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Ghost Bites (Afrimat | Attacq | Barloworld | Burstone | Capitec | Emira | EOH | HCI | Heriot | Netcare | RCL Foods | Schroder | Spar | Trellidor)

The Finance Ghost
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Ghost Bites (Afrimat | Attacq | Barloworld | Burstone | Capitec | Emira | EOH | HCI | Heriot | Netcare | RCL Foods | Schroder | Spar | Trellidor)

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

Afrimat released a voluntary trading update (JSE: AFT)

And the fact that it is “voluntary” tells you that this is a modest change in earnings

At a time when most mining and resources companies are reporting a major decline in earnings, Afrimat has reported a positive move in HEPS for the six months ended August. Although it is only a move of between 2% and 7%, it’s still a really great outcome compared to so many others in the sector.

The group’s strength lies in its diversity of commodity exposures, with the benefit clearly visible in this period.

Results are due around 26 October 2023.

Attacq shows the power of a focused strategy (JSE: ATT)

Distributable income per share has grown sharply and more growth is expected

With so many property updates recently coming into the market, the trend for me is clear. Broad exposure in this economy is very problematic. Focused exposure is still working.

Attacq’s Waterfall City area is doing the things, with the group reporting distributable income per share up by 14.5% for the year ended June 2023. Waterfall City is 57% of distributable income and grew by 27.6%. As you might be aware, the Government Employees Pension Fund has invested R2.7 billion directly into that portfolio. It’s like an oasis in the desert of Gauteng.

There’s other stuff in the portfolio as well, not least of all a 6.5% interest in MAS offshore. With MAS cutting its dividend, that’s not an ideal situation. The other headache is the business in the Rest of Africa, with the disposal of the interest in Ikeja City Mall hanging in the balance as the buyer is struggling to raise the funds.

I do wonder about the commentary about how “business diversification” will be a focus area going forward, with opportunities “complementary to the real estate portfolio” – whatever that may mean.

The dividend actually increased by 16%, ahead of distributable income as the dividend includes trading profit generated from the sale of sectional title units.

The loan to value ratio has increased by 10 basis points to 37.3%.

Notably, over 25% of the total energy mix is from renewable sources.

The really impressive part is that distributable income per share is anticipated to increase by between 8% and 10% in FY24. This assumes no dividend from MAS.

The share price closed 3% higher, putting it on a yield of just 6.8%.

Positive momentum continues at Barloworld (JSE: BAW)

This is another perfect example of why I prefer industrials in this environment

Barloworld has released a voluntary update for the 11 months to August 2023. Revenue from continuing operations is up by 15%, EBITDA is up by 13% and operating profit from core trading activities is up by 18%. Happiness all round, with the joy continuing on the net debt line which has dropped from R7.5 billion to R6.3 billion.

Equipment southern Africa grew revenue by 34% and operating profit by 17.3%. Operating margin fell 60 basis points due to the mix effect in favour of machine sales. Working capital increased to support demand but is expected to improve by year-end. The Bartrac joint venture grew profits by 56%. The blemish on these numbers is a drop in the firm order book from R5.7 billion to R3.7 billion.

Equipment Russia is obviously finding life really difficult, with revenue down 46%. Thanks to the revenue mix shifting in favour of aftermarket services which are much higher margin than new machinery, operating profit only fell by 8.7%. They’ve obviously also made progress in reducing costs. Operating margin grew from 11.3% to 19.2%. The Russian business is self-sufficient in terms of funding.

Equipment Mongolia grew revenue by 48.1% and improved margins as well, though the announcement doesn’t indicate to what extent.

Ingrain’s business is ultimately consumer-facing, so this is predictably where the pressure is. Revenue is up 12.1%, with export volumes and higher prices offsetting flat domestic sales. EBITDA is down 19.2% unfortunately, with an operating margin of 8.2% vs. the prior period of 12.4%.

As I’ve become used to with Barloworld, the balance sheet has been well managed.

Burstone needs a strong second half (JSE: BTN)

Negative reversions in SA and higher interest costs everywhere are hurting

In case you weren’t paying attention to the market, Investec Property Fund changed its name to Burstone Group after buying out the Investec property management company at an eyewatering valuation.

For the six months ending September, Burstone expects distributable income per share to be 4% to 5% lower. For the full year, they hope to achieve low single digit growth. That would be a pretty big turnaround, with much of it attributable to the timing of interest rate increases in the base year.

In South Africa, the year-on-year change in weighted average cost of funding is 40 basis points. In Europe, it’s 100 basis points (a huge move on a base of 2.1%).

The loan-to-value ratio is around 42%. Assets of R950 million were sold at a 1.5% discount to book value. The management company was acquired for R850 million (I told you it was eyewatering) and other investments in assets were R250 million.

Looking deeper, the South African portfolio is delivering like-for-like net property income growth of 2%, with negative reversions of 7%. The Pan European Logistics Platform is growing at 7% to 8% on the net property income level, with positive reversions, but earnings are expected to drop by 10% in rands (15% in euros) because of the impact of funding costs. Burstone’s share in the platform has increased from 64.15% to 83.15%, so there’s an increase of 18% in distributable earnings attributable to Investec despite the underlying platform suffering a drop.

No detailed commentary has been given about the Irongate fund management platform in Australia, other than the assets performing “well in a tough market” – read into that what you will.

Detailed results are due on 16 November.

Net of impairments, Capitec is less efficient (JSE: CPI)

I am questioning the way the market calculates the efficiency ratio

Capitec has released results for the six months to August and that’s always a big deal. Remember, this bank is priced for serious growth, so you would expect to see very strong numbers.

Net interest income is up by 17% and non-interest income grew by 25%. So far, so good. The fastest growing income line is actually funeral plan income, up 59%.

Credit impairments shot up by 62%, which isn’t unexpected in this environment. This means that net income only increased by 10%.

Operating expenses were up 14%, so operating profit before tax was just 6% higher. This means that operating margin has deteriorated. But if you read the commentary, you’ll see that the cost-to-income ratio has improved from 41% to 38%. Now, that’s only true if you ignore the impairments. On that basis though, the group would be incentivised to show efficiency gains by simply extending poor-quality loans and growing pre-impairment income.

Headline earnings per share grew by 9% and the interim dividend increased by the same amount.

The net asset value per share is R339.95 and the share price is R1,751. Does that premium to book sound right to you on growth of 9%, well below other banks in the peer group?

The market is desperate for any good news though, so the share price increased by 6.4%. I can only assume that people liked the dividend growth.

Emira’s occupancy and reversions have improved (JSE: EMI)

The company has released a pre-close update

In an update dealing with the five months to August, Emira announced that the local portfolio of retail, industrial and office properties has a total vacancy rate of 4.3%, which is better than 4.7% at March 2023. The focus has been on retaining tenants, with negative reversions of 5.5%. Again, that’s better than the 2023 number of -8.4%. The weighted average lease expiry is 2.6 years and the average annual lease escalation was 6.5%.

Looking deeper, retail vacancies increased from 3.1% to 3.3%. Reversions improved from -5.5% to -2.4%. Both trading density and footcount improved within the portfolio.

In the office portfolio, vacancies were up from 12.5% to 12.7%. Reversions improved from -14.8% (!) to -7.5%, a reminder of how bad things were and how tough they still are. With mainly P- and A-grade properties, it also gives a clue into how rough things must be for low quality office space.

