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Ghost Bites (Grindrod Shipping | Kibo Energy | Kore Potash | Life Healthcare | MC Mining | Orion Minerals | Renergen | Royal Bafokeng Platinum | Steinhoff)

The Finance Ghost
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Ghost Bites (Grindrod Shipping | Kibo Energy | Kore Potash | Life Healthcare | MC Mining | Orion Minerals | Renergen | Royal Bafokeng Platinum | Steinhoff)

Grindrod Shipping reduces debt through ship sales (JSE: GSH)

In such a cyclical industry, timing is everything

With things having slowed down in the shipping industry and interest rates on the rise, it made sense for Grindrod Shipping to sell off some ships and reduce debt with the net proceeds.

There were four such sales in March and April, with total net proceeds of $26.6 million. The cash was used to reduce senior secured debt in the group.

Kibo Energy is a good example of dilution in action (JSE: KBO)

Always look out for convertible instruments

When a company has issued warrants or convertible debt, there is risk of dilution for ordinary shareholders.

A warrant is just a type of option, allowing the holder to exercise the right to receive shares directly from the company (i.e. new shares) for a pre-determined price. Warrants can be used as part of start-up capital raising to create an equity kicker for early-stage investors to get them across the line.

A convertible loan does what it says on the tin: this is a debt instrument that can be converted into equity (shares) at the option of the holder.

The latest announcement dealing with equity conversions is a reminder that Kibo has dilutive structures in place, something that investors should be aware of when investing.

Kore Potash quarterly review (JSE: KP2)

This is a useful summary of progress at the Kola Project

The focus is still on finalising the terms of the Engineering, Procurement and Construction (EPC) contract. Kore Potash’s counterparties to this contract are PowerChina and SEPCO, who are working on guarantees to support the EPC contract.

Importantly, Summit Consortium has confirmed that the financing proposal for Kola will be provided within six weeks of the EPC terms.

As at 31 March, the company had $3.8 million in cash.

Life Healthcare: enough volatility to send you to the ER (JSE: LHC)

Here’s a lesson in investing in “safe” assets, like hospital groups

Life Healthcare is currently weighing up its options to sell its offshore business, Alliance Medical Group. Unsolicited proposals were received that the board can’t ignore, driving a need to engage with the potential offerors.

The company has renewed its cautionary announcement in this regard. Caution indeed, as just a cursory glance at this share price chart will reveal:

Fully licensed and shovel ready (JSE: MCZ)

MC Mining updated the market on the Makhado project

In MC Mining’s case, the shovels would be building the project rather than taking hard coking coal out of the ground. The good news is that an estimated 650 permanent jobs are expected to be created at full production. A detailed execution plan for the next five years has been put together based on the bankable feasibility study for Makhado and a great deal of subsequent work.

Various tender processes for contractors are underway and are expected to be concluded in the third quarter. Funding arrangements are expected to be concluded at around the same time.

It’s a long process, even once a project is “fully licensed and shovel ready” as the company puts it.

Orion Minerals reflects on the past quarter (JSE: ORN)

Copper and zinc prices are volatile as always, but the outlook remains strong

So-called “junior” mining companies are risky things. While they are running around trying to piece together funding for projects, metal prices can change and so can sentiment. It helps when there is a solid long-term story, as is the case with a metal like copper.

The past quarter was critical for Orion, with Clover Alloys coming in as the cornerstone equity investor. Together with other equity investors, this puts the company in a position to access the Triple Flag Precious Metals ($87 million) and IDC facilities (R250 million).

Scalable dewatering of the underground operations is set to start this quarter.

Renergen’s trading statement isn’t important (JSE: REN)

The share price isn’t being driven by current financial results

With Renergen having been firmly in development phase, the current financial results don’t tell you much about the long-term prospects or what the share price should be doing.

Still, I should mention that a trading statement has indicated a headline loss per share of between -22.6 cents and -17.1 cents for the year ended February 2023. That’s an improvement on the prior year of between 18% and 38%.

The royal saga continues (JSE: RBP | JSE: IMP)

Although Northam Platinum pulled its offer, the TRP complaints are unresolved

I’m tired of reading about this deal, so I can only imagine how tired those involved are. The management team at Royal Bafokeng Platinum is particularly gatvol, with the company having been under offer for over 18 months. Operating in a tough environment with that level of uncertainty really isn’t easy, something we are starting to see in the numbers.

Northam Platinum is no longer interested in making an offer to shareholders. This doesn’t mean that the saga is over, as a Takeover Regulation Panel (TRP) Compliance Certificate cannot be issued until complaints are resolved. A couple of complaints are causing major headaches, with the company trying to resolve them.

