6% for the six months to August. The dividend per share is down 19.9%. The net asset value per share is down 10.9% to R16.73, with the share price having closed at R12.60.

Despite the obvious pressure in the markets in which Equites operates, the SA portfolio valuation increased by 1.7% and the UK is up 2.1% in GBP terms.

At this stage, Equites is focused on pre-let developments in South Africa. No further substantial development expenditure in the UK is expected.

To give you an idea of why developments are under pressure, look at the initial yield on these developments and consider them in the context of where 10-year government bond yields in South Africa are sitting (10.8%):

The principle is that over say 20 years, the internal rate of return ends up being attractive. In the initial years though, the yields aren’t lucrative.

Based on the interim dividend of 65.37 cents, the annualised yield is 10.4%. I’m not a buyer at that yield.

MiX Telematics has attracted a US suitor (JSE: MIX)

The lovely news is that we won’t be losing a listing here

There’s just about an audible groan when we see an offer come in for a JSE-listed company, as it inevitably ends in the loss of yet another listing on the local market. The good news is that this is a share-for-share offer to MiX Telematics shareholders by a company named PowerFleet and the plan is for the enlarged PowerFleet to list on the JSE, so we’ve actually gained something as a market in the form of additional underlying businesses to consider.

I know, right? Unreal.

PowerFleet describes itself as being a global leader in “Internet of Things” solutions, so the buzzwords are coming to our market. That’s really just a fancy way of talking about monitoring of assets and related services. The company has been listed on the Nasdaq since June 1999. It also happens to be listed on the Tel Aviv Stock Exchange.

If the deal goes ahead and MiX Telematics shareholders swap their shares for a holding in the enlarged PowerFleet instead, then they will hold 65.5% in that enlarged company. In other words, PowerFleet isn’t exactly a global giant planning to swallow up MiX, which explains why the JSE listing of PowerFleet will be part of the deal.

The enlarged business would obviously have the benefits of scale, with lots of promises around the combined data strategy and R&D capabilities as well. One would certainly hope that liquidity will benefit as well.

The share price closed 15.6% higher on the day, with the scheme circular and prospectus due for circulation on 5 December. This will be an interesting one to dig into!

Nikkel Trading acquires another block of Brikor shares (JSE: BIK)

More shares have changed hands at 17 cents per share

On 12 September, Brikor announced that Nikkel Trading 392 reached a 64.11% holding in the company. This triggers an offer to remaining shareholders at a price of 17 cents per share.

This doesn’t preclude Nikkel Trading from picking up more shares along the way, also at 17 cents per share. This is exactly what has happened, with the stake now up to 68.01%.

Sappi is facing serious challenges in graphic paper (JSE: SAP)

Another European mill faces closure

Cyclical businesses are tough things to stomach. It gets even more volatile when you look at specific segments in Sappi, rather than just the businesses as a whole. For example, the graphic paper market is struggling with overcapacity, which means there simply isn’t enough demand for the level of supply. This forces periods of downtime at the mills, which destroys profits.

In July 2023, Sappi started the process to possibly close the Stockstadt Mill in Germany. An agreement has been signed to sell the site, although the announcement also mentions that the site will be closed during Q1 of 2024. Either way, the impact on Sappi is cash neutral.

As conditions have worsened since then, the Lanaken Mill in Belgium is next on the list. A closure is possible, although Sappi is also looking at how to cut overheads, presumably in an attempt to avoid closure and the impact on the 644 workers at the mill.

Sappi will continue to serve the graphic paper market through the mills that can operate competitively. The overall focus in Europe is the packaging and specialities segment. In a business like this, it’s all about knowing where to focus.

Southern Palladium gives us a geology lesson (JSE: SDL)

Latest drilling results from Bengwenyama have been released

Junior mining updates are incredibly good at alienating nearly everyone. For example, here’s an actual sentence from the Southern Palladium announcement: “Assay results for 39 UG2 intersections from SPD’s 70% owned Bengwenyama project have now returned an average grade of 8.00g/t (3PGE+Au) and 9.63g/t (6PGE+Au) over an average reef width of 69cm.”

Wonderful. I’m sure someone, somewhere knows what that means.

I always just skip to the commentary by the executives, in this case noting that the consistency of the grade and continuity of the reef continue to be confirmed by the latest drilling results. You don’t need a geology degree to understand that this is a good thing.

The company is busy with a second Mineral Resource update, scheduled to be announced in the fourth quarter of this year.

Little Bites:

  • Director dealings:
    • If I understood the announcement correctly, two directors of Capital & Regional (JSE: CRP) exercised options for shares worth R1.3 million. I usually ignore share awards, but the difference here is that the directors cash funded the tax i.e. didn’t sell shares to cover the tax. That’s a buy in my books.
    • A prescribed officer of Sasol (JSE: SOL) retained shares worth R4.7 million and sold shares worth R4.3 million. I’m including this as a good example of how share-based awards usually play out, with a big sale to cover the tax.
    • Substantial share awards have vested for several ADvTECH (JSE: ADH) directors. The announcement doesn’t note any selling, but I’ll be surprised if we don’t see any in days to come.
  • The current CFO of Hulamin (JSE: HLM), Mark Gounder, has been appointed as the CEO of Hulamin. He replaces Geoff Watson who was appointed interim CEO in October 2022. Pravashni Nirghin will be appointed as interim CFO, an internal appointment.
  • The CFO of WBHO (JSE: WBO), Charles Henwood, is retiring after 12 years in the role. His replacement is Andrew Logan, who has been with the group for 20 years.
  • I’ve previously noted a truly poetic end to Steinhoff’s (JSE: SNH) unfortunate life, with the company due for liquidation on Friday the 13th. This is also the date on which the company will be delisted in Frankfurt. The JSE delisting date is the 16th of October. Good riddance.

Ghost Wrap #49 (Famous Brands vs. Spur | Sibanye-Stillwater | De Beers | Mondi | Life Healthcare | Datatec | Fortress)

The Finance Ghost
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Ghost Wrap #49 (Famous Brands vs. Spur | Sibanye-Stillwater | De Beers | Mondi | Life Healthcare | Datatec | Fortress)

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 recapped a week’s worth of news across a variety of sectors:

  • Famous Brands vs. Spur is becoming a very interesting battle indeed, with the latter as my pick.
  • Sibanye-Stillwater has given the green light to the next phase of the Keliber lithium project.
  • De Beers is really struggling with demand for diamonds at the moment.
  • Mondi has managed to exit Russia, with letters of credit securing the final two payments from the buyer of the asset.
  • Life Healthcare announced a deal for Alliance Medical Group, reflecting what looks to me like a modest investment return on that asset since 2016
  • Datatec is proof that you can find fast-growing companies on the local market, if you know where to look.
  • Fortress has proposed a rather clever way to get rid of the dual-class structure in its shares, by using a portion of its stake in NEPI Rockcastle.
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