It’s not often that a business outlasts an empire. 400 years and 15 generations later, the Avedis Zildjian company is still making a beautiful noise.
Whenever I’m stuck for conversation at a dinner party, I like to ask the person that I’m speaking to if they can name any of the oldest family-run businesses in the world. It’s an unconventional way to get a conversation started, sure, but it always gets interesting results.
Many people will guess the names of oil giants (sorry, too new) or diamond miners (nope, too volatile). Some will hazard a guess at wineries (clever – there is actually a French winery that was operated by the same family for 1000 years). One memorable lady once told me about a Japanese spa hotel that was established in the year 705 and run by 52 generations of the same family before it was taken over by an “outsider” in 2017 (imagine being that guy).
But no-one ever guesses a company that makes cymbals. And that’s why I like to tell people about the history of Zildjian.
There’s a market for noise
The Zildjian story starts in 1618, in what is now known as Istanbul but was then called Constantinople. An Armenian metalsmith and alchemist named Avedis was working in the court of the Sultan of the Ottoman Empire when he came across a way to shape an alloy of tin, copper, and silver into a sheet of metal. Popular anecdotes have it that Avedis was trying to create gold – but instead he created a thin metal that could make musical sounds without shattering.
Sultan Mustafa I was so impressed by Avedis’ invention that he officially granted him the surname Zildjian, which translates to “son of a cymbal maker”, thereby ensuring that Zildjian’s invention would be intrinsically linked to his bloodline. In 1623, Avedis was granted permission to start his own business outside of the palace.
Ottomans of the day had many different uses for cymbals: for starters, there were the Ottoman military bands, who relied on cymbals to make noise that would intimidate their enemies on the battlefield. Cymbals were also used in the services of Greek and Armenian churches, and (on quite the opposite end of the spectrum) by the belly dancers of the Sultan’s harem. So while Avedis’ business operated in a very particular niche, there was no lack of demand for his products.
When the original Avedis passed away, his business and the secret formula for his unique alloy were passed down to his son. And so started one of the most successful succession stories in the history of business.
A harsh clashing of ideas
For 356 years, the descendants of Avedis Zildjian guarded his secret alloy formula and kept his business going strong, despite such challenges as an Armenian massacre, the exile of the head of the family, World Wars 1 and 2, the family’s emigration to the United States, and the Great Depression. 9 generations of Zildjians built on their forefather’s legacy – until the 10th threatened to tear it apart.
Following the death of Avedis the Third in 1979, an acrimonious dispute developed between his sons, Armand and Robert, While Armand was the eldest and the rightful heir to the business, Robert insisted that he was the better businessman. The dispute was settled (on paper, at least) after two years in court, with Armand being granted ownership of the company’s main factory in Massachusetts, while Robert was given the secondary, smaller factory in Canada.
Determined to do things his way, Robert broke away from the family business and used his factory to start a new line of cymbals. This was the birth of the Sabian brand, which would rise to become one of Zildjian’s main competitors for the title of largest cymbal-maker in the world.
Armand and Robert passed away in 2002 and 2003 respectively. Both Zildjian and Sabian have continued to be run exclusively by members of the Zildjian bloodline since then. Between them, these two cymbal brands have cornered more than 65% of the market.
Finding success in succession
Legend has it that the founder of Zildjian was trying to create gold when he stumbled across his proprietary alloy formula. I sometimes wonder how he would feel if he could see the brand that was built on his name celebrating 400 years in business this year. I reckon that legacy is worth more than gold.
So, why did succession work for Zildjian, when it led so many other businesses to failure?
There’s no recipe that guarantees longevity in a business – there are just too many variable factors like brand power, global disasters, technological innovations and the ability to move with the times. That being said, I do think that the Zildjian family has made some smart decisions over the years.
For starters, the secret alloy formula at the heart of the business has stayed a family secret to this day. The Zildjians who do know it are prohibited from sharing it, even with their spouses. As far as this business is concerned, that formula is their main IP, and they’ve guarded it extremely well.
Secondly, Zildjian believes – really believes – in the power of the bloodline. While the business was transferred from male heir to male heir in the early years, in the early 1900s, when the main male heir was exiled, the business was transferred to his daughter instead of to an outsider. Victoria Zildjian was the first female in the family to run the factory, but she wasn’t the last. When it comes to passing the baton, Zildjian favours family over all else.
While staying true to the original nature of the business, Zildjian has also been pliant enough to move with the times and innovate. As you can imagine, making the leap from supplying instruments of war to instruments for rockstars took some careful navigating. Historically, Zildjian has relied on those who use their products – musicians – to collaborate with them and inform them on the innovations that were needed. Musical legends such as Ringo Starr and Gene Krupa have worked closely with the brand to develop specific lines of cymbals for particular genres of music.
Reading the descriptions of board members’ careers on the Zildjian website, you soon notice a familiar pattern. A Zildjian descendant will study a discipline of their choice and find work out in the world that has little or nothing to do with cymbals – but they will stay on the board, with their finger firmly on the pulse of the business. This ensures that the business doesn’t become trapped in a vacuum, as fresh ideas and insights are constantly being introduced from the outside world.
I’ll close with my favourite anecdote about this business, which I read in an interview with Zildjian’s current CEO, Craigie Zildjian. During the interview, Craigie’s four-year-old granddaughter Emilia – a member of the 16th generation of Zildjians – came to sit on her grandmother’s lap. “Are you going to work in the factory one day, Emilia?” Craigie asked her. Without hesitation, the little girl answered “Yes!”
Maybe there is something special in the Zildjian bloodline. Or maybe they’re just really good at linking business with family pride. Either way, I think it will be a really long time before we encounter a family business quite like this one again.
About the author:
Dominique Olivier is a fine arts graduate who recently learnt what HEPS means.Although she’s really enjoying learning about the markets, she still doesn’t regret studying art instead.
She brings her love of storytelling and trivia to Ghost Mail, with The Finance Ghost adding a sprinkling of investment knowledge to her work.
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 five important stories on the local market:
Purple Group may be loss-making, but the revenue resilience in a near-impossible year is a strong tick in the box for this story.
Spar has hopefully signed off on the worst year that the company will ever experience, with several own goals and the suspension of dividends.
Pepkor has a reputation as a defensive retailer, but that doesn’t seem appropriate based on the underlying businesses.
Bidvest gave the market a fright with its recent commentary about pricing pressure, leading to a sharp correction in the share price.
Attacq is an excellent reminder that the old adage of “location, location, location” applies to REITs as well.
Listen to the latest episode of Ghost Wrap here, brought to you by Mazars:
Castleview releases its first interim results in current form (JSE: CVW)
The substantial injection of assets was only in the second half of last year
Castleview’s results are not comparable at all against the prior interim period, as the acquisition of the I Group portfolio took place in the second half of the 2023 financial year. The interim results to September 2023 thus reflect that portfolio and the comparable period doesn’t.
Instead, we should just focus on the current numbers, like the net asset value of R8.40. The current share price is R8.50 but there is basically no liquidity here, so the similarity of share price to net asset value reflects the injection of assets in exchange for shares.
The interim distribution is 10.676 cents and the loan-to-value is 48.4%.
Copper 360 targets EBITDA of over R650 million in FY25 (JSE: CPR)
Spreadsheets are easy; execution is hard
Copper 360 is off to a decent start as a listed company. With results now out for the six months to August, the company is still all about the narrative rather than anything else. Junior mining requires many leaps of faith in the construction phase.
The important thing to remember is that the Measured and Indicated Mineral Resource statement shows that copper at Rietberg Mine is higher than originally though. This requires R95 million more in capital for construction, but it also takes the FY25 EBITDA forecast from R360 million to R570 million.
Once you add in the recently announced Nama Copper deal, the EBITDA target for FY25 moves to at least R650 million.