For example, there is a fight underway around the accelerated vesting and issuance of shares to the CEO and COO who announced their retirements. They were then given contracts to stick around until the corporate action is concluded. Northam Platinum believes that this is a “frustrating action” under Takeover Law and the matter has gone as far as the High Court. The problem is that the High Court process has the potential to really drag on, which would then delay the issuance of a compliance certificate by the TRP. Royal Bafokeng is considering other steps that would resolve this matter.

There were other issues as well. Northam Platinum made a complaint about the independence of the Royal Bafokeng directors, with that complaint dismissed by the TRP and then the Takeover Special Committee (TSC) in the appeal process. There were also concerns around the level of disclosure by the valuation independent expert in terms of valuation ranges. This was subsequently resolved, although the ranges are now so out of date that they are actually pointless.

Meanwhile, Impala Platinum has extended the longstop date to 31 May. The language in that company’s announcement is starting to sound very frustrated and impatient.

Somehow, I don’t think that Northam Platinum is on the Christmas card list for either Implats or Royal Bafokeng.

Steinhoff: worthless, but willing to share (JSE: SNH)

The speculative punts on this share price continue

Steinhoff closed 20.8% higher on Wednesday. You may be mistaken for thinking that there’s a good reason for this.

Instead, there’s just the usual activity in this share price of speculators playing a game of musical chairs. When the music stops, those who didn’t get out with a profit will be left as the proud owners of unlisted instruments in a worthless company.

In case you think that this is just me being painful about Steinhoff, here’s the company literally telling you that there is no value:

In simple terms, the company is worthless and hence creditors didn’t mind making space for shareholders to receive 20% of nothing. Ask yourself this: if there was any value here at all, why would creditors give some of it up after shareholders voted against the restructuring plan?

Little Bites:

  • As part of significant changes to its board, Grand Parade Investments (JSE: GPL) has also announced the appointment of a new chairman.
  • The CFO of AECI (JSE: AFE) has resigned for personal reasons. An internal promotion has been made on an interim basis.
  • The delisting of Jasco Electronics (JSE: JSC) was approved almost unanimously by shareholders at a general meeting.
  • Oando PLC (JSE: OAO) looks set for an offer and delisting process. In case you’re interested, the company released a very long announcement about taking delivery of electric buses (a perfect example of SENS being used as a public relations platform) and also released financials for the year ended December 2021, so it has nearly caught up.
  • Efora Energy (JSE: EEL) has been suspended for a long time. The company seems to be making some progress in addressing the backlog of financial reporting, but there’s still a long way to go in finishing audits etc.

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

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

Exchange-Listed Companies

Capital Appreciation has acquired 100% of Dariel Solutions, the holding company of Dariel Software. The R131,2 million purchase price will be settled through cash (R85,3m) and Capital Appreciation shares (25,243,779 shares at R1,52 each, totalling R38,4m).                                  

Unlisted Companies

The UK’s Card Factory, has acquired 100% of SA Greetings Corporation for £2,5m in cash. SA Greetings is a wholesaler of greeting cards and gift packaging. It operates 24 “Cardies” stores and owns a roll-wrap production facility.

Convergence Partners has acquired a stake in 42Markets, a financial and capital markets fintech investment group, for US$10 million. The investment was made through the recently closed, US$296 million, Convergence Partners Digital Infrastructure Fund. The capital will be used to speed up the development and expansion of its portfolio companies (Mesh, Andile and FXFlow).

Consumer rewards app, Maholla, has raised US$1,5 million in seed funding. Investors include the Buffet Group, Castleton Capital, Praesidium Capital Management and Galloprovincialis. Moholla’s app rewards users for scanning any receipt from any store. It then links the retail-agnostic shopping data to the consumer and provides a real-time understanding of what consumers are purchasing in SA.

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

Weekly corporate finance activity by SA exchange-listed companies

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

The PBT special dividend of 75 cents per share (a total gross distribution of R156,9 million) has been approved and will be paid on 15 May.

Distell and Heineken have announced that all the scheme conditions have been completed and Distell will delist from the JSE on 28 April.

Kibo Energy issued a total of 794,893,911 new shares following a warrant conversion and convertible note conversion. 284,524,625 shares were issued for the warrants and 510,369,286 shares issued for the convertible loan note conversion.

The Jasco Electronics shareholders have approved the delisting resolution and the offer has become unconditional. The finalisation date announcement is expected to be released in early May.