Industrial vacancies went in the right direction, down from 2.1% to 90.6%. Reversions were still negative though, coming in at -6.4% vs. -6.5% in 2023.

The residential portfolio is a mix of directly held and indirectly held properties, as Emira has a 68.15% economic interest in Transcend. Across the residential portfolio, vacancies were 3.1% vs. 2.6% at March 2023. Residential units are being sold off, but disposals by Transcend are at a slower pace than budgeted because of the impact of higher interest rates. Emira has made an offer to Transcend shareholders to take the company private at R6.30 per share, so hopefully interest rates don’t cause too much pain to that value unlock strategy.

Notably, Emira’s disposal of Enyuka closed in July 2023 for aggregate proceeds of R641.5 million. A vendor loan of R130 million was provided to the purchaser, so proceeds of R511.5 million were realised.

The US portfolio is performing in line with expectations, although vacancies increased from 2.6% to 3.9%.

Emira’s loan-to-value ratio has improved from 44% at the end of March 2023 to 42% in August 2023. Once the Transcend offer closes, this is expected to increase to between 43% and 44%.

Results for the six months to September are due on 16 November.

This is hopefully the final loss-making year for EOH (JSE: EOH)

The first half of the year was impacted by debt levels

EOH would like you to concentrate on operating profit, as this is the performance before we consider the balance sheet. On that metric, there’s an increase of between 20% and 50% for the year ended July 2023, a very wide range to be giving the market two months after the end of the period.

The headline loss per share improved by between 53% and 62%. It’s still a loss though of between 17 cents and 21 cents, with the benefit of the equity capital raise only felt in the second half of the year.

For me, the biggest concern is that revenue from continuing operations only grew by between 2% and 4%. Although there was a big jump in operating profit, there were lots of other movements and once-offs. Investors cannot do well over the long term unless EOH starts producing better revenue growth, as this performance is below inflation.

To justify attention from investors in a high yield environment, EOH needs to show real growth in revenue growth i.e. ahead of inflation.

Results will be published on 18 October.

HCI gives an update on Namibian oil (JSE: HCI)

This is a classic junior resources situation, where updates are full of technical terms

In case you haven’t been following the HCI story, the company is a 49% shareholder in Impact Oil and Gas. This is a UK-based company that is a 20% participant in a block in offshore Namibia and a 18.89% participant in another block.

If you want to read the full announcement regarding drilling results, you’ll find it at this link.

In summary, the CEO is “very pleased” with the results. I usually skip to the management commentary in these announcements, as I didn’t study geology or mining engineering.

Heriot REIT’s floating rate debt is biting (JSE: HET)

The good news is that distributable earnings per share still went up

This was an important period for Heriot REIT, with the consolidation of Safari Investments (JSE: SAR) and thus the inclusion of investment property valued at R3.7 billion. This also contributed to the 22% uplift in net asset value per share, as the company was able to recognise an unrealised bargain gain.

To Heriot’s credit, the metric they focus on is distributable earnings per share. They’ve grown this by 4.2%, which is considerably lower than the growth in net operating income of 13.8%. This is because of the 350 basis points increase in the repo rate during this reporting period, with Heriot having only floating rate facilities. The timing of balance sheet movements means that Heriot’s average cost of borrowings increased by 239 basis points to 8.68%, leading to a lower distributable earnings per share than would otherwise have been the case.

The office segment is still struggling, with the company noting negative reversions and muted demand. The rest of the portfolio is doing better.

Very encouragingly and in stark contrast to the highly negative guidance given by other major property funds, Heriot is expecting the distribution per share for the year ending 30 June 2024 to increase by between 3% and 7%. This assumes a further increase in rates of 50 basis points in the next year.

The share price closed 10.20% higher at an implied yield of 7.9%.

Netcare is on track to meet FY23 guidance (JSE: NTC)

And encouragingly, margins are going in the right direction – with adjustments

Paid patient days at Netcare are expected to increase by 6.8% for the year ending September. Revenue is expected to be 9% to 10% higher, which is enough for positive operating leverage. I must point out that Netcare reports operating margin on a truly ridiculous basis, as they exclude diesel costs. We would all love to pretend that load shedding doesn’t exist, wouldn’t we?

On this “normalised” basis which I disagree with wholeheartedly, margin is up by between 125 and 175 basis points vs. FY22 at 17.2%.

If you need an indication of what adulting is like at the moment, maternity days are down (apparently in line with global trends) and the mental health segment is the fastest growing in terms of paid patient days (even after adjusting for the Akeso Gqeberha facility). What a world we live in.

Netcare is hoping to achieve 100% of its energy needs from renewable sources by 2030. Including a new power agreement, there are initiatives and plans in place to achieve 26%.

RCL Foods hasn’t escaped avian influenza (JSE: RCL)

Around 410,000 birds have already been culled

We’ve already heard from Astral Foods (JSE: ARL) and Quantum Foods (JSE: QFH) about the extent of the bird flu outbreak currently in South Africa. This is a very serious issue, affecting supply of chicken and eggs and likely to lead to price inflation in a type of protein that is a staple for South Africans.

At RCL Foods, the outbreak has affected 11 of the 19 sites in the inland region. Around 410,000 birds have been culled, with an estimated financial impact of R115 million.

Schroder’s NAV per share goes backwards (JSE: SCD)

The macroeconomic trends in Europe aren’t pretty for property

Schroder REIT announced a reduction in NAV per share of 1.8% this quarter. The trend this year has been negative, with property valuations under pressure as yields in Europe have increased. This is despite Schroder enjoying 100% indexation of rentals to inflation, giving us a timely reminder that property as an inflation hedge is a very dubious thesis.

The portfolio loan-to-value ratio is 31% based on gross asset value and 23% net of cash. This is roughly in line with March levels.

The market gave Spar’s update the thumbs up (JSE: SPP)

The group is clawing its way back from the abyss

I’ll start with the trading update for the 47 weeks to 25 August, in which group turnover grew by 10.6%.

Southern Africa was good for 5.9%, with grocery up 8.1% (below inflation of 10.1%) and TOPS down by 0.6% vs. a very high base. The combined Southern Africa result for grocery and liquor is 7.0%. They reckon it would’ve been 9% without the disastrous SAP implementation. What’s that saying about if my aunt had a certain something, she would be my uncle?

Turnover at Build it fell by 3.6%, because South Africans aren’t building it unless “it” is a solar installation. The pharmaceutical business grew 19.9% at least.

BWG Group in Ireland and South West England grew turnover by 8.5% in local currency. In Switzerland, turnover fell 3.4% in a challenging environment. In Poland, turnover increased by 5% in local currency. The rand is a great big stinking you-know-what, so all those numbers look much stronger when converted to rand.

I think that what the market focused on is the paragraph dealing with Poland, with Spar noting that it will engage in a process to dispose of that interest. It’s been an absolute disaster and Spar is stretched too thin, with the market appreciating the maturity of a decision to rather focus. This is especially important when you consider that the group is in breach of a leverage covenant that lenders have waived for now.

With a new management team in place, this is firmly a turnaround story that the market will watch closely. Where do you reckon this one is headed?