It’s not all good news, though. If you read all the way down the announcement, you’ll find that copper recovery was only 43.5% vs. 71%. That’s a long way off plan, driven by inefficient crushing (leading to the decision to bring that in-house rather than rely on a contractor) and a fine materials recovery process that needed work.
The market cap is R2.5 billion. It feels to me like too much of that FY25 EBITDA target is already priced in here.
Hudaco announces a local bolt-on acquisition (JSE: HDC)
The group is acquiring Plasti-Weld for R56 million
This is a small transaction and hence a voluntary announcement, so don’t get too excited about the level of detail coming your way. For example, we don’t know what valuation multiple has been paid by Hudaco for this acquisition.
What we do know is that Plasti-Weld imports and stocks plastic welding equipment and other tools. It also manufactures plastic welding rod and has 15 staff, all based in Gauteng.
Hudaco believes that this is a good fit for the engineering consumables segment, specifically as a bolt-on acquisition to the thermoplastic pipes and fittings business, Astore Keymak.
The purchase price has been based on three years’ worth of historical profits as well as profits for the first year after the effective date. The maximum purchase price is R56 million, which suggests that there is an earn-out structure here.
The deal will be funded in cash by Hudaco.
Huge Group: covering themselves in glory once more (JSE: HUG)
The latest own-goal is the release of a trading statement and results on the same afternoon
The concept of a trading statement is clearly understood in the market, yet there are always companies that embarrass themselves by releasing a trading statement and full results either a few days apart or, much worse, on the same day.
A trading statement is supposed to be an early warning that results will be materially different from the comparable period. It’s completely daft to release a trading statement early in the afternoon and then full results later that day, as the trading statement gives an expected range and the results give exact numbers.
This isn’t Huge Group’s first blunder in the market, so I’m not really surprised to see this. You may recall their disastrous attempted acquisition of Adapt IT. I don’t take the company very seriously and neither does the market, with a share price of R2.10 on a net asset value (NAV) per share of R9.60. The company sees itself as an investment holding company, so the NAV per share is theoretically the fair value of the underlying portfolio. The NAV is up 2.3% year-on-year.
As a final comment, around 40% of the investment portfolio is attributed to preference shares in Huge Connect. Hilariously, these are valued based on a required rate of return of 10%, which is lower than the SA Government bond rate. I would value them on a required return much higher than that, which would bring the NAV down significantly. This is just one reason why the NAV per share and the share price live in different postal codes.
In reality, I suspect that the share price is at a discount to a plausible NAV. I just don’t think the fair value is anywhere near R9.60 per share.
I can see consumer weakness in the Hyprop numbers (JSE: HYP)
Just look at the trend in monthly trading density vs. last year
The Hyprop pre-close update dedicates many paragraphs to giving examples of stores that have opened in the malls. You can safely ignore all of that, as it tells you nothing about financial performance.
Here’s the table that matters, showing how growth in tenant turnover and trading density (sales per sqm) almost disappeared in October vs. previous months:
Vacancies and rent reversions look good at Hyprop, but that October number really worries me. Retailers are desperate for a decent end to the year and now we have hectic load shedding on top of everything else.
The growth rates in Eastern Europe look at lot better than they do here, although I’ve also highlighted September to show that slow months can happen anywhere:
I am hoping that October was somewhat of an anomaly in the South African portfolio. Time will tell.
Things are not sounding good in Nigeria and Ghana from a macroeconomic perspective, so that’s an unhappy read-through for companies like MTN. Massmart-owned retailer Game seems to have pulled out of space in Ghana, with Hyprop trying to fill that space accordingly.
The loan-to-value ratio is 37.8%, so the Hyprop balance sheet is in good shape. Strong support from shareholders for the dividend reinvestment programme certainly helps.
Lewis pulled it together in the second quarter (JSE: LEW)
After a very slow start to the year, management interventions paid off
Lewis released results for the six months to September. They tell a tale of two quarters, as growth was a paltry 1.1% in the first quarter. After a kick-up-the-you-know-what, new product ranges and advertising campaigns drove growth of 8.5% in the second quarter. Over six months, growth was thus 4.8%. Not great, but could’ve been much worse.
Encouragingly, gross profit margin was up 140 basis points to 40.7%. This helped achieved operating profit growth of 7.5%, which means there was positive operating leverage (an improvement in operating margins) despite the tricky broader environment.
The banks certainly got their pound of flesh though, with net finance costs up from R44.8 million to R62.3 million. Even where local retailers are doing well operationally, they are working for their bankers. There are foreign exchange distortions in there as well.
Headline earnings fell by 14.6% and HEPS was down 6.6%, with the fall partially shielded by the share buybacks that Lewis is most famous for.
If you’re wondering how consumers are doing out there, then my final comment is that credit sales grew 19.5% and cash sales fell 14.4%. Ouch.
Despite the drop in HEPS, the interim dividend is up 2.6% to 200 cents per share.
Lighthouse sells a big chunk of Hammerson (JSE: LTE)
The group has freed up R616 million in the process
Lighthouse has clearly run out of patience with Hammerson, deciding to let go of R616 million worth of shares so that the capital can be redeployed in yield-accretive opportunities. These sales were achieved on-market, which shows you how useful liquidity can be.
This was a Category 2 transaction that didn’t require shareholder approval.
Of course, all eyes will now be on what Lighthouse does with the capital!
Mahube Infrastructure declares a solid interim dividend (JSE: MHB)
Be cautious though, as there were bumper dividends from investments that funded this
On a closing share price of R4.84 and with an interim dividend of 35 cents declared, Mahube Infrastructure might look like quite the yield play. Caution is always required when dealing with interim dividends and assuming that they can be annualised, though.
Mahube invests in infrastructure assets like solar and wind, so the underlying cash flows are about as predictable as the wind itself. Revenue in the six months to August 2023 increased by 39% and HEPS was up 65%.
The jump in dividend income earned by the company was because of a special dividend from two solar projects that were refinanced. Therein lies the rub: special dividends are not designed to be repeated.
These are strong numbers from the fund, but I certainly wouldn’t imply an annual yield by doubling the interim dividend.
Purple Group put in a surprisingly resilient revenue performance (JSE: PPE)
I fully expected revenue to drop this year
Against a backdrop of much higher interest rates and inflation, I anticipated a decrease in revenue at Purple Group as investors find it increasingly difficult to keep adding to their portfolios. I was wrong, as revenue actually increased by 0.8% to R276.1 million. I think that’s impressive.
The pressure did come in expenses though, which were up substantially by 31.9%. Most of this pressure was in the cost of servicing institutional clients, but take note of the inflows mentioned further down. We also saw R25 million in expenses in the Philippines, out of a total expense base of R241 million. These costs drove a swing from profit attributable to ordinary shareholders of R44 million to an attributable loss of R24.9 million.
Looking deeper, I’m even more surprised (and rather pleased) to report that EasyEquities revenue grew by 11.1% to R237.8 million. Active clients were up 17.5% but retail inflows fell by 28.1%. Institutional inflows were up by a huge 169.9%, so institutional revenue is now 39.7% of total revenue, which is a huge increase from 9.7% in 2022.
Thanks to higher client numbers, the cost of service per active client fell by 10% to R170. The cost to acquire an active client is R96 per client.
GT247.com felt the revenue pain, down by 34.5% to R37.3 million. The profit after tax was R2.4 million vs. R11.3 million in the prior year. I was glad to note the introduction of a product called EasyTrader, which aims to take the capability in GT247 to the more sophisticated clients in EasyEquities. This is absolutely the right thing to do.
I wasn’t surprised to see a drop in revenue of 40.1% in EasyCrypto. Interestingly, client assets are up in value, so perhaps people really are just HODLING on their favourite blockchain assets?