The Kal Group (previously Kaap Agri) will repurchase and delist 247,843 shares following the release of the odd-lot offer results.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 17 to 21 April, a further 2,651,096 Prosus shares were repurchased for an aggregate €185,26 million and a further 566,392 Naspers shares for a total consideration of R1,9 billion.

Two companies issued profit warnings this week: Coronation Fund Managers and Renergen.

Three companies issued or withdrew cautionary notices: Trustco, Life Healthcare and Afristrat Investment.

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

Who did what this week across the African continent?

DealMakers
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Who did what this week across the African continent?

Smile Identity has acquired Inclusive Innovations, the parent company of a Ghanaian identity verification software developer, Appruve. Financial terms were not disclosed. The acquisition strengthens Smile Identity’s presence in Ghana and also aids it’s expansion into francophone Africa, focusing on Côte d’Ivoire and Senegal.

InfraCo Africa, part of the Private Infrastructure Development Group, has invested US$1,5 million in Uganda’s Afresco. The investment will support Afresco’s ‘Energy-as-a-Service’ offering to Commercial & Industrial clients in Uganda, Malawi and the DRC.

The UAE’s Ignite Power has acquired the solar solutions portfolio in Kenya of Mwezi Limited. The company did not disclose any financial terms. The acquisition will expand Ignite’s presence in the East Africa country.

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

www.dealmakersafrica.com

Competition law developments in Africa

Lesley Morphet
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Competition law developments in Africa

2022 was another busy year for competition regulators across Africa.

One aspect driving this activity arises from the introduction of the Africa Continental Free Trade Area (AfCFTA) Agreement. The AfCFTA has, as its primary objective, the creation of a single market for goods and services across the African continent. Before it can function, protocols need to be put in place, one of them being a Competition Policy Protocol, the provisions of which require the existence of a functional competition regime.

A draft Protocol has been developed in terms of Phase II of the AfCFTA Agreement, and was approved in October 2022. Pursuant to this, Rwanda has launched a project to align the national legal framework with the Competition Policy Protocol, and Ghana has delayed the submission of its Competition and Fair Trade Practices Bill to Parliament in order to ensure that the Bill is in alignment with the draft Protocol.

Many countries in Africa have existing competition legislation, and the diminishing number of countries without a competition law are taking steps to introduce such legislation. For example, Uganda, which for many years has been considering the introduction of a competition law, moved a step closer to this in 2022, with a bill having been submitted to Parliament for debate and consideration. Lesotho is considering the introduction of competition law. Burundi is also being assisted by the East African Community (EAC) to set up its competition authority.

Existing regulators are becoming more active. One of these is Mozambique, which in 2022 imposed its first administrative penalty for failure to notify a merger. The authority has identified market studies and restrictive practices investigations as key areas to be prioritised. It has also made provision for the electronic submission of merger notifications and complaints.

Nigeria is also making its mark in the field of competition and consumer law since its legislation came into force a few years ago. With respect to all aspects of competition law, Kenya has been very active for a number of years, particularly under the stewardship of Francis Kariuki, who was appointed Director General of the Competition Authority of Kenya in 2013. His term came to an end last month, and an acting Director General has been appointed. It will be interesting to see how the authority develops under new leadership. Egypt, too, is being proactive where mergers are concerned. Until now, it had a post-merger notification regime which had no powers to assess, approve or block a transaction, but they have now introduced legislation moving to a suspensory regime with penalties for gun-jumping.

Kenya, Nigeria and Egypt, along with South Africa and Mauritius, are proactively looking at digital markets and the implication for competition, an area which is seen by regulators globally as being of great importance. Following a workshop on “Digital Economy and Competition in the African Region”, hosted by the ECA in October 2021, an Africa Heads of Competition Dialogue was held in South Africa in February 2022, involving representatives from these countries. The Dialogue was convened to discuss the development of an African response to digital markets.

South Africa has taken the lead in development in this area, with the South African Competition Commission (SACC) having launched a market inquiry into online intermediation platforms in 2020. It released an interim report towards the end of 2022, and is due to release its final report in February 2023. From a competition law perspective, South Africa is still the most active jurisdiction across all areas, and from a merger perspective, the competition authorities are emphasising the importance of public interest considerations. In the past, their focus in this regard has been on employment aspects, but more recently, pursuant to an amendment to the law, this has expanded to include considerations of ownership, particularly by historically disadvantaged persons and workers. This focus on public interest also appears to be gaining traction in other jurisdictions on the continent.

Regional regulators are also active. The EAC recently passed an amendment bill aimed at granting the EAC competition authority the power to set the criteria for approving mergers or acquisitions.