Investors are trying to flee Trellidor (JSE: TRL)

If there was decent liquidity, I think the share price would be a lot lower

Trellidor has released results for the year ended June. Revenue fell by 2.1% and believe me, that’s the most enjoyable number you’ll read about.

If we adjust for the costs of the extremely punitive Labour Appeal Court judgement, earnings per share was 3.7 cents this year vs. an adjusted base of 25 cents. Reported earnings per share last year was 0.4 cents because of that judgement, so the market was certainly expecting an uplift. The problem is that a return to previous levels of operating profitability now seems like a pipe dream, as the operations are really struggling and there was a massive 81.3% increase in net interest.

Unsurprisingly, there is no dividend.

If I’m going to highlight one silver lining, it may as well be that cash from operations of R39 million was in line with the prior year. Inventory levels were reduced in the second half of the year.

The share price has tanked 29% in the past five days.

Little Bites:

  • Director dealings:
    • The CFO of Sirius Real Estate (JSE: SRE) has bought shares worth £85.7k.
  • AEEI (JSE: AEE) has finally announced a resolution to the situation in BTSA. A subsidiary of AEEI holds 30% in BTSA and will dispose of that stake (structured as a share buyback) for R290 million. This has been the subject of a long dispute and arbitration, with the relationship between the parties having broken down.
  • The CFO of Stadio Holdings (JSE: SDO) will step down at the end of December to take a “career break” – the search is underway for a replacement.
  • Holders of Steinhoff preference shares (JSE: SHFF) should note that the company has released a cautionary announcement around a transaction related to these shares.
  • Mining exploration company Southern Palladium (JSE: SDL) has released its financial report for the year ended June. The income statement isn’t the focus area during the exploration phase, but it’s still worth noting a headline loss per share of A$0.08. This is better than the headline loss per share of A$0.18 in the comparable period. The group is focused on its 70% interest in the Bengwenyama Platinum Group Metal project and exploration to support a prefeasibility study and the lodgement of a mining right application.
  • Buka Investments (JSE: BKI) has announced that the headline loss per share for the six months ended August will be between 10.5 cents and 12.5 cents, which is much larger than the loss in the corresponding period of 6.72 cents.

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

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

Exchange-Listed Companies

RMB (FirstRand) via its Family Office Group Solutions business, has acquired a 20% stake in Genfin Holdings for an undisclosed sum. Genfin’s subsidiaries include Genfin Business Finance, which delivers alternative lending solutions for SMEs and Kanga Finance, a developmental credit provider. The equity investment and bespoke debt funding solution will be used to provide further growth capital to its subsidiaries.

African Infrastructure Investment Managers (Old Mutual) is to double its equity commitment to NOA Group having first invested $90 million (R1,6 billion) into the vertically integrated energy platform in November 2022. NOA aims to develop, finance and operate a portfolio exceeding 2.5 GW of renewable energy assets over time.

Invenfin, the venture capital arm of Remgro, has made a further investment of US$1,5 million in Root. Founded in SA in 2016, Root offers a low-code platform that empowers modern digital insurance products designed for direct, affinity, and embedded distribution at scale. The end-to-end insurance platform helps companies sell digital insurance products in Africa, the UK and in Europe. Funds will be used to accelerate its expansion plans in Europe and the UK.

Singapore-based Grindrod Shipping, 83% owned by Taylor Maritime Investments Ltd, a subsidiary Grindrod Shipping Pte Ltd, has entered into two agreements to acquire Taylor Maritime Management from Taylor Maritime Group and to buy Tamar Ship Management from Taylor Maritime Group and Temeraire Holding. Under the terms of the transaction, Grindrod Shipping Pte Ltd and Island View Ship Management Pte Ltd have agreed to acquire the companies for c.US$11,75 million with a maximum value not exceeding $13,5 million. The transaction will be financed via a combination of cash and the allotment of new Grindrod Shipping shares. The acquisition is subject to certain conditions and is expected to close before mid-October.

An agreement to settle the dispute between African Equity Empowerment Investments (AEEI) and BT Communications Services South Africa (BTSA) has finally been reached and AEEI will dispose of its 30% stake in BTSA for R290 million. The stake was sold in 2008 by BT Group plc (BT) for R27 million to AEEI as its BEE shareholder with BT holding an option to repurchase the stake upon the occurrence of certain events. In 2021 a dispute arose over the call option which has been the subject matter of an arbitration ever since. AEEI has “taken the decision to preserve shareholder value by unlocking cash reserves for growth and to limit further advisory and legal costs”.

Equites Property Fund subsidiary, Equites International, has disposed of a property currently let to Tesco Distribution, located on Dodwells Road in Hinckley, UK to Relif UK IB.V. The purchaser, part of the Realterm Europe Logistics Income Fund, will acquire the property for a purchase consideration of £29,75 million. The transaction is a category 2 transaction and so does not require approval by shareholders.

Currently in business rescue, Rebosis Property Fund is to dispose of a further four office properties to Katleho Property Investments for an aggregate consideration of R160 million. The properties were valued at R291 million in April 2023. The beneficial shareholder of Katleho is Heriot Investments.

Unlisted Companies

Red Rocket, an independent power producer established in 2012, has received a capital injection of US$160 million from management shareholders vehicle, Bill Kilgore Investments and an international consortium of clean energy investors comprising Inspired Evolution, STOA and FMO, the Dutch entrepreneurial development bank.

The Cape-based payment orchestration platform Revio has raised US$5,2 million in a seed investment round. Fintech fund QED Investors led the round with participation from Partech and existing investors Speedinvest, RaliCap and Everywhere VC. The startup helps merchants optimise their order to cash lifecycle. Funds will be used to scale Revio’s coverage across the continent and expand its capabilities to add value for customers.

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

Weekly corporate finance activity by SA exchange-listed companies

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

Nampak has successfully raised R1 billion by way of a partially underwritten renounceable rights offer. The offer was oversubscribed with gross demand equating to more than 138% of the available rights offer shares. A total of 5,714,286 shares will be issued at R175 per share.

As part of its capital optimisation strategy, Investec Ltd acquired a further 101,332 Investec Plc shares on the open market at an average price of R105.48 per share.

Ascendis Health has advised shareholders that it has initiated a process to investigate and progress a potential delisting of the company from the JSE. Discussions have been entered into with CAN Capital IHC, an entity owned and controlled by Carl Neethling – the current CEO of Ascendis. Shareholders have been warned that while no offer has been made, if any offer is made, it is not expected to be at a significant premium to the current traded price of 69 cents per Ascendis share.

Optasia, a global fintech company in the Ethos Capital Partners stable, may consider a secondary listing on the JSE in the next 18 months as Ethos seeks to exit its investment. In November last year Brait, in which Ethos has an c.12% stake, hinted at the possible listing of Virgin Active in the medium to long term.

Luxe, the jewellery company which owns Arthur Kaplan and NWJ, was suspended by the JSE in August 2022 for failure to release its financial results. The company faced a further blow this week following a high court judgement placing it in liquidation. Earlier this year Luxe, without notifying the market, had its subsidiaries placed in liquidation. The application to have Luxe placed in liquidation was brought about by Richline SA, a jewellery manufacturer.