In my view, despite the fact that there’s a loss, this is probably the most impressive result I’ve seen from Purple. I genuinely expected a significant drop in revenue.
Reinet’s NAV has dipped since March 2023 (JSE: RNI)
The dividend is slightly higher year-on-year, though
Reinet can perhaps best be described as Johann Rupert’s “stay-rich” fund, with investments in companies like British American Tobacco and Pension Insurance Corporation. The net asset value (NAV) per share has dropped 1.8% between March 2023 and September 2023, but a proper long-term view shows an 8.5% CAGR in euros since March 2009.
An inaugural dividend from Pension Insurance Corporation of €57 million helped Reinet increase its interim dividend from €0.30 per share to €0.28 per share.
In addition to the two major investments, the group holds investments in various private equity funds. These stakes contribute 21.2% of the investment portfolio excluding cash.
Resilient’s tenants have little in the way of real growth to report (JSE: RES)
At least rental reversions are positive
Resilient released a pre-close update covering the 10 months to October. Comparable sales growth was 5% over this period, which means the fund’s tenants are struggling to stay ahead of inflation. Some regions are running far lower than that number for various reasons.
Despite the overall pressure, vacancies are down and reversions were extremely positive, with leases for new tenants up by a whopping 26.5%. Across renewals and new tenants, leases were up 7.9%.
It feels like landlords are playing catch-up, but they will need proper underlying growth to support ongoing rental increases.
Load shedding certainly won’t help. By December 2023, Resilient will have solar backup that will supply 27.5% of the group’s energy consumption.
Things are looking far better in France, where sales increased 10.1% for the nine months ended September.
In terms of the balance sheet, Resilient received 50% of its dividend from Lighthouse in shares and the rest in cash. Resilient also sold its remaining interest in Hammerson, receiving R1.2 billion vs. the original purchase price of R746.4 million.
Des de Beer is retiring as CEO at the end of 2023, with Johann Kriek appointed as his replacement.
Full-year guidance of R4.00 per share has been affirmed. The current share price is R40. You don’t need your calculator to work out the yield.
Salungano is still trying to refinance its business (JSE: SLG)
The company is falling further behind on financial reporting
Salungano is suspended from trading because it hasn’t released its 2023 financial statements. In order to release those financials, it needs to conclude a refinancing process so that it can be seen as a going concern. Although a Chief Restructuring Officer has been appointed, it takes time to get these things right.
It doesn’t help that subsidiary Wescoal Mining is in a voluntary business rescue process. The publication of the business rescue plan has been postponed to February 2024.
And on top of all this, the interim results for the six months to September are due for release soon and that deadline is obviously going to be missed because the March year-end results aren’t done. These problems tend to compound over time.
Spar says farewell to its dividend (JSE: SPP)
You won’t even find it lurking at the back of the store
I’ll start with the good news: turnover at Spar increased by 10.1%. That largely brings me to the end of the good news.
Operating profit tanked by 47% from R3.4 billion to R1.8 billion. The company tries to soften the blow with its view that R1.4 billion is non-recurring. That just means that they hope the same problems won’t happen again. It doesn’t mean that there won’t be new problems.
Locally, SPAR Southern Africa only grew turnover 5.1% in a period where price inflation was 9.7%. This tells you that volumes went firmly the wrong way. It was even worse at Build it, with turnover down 4.3% as consumers bought food rather than household improvement products. You need to Eat it more than you need to Build it. Luckily, people still got sick, so the pharmacy businesses achieved 19.2% turnover growth.
In Ireland and South West England, turnover was up 8.1% in euros and 21.9% in rands. The food services business did well, assisted by a recovery in hospitality.
In Switzerland, turnover fell 3.3% in local currency and increased by 13.6% in rands. Food is so expensive in Switzerland that residents travel across the border to buy food. Life in Europe, hey.
Despite property funds telling a great story about retail in Poland, SPAR Poland isn’t seeing enough of that happiness. Turnover was only up 5% in local currency or 19.9% in rands. The business is still heavily loss-making though, leading to a decision to sell the operations in Poland. Finding a buyer might not be so easy. This acquisition has been a terrible story for Spar, in fairness with a completely unforeseeable pandemic in the middle that made integration very tough.
There are no excuses for the catastrophic SAP roll-out though, which cost Spar R1.6 billion in turnover in KZN and R720 million in lost profits. They’ve also had to write off R94.1 million because they’ve had to change their approach to the SAP roll-out in other regions.
The group isn’t in breach of any debt covenants at this stage. To be prudent though, the dividend is now a thing of the past. With HEPS down 47.7%, that’s the right approach.
The stock has lost 40% of its value in the past 5 years. If only the same could be said for food prices.
Little Bites:
Director dealings:
Adrian Gore has entered into a large hedge over his Discovery (JSE: DSY) shares, in the form of buying put options with a notional value of R578 million at a strike price of R110.26 and selling call options with a notional value of R927 million at a strike price of R176.71. Simply, what’s happening here is that he is buying downside protection at R110.26 per share and funding it by giving up upside above R176.71 on a bigger value of shares. The current share price is R133. Separately, a director of a major subsidiary of Discovery sold shares worth R1.03 million.
A prescribed officer of Standard Bank (JSE: SBK) has cashed in, selling shares worth R11.1 million.
A prescribed officer of Old Mutual (JSE: OMU) has bought shares worth R2.9 million.
The CEO of AECI (JSE: AFE) bought shares worth R216k.
A non-executive director of Gold Fields (JSE: GFI) bought shares in the company worth $15.2k.
An associate of two directors of Delta Property Fund (JSE: DLT) has bought shares worth R45.9k.
After releasing results the previous day, Hosken Consolidated Investments (JSE: HCI) released a cautionary announcement related to a proposed transaction. The cautionary doesn’t even say whether this is an acquisition or disposal. We will have to wait and see if anything more concrete is announced at some point.
Fortress (JSE: FFA | JSE: FFB) has released the circular for the transaction to repurchase all Fortress B shares by giving those shareholders NEPI Rockcastle (JSE: NRP) shares as payment. EY is acting as independent expert and has opined that the transaction is fair and reasonable to both classes of shareholders. After the last failed attempt to address the dual-share class structure, the company will be hoping that this one goes through.
In what will probably not be loved by the market as a succession story, Bell Equipment (JSE: BEL) has announced Ashley Bell (currently a non-executive director) as the replacement for Leon Goosen as CEO. This is no comment on Ashley at all and I’m sure he’s a capable guy, but the market tends to be nervous of family businesses that choose to bring management back in-house vs. having an unrelated person in charge. Time will tell.
The business rescue practitioners dealing with Tongaat Hulett (JSE: TON) have published the updated business rescue plans. There are two plans because there are two bidders! Kagera Sugar was initially identified as the preferred bidder, but that group has fallen away. The two horses in the race are now the Vision Consortium (which includes Robert Gumede) and RGS Group, which produces sugar in Mozambique. In terms of the local economy, it’s really important that Tongaat is rescued here. Creditors will vote on the plans on 8 December.
Orion Minerals (JSE: ORN) has received R5 million from Clover Alloys and has issued shares accordingly.
AYO Technology (JSE: AYO) announced that deputy chairman, Khalid Abdulla, is retiring with effect from 1 December.
With a market cap of just R5 million, it doesn’t get more obscure than African Dawn Capital (JSE ADW). In the six months to August, the company generated revenue of R7.9 million and a loss before tax of R8.2 million. Obscure, and getting more obscure it seems.
South Africa’s AltX-listed copper producer, Copper 360, has acquired Nama Copper from Mazule Resources in a deal valued at R200 million. Nama Copper is located adjacent to Copper 360’s operations in Nababeep. Its flotation plant is currently under care and maintenance.