The Common Market for Eastern and Southern Africa (COMESA) is a very active regional authority, both from a merger and a prohibited practice perspective, and it has also weighed in on the topic of digital markets. In March 2022, it issued a press release regarding Digital Finance Services, noting that they have been undertaking a number of activities aimed at promoting fair digital markets, and have prepared Guidelines for e-Commerce.

This active trend looks set to continue in 2023, and parties with activities in Africa should continue to ensure that they are compliant with the various existing and impending competition laws on the continent.

Morphet is a Partner | Fasken

This article first appeared in DealMakers AFRICA.

DealMakers AFRICA is the continent’s quarterly corporate finance publication.

www.dealmakersafrica.com

Ghost Bites (Anglo American | Amplats | Astoria | British American Tobacco | Hammerson | Kumba Iron Ore | Prosus | Quilter | Sibanye-Stillwater | Steinhoff)

The Finance Ghost
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Ghost Bites (Anglo American | Amplats | Astoria | British American Tobacco | Hammerson | Kumba Iron Ore | Prosus | Quilter | Sibanye-Stillwater | Steinhoff)

Anglo’s production is boosted by Quellaveco (JSE: AGL)

This copper ramp-up was the major positive news in Q1

Anglo American is a huge beast, so a 9% increase in production that is mainly attributable to a single project tells you how big that project really is. Of the 178,100 tonnes of copper produced in this quarter, 59,500 tonnes was attributable to Quellaveco. There was no production from Quellaveco in the base period.

Aside from Quellaveco, there was good news at the steel and iron ore operations as well. These benefits were partially offset by lower copper grades in Chile, a drop in PGM production and the transition of De Beers’ Venetia mine from open pit to the new underground section.

2023 production and unit cost guidance has been reaffirmed across all business units.

In terms of realised prices, I’ve decided to include the entire table from the announcement to show you how significantly commodity prices have dropped off year-on-year when measured in US dollars:

Production fell at Anglo American Platinum in Q1 (JSE: AMS)

The decrease is in line with guidance, which has been reaffirmed for the full year

In its own-managed mines, Anglo American Platinum (or Amplats) anticipated a drop in production because of lower predicted grade at one of the mines and infrastructure closures at another. Refined PGM production was impacted by smelter availability, which in turn was impacted by Eskom load curtailment.

Due to lower refined production, PGM sales volumes decreased by 17%.

Despite this, there is no change to 2023 guidance across production and unit cost guidance.

Astoria holds its portfolio valuations steady in Q1 (JSE: ARA)

Detailed valuations of unlisted assets are only performed at the end of the interim and annual periods

Astoria holds a portfolio of listed and unlisted assets. The unlisted assets are valued by the directors based on maintainable earnings and reasonable valuation multiples. The listed assets need to be marked to market, which led to a write-down in value this quarter.

There’s not a whole lot that you can read into the quarterly results, particularly because the major driver has been market volatility and its impact on the listed portion of the portfolio. If you want to understand more about the group, you would be better served by watching the recording of the recent appearance on Unlock the Stock:

A smokin’ fine for British American Tobacco (JSE: BTI)

The US scored a payday here for BAT’s activity in North Korea over a decade

This isn’t a political platform and never will be. Still, I can’t help but stare in awe at a fine payable to the US authorities of a whopping $635 million (plus interest) by British American Tobacco for activities in North Korea from 2007 to 2017. Sanctions are clearly a profitable business model for the Americans.

British American Tobacco ceased all operations in North Korea in 2017, so this investigation related to the decade before that.

In its interim report, the company had raised a provision of roughly $540 million for this settlement. Perhaps the most incredible thing of all is that despite the obvious shortfall, full-year guidance for the company is unchanged.

Hammerson’s property values are going sideways (JSE: HMN)

Improvements in property income are being offset by adjustments to yields

Because of the way property is valued, it’s entirely possible for the rental income to improve and the value to stay flat or even move lower. It all comes down to the required rate of return for investors, which is higher as the cost of capital in a market increases. This is why a rising rate environment can hurt property values even when property is thought of as an inflation hedge.

In line with what I’ve seen from other European funds, Hammerson’s portfolio value went sideways this quarter despite improvements in rental income and footfall.

Importantly, balance sheet metrics have also improved. The company can’t do much about property values but it can certainly reduce debt. You may recall seeing headlines about anger at Hammerson for the lack of a dividend. Perhaps the improved property metrics will be supportive of a return to dividends sooner rather than later.

Kumba reports higher production and flat sales (JSE: KIO)

The base period was significantly impacted by rainfall

After some positive commentary on Transnet by Afrimat and Sasol, I’ve been waiting to see whether Kumba is also having a better experience. Although ore railed to port by Transnet increased by 3% year-on-year, it was still below Kumba’s expectations.