Several listed companies reported repurchasing shares. They were:

Gemfields has repurchased an additional 5,200,000 ordinary shares at an aggregate price of R3.21 per share. The repurchased shares will be held as treasury shares. The total number of shares in issue including treasury shares is 1,221,918,104.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 18 – 22 September 2023, a further 3,873,865 Prosus shares were repurchased for an aggregate €110,83 million and a further 340,108 Naspers shares for a total consideration of R1,1 billion.

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 for a total consideration of £43,73 million.

South32 continued with its programme of repurchasing shares in the open market. This week a further 735,515 shares were acquired at an aggregate cost of A$2,44 million.

As part of Investec Ltd’s share repurchase programme, the company reported this week that it had repurchased 152,647 shares at an average price per share of R104.63. Since November 21 2022, the company has repurchased 13,78 million shares at a cost of R1,48 billion.

Profit warnings and cautionary notices issued this week

Seven companies issued profit warnings this week: Quantum Foods, York Timber, Sable Exploration and Mining, Wesizwe Platinum, Safari Investments RSA, Buka Investments and EOH.

Seven companies issued or withdrew a cautionary notice: Life Healthcare, Finbond, Ascendis Health, Conduit Capital, Ayo Technology Solutions, African Equity Empowerment Investments and Steinhoff Investments.

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?

DealMakers AFRICA

AgDevCo, a specialist investor in African agriculture, has invested in East African Magical Farms. The value of the investment was not disclosed but the funding will be used to expand into two additional farms in the Naivasha area in Kenya.

Nigerian fintech startup Risevest has acquired digital trading startup Chaka. Financial terms of the deal were not disclosed. The companies confirmed that both Risevest and Chaka will continue to trade as separate products.

All On announced a US$200,00 investment in Enerplaz PayGo Solutions. Launched in 2021, the clean energy company provides Energy-as-a-Service solutions to MSMEs and residences in the Niger Delta Region.

TotalEnergies EP Angola Block 20 has completed the sale of a 40% stake in Block 20 to Petronas Angola E&P for US$400 million. TotalEnergies will retain a 40% stake alongside Sonangol Pesquisa e Produção S.A. with a 20% stake.

The Emerging Africa Infrastructure Fund has committed €46 million to the upgrade and extension of the Autoroute de L’Avenir. The A1 motorway links Senegal’s capital Dakar, to the Blaise Diagne International Airport and was the first toll motorway in West Africa built under a public-private partnership scheme. The Government of Senegal and Eiffage SA (majority shareholder) own the toll road.

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

Future proofing the social and ethics committee

Johann Piek
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Future proofing the social and ethics committee

The Companies Act, No. 71 of 20081 (the Act) introduced the social and ethics committee (SEC) concept to South African corporate law, and with effect from 1 May 2012, mandated certain categories of companies to constitute and maintain a SEC.

Initially, some companies constituted SECs merely as a tick-box exercise to comply with the Act, with SEC detractors viewing the committee as a training ground for new non-executive directors (NEDs) and a ‘waiting room’ for NEDs wanting to ‘scale down’ responsibilities. However, the growing importance of stakeholder inclusivity and the widespread acceptance of ESG and sustainability (ESG+S) have placed the SEC and its evolving role in the spotlight.

In recent years, many key South African role players have taken note of the SEC’s increasing importance, including the Department of Trade, Industry and Competition (DTIC). On 1 October 2021, the DTIC published the latest draft of the Companies Amendment Bill for public comment (the Bill).2 The Bill proposed, inter alia, several SEC-related amendments to the Act, which included the following, relating to public companies –

• A SEC report in a prescribed form3 must be presented at public company annual general meetings (AGMs), and must be approved by way of an ordinary shareholders resolution.

• Where the SEC report is not approved, engagement with shareholders who voted against the SEC report will be required and, within a period of four months, a statement on the outcome of such engagement must be published on the company’s website and SENS (if listed). Such statement will also form part of the SEC report to be presented at the company’s next AGM.

• Public company SEC members must be appointed, or reappointed, as the case may be, at each AGM of the company.

• Public company SECs are to include no less than three directors, with the majority of such directors to be independent and not to have been involved in the day-to-day management of the company during the previous three financial years.

• SEC vacancies are to be filled within 40 days.

While there appears to have been little progress in the legislative process, with public comments on the draft Bill still being considered by the DTIC, this is nevertheless a good time to consider further refinements to the SEC construct, including the points highlighted below.

  1. SEC functions

Regulation 43(5) of the Companies Regulations (Reg 43(5)) sets out the statutory functions of the SEC, whilst the King IV Report on Corporate Governance for South Africa, 2016 ‘broadens’ the SEC’s role to include “oversight and reporting of organisational ethics, responsible corporate citizenship, sustainable development and stakeholder relationships”. The matters set out in Reg 43(5)(a) were broad to start off with and have, over time, ‘unofficially’ expanded in scope. Considering that Reg 43(5) has been in effect since 2012, it is proposed that the prescribed matters be formally updated to account for recent developments, such as the increasing imperative of addressing the climate crisis, whilst simultaneously empowering the SEC to provide strategic leadership on these items, instead of limiting itself to mere compliance oversight.

  1. ESG and sustainability

ESG+S has increasingly become a key business imperative for companies to consider and incorporate in their strategies, operations and reporting. In South Africa, much of a company’s responsibility for governing ESG+S practices and related matters falls on the SEC. Despite initially being categorised as non-financial factors, ESG+S has proven to possess rising financial implications for companies (many investors take ESG+S performance into consideration when deciding whether to invest in a company). Given the ever-expanding scope of ESG+S factors for SECs to consider and the increasing amount of time required to be spent thereon, as well as the growing financial implications associated with ESG+S compliance (and non-compliance), it is suggested that greater structure and certainty be given to the SEC’s ESG+S function, either in Reg 43(5) or in the next iteration of the King Code.

  1. Cross committee membership

Cross committee membership encourages pollination of thinking between members of the different board committees and gives such members a deeper understanding of the risks and opportunities faced by the company, as well as the strategies to address these. It might be worth-while to consider the merits of mandated cross committee membership (i.e. for at least one audit committee (AuditCom) or risk committee member to also serve on the SEC).

  1. Qualifications, skills and experience

The Bill proposes that the Minister may prescribe the minimum qualification requirements for SEC members. Considering the wide ambit of the SEC’s mandate, it may make sense to prescribe the qualification requirements for a minimum portion of the SEC, with it being sufficient for other members to have SEC-relevant experience. This approach will help to ensure that the SEC comprises a mix of relevant qualifications, skills and experience.

Despite not having been promulgated yet, the Bill’s proposed amendments to the Act should be welcomed. However, to truly ensure the SEC’s future relevance, key aspects, such as its functions and members’ competence requirements, would need to be updated.

1.Section 72 of the Act, read with Regulation 43 of the Companies Regulations, 2011 (‘Companies Regulations’) provides for the establishment of SECs.
2.The 2021 draft contained some departures from the prior version, published on 21 September 2018.
3.The SEC report must detail (i) how the SEC performed its functions; (ii) how the SEC fulfilled its mandate; and (iii) that there were no instances of material non-compliance to report.