Hudaco Industries is to acquire the trading assets and liabilities of the Plastic-Weld business, an importer and stockist of plastic welding equipment, hot-air tools, specialised test and inspection equipment and thermos cutters. The purchase consideration of R56 million (maximum) will be funded from cash and existing facilities.
A consortium led by ACN Capital (its founder is current CEO and acting CFO of Ascendis Health) has made an offer to minorities to acquire their Ascendis Health shares for a cash consideration of 80c per share. The offer price represents a premium of 25% to the 30-day volume weighted average price as at 26 September 2023, the day prior to the release of the initial cautionary. The delisting of the company will give the consortium the opportunity to continue with its restructure, optimise and grow the remaining businesses and exit those that are considered mature which will realise value for those shareholders who opt to remain in an unlisted company.
African Rainbow Minerals (ARM) has concluded an agreement with Norilsk Nickel Africa to acquire the remaining 50% participation interest in its joint venture that operates the Nkomati Mine. The mine is currently under care and maintenance. ARM will take over the environmental liabilities of the mine together with Norilsk’s proportionate share of the obligations and liabilities relating to the assets, with a R325 million contribution from Norilsk. For ARM the benefits of the transaction include the known and predictable nickel sulphide orebody and the bi-metal product credits which include copper, cobalt, platinum, palladium and chrome.
Delta Property Fund has entered into an agreement with Goldview Africa to dispose of its property known as the Smartxchange, situated at 5 Walnut Road in Durban for R46 million. This follows the failed deal with Ubud Development in May this year in which the parties could not reach agreement on the terms of the sale.
Unlisted Companies
Local fleet management startup GoMetro has raised US$11,5 million in a Series A round. The capital will serve as a catalyst for GoMetro’s mission to digitise heavy duty commercial transport operations and further develop its EV fleet management platform in the key markets of UK, US and South Africa. The round was led by Zenobē Energy with participation from new backers Futuregrowth Asset Management, ESquared Ventures and Kalon Venture Partners and existing investors Decades Capital, Hlayisani Capital and Tritech Global.
Global logistics provider Dachser has acquired the remaining 30% stake in Dachser South Africa from the founding Duve family. Dachser first entered SA with a joint venture, taking a majority stake in the family-owned company Jonen Freight. The company offers air, sea and road logistics. Financial details were undisclosed.
British International Investment (BII) has announced a R125 million investment in two 140MW wind farms in South Africa’s Northern and Eastern Cape. Currently under construction, the two wind farms are expected to reach completion in 2024. This is part of a three-project cluster co-developed by H1 Capital and EDF Renewables.
EnviroServ has acquired the remaining 50% stake in Vissershok Waste Management Facility, a waste treatment and disposal facility in Cape Town. Financial details were undisclosed.
Lighthouse Properties has disposed of 98,051,120 Hammerson plc shares for an aggregate cash consideration of R616,1 million.
Quilter has repurchased a total of 15,798,423 shares in terms of its Odd-lot Offer, 291,711 ordinary shares on its UK share register and 15,506,712 shares held by South African shareholders, for an aggregate £13,9 million (R317,2 million). The shares represent c. 1.13% of the existing issue share capital of the company.
Orion Minerals is to issue 25 million shares at R0.20 per share to Clover Alloys. Clover exercised the options which were offered as part of Orion’s placement undertaken earlier this year.
Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 20 – 24 November 2023, a further 3,450,828 Prosus shares were repurchased for an aggregate €104,72 million and a further 325,415 Naspers shares for a total consideration of R1,11 billion.
Following the announcement in October of its share buy-back programme, AB InBev has repurchased a further 1,630,438 shares at an average price of €57.13 per share for an aggregate€93,15 million. The shares were repurchased in the period 20 to 24 November 2023.
Glencore intends to complete its programme to repurchase the company’s ordinary shares on the open market for an aggregate value of US$1,2 billion by February 2024. This week the company repurchased a further 9,650,000 shares for a total consideration of £43,1 million.
Six companies issued profit warnings this week: Efora Energy, Nampak, PBT Group, Purple Group, Transaction Capital and Huge Group.
Six companies issued, renewed or withdrew a cautionary notice: Sun International, Ellies, Ascendis Health, enX, Afristrat Investment, Hosken Consolidated Investments.
Affirma Capital (formerly Standard Chartered Private Equity) has sold its 37.5% stake in Nigeria-headquartered, the GZI Group to Oppenheimer Partners. Affirma first invested in GZI back in 2012. In 2018, the private equity fund led a capital raise to fund the company’s expansion into South Africa. It was during this funding round, that Oppenheimer Partners joined Affirma as a strategic shareholder.
Netis has announced that a consortium comprising Amethis, AfricInvest, International Finance Corporation and Proparco, have taken a majority stake in the pan-African telecommunications infrastructure service provider. The value of the deal was undisclosed. Headquartered in Morocco, Netis operates in more than 15 countries including Côte d’Ivoire, Burkina Faso, Ghana, Benin, Togo, Niger, Nigeria, Gabon, DRC, Rwanda, Tanzania, Uganda, Kenya, Ethiopia and Mauritius.
Tunisia’s B2B software-as-a-services (SaaS) startup, Winshot, has raised an undisclosed six-figure investment round led by 216 Capital. The funding will allow the company to expand its marketing and sales teams and thereby enhance and expand its presence in Tunisia and France.
BluePeak Private Capital has announced a US$20 million hybrid loan to East and Central Africa logistics group, Prime Logistics. This is BluePeak’s first ESG-linked investment and will be used to advance the company’s expansion plans across Africa.
Development Partners International and Verod Capital have acquired Enko Capital’s majority stake in Nigeria’s Pan African Towers. Financial terms were not disclosed. As at August 2022, Pan African Towers had a nationwide presence of c.760 sites across Nigeria, primarily in the Southwest. Enko Capital Managers first invested in Netis in 2018.
Newtown Partners (DP World), Saviu Ventures, AAIC Investment, Axian Ventures and Health54 have invested US$2,5 million in the Cameroon health startup Waspito. This seed extension round follows on from the US$2,7 million raised last year. The company expanded to the Ivory Coast earlier this year and is now looking to access the Senegal and Gabon markets.
The complexity of mediation in South Africa has increased over the years, and technology has become a useful tool to manage various aspects of it, but human interaction is still central to the process.
Mediation has emerged as a vital alternative dispute resolution (ADR) mechanism in South Africa. It offers parties involved in legal disputes an opportunity to resolve their issues outside the traditional court system, often resulting in quicker, more cost-effective, and mutually satisfactory outcomes.
This article discusses the evolution of mediation in South Africa, and the challenges it currently faces.
The Evolution of Mediation in South Africa
Mediation in South Africa has developed over the years, in response to a growing backlog of cases in the courts, the expense and duration of court proceedings, and the desire for more client-centric dispute resolution options.
In 1984, the Department of Justice introduced the Small Claims Court, as well as legislation enabling “Mediation in Certain Civil Cases.” This enabled broader access to justice, particularly for those members of society without the means to fund significant litigation costs.
While South African courts have supported mediation as a form of dispute resolution, recent developments have introduced systemic changes, resulting in greater use of mediation.
In 2014, the Magistrate Court Rules were amended to introduce mediation as a way to resolve disputes, either before litigation commences or after its commencement, but before judgment has been given.
The South African Law Reform Commission invited stakeholders in 2017 and 2019 to provide input on the proposed introduction of an ADR system, which included mediation as a dispute resolution option. The new system would include the accreditation of mediators, establish an entity responsible for regulating mediators’ professional conduct, and introduce mandatory mediation. A discussion paper (including a Mediation Bill) is in preparation.