Looking at this quarter specifically, production increased by 14% because of difficulties in the base period including the weather. Sales volumes were flat year-on-year (hence inventory stockpiles increased). Compared to Q4 2022, which was a disaster with the Transnet strike, sales are up 38%.

Guidance for full year 2023 has been reaffirmed subject to Transnet performance.

Prosus has further reduced its Tencent stake (JSE: PRX)

The buybacks continue to be funded by the sale of Tencent shares

In my next life, I’m coming back as a Prosus executive. After putting in place a convoluted structure to try to reduce the inherent discount to the valuation in the holding structure with Naspers, the management team is now being paid eyewatering sums of money to sell Tencent shares on one side and repurchase Prosus and Naspers shares on the other. The worst part is that this is what should’ve happened in the first place, instead of the ridiculous cross-holding structure that we have today.

Sigh.

After a further sale of shares in Tencent, Prosus’ stake has now decreased to 25.99% in the company.

Quilter reflects improved investor sentiment in 2023 (JSE: QLT)

Flows in Q1 2023 are significantly higher than in Q4 2022

Quilter reported a modest 2% gain in assets under management and administration as at 31 March 2023 vs. 31 December 2022. That’s not earth shattering, but not bad for a three-month period either. The gain was mostly attributable to net inflows, which is the good news in this story.

Although net inflows were lower year-on-year, the comparable period was before the conflict in Ukraine really took off. If we look at Q4 2022 for comparative purposes instead, the momentum in flows is positive. This is especially true in the Affluent channel.

Quilter (and its shareholders) will hope that this momentum can be sustained throughout 2023.

This capital raise is at the Finnish line (JSE: SSW)

Sibanye’s lithium project in Finland is enjoying local government support

In its efforts to secure the outstanding equity funding for the Keliber Lithium project in Finland, Sibanye has announced that the Finish Minerals Group (the manager of the Finnish State’s mining industry shareholdings) will increase its holding in the Keliber project from 14% to 20%.

This will be effected through the rights issue by the project’s holding company, with the state obviously taking up an outsized proportion of rights in order to increase its stake. Of the total raise of €104 million, a substantial €53.9 million is coming from the Finnish State.

Sibanye will retain 79% in the project, with minority shareholdings holding the remaining 1%.

Laying of earthworks for the project commenced in March and the project is progressing well. The remaining capital for the project will be raised in the form of debt.

Steinhoff creditors say WHOA – mostly (JSE: SNH)

Major shareholders are trying to extract some value here

I really do love the fact that Steinhoff’s Dutch Law restructuring plan is called the WHOA Restructuring Plan. Whoa, indeed.

After the plan was published at the end of March, shareholders were allowed to make representations that were also shared with the court-appointed observers.

Unsurprisingly, the shareholders pushed for a material change to the terms. Equally unsurprisingly, the creditors said whoa. There will not be any material changes.

The important update is that contingent value rights (CVRs) to be issued to creditors and shareholders in the new “topco” will carry identical terms and conditions. Creditors will hold 80% and shareholders will hold 20%.

In other words, once the creditors are settled and this exceptionally complicated scenario plays out, the current shareholders would hold 20% of whatever is left via an unlisted instrument. For retail shareholders who have a tiny stake in Steinhoff, holding such an insignificant amount in the unlisted space is literally worthless.

I maintain that the fundamental value of a listed Steinhoff share is close to zero.

Little Bites:

  • Director dealings:
    • A director and prescribed officer of Sabvest (JSE: SBP) collectively bought shares worth R765k.
  • Oasis Crescent Property Fund (JSE: OAS) has very little liquidity, so it only earns a mention in Little Bites on an otherwise busy day of news. With no leverage in order to be Shari’ah compliant, this property fund has a highly conservative business model. Despite the lack of debt, an improvement in conditions drove a 14.6% increase in distributable income in the year ended March 2023.
  • Eastern Platinum (JSE: EPS) has some unusual drama on its hands, having received unproven whistleblower allegations related to undisclosed related party transactions involving the sale of chrome at discounted prices. Two independent directors will oversee an investigation into this.
  • With approval from the SARB now obtained, PBT Group (JSE: PBG) will pay its special dividend on 15 May.