Johann Piek is a Director | PSG Capital

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

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

Resetting share incentive schemes – navigating the tax consequences

Brian Dennehy
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Resetting share incentive schemes – navigating the tax consequences

Share incentive schemes have, for some time, become a key mechanism to attract, retain and reward top talent. This holds true not only for listed companies, but also for unlisted companies – including those in the private equity sector.

Fund managers often want to incentivise key management in their portfolio companies with an equity slice in the business, thereby creating an alignment of interests to grow profits and, ultimately, returns.

The fortunes of participants in share incentive schemes have, unfortunately, been somewhat mixed over the years, given the volatility in macro-economic conditions, as well as the impact of ‘big bang’ events, such as the 2008 global financial crisis and the more recent COVID-19 pandemic. Many incentive schemes have ended up under water, leaving fund managers to consider what, if anything, can be done to reset these schemes to deliver the incentives that they sought to achieve.

Given the complexity of the relevant legislation, the tax consequences of amending and resetting incentive schemes need to be carefully considered. As a starting point, it is important to understand whether the scheme is ‘restricted’ or ‘unrestricted’. Broadly speaking, a ‘restricted’ equity scheme is one in which the participants are restricted from selling their equity shares (either for a period of time or as an outright prohibition), and/or where the participants may, for any reason, be forced to sell their equity shares at less than market value (for example, if they are dismissed).

In contrast, an ‘unrestricted’ scheme is one in which the participants are able to freely sell their equity shares, and where the participants cannot be forced, under any circumstances, to sell their equity shares at less than market value. Pre-emptive rights (also referred to as rights of first refusal) in favour of other participants or other shareholders that are exercisable at market value, as well as forced sales at market value, do not taint the shares as restricted for tax purposes.

From the participants’ perspective, the distinction between a restricted and unrestricted share scheme is fundamental, as each one is taxed differently. In an unrestricted scheme, the scheme shares are treated as having ‘vested’ in the participants’ hands upfront (at least for tax purposes), with any difference between the market value of such shares and the consideration paid therefor being subject to income tax. All future growth in these scheme shares would then typically be subject to capital gains tax (CGT), not income tax. Conversely, restricted scheme shares are only treated as ‘vesting’ for tax purposes on the earlier of disposal or when all the restrictions attaching to the share are lifted, with the difference between the proceeds/market value (as the case may be) of the shares and the initial consideration paid therefor being subject to income tax at such time only.

Resetting restricted and unrestricted share schemes that are currently underwater may also result in varied tax implications. For example, swapping one restricted share for another restricted share of a different class (with enhanced or reset participant rights) would not necessarily result in any immediate tax consequences for the participants. Instead, the newly acquired restricted shares would simply be subject to income tax upon disposal or vesting, as the case may be. Swapping an unrestricted share for another unrestricted share of a different class would, on the other hand, typically result in the value of the newly issued share being subject to income tax in the participants’ hands upfront. This is clearly not ideal from a cash flow perspective, but at least all future growth in these newly acquired shares would be subject to CGT, not full income tax.

Ad hoc special dividends may, in some cases, be used as a mechanism to reset scheme values, as these dividends would simply be subject to dividends tax at 20%, not full income tax. Obviously, however, this would move the cash flow burden to the company itself, which may be undesirable.

Like many areas of tax, the rules governing share schemes are complicated, and very widely drafted. Resetting these schemes, although done with the best of intentions, can result in very costly and unintended consequences if not carefully navigated.

Brian Dennehy is Director of Tax | Webber Wentzel

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

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

Ghost Stories #21: 2023 ETF Scorecard with Siyabulela Nomoyi (Portfolio Manager at Satrix)

The Finance Ghost
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Ghost Stories #21: 2023 ETF Scorecard with Siyabulela Nomoyi (Portfolio Manager at Satrix)

The universe of Exchange Traded Funds (ETFs) is broad, offering investors many different ways to invest in the market.

Not only are there various different sector and weighting methodologies available, but Satrix ETFs offer South African investors a way to make perhaps the biggest decision of all: offshore vs. local exposure.

As we reflect on ETF performance in 2023, Siyabulela Nomoyi of Satrix joined The Finance Ghost to look at topics like:

  • Offshore vs. local performance and the impact of the start date for that analysis, including the currency effect;
  • The importance of understanding the underlying stocks in an ETF and their relative valuations; and
  • Relative performance of local ETFs.

The Ghost couldn’t help but slip in his ongoing request for a retail sector ETF, an index that the JSE really needs to add to the local market.

To understand more about ETFs and how they can be used in your portfolio, enjoy this podcast brought to you by Satrix.

To find out more about SatrixNOW, visit this link>>>

Disclosure
Satrix Investments (Pty) Ltd is an approved FSP in term of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision.
While every effort has been made to ensure the reasonableness and accuracy of the information contained in this podcast (“the information”), the FSP’s, its shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaims all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information.

Ghost Bites (Ascendis | Ethos Capital | Grand Parade | Old Mutual | Rebosis | York Timber | Wesizwe Platinum)

The Finance Ghost
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Ghost Bites (Ascendis | Ethos Capital | Grand Parade | Old Mutual | Rebosis | York Timber | Wesizwe Platinum)

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

Is the Ascendis story coming to an end? (JSE: ASC)

A consortium led by Carl Neethling might be taking the company private

Hot on the heels of its trading statement, Ascendis announced that a consortium led by Carl Neethling is in discussions with the company regarding a potential take-private. The crummy news for minority shareholders is that if there is an offer, it is “not expected to be at a significant premium” to the current traded price of 69 cents a share.

No formal offer has been made at this stage. It’s very unusual to see an offer at a low premium, so it will be interesting to see how this plays out.

Net asset value per share inches higher at Ethos Capital (JSE: EPE)

Pressure on the Brait share price has let the team down

For the year ended June 2023, the net asset value per share of Ethos Capital increased by a paltry 0.8%. This is based on the Brait share price rather than Brait’s underlying net asset value. MTN Zakhele Futhi hasn’t helped either, with major drops in the listed portfolio that offset the 14% return in the unlisted portfolio.

I must point out here that the unlisted portfolio is the opinion of management, whereas the listed portfolio is the opinion of a market. You can figure out for yourself which one carries more weight. It does help that there was an equity deal in Optasia that helps confirm the value of the largest of the unlisted investments, driving a small uplift in the average valuation multiple in the portfolio.

Here’s the summary of net asset value per share, in which I’ve highlighted Brait and Optasia to show the combined contribution of 56.3% to group assets.

If you want to dig into this in great detail, you’ll find the results presentation at this link.

The current share price is R4.25, so the discount to the NAV per share of R8.56 is over 50%.

You have to read Grand Parade’s numbers carefully (JSE: GPL)

There are many once-offs and distortions

Grand Parade’s numbers are tricky. There has been a great deal of corporate activity, including the unbundling of the stake (steak?) in Spur and various restructuring transactions. The base period includes a number of discontinued operations, like Burger King and the disaster that was Mac Brothers.

The split between continuing and discontinued operations doesn’t even tell the right story, as Spur gets included in continuing operations and so do loans to Mac Brothers.

To help you look through the noise, I’ve included this table showing the contributions to headline earnings. Gaming grew by 12%, with around half of that amount in absolute terms going into increased corporate costs.

The group is now exclusively focused on the gaming sector, including “robust oversight” of its existing gaming investments, whatever that practically means.