In 2020, Rule 41A was incorporated into the Uniform Rules of the High Court. This rule requires plaintiffs to consider mediation as a potential option for resolving a dispute. If parties elect to move forward without mediation, they must provide reasons for this decision.
Challenges Faced by Mediation in the 21st Century
Despite these positive developments, several challenges have emerged that hamper the effectiveness and accessibility of mediation in South Africa. The government’s response to the COVID-19 pandemic significantly accelerated the use of technology for remote mediation, but it has been criticised. Although technology has expanded access to mediation services, it also presents challenges related to digital literacy, security, and ensuring the confidentiality of mediation proceedings.
While online mediation offers convenience, it also raises concerns about cybersecurity, data privacy and, perhaps most importantly, the loss of personal connection and interaction between parties and mediators.
In the rapidly-evolving landscape of dispute resolution, Artificial Intelligence (AI) and automation has emerged as a transformative force, revolutionising the field of mediation and offering innovative solutions to enhance the efficiency and effectiveness of the mediation process, such as:
* Document management: AI can assist to streamline the management of legal documents, contracts and case files, making administrative tasks related to document review and organisation more efficient. This allows mediators to focus on the core mediation process.
* Data Analytics and Case Assessment: AI can analyse vast amounts of data quickly, allowing mediators to assess cases, identify patterns and predict potential outcomes more accurately.
* Scheduling and Logistics: Automation can handle scheduling, communication and logistical aspects of mediation.
Despite AI’s ability to enhance the efficiency and effectiveness of mediation, particularly in administrative and data-driven aspects, the core role of mediators to facilitate communication, build trust, manage emotions, and guide parties toward mutually agreeable solutions remains essential and cannot be replaced by technology. Successful mediation in the future is likely to involve a harmonious blend of human expertise and AI-driven support.
Over the years, disputes have grown in complexity. Mediators must adapt to handle intricate commercial, family and community disputes effectively, as well as the interplay between AI and human expertise. Training that supports the integration of AI ought to be advocated, and certification standards for mediators must be consistently enforced to ensure that parties receive competent and effective mediation that operates alongside and in conjunction with the formal legal system. Ensuring a smooth integration between mediation, technology and the courts, and fostering a culture that encourages parties to consider mediation before litigation, remains a challenge.
Addressing these 21st century challenges in mediation requires ongoing adaptation, training and innovation. It also necessitates the development of clear regulatory frameworks for online mediation, and ethical guidelines that account for digital environments. A commitment to promoting public awareness and maintaining trust in mediation as a valuable tool for resolving disputes in the modern world is fundamental.
Michael Straeuli is a Partner and Amaarah Mayet an Associate | Webber Wentzel.
This article first appeared in DealMakers, SA’s quarterly M&A publication.
Global deal activity has slowed; however, M&A remains an important strategic capital allocation lever for financial services groups.
According to Refinitiv, the American-British global provider of financial market data and infrastructure, the $2,9bn in ‘announced’ sub-Saharan African (SSA)-based merger and acquisition (M&A) deals in the first quarter of 2023 was 80% lower than the prior year, marking the lowest first-quarter value in 20 years. While deal volumes were not as severely affected, they were still 30% lower than in 2022.
This declining trend was also evident in South Africa. According to DealMakers SA, there were 118 local M&A deals, with a total value of approximately R64bn, finalised in South Africa in H1 2023. This performance was down from the 166 local deals with approximately R284bn in finalised value achieved in the first half of the prior year.
Meanwhile, the Old Mutual Corporate Finance team has been kept busy by a range of strategic M&A deals, which helped expand our capabilities and physical reach across our various businesses. Recent transactions included the acquisition of equity stakes in Preference Capital, Versma Administrators, Primak Brokerage, Genric and ONE Financial Services.
The most significant deal-making ‘moment’ over the past two years came courtesy of the company’s transformative Broad-Based Black Economic Empowerment (B-BBEE) ownership transaction – named Old Mutual Bula Tsela (Sesotho for “pave the way”) – which makes Old Mutual the first financial services provider in South Africa to facilitate an offer of shares to the black South African public (via our Retail Scheme), and the first issuer to make room for those earning lower incomes.
So, you have closed an M&A deal. Now what?
Media coverage on M&A deals seldom explores what happens once the ink on the share transfer forms has dried and the deal becomes effective. In our experience, this is the moment when the proverbial rubber hits the road. As the internal advisers to company boards and executive teams, we are called upon to provide sound and considered advice about a wide range of M&A-related matters, both before and after deals have closed.
Internal corporate finance teams help to ensure that M&A transactions are bedded down in line with the terms and conditions agreed to by all parties to the deal. One of the important roles that we play is to take observer seats on the acquired company board, to ensure that what we thought we were buying is indeed what we bought, and that the integration plan unfolds as planned.
Immediately following an acquisition, you can expect to see a flurry of workshops to ensure an alignment of corporate cultures, delegations of authority and risk appetites, among other factors. These are made easier by the relationships that corporate finance teams have established with the management team at the target firm over the course of negotiations.
During negotiations and in the process of closing a deal, the acquired firm’s management and staff would have had very limited engagement with the employees at the acquiring firm, which can make the integration process tricky. It is also worth noting that the relationship shifts from one of pre-acquisition negotiation to one of co-operation and mutual support, post-acquisition. An internal corporate finance team, therefore, plays an integral role in creating long-term value for stakeholders, both before and after the M&A transaction closes.
Aside from getting your capital allocation decisions spot on, it helps to define and agree on an internal set of criteria to ensure that everyone involved in decision-making on M&A deals understands what you are aiming for. The ultimate goal of M&A deals is to build a group that is worth more than the sum of its parts, in a way that strategic relationships and organic growth cannot achieve.
Key factors to unlock synergies post-execution of an M&A deal include embedding accountability through agreed key performance indicators and ensuring that adequate time is allowed for post-acquisition implementation before rushing headlong into the next deal.
Being part of an internal corporate finance team is incredibly rewarding. You get to see the envisioned value creation unfold a few years down the line, and to build relationships with various management teams across multiple lines of business. And, of course, you soak up the learnings on offer from the “baptism of fire” that goes with being immersed in the commercial, risk management and strategic decision making of diverse executive teams. You get to digest and onboard these experiences, carrying them with you into your next M&A deal.
Taskeen Ismail is Head of Corporate Finance | Old Mutual Group.
This article first appeared in DealMakers, SA’s quarterly M&A publication.
Many consumers, especially in the developed world, give little to no thought to where the food they eat originates from, and the intricate production, processing and distribution chains necessary to ensure that it arrives and is fit for human consumption. Knowledge of the subject is essential to sustaining and improving these processes, bearing in mind that the world’s population continues to grow. While such growth has slowed over recent decades,1 pressure on global resources continues to increase. According to the United Nations, the 46 least developed countries in the world host some of the world’s fastest growing populations. Many are projected to double in population size between 2022 and 2050, putting additional pressure on resources in countries where they are scarce.2
Of these 46 countries, a significant number are in Africa. Today, a fifth of Africa’s population (278 million people) is undernourished, and 55 million of its children under the age of five are stunted due to severe malnutrition.3
In affluent countries, access to education and training, water and electricity, funding and other elements essential to the food and agricultural value chain, is more widespread. However, in many African countries, these ’luxuries‘ are not readily available, and the daily struggles just to ’get by‘ inhibit the ability to grow and prosper.
While, in 2021, 52% of people employed in sub-Saharan Africa were active in agriculture, and roughly 45% of the world’s area suitable for sustainable agriculture production expansion was located in Africa, the continent had the lowest average agricultural productivity per worker globally.4 The low productivity and agriculture yields are attributed to a number of reasons, including, inter alia: • lack of access to inputs; • limited access to technologies and advisory services; and • low input use efficiency under rainfed conditions, where climate change and associated climate variability results in frequent droughts and floods, reducing crop yields.5
Agriculture in Africa is critical for the provision of employment and nutrition to the population, and ultimately, for wealth creation and prosperity. With almost half of the world’s suitable arable land – and with human capital that is available and expanding – there is enormous potential for Africa, provided that the necessary ingredients available are combined correctly.