Ghost Bites (Capital Appreciation | Jubilee Metals | KAL Group | Purple Group | Sibanye-Stillwater | South32)

The Finance Ghost
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Ghost Bites (Capital Appreciation | Jubilee Metals | KAL Group | Purple Group | Sibanye-Stillwater | South32)

Capital Appreciation announces a R131 million deal (JSE: CTA)

The acquisition target is Dariel Solutions

Dariel Solutions is the holding company of Dariel Software, an IT software services provider that was founded in 2001. As is so often the case, it takes two decades to build a business to the point where it can be sold for this sort of number. The focus on the FinTech sector is what caught the attention of Capital Appreciation.

The structure looks decent for Capital Appreciation. The R131.2 million purchase price is split nicely across a cash payment (R46.9 million), equity allotment out of treasury shares (R38.4 million) and potential earn-out payment (up to R45.9 million). The earn-out has cash and equity elements to it. In summary: Capital Appreciation is making good use of its listed platform here.

It’s rather interesting to note that the profit warranty is based on EBITDA over a 24-month period. This takes some volatility out of it, with the warranty being R62.2 million in total EBITDA from 1 April 2023 to 31 March 2025. This represents a compound annual growth rate (CAGR) of 20%.

The net asset value of Dariel was R47.8 million as at the end of March 2023. That’s not the way tech companies are valued, so I would suggest looking at EBITDA of R23.8 million and profit after tax of R16.2 million in assessing the purchase price. The trailing Price/Earnings multiple is 8.1x if the full purchase price is applicable, which would be the case if the earn-out is met.

This is a sensible price for what seems to be a fast-growing, established company. The Capital Appreciation share price increased by 1.3% on the day. With a market cap of R2 billion, this is a small but not insignificant transaction for the company.

Jubilee Metals has a good story to tell (JSE: JBL)

Production guidance should please shareholders

With recent upward momentum in PGM prices, it’s a good time to be delivering on production expectations. Jubilee Metals is doing precisely that in the PGM side of the business, with full year guidance reaffirmed.

Of course, mining is never simple. Jubilee has the ability to focus on either copper or cobalt at the Sable Refinery. With cobalt prices having dropped by around 76% from the year’s high, it wasn’t terribly difficult to choose copper as the winner. Copper guidance for the full year is unchanged, though.

In chrome, full-year production is expected to be ahead of guidance. As an additional benefit, chrome prices have also been stronger during this quarter.

There’s been no shortage of volatility in this share price in recent years:

KAL Group mopped up over R10m worth of odd-lots (JSE: KAL)

In case the name isn’t familiar, this is the renamed Kaap Agri Limited

Odd-lot offers have been popular on the JSE lately. It’s a bit sad I think, as companies don’t like having a long tail of retail shareholders because of the administrative costs. Although odd-lots aren’t forced to sell, many don’t notice and end up selling their shares by default.

If you aren’t familiar with how this works, an odd-lot is a holding of fewer than 100 shares. The company can make an offer to all such shareholders, buying back their shares and hoping to save on administrative costs in the process.

In the latest example, KAL Group has repurchased 0.3% of its total issued share capital for nearly R10.1 million.

The company is set to release results on Star Wars day – May the 4th!

Purple Group turns red (JSE: PPE)

The share price continues its correction as macroeconomic conditions bite

Twitter can be a nasty place. If ever you needed an example of how quickly a mob can turn against something, look no further than the general narrative on Twitter around Purple Group.

Also, if you ever needed further proof that the price drives that narrative, check out the results of this survey at roughly the halfway mark:

Suddenly everyone is bearish on Purple Group. I was pointing out how overvalued the company was long before the investors starting heading for the exit over the past year. For context, just take a look at this share price chart:

Where is this headed? The trend definitely isn’t your friend here if you are long, with little to suggest that the near-term pressure on South African consumers (and thus investors) will ease. We can see it coming through in significantly lower client inflows and thus average revenue per user (ARPU), a key metric for any growth company.

Although active client numbers have increased sharply, profitability isn’t driven by active accounts. It is driven by activity on those accounts and the level of deposits, as EasyEquities does have various sources of revenue these days.

With a loss-making period being digested by the market, Purple Group CEO Charles Savage joined me to discuss a wide range of topics related to these results and the company’s growth prospects. I can’t write anything that does this discussion justice, so rather just listen to it:

Something positive at Sibanye-Stillwater (JSE: SSW)

Good news has been hard to come by recently at Sibanye

This is a highly operational update, but it is at least good news for a mining group that has mostly been reporting unhappy things in recent times. Sibanye’s Stillwater West mine can now report a recommissioned vertical shaft, which means the damage suffered during March 2023 has been repaired.

Production from the deeper levels of the mine (below 50 level) has resumed and should reach normalised levels by the end of this month. Suspension of production at deep levels for even just a few weeks had a negative impact on production numbers of approximately 30,000 2Eoz.