Investment flows at Old Mutual are a sign of the times (JSE: OMU)

Inflation and high interest rates are eating into savings

Old Mutual has released results for the six months ended June. This includes the adoption of IFRS 17, which means major distortions and accounting restatements.

I’ll try and ignore the IFRS nonsense and focus on the operational metrics instead. Life APE sales excluding China grew by 14%. They were only up 1% including China, as the base period included product sales that were subsequently discontinued in anticipation of regulatory channels.

The value of new business margin increased to 2.6%, putting it within the medium-term target range of 2% to 3%.

Although gross flows grew by 17%, net client cash outflows of nearly R7.3 billion were worse than the prior period because clients needed to access their funds to survive these economic conditions. Despite this, funds under management grew by 6% to R1.3 trillion, supported by equity market performance.

Return on group equity value was only 10.5%, which is way below the performance of banking groups in South Africa. Return on embedded value in the Life and Savings business was 13.9%. The group uses a couple of other metrics, like return on net asset value of 11.9% and core return on net asset value of 13.1%.

I don’t really care which of those metrics you use, performance is still well below our local banks. Growth also isn’t exciting, with results from operations at Old Mutual only up by 3%. In this environment, would you rather be lending money to consumers or hoping they save and invest with you?

The group equity value per share is R18.806 and the share price is R12.10, so the market is quite correctly valuing Old Mutual at a discount. This discount is why the year-to-date share price performance of over 15.5% actually beats local banks. Like everything in investing, it comes down to valuation.

The Rebosis fire sale continues (JSE: REA | JSE: REB)

The selling price is way below the recent valuation

As you are probably aware by now, Rebosis is in business rescue and has been executing a “public sale process” to try and sell as many properties as possible to pay down the debt.

The latest such sale is to Katleho Property Investments, a subsidiary of Heriot Investments. The portfolio being sold is four office buildings, three of which are in Ekurhuleni and the other is in Midrand. The portfolio was valued at R291 million on 1 April 2023.

Perhaps that was an April Fool’s valuation, as the actual selling price is R160 million. Based on net operating income, the implied yield is a whopping 26.8%. Rebosis has practically given these properties away. A desperate seller is a terrible thing.

Unless you’re the buyer, of course.

York Timber has given far more detailed guidance (JSE: YRK)

At least cash from operations is positive, if we are looking for silver linings

York Timber has released an updated trading statement that gives a much tighter range for HEPS. Importantly, it also gives guidance for EBITDA and cash from operations.

I’ll start with HEPS, which is shouting timberrrrrr all the way down from 53.30 cents to a loss of between 73.27 cents and 77.00 cents for the year ended June. If we strip out various items (including biological asset fair value movements), we find EBITDA coming in between 58% and 63% lower than the comparable period. Cash from operations is also on the right size of zero at least, despite being between 48% and 53% lower.

Even without the biological asset fair value movements that cause big swings in earnings, this was a poor period for York.

Wesizwe Platinum nosedives (JSE: WEZ)

The headline loss is much higher than the comparable period

With unprotected strike action and ongoing pain in the PGM sector, this was never going to be a happy financial update from Wesizwe Platinum. Still, the extent of the loss is quite breathtaking, especially as this is an interim period.

For the six months to June, the headline loss per share has vastly deteriorated, coming in at between 59.22 cents and 60.04 cents. The loss in the comparable period was just 4.09 cents.

Keeping in mind that the share price is only 76 cents, this isn’t looking good.

Little Bites:

  • Director dealings:
    • I usually ignore sales by directors related to vesting of share options. Half of the Woolworths (JSE: WHL) announcement related to those types of sales. The other half was very interesting, with a director of the holding company selling shares worth R1.7 million and a director of the operating subsidiary selling shares worth a massive R19.1 million,
    • A director of Liberty Two Degrees (JSE: L2D) has sold shares worth R1.57 million.
    • A director of Novus (JSE: NVS) has sold shares worth R608k.
  • I’m not sure these are director dealings in the truest sense of the word, so I’m showing them separately. Three directors of Nampak (JSE: NPK) were announced as having followed their rights in the rights offer. Andre van der Veen (part of A2 Investment Partners) is obviously the largest, with an investment of over R72 million.
  • Heriot Investments has been busy. Not only has the company bought the Rebosis properties at a bargain price, but it has also transferred a 10.02% stake in Safari Investments (JSE: SAR) to its subsidiary, Thibault REIT Limited. This is only relevant because Thibault has applied for a listing on the Cape Town Stock Exchange.
  • AYO Technology (JSE: AYO) renewed its cautionary announcement related to the settlement agreement with the PIC. The company says that the parties have made significant progress in finalising the terms of the settlement agreement to ensure compliance with the JSE Listings Requirements.
  • Conduit Capital’s (JSE: CND) disposal of subsidiaries CRIH and CLL continues to hang in the balance, with the closing date for fulfilment of conditions extended yet again, this time to 31 October.
  • Basil Read (JSE: BSR) is currently in business rescue. The CEO of the company has resigned, so that doesn’t do much to help with stability. An acting appointment has been made internally.
  • Sable Exploration and Mining (JSE: SXM) has a share price of just 6 cents per share. It’s therefore not ideal that the headline loss per share for the six months ended August is between 65 cents and 75 cents per share! It’s worse than the comparable period, despite the company claiming that the loss has decreased. The maths is not mathing at this company.

Ghost Bites (AngloGold | Ascendis | Bytes | Equites | Grindrod Shipping | Investec | Nampak | Vukile)

The Finance Ghost
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Ghost Bites (AngloGold | Ascendis | Bytes | Equites | Grindrod Shipping | Investec | Nampak | Vukile)

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

AngloGold begins its new corporate life (JSE: ANG)

Will the primary listing in the US make a difference in years to come?

AngloGold is a company with a rich history in South Africa. This makes it historically significant that the primary listing has been moved to the New York Stock Exchange, with only a secondary listing maintained on the JSE (and A2X and the Ghana Stock Exchange for that matter).

Although this sounds like semantics and even the stock ticker on the local market hasn’t changed, it signals intent to take a global gold story to a US investor base. The headquarters are now in Denver, Colorado, though it obviously retains a large corporate office in the City of No Water. I mean, the City of Gold. I mean, Joburg.

Headline loss narrows at Ascendis (JSE: ASC)

But it’s still a loss

I can finally call Ascendis by its correct name, rather than the very cheeky “Descendis” that I used for a long time when the thing was in a death spiral. Although the company is still loss-making, the trajectory of the losses is firmly in the right direction.

In a trading statement for the year ended June 2023, the company noted that the headline loss per share from continuing operations will be between -37.4 cents and -45.7 cents. This is an improvement of between 69.5% and 62.7% vs. the comparable period.

The headline loss from total operations is between -35.7 cents and -43.6 cents, an improvement of between 55.8% and 46.0%.

Bytes is achieving double-digit growth (JSE: BYI)

The market really liked this story

Bytes closed 9.5% higher on the news that trading conditions are solid, with the operations in the UK and Ireland growing gross invoiced income, gross profit and adjusted operating profit. In other words, things are heading firmly in the correct direction thanks to market share gains in private and public sector work.