According to the African Development Bank Group, current productivity levels within Africa are low. Raw produce is exported abroad, where it is refined and processed, and then sold back to Africans at a much higher price, with the majority of consumer goods being imported. The lion’s share of the economic benefit derived, therefore, remains abroad. With the correct training and resource allocation, the growing, processing and ultimate sale can all be realised on the continent, greatly increasing the value add and wealth generation per capita within Africa.
So, what does Africa require to enable this: • access to funding on terms that are commercially viable for African farmers. This should be combined with education on how best to utilise the funding to ensure that it is effectively deployed and managed. The likes of development finance institutions (DFIs) could play a pivotal role, provided that they are willing to be flexible with their payment terms, to cater for the cyclical nature of the agriculture industry;
• education and transfer of skills – this includes farming in a way that is smarter and more sustainable, with the likes of artificial intelligence and new technologies (with the assistance of local and international experts in the field) creating platforms to unlock this, to achieve greater efficiencies. In recent years, there has been a vast increase in agri-tech developed, with the likes of ‘Farmers Friend’ launched by IQ Logistica, which is a mobile application tool that allows farmers to manage their farming operations and easily view, manage and access all of their operational data to mitigate risks;
• new policies (to the extent that adequate ones are not in place), improved disaster management (to counter the risk of disease, drought, floods and other consequences of climate change) and access to emergency funding/assistance at short notice; and
• acknowledgement from African leaders that policy, education practices and resource allocation will need to be refined to enable and unlock all of the above with a resounding consensus that ‘Africa is open for business’.
It is only through continued and consistent engagement by all stakeholders that meaningful progress will be made. There is an abundance of skills and knowledge within Africa, including corporate advisors who are au fait with the landscape, that can be drawn on to assist with capitalising on the opportunity. In addition, increased cooperation with players outside the continent (e.g. multi-nationals partnering with local entrepreneurs) would assist Africa to overcome the challenges facing it and achieve a successful and sustainable outcome.
Major Trends in Population Growth Around the World – The National Library of Medicine. (https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8393076/#:~:text=Continuing%20Gowth%20of%20the%20World%20Population%20at%20a%20Slowing%20Pace&text=The%20slowing%20pace%20of%20the,1980%2C%20and%205.0%20in%201950)
World Population Prospects 2022 – United Nations Department of Economic and Social Affairs (https://www.un.org/development/desa/pd/sites/www.un.org.development.desa.pd/files/wpp2022_summary_of_results.pdf)
Over 20 million more people hungry in Africa’s “year of nutrition” – OXFAM International (https://www.oxfam.org/en/press-releases/over-20-million-more-people-hungry-africas-year-nutrition#:~:text=Today%20a%20fifth%20of%20the,stunted%20due%20to%20severe%20malnutrition.)
Revitalizing African agriculture: Time for bold action – UNCTAD (https://unctad.org/news/blog-revitalizing-african-agriculture-time-bold-action)
Increasing Agricultural Productivity in Africa: Can STI help Africa to make a quantum leap in agricultural productivity? – Food and Agriculture Organisation of the United Nations (https://www.fao.org/science-technology-and-innovation/increasing-agricultural-productivity-in-africa-can-sti-help-africa-to-make-a-quantum-leap-in-agricultural-productivity/en#:~:text=The%20low%20yields%20are%20largely,and%20floods%20reduce%20crop%20yields.)
James Moody is a Corporate Financier | PSG Capital
This article first appeared in DealMakers AFRICA, the continent’s quarterly M&A publication.
Listen to the latest episode of Ghost Wrap here, brought to you by Mazars:
Acsion is an oddball that is still at a huge discount to NAV (JSE: ACS)
I’m not sure the market knows what to do with this one
Acsion is a property development firm rather than a REIT. That’s fine in principle, as there are other such firms on the market. The problem, I think, is that the strategy is all over the show, as the company has various rental properties and even generates 10% of its revenue from the hospitality industry, actually operating hotels itself.
The market likes things that are easy to understand, especially among the more obscure names with little or no liquidity anyway.
Acsion’s revenue is up 20% and net asset value (NAV) per share is up 17% to R26.16. The interim dividend is 16.40 cents, down from 18 cents last year. The market couldn’t care less about the NAV, with the share price languishing at R5.56.
The problem is that the dividend yield and the NAV don’t really make sense next to each other, so the market is focusing on the cash flow from the assets rather than the paper value. If the NAV is a genuine reflection of what the assets are worth, this should be a slam-dunk take-private opportunity.
The percentage moves at Crookes are a bit daft (JSE: CKS)
Agriculture is many things, but steady and smooth isn’t one of them
Crookes Brothers has released results for the six months to September. Thanks to a previously released trading statement, we knew they would reflect a huge improvement. Revenue from continuing operations is up by 17% and operating profit after biological asset fair value movements has jumped by a ridiculous amount, from R8.8 million to R108 million!
Once finance costs and other things are taken into account, the swing is from a headline loss of R29 million to headline earnings of R49 million. Importantly, cash generated from operations came in at R112 million, a huge increase from R28.9 million previously.
Despite this, there’s no dividend for the interim period.
In case you’re wondering how the group makes money, sugar cane generated operating profit of R166.9 million, bananas came in at R7.6 million and macadamias registered a loss of R33.9 million. These numbers are all net of fair value movements in biological assets. In particular, world macadamia nut prices are severely depressed.
Adjusted earnings are a lot higher at Deneb (JSE: DNB)
And in this case, the adjustments are appropriate
I’m normally skeptical of adjusted HEPS. The concept of HEPS is already somewhat adjusted in nature, as there are rules about what can be excluded as once-offs or non-recurring items. Still, those rules don’t capture every possible reality. In this case, Deneb received a large insurance claim in the prior year that was included in HEPS, which is why HEPS as reported is down by 36%.
In reality, it’s up 69% if that amount is excluded from the base, driven by revenue up 9.4% and adjusted profit up by 30.4%. The net asset value per share is up by 3%. Notably, the operating profit growth was driven by very strong cost control and a decline in gross margin of only 10 basis points.
Like last year, there’s no interim dividend.
eMedia was resilient in this period (JSE: EMH)
There were many reasons why the numbers should be a lot worse
Load shedding. Inflation. Fuel prices. General pain in FMCG, which is where a lot of advertising revenue comes from. It’s been a perfect storm for many businesses, yet eMedia has managed to constrain the revenue decrease to just 0.8%. Clearly, all those years of showing Anaconda on e.tv built some resilience into the place.
Operating profit fell by 4.4% and HEPS is down by 8.4%. Again, it could’ve been so much worse. The dividend per share is down by 14.3%.
eMedia is the biggest broadcaster in South Africa, so it has considerable potential upside if things improve. I would argue that an environment where rates start to taper off would be supportive of growth here. Most media companies have been treading water in 2023 at best.
There have been numerous legal battles with the other broadcasters in South Africa as they all fight over sports rights in particular. This resulted in significant legal fees in this period.
The numbers in the Media Film Service business are quite frightening, where profit fell by R20.9 million as a direct result of the actor and writer strike in Hollywood. The company relies on international film productions. It seems like there’s a tentative agreement to end the strike.
Exxaro is navigating a tough climate (JSE: EXX)
Local infrastructure problems remain a challenge
Exxaro released a financial director’s pre-close message. Basically, that’s just a pre-close update for the year ending December 2023.