Mining is hard.

South32 revises production downwards in several areas (JSE: S32)

The share price didn’t have a good day

In case you’re wondering how important production guidance is for mining groups, I decided to CTRL-F “guidance” in the South32 update. It appears a whopping 51 times! There’s your reminder for the day that valuations are firmly forward-looking in nature.

There was some good news in this South32 update, like copper equivalent production up by 7% year-to-date and Australia Manganese achieving record production. Commodity pricing was also higher across the general portfolio.

Weather and other temporary impacts affected production in several operations this quarter, with guidance revised lower for the full year as a result. Surprisingly, unit cost guidance is largely unchanged despite the production pressures. Capital expenditure guidance is unchanged.

The group is in a strong balance sheet position and regular followers of SENS will know that South32 has been busy with an extensive share buyback programme in addition to the payment of cash dividends to shareholders. There’s a question mark around the wisdom of this in a rising interest rate environment, with finance cost guidance for the year revised sharply upwards from $150 million to $190 million.

The growth strategy is focused on so-called transition metals like copper and battery-grade manganese.

Little Bites:

  • Director dealings:
    • Des de Beer has bought another R12.4 million worth of shares in Lighthouse Properties (JSE: LTE).
    • A director of Old Mutual (JSE: OMU) has bought shares worth over R1.1 million in the company.
  • Altron (JSE: AEL) is selling its ATM hardware and support business to American group NCR Corporation. The parties have agreed to extend the fulfillment date for outstanding conditions by one month to 31 May 2023. This is required for competition approval in Namibia and some tax admin with SARS.
  • As I suspected, life after REIT may not be so bad for Fortress (JSE: FFA). GCR has improved the company’s credit rating outlook from Evolving to Positive and affirmed its existing credit ratings.
  • Brimstone (JSE: BRT) is proposing the specific repurchase of forfeitable shares that may vest in February 2024. The price would be based on the 30-day VWAP at the time of vesting, with no premium or discount. As I see it, this is a liquidity event for the executives and managers who receive share-based awards, as there is a lack of liquidity in the Brimstone price. They are essentially turning an equity-settled scheme into a cash-settled scheme.

Ghost Stories #12: A Market Thriller with a Future in Manila (with Charles Savage)

The Finance Ghost
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Ghost Stories #12: A Market Thriller with a Future in Manila (with Charles Savage)

With the release of interim results for the six months ended February 2023, Purple Group is reflecting the broader economic and social issues that are plaguing South Africa. With huge pressure on consumer budgets, there simply isn’t enough left over for investment.

Purple Group and its EasyEquities business are cyclical and we are now at a painful point in the cycle. To unpack what that looks like and what the future of Purple Group holds, CEO Charles Savage joined me on Ghost Stories.

We discussed topics including:

  • Trends in retail flows of users on the platform, including commentary on the different distribution partners (Capitec, Discovery, Telkom, Satrix and Bidvest).
  • Bear case arguments like the potential deterioration of unit economics as the user base grows, or the decision to invest in the Philippines at a time when South African conditions are tough and demand focus.
  • The mix of activity-based and annuity revenue in the EasyEquities business, with insight into the RISE business and the impact of its consolidation on the numbers.
  • The pending launch of a fixed income product to help investors earn a yield on cash that is in their brokerage accounts, with some commentary around other product launches into the large user base.
  • The performance of EasyProperties and EasyCrypto in this environment.
  • The R150 million capital raise referenced in the results and how Charles is thinking about the sources and uses of this cash.

I hope that you enjoy this show and that it helps you in your assessment of the Purple Group share price. Please do your own research and remember that an appearance on Ghost Stories doesn’t mean that I endorse the company that the executive in question is representing.

Note: although EasyEquities is an important partner to Ghost Mail, my commentary on the Purple Group share price and business model has always been and will always be independent.

Who’s who in the bling industry?

Trive South Africa
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Who’s who in the bling industry?

Opulence, grandeur, sparkle and the who’s who are all terms associated with luxury and abundance, but it does not get more luxurious than these French conglomerates, LVMH, Hermès, Kering, and Financière Richemont S.A., commonly referred to as Richemont, the Switzerland-based luxury goods holding company founded by the famous South African businessman, Johann Rupert.

Comparing Share Price Performance Across French Luxury Brands 

Concerning the price chart below, it is clear that Hermès International SCA (EPA: RMS), commonly known as Hermès, has delivered superior returns to its shareholders, boasting a stellar 280% cumulative return (green line) over the most recent five-year period. Hermès has significantly outperformed its competitors and the Vanguard Consumer Discretionary ETF (yellow line) on a five-year historical performance basis.