Both gross profit and adjusted operating profit grew “comfortably in double digits” in the six months to August. Net cash at the end of the period was £51.3 million, net of £30 million worth of dividends in the period. The company has seasonal cash conversion and expects a strong second half.

Detailed results are due for release on 25 October.

Equites brings more capital home (JSE: EQU)

The company has sold a distribution warehouse in the UK

The property in question has a lease in place with Tesco Distribution until December 2023. That isn’t a typo. The lease is right on the cusp of expiring and the tenant hasn’t committed to a new lease, so Equites was staring down the barrel of a potentially significant vacancy.

A European logistics income fund is clearly feeling less worried, swooping in to buy the property for £29.75 million. This drops the loan-to-value ratio at Equites by 170 basis points, increases the weighted average lease expiry (obviously) and unlocks net cash proceeds of R684 million. Other than the reduction of debt in the UK, Equites is going to bring the capital back to South Africa to support the local development pipeline.

Equites claims that an internal rate of return of 12.1% was achieved on the property (measured in pounds and net of debt). The selling price is a 16.2% premium to the latest book value but I wouldn’t put much focus on that, as UK property prices have been heavily written down as yields have increased in the UK.

The property contributed £2.476 million to distributable income for the year ended February 2023, so the price is a yield of 8.3%.

Grindrod Shipping acquires Taylor Maritime’s ship management businesses (JSE: GSH)

This is part of the strategy of central management of a larger fleet

Grindrod Shipping announced the acquisition of 100% of two ship management companies. Taylor Maritime is the sole owner of one of the companies and part owner of the other. In case you’ve forgotten, Taylor Maritime also holds the vast majority of shares in Grindrod Shipping.

The acquisition price is between $11.75 million and $13.5 million, depending on how the earn-outs play out. The payment structure is a mix of cash and shares, payable over two years.

The company says that this will increase ship management income fees, “unlock synergies” (that dirty M&A term) in the commercial deployment of the dry bulk fleet and achieve savings on the technical side.

An awkward disclosure error by Investec (JSE: INP | JSE: INL)

The UK funds under management number actually went the other way

In the trading update released last Friday, Investec disclosed the UK Wealth and Investment funds under management (FUM) number as having increased by 1.3%. This was wrong, as there was actually a decrease of 2.0% since March 2023.

There were positive net inflows, so this is more to do with changes in asset values than anything wrong with the underlying business.

Nampak’s rights offer was heavily supported (JSE: NPK)

Coronation is the only underwriter that received additional shares

The important news for Nampak as a whole is that the company has successfully raised the intended R1 billion in equity at a price of R175 per share. The important news for its shareholders is that if you hoped to get any excess applications through this process, I’m afraid you will be disappointed. Such was the demand for the rights offer (over 138% of available shares) that a couple of the underwriters aren’t even getting excess shares.

Excluding excess applications, 90.08% of shares were subscribed for. Coronation gets first bite at the cherry based on the underwriting agreements, which means the remaining 9.92% all went to them. The other underwriters didn’t get anything and there’s certainly nothing for anyone else who asked for additional shares.

All eyes will now be on whether Nampak can steady the ship.

Vukile releases a fascinating pre-close update (JSE: VKE)

The South African retail portfolio is performing very well

The concept of “property” as an asset class is a dangerous umbrella term. There is a vast difference between an office building in Sandton and a value shopping centre on the edge of a township area or on a busy commuter route. If you need any further proof, you can look at Vukile’s pre-close investor presentation.

In the South African portfolio, turnover is 3.6% higher than the comparable period and trading densities are growing across all segments. Vacancies at August 2023 are steady at 2.0% and reversions have improved from 2.3% for the year ended March to 2.4% for the six months to September. Footfall is 107% higher than in FY23.

I really enjoyed this chart in the update, showing the size of each category (the bubble) and the current performance across turnover growth and density growth. Top right is where you want to be. Bottom left is where you don’t want to be. The concerning bubble is Fashion, which is (1) very large and (2) very stagnant:

The performance in the Spanish portfolio also looks very good. Turnover at all the centres is up by strong double digits year-on-year. Unlike in South Africa, Spanish consumers have money for clothes:

Looking at the balance sheet, Vukile held a successful R526 million bond auction in August, so there’s support from the market for this story. The loan-to-value ratio of 44% seems a little high to me in this environment, but the credit rating is strong with a stable outlook.

Most importantly, the guidance for FY24 is positive. The dividend per share is expected to grow by 7% to 9%. That is vastly different to what we’ve seen from the likes of Growthpoint and Hyprop.

This is why the chart over the last 12 months looks like this for the three funds:

Sadly, this is what the chart looks like over five years:

Little Bites:

  • Director dealings:
    • Des de Beer was clearly feeling flush for the latest purchase of shares, buying R8.2 million worth of shares in Lighthouse Properties (JSE: LTE).
    • The CEO of Sirius Real Estate (JSE: SRE) sold shares worth £450k. Interestingly, other directors / associates / senior execs bought shares worth a total of £19k.
    • A non-executive director of Richemont (JSE: CFR) has bought shares worth almost R2.3 million.
    • An associate of a director of NEPI Rockcastle (JSE: NRP) bought shares worth R1.27 million.
    • A founder of Brimstone (JSE: BRN) has bought N ordinary shares worth R165.5k.
  • OUTsurance Group (JSE: OGL) shareholders are looking forward to the final dividend of 78 cents a share and special dividend of 8.5 cents a share that the company has declared. The special dividend requires SARB approval and this approval hasn’t been obtained yet, so this may kick out the date for that dividend. The final dividend is unaffected.
  • If you’re wondering about your clean-out dividend from Advanced Health (JSE: AVL), there are “unforeseen circumstances” that have delayed the payment to 27 September.

Ghost Bites (Gemfields | Investec | Life Healthcare | Quantum Foods | Texton Property Fund)

The Finance Ghost
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Ghost Bites (Gemfields | Investec | Life Healthcare | Quantum Foods | Texton Property Fund)

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

No interim dividend for Gemfields investors (JSE: GML)

The board keeps reminding investors that 2022 was a standout year

It’s rather interesting to note the words “lab-grown” in the opening paragraph of the Gemfields earnings announcement. Lab-grown diamonds have been a source of much debate out there. Lab-grown gemstones exist as well, yet nobody is really talking about it. There’s an acceptance that the market for gemstones enjoys very different pricing between natural and lab-grown gemstones.

I still believe that the key difference here is societal pressure to buy diamonds as an engagement present, driving demand for a more affordable solution. The same isn’t true for gemstones, which have always been a genuine “luxury” purchase that isn’t linked to a generally accepted milestone in our lives.

This doesn’t mean that the gemstone market doesn’t have its own challenges. Mining is always tricky, with recent announcements covering the disappointing production quality of emeralds at the Kagem mine and the decision to withdraw from the high-quality auction this year.

Looking at rubies, the company has started production on the second processing plant at Montepuez in Mozambique. This is the single largest ever investment by the group. This is expected to become operational in the first half of 2025 and the company calls it a “gamechanger” for processing the stockpile of rubies.

The year-on-year numbers tell a story of 2022 as a standout period, which is why there was an interim dividend last year that has not been repeated this year. Revenue has dropped by 20.5% and EBITDA has fallen by 30.5%. By the time you reach the bottom of the income statement and adjust for minority interests, profit attributed to the owners of Gemfields fell tremendously by 77%!