It won’t go down as the happiest of years, with the API4 coal export price having dropped quite spectacularly from $271 per tonne in FY22 to $122 in FY23. Those elevated coal prices are but a distant memory. Total coal production is flat, with sales volumes down 2%.
The group net cash balance is R13.5 billion and the company wants to retain R12 billion to R15 billion to fund the growth strategy. On that basis, I wouldn’t expect much of a dividend here.
In some regions, product originally destined for the export market was rerouted for domestic sales. This is why we see a growth rate of 19% in Mpumalanga domestic thermal coal sales. Transnet Freight Rail (TFR) remains an issue, although the company has put a number of initiatives in place to try mitigate this issue. Concerningly, Exxaro notes that attempts by the coal export industry to support TFR have not yielded an improvement in tonnage railed.
None of this is stopping Exxaro from investing further in its business, with capital expenditure up 57% year-on-year.
The company seems fairly upbeat on near-term prices, while acknowledging that coal demand is being dampened in the long term by Europe’s drive for decarbonisation. On exports, higher prices would support the economics of sending coal by trucks rather than train.
The Fairvest B dividend is lower this year (JSE: FTA | JSE: FTB)
But the 100% payout ratio has been maintained
Fairvest has an unusual dual-share class structure that was popular several years ago on the JSE. The A shares increase their dividend by the lesser of 5% of CPI inflation, with the B shares then picking up the variability in the rest of the earnings. In other words, the A shares give more certainty and the B shares are the crazy cousin at the Christmas party.
In the year ended September 2023, inflation was high and so the A shares increased the dividend by 5%. Given the broader operating challenges in the country, the B shares saw the dividend drop by 4.6%.
The group is selling non-core assets and is working towards being a retail-focused fund. Progress was made in this strategy in this financial year, with guidance for the B shares being modest growth in distributable income per share.
The A shares are trading on a yield of 9.2% and the B shares on a yield of 12.4%.
Grindrod Shipping’s final quarterly report is a large loss (JSE: GSH)
The company is changing to a semi-annual reporting cycle, like most local groups
When people talk about highly cyclical industries, shipping is often used as an example. If you read the latest report from Grindrod Shipping, it’s not hard to see why.
In the three months ended September, the company generated revenue of $112.5 million and a gross profit of $4.2 million. Adjusted EBITDA was $11.2 million, which tells you that ship sales also play a role on the income statement. Despite this, the attributable loss for the quarter was $8.5 million. This takes the year-to-date situation into a loss as well, with an attributable loss of $7.2 million for the nine months.
After a large capital distribution this year, no further cash distributions are envisaged for 2023. The company has also reduced debt by $36.1 million, in some cases achieved through sales of ships.
The good news heading into the fourth quarter is that the shipping rates agreed thus far are ahead of the year-to-date numbers and well ahead of the third quarter. Festive demand obviously plays a role in this. Still, a 10% drop in the share price after this announcement tells you that some are still being caught out by how cyclical this industry is.
Mothership HCI is, as usual, a mixed bag (JSE: HCI)
The most severe drop in earnings was in the coal business
Hosken Consolidated Investments (or HCI) sits at the top of a structure that includes various unlisted and listed businesses, including Deneb and eMedia that I’ve covered elsewhere today. Frontier Transport Holdings is also in there, having recently released results.
For the six months to September 2023, EBITDA increased by 18%. That sounds good, yet HEPS is down by 13% and there’s no dividend as the company needs to preserve cash for the oil and gas investments in Namibia.
If we dig deeper, we find that higher finance costs and equity-accounted losses were a major driver of the EBITDA increase not translating into a happy HEPS result. There were also substantial gains on investments that are excluded from headline earnings.
Here’s the segmental view, with the more important moves highlighted:
Note the huge difference between profit and headline earnings on the “other” line, which is where the group recognises gains on investments (which are reversed out for headline earnings) and funding costs (not reversed out).
With no dividend to shareholders because of the investment in oil and gas, all eyes will be on the performance of that investment.
At some point, PBT Group had to run out of puff (JSE: PBG)
The share price has corrected this year, with the five-year performance still ridiculously good
PBT Group is a good little business. It’s ultimately a technology and data consulting business, not hugely dissimilar to Accenture. Many of the clients are in the financial services sector. PBT Group sells time, but a quick look at Accenture will show you that selling time can be very lucrative.
After an almost perfect run of performance, eventually something had to go wrong. This is especially true in a country that is struggling for economic growth.
The group has released a trading statement for the six months to September. It includes a lot of financial information, so this is more like a mini-results release than a traditional trading statement.
Before we dig into them, it’s important to understand that PBT Group Australia was disposed of on 30 September 2023, so it comes through as a discontinued operation in these numbers. Focusing on continuing operations is a good idea.
On that basis, revenue is up by between 5.4% and 9.8%. EBITDA is only up by between 0.5% and 4.6%, so there’s clear margin pressure there. Although profit after tax looks better at growth of 7.7% to 12.1%, normalised HEPS is down by between -6.2% and -2.4%. HEPS as reported is down by between -20.2% and -17.0%, but there’s a significant distortion from the accounting treatment of B-BBEE shares.
The share price closed 10% lower at R7.11. The interim normalised HEPS range is 30.8 cents to 32.0 cents. By small cap standards, the multiple had moved too high here.
Despite an extra trading week, Pepkor’s dividend fell sharply (JSE: PPH)
Here is yet another example of why I’m bearish on South African retail shares
For the year ended September 2023, which has a 53rd week of trading in it, Pepkor’s revenue grew by 7.7%. That’s not enough, sadly. Operating profit fell by 8.1% and HEPS was down 8.2%. The dividend payout ratio moved lower as well, so the dividend per share is down 12.9%.
The drop is payout ratio is despite a 15.9% improvement in cash generated from operations. I guess when you’re staring deep into the abyss of South African consumer spending, conservatism around the balance sheet is advisable.
The highlight, unsurprisingly, is that performance in Avenida in Brazil is ahead of the original plan. Latin America is a vastly more appealing consumer opportunity than South Africa. I genuinely don’t know why more South African retailers aren’t looking for opportunities there.
Based on HEPS of 149.2 cents, Pepkor is trading on a P/E multiple of 12.4x. The dividend yield is only 2.6%.
Prosus – Naspers expect the eCommerce businesses to break-even in the second half of this year (JSE: PRX | JSE: NPN)
Of course, there’s no mention of return on capital yet
Prosus has released interim results for the six months to September. There’s more focus on talking about profitability than before, which can only be a good thing. Consolidated trading losses in the eCommerce business (all the frothy stuff they bought with Tencent dividends) came in at $36 million, which is a lot better than $220 million in the comparable period. The company has given a bold prediction that breakeven can be achieved in the second half of this financial year!
I must point out that on an economic interest basis, trading losses improved from $820 million to $249 million. There’s still a long way to go here for shareholders.
The reduced losses in that side of the business contributed to an increase of 85% in core headline earnings to $2 billion. On a per share basis, it helps that Prosus has repurchased 16% of its shares. Core HEPS is up 99% and HEPS as reported is up 27%, both in dollars.
At Naspers, core HEPS is up 546% and HEPS as reported is up 143%.
One of the headaches in the business at the moment is the Edtech business, where Stack Overflow certainly isn’t overflowing with profits. The other business there is called GoodHabitz. The jokes write themselves. The group has intervened in both businesses to improve profitability.
I always look for disclosure on Takealot as well. With Amazon about to enter the market, there’s yet another period of losses at Takealot. The loss is admittedly 85% lower as measured in dollars, which is great news, but it’s still a loss. Takealot group revenue grew 9% in ZAR, which isn’t exactly a high growth story. It shows you just how broken the broader general merchandise market really is.
FARFETCH is going as badly as I expected, with some relevance to Richemont (JSE: CFR)
We covered FARFETCH in Magic Markets Premium previously and concluded that the name was appropriate
I’m not even slightly surprised that things aren’t going well at FARFETCH. The business model of selling luxury goods online continues to make no sense to me at all. This is the group that Richemont hopes to shift YOOX NET-A-PORTER to, as Richemont has perhaps also realised that the online side is actually rather difficult.
After a disastrous US listing, there are rumours of FARFETCH being taken private. Richemont has confirmed to the market that it has no plans to lend or invest into FARFETCH. The company has no financial obligations towards FARFETCH either. The deal for YOOX NET-A-PORTER is also still subject to conditions and Richemont is reviewing them carefully.
I maintain my view that FARFETCH is a mess.
PGM operations in the US aren’t immune from job cuts either (JSE: SSW)
Sibanye-Stillwater is restructuring operations on that side of the pond as well
Due to the ongoing state of the PGM market, Sibanye-Stillwater is having to restructure operations to reduce costs. The US operations are also impacted by this, with the company announcing that 100 employees (mainly at the Stillwater Mine) will be affected. A further 187 contract workers will also be impacted.
This restructuring should not significantly impact production, but will of course reduce costs. Simply, PGM prices aren’t playing out the way Sibanye hoped they would.
Purple Group will report a full-year loss (JSE: PPE)
This isn’t surprising in this economic climate and the loss is smaller than I think many expected
Building in public is hard. Most startups are built in private, so that the extreme volatility is known only to a few. EasyEquities is very much a startup in the true sense of the world, only now expanding into its second market in the form of the Philippines. The product range is still being fully developed even in the South African market.
I’ll say it again: this is a startup. This means that expecting a smooth ride at Purple Group is like expecting to have fun at the dentist.
For the year ended August 2023, the headline loss per share is between -1.94 cents and -2.15 cents. The comparable period saw HEPS of 1.12 cents. In a market where interest rates and inflationary pressures have hammered South Africans and their ability to invest in the market, I’m not surprised by this downturn at all. In fact, I think this loss is quite modest vs. what might have been.
The two things to watch here are (1) performance as interest rates ease and (2) how successfully they achieve product-market fit in the Philippines.
If you can’t handle volatility, you shouldn’t be anywhere near this thing as an investor. And if you had listened to experienced voices during the pandemic instead of the army of overnight influencers on Twitter, you would’ve known that sooner. Perhaps lessons have been learnt by retail investors as they’ve journeyed from over R3.40 per share down to the current level of 62 cents.
Transaction Capital will keep SA Taxi in its entirety (JSE: TCP)
The net asset value range is R11.30 to R12.07, so the share price is still at a significant discount
I was one of the investors who was severely caught out by the capitulation in the Transaction Capital share price. Now at R6.98, it’s at least shown some signs of life recently. It still has a very long way to go and I don’t think it will ever return to the levels seen previously.
In a trading statement for the full year ended September 2023, the headline loss from continuing operations is between -R784 million and -R703 million. In the previous year, headline earnings came in at R1.6 billion. As swings go, that’s a violent one.
The group tries to make shareholders feel better by reporting a “core earnings” range of R220 million to R282 million, which is between 77% and 82% lower than last year.
The more important news is that there isn’t much difference between continuing operations and total operations, as Transaction Capital has decided to keep SA Taxi’s auto refurbishment and repair facilities. There’s a new strategy focusing on pre-owned taxis at lower volume, as affordability for new taxis is a serious problem in the current economy. This means that we are heading back to having older taxis on the road in general, yet another symptom of this country’s economic policies.
The ongoing support of debt funders is critical to the viability of SA Taxi. Importantly, Transaction Capital hasn’t put in any additional equity funding since March 2023.
Looking at the other businesses, WeBuyCars actually did better than expected in the latest quarter, with previous guidance being that full year earnings would be down by around 20%. No updated guidance is given. Debt collection business Nutun is performing in line with previous guidance.
Results will be released on 5th December.
Vukile gives hope for the property sector (JSE: VKE)
Key metrics are looking much stronger
Vukile Property Fund is proof that not all property funds are created equal. Where some are struggling at the moment, others are doing really nicely.
In the six months to September, Vukile’s South African portfolio has grown like-for-like annualised net operating income by 5.1%. Vacancies are at 2.0% and reversions turned positive (+2.4% vs. -2.4%, a big swing). Even valuations are 3.9% higher on a like-for-like basis.
The Spanish portfolio showed normalised net operating income growth of 13% and vacancies of just 1%. Reversions are positive.
There is no debt maturing in FY24, so there’s no immediate refinancing risk. The loan-to-value of 42.9% is perhaps slightly high, but more than manageable. Thanks to the strong underlying performance, the interim dividend is 10% higher and guidance for the full year has been upgraded to reflect expected growth in the dividend per share of 8% to 10%.
The net asset value per share is R21.16 and the share price is R13.48. This is certainly one of the better local REITs.
Little Bites:
Director dealings:
There’s some strong buying in Sibanye-Stillwater (JSE: SSW) shares by very high ranking executives including Neal Froneman. The total purchases are worth around R18.5 million, so that’s material.
An associate of a director of Afrimat (JSE: AFT) has sold shares worth R12 million.
A director of STADIO (JSE: SDO) sold shares worth R1.1 million.
A non-executive director of Richemont (JSE: CFR) has bought A share warrants with a value of R86k.
Des de Beer has awoken from his slumber and is off to a modest start, buying just R12.7k worth of shares in Lighthouse Properties (JSE: LTE).
Delta Property (JSE: DLT) is fighting inch by inch, with the latest news being the sale of the Smartxchange property in KZN for R46 million. A previous attempt to sell the property failed after the buyer couldn’t meet the required conditions. The proceeds will be used to reduce debt and the loan-to-value is expected to fall by 20 basis points to 59.8%. Vacancy levels will reduce by 60 basis points to 33.9%. The valuation of the property as at 28 February 2023 was R50 million, so the sale is below that value.
Mantengu Mining (JSE: MTU) only commenced its Langpan operations midway through this interim period. Chrome production continues to ramp up monthly and the new processing plant is scheduled to be commissioned in the first quarter of calendar year 2024. Shareholders will be looking for the income statement to turn green, as the loss for the six months to August is R16 million.
Copper 360 (JSE: CPR) announced the acquisition of all the shares and claims in Nama Copper for R200 million. This will take expected 2025 output to more than double the original estimates. The CEO of Copper 360 calls it a “game changer” for the company and it certainly seems that way. The deal includes an offtake agreement with the sellers of Nama Copper. The operations of Nama Copper are adjacent to Copper 360’s existing operations and are similar in many ways, although they are currently in care and maintenance state. Unlike most junior mining deals that require an issue of fresh equity, Copper 360 is looking to finance this from a combination of debt and royalty agreements.
Life Healthcare (JSE: LHC) released updated pro-forma accounts related to the potential disposal of Alliance Medical Group. These should be read in conjunction with the transaction circular. Assuming the deal was effective on 30 September 2023, then the group HEPS per share would be 3.9% higher and the NAV per share would be 0.1% lower.
If you would like to learn more about the AngloGold Ashanti (JSE: ANG) business and strategy, then you should refer to the latest investor update presentation by the company. It’s difficult to pick out highlights from it, as this really does cover all the strategic initiatives in detail. I suggest you read the full presentation at this link.
The chairman of Trellidor (JSE: TRL) has decided to move on after 16 years in the role. The ex-CEO of Holdsport (you might remember that company as it was listed several years ago), Kevin Hodgson, looks set to join the board.
Go Life International (JSE: GLI) released results for the six months to August 2023. Revenue is once again zero, with an operating loss of $62k. The company is changing its name to Numeral Limited, perhaps because some numerals will eventually be found on the revenue line?
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