Even if you use adjusted HEPS (which excludes the impact of the negative fair value move on the Sedibelo PGM asset), there’s a drop of 54%. Whichever way you cut it, there’s a big drop off here that is a strong reminder that mining companies on a low Price/Earnings multiple can get very ugly. That multiple unwinds quickly as profits fall.

I must however point out that even though 2022 was a stellar year, this performance of HEPS of 0.8 US cents is even well below 2021’s number of 2.0 cents.

The share price is being helped out by rand weakness, as it is currently trading well ahead of 2021 levels:

Investec’s UK business is driving growth (JSE: INP | JSE: INL)

This has been a period of significant corporate activity as well

Investec has released a pre-close update dealing with the six months to September. There’s a significant difference between reported and constant currency numbers, with the bank pointing out 19% depreciation in the rand.

There were also quite a few corporate actions. The merger of Investec Wealth & Investment UK with Rathbones Group was completed recently. The property management company related to Investec Property Fund (now Burstone Group) was sold to that fund at a lucrative price in my opinion. The group has invested R6.7 billion in share buybacks. There are also distortions in the base period, like the distribution of the Ninety One stake.

This means that “adjusted profit” will be all over these results. Thankfully the difference isn’t too big though, unlike at a place like Discovery where the adjustments are huge. At Investec, HEPS is up by between 6% and 12% and adjusted earnings per share is up by between 8% and 14%.

Looking at the operations, the UK business should report adjusted operating profit that is at least 25% higher. The South African business is up by at least 5%, as the local business isn’t growing anywhere near quickly enough to offset the impact of rand depreciation.

Notably, the cost-to-income ratio has dropped below 60% as revenue grew ahead of costs.

The group credit loss ratio is expected to be at the upper end of the through-the-cycle range of 25bps to 35bps. Surprisingly, South Africa is at the lower end of the range of 20bps to 30bps and the UK is at the upper end of the range of 30bps to 40bps. When you dig deeper, this is because of better than expected recoveries in the local business and the interest rate and inflationary pressures in the UK.

Interim results are scheduled for release on 16 November.

Life Healthcare renews its cautionary (JSE: LHC)

Several months later, negotiations for Alliance Medical Group are still underway

Life Healthcare first made an announcement about a potential disposal of Alliance Medical Group back in February 2023. The company wasn’t looking to sell the business, but received interest from the market regardless.

Although it usually takes a while to negotiate a transaction, this one is starting to feel cold. We are now in September and the cautionary has been renewed once again, noting that there has been “significant progress” but there is still no certainly of a transaction on the table.

Bird flu is ripping through the poultry industry (JSE: QFH)

Quantum Foods has slipped into a loss-making position

Bird flu has bucked the semigration trend by moving from the Western Cape to Gauteng. Clearly, nobody warned it about the potholes.

Jokes aside, this is an incredibly serious problem. Quantum Foods’ Lemoenkloof layer farm in the Western Cape was smashed by the virus in April 2023 and now the farms in Gauteng and the North-West province have been affected. The value of the birds affected by the outbreaks is estimated to be R106 million, which is a huge number when you consider the market cap of Quantum Foods at R930 million.

This has triggered the release of a trading statement that reflects headline earnings slipping into a loss for the year ended September 2023. The company hasn’t guided how large the loss will be. The silver lining here is that the farms in the Western Cape and Eastern Cape haven’t been affected by the outbreak.

Of course, this comes after the recent update by Astral Foods (JSE: ARL) that showed how terrible things are in the poultry industry. Load shedding and consumer spending are already disasters. Bird flu is just the nail in the coffin.

Office-heavy Texton improves occupancy rates (JSE: TEX)

Offshore capital allocation is also helping to grow the distribution per share

Spare a thought for Texton. The property fund has 89.3% of its SA portfolio in office properties. Trying to manage that beast in a post-pandemic world is a less appealing role than coaching the Wallabies. Still, with what the company calls an SME-focused strategy, the vacancy rate has dropped from 22.3% to 18.5% in the year ended June 2023. Rental rates are still under huge pressure though, with negative reversion of 14.3% in the office portfolio vs. -2.1% in retail and -8.2% in industrial.

In the UK portfolio, the primarily industrial portfolio features triple net leases and a weighted average lease expiry of over seven years, so this is a predictable income stream (in theory). The decrease in property valuations in the UK in response to pressure from rising rates was largely offset by depreciation of the rand.

The recent focus at Texton has been to invest in offshore funds. I don’t particularly like this fund-of-funds approach as it does little to remove structural discounts to NAV. Nonetheless, Texton has five investments in the US (combined market value R572 million) and one in the UK with a current value of R26.6 million. Rand depreciation obviously helps here.

The group sold five properties this financial year for R447.3 million. Debt was reduced by R420.8 million, of which the company describes R240 million as being a “permanent reduction” in debt. The effective interest rate on the South African debt has increased from 7.44% to 10.77%. In the UK, it jumped from 2.71% to 6.61%. This is why property funds have been under pressure.

The NAV per share has grown by 5.5% year-on-year to R6.1937 cents. The share price is just R2.50, so that’s a substantial discount to NAV of roughly 60%. Texton grew its dividend per share by 13.3% to 19.26 cents, which puts it on a traded yield of 7.7%.

The weak rand has been very helpful for Texton in this period.

Little Bites:

  • Director dealings:
    • Christo Wiese is taking a positive view on the Shoprite (JSE: SHP) share price, selling put options worth R226.4 million at a strike price of R226.45 and buying call options with a strike price of R236.18 for R236.2 million. The current share price is R241. He has basically used the put options (on which he only loses out if the price drops below R226.45) to almost fully fund the purchase of call options that are already in the money. The options expire in December.
    • An associate of a director of NEPI Rockcastle (JSE: NRP) has bought shares worth R1.5 million.
    • Des de Beer has bought shares in Lighthouse Properties (JSE: LTE) worth R878k.
  • Finbond (JSE: FGL) has reminded the market of the plan to repurchase a massive 38.55% of shares in issue at a price of 29.11 cents per share. The current traded price is 38 cents per share. The circular for this repurchase will be posted to shareholders after the release of interim results (end of October) and prerequisite important milestones like a firm intention announcement.
  • Shareholders in Liberty Two Degrees (JSE: L2D) voted almost unanimously in favour of the scheme of arrangement and take-private of the company. It received 99.96% support at the general meeting.
  • Vukile Property Fund (JSE: VKE) has announced the appointment of a couple of financial heavy-hitters to the board. Jon Zehner joins the board with extensive global investment experience in real estate and James Formby is the former CEO of Rand Merchant Bank. These aren’t the kind of board appointments that you make to improve your lease terms or your occupancy levels. This is deep balance sheet experience.
  • This wasn’t the only banking-into-commerce announcement of the day. Marna Roets has joined the board of Zeda (JSE: ZZD) after extensive experience in banking, including senior roles in Standard Bank and Barclays Africa.
  • There’s another delay in the joint venture transaction for Mast Energy Developments, the subsidiary of Kibo Energy (JSE: KBO). The revised completion date is expected around mid-October 2023. The delays seem to be due to statutory processes, so theoretically all should still be fine.
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