LVMH Moët Hennessy Louis Vuitton (EPA: MC), commonly called LVMH, has performed remarkably well over the last five years, returning nearly 220% to its shareholders (blue line). Despite falling short of Hermès’ five-year performance, LVMH shareholders will be pleased to see such impressive share price growth, significantly outperforming the overall investment return of stocks in the consumer discretionary sector, as measured by the Vanguard Consumer Discretionary ETF.

With Hermès (EPA: RMS) and LVMH (EPA: MC) seemingly racing ahead, returning superior percentage growth in their respective share prices, it is important to note that Kering (EPA: KER) has underperformed the Vanguard Consumer Discretionary ETF, returning a measly 32% (orange line) over the most recent five-year period.

China’s Reopening Bodes Well for Luxury Goods 

French stocks have soared to record highs as investors pile into luxury goods groups with expectations of a sustained rebound in Chinese demand for these brands. The CAC40, a stock market index that represents the 40 largest publicly traded companies in France, has risen more than 14% over the last one-year period and by more than 30% since a low at the end of September of 2022. Concerning the price chart below, over the most recent one-year period, the CAC40 index (green line) has comfortably outperformed the SXXP (blue line) as well as the S&P 500 index (orange line), returning double-digit growth over the last twelve months.

The SXXP, or the STOXX Europe 600 index, is a broad-based stock market index representing 600 large, mid-sized, and small-cap companies across 18 European nations. This broad-based European index has returned just under 2% over the most recent one-year period. Still, it fares relatively well against the performance of the S&P 500 index (orange line), which has seen negative growth over the most recent twelve months.

The superior relative performance of the CAC40 index can be primarily accredited to macroeconomic trends boding well for luxury goods amidst China’s efficient removal of zero-Covid restrictions, which has accounted for most of the luxury goods sector’s recent success. According to market analysts at Morgan Stanley, Chinese demand for luxury products is among the world’s highest, with China recently emerging as the most important market for European luxury names. Consequently, the country’s economic reopening following extended lockdown periods bodes well for the luxury goods market, especially seeing that prices for luxury goods can reportedly be up to 30% lower in Europe than in China.

While China’s reopening paves the path for surging demand for luxury goods, it is also important to note that demand for luxury products is relatively inelastic, meaning that consumers are less sensitive to changes in price. In other words, the demand for a luxury product remains relatively stable, given a series of price changes. For this reason, luxury products are widely viewed as a hedge against inflation despite generally performing poorly in past recessions. Overall, French stocks have enjoyed a stellar rebound against China’s economic reopening and increased demand for luxury goods.

Hermès International S.A. (EPA: RMS)

Hermès, the world-renowned French brand specialising in crafting luxury items, has seen its share price surge more than 30% this year, giving it a market value of more than €200 billion. The maker of Birkin bags has demonstrated immense resilience to challenging market conditions by utilising its strong brand appeal while predominantly catering to affluent consumers, paving the path to its recent success in navigating turbulent demand trends.

Fundamental Analysis:

On Friday, 14 April, the French luxury design house, Hermès released revenue figures for the first quarter of 2023, starting the year positively by posting a 23% year-over-year growth in consolidated revenue, which came in at €3.38 billion for the quarter, as all geographical areas recorded robust growth. Surging demand for the company’s must-have handbags has incentivised Hermès to strengthen its production capacities by opening a string of artisan factories to ramp up production. Moreover, the French luxury conglomerate recently announced plans to reopen its iconic flagship store in the centre of Beijing, given the brand’s dominant presence in China amidst the country’s decision to dismantle its zero-Covid restrictions. Despite macroeconomic uncertainties, Hermès maintains its ambitious stance on solid revenue growth as the group confidently moves through the 2023 financial year.

Looking at Hermès’ 2022 annual financial statements, the luxury design house posted stellar results amidst a turbulent macroeconomic environment which saw interest rates rise persistently in a heated battle against inflation, cutting into consumers’ disposable income and thus cementing the ideology that luxury items are a hedge against inflation. Revenue came in at €11.60 billion for 2022, representing a 29% year-over-year increase from the 2021 figure of €8.98 billion. Basic earnings per share (EPS) increased by 38% from €23.37 in 2021 to €32.20 per share for the 2022 financial year, while operating cash flows surged by 34% over the same period.

Technical Analysis:

Looking at the 1W price chart on Hermès, it is clear that the first half of 2022 proved exceptionally troublesome for the French luxury design house, with the share price crashing nearly 42% over a mere seven months to find support at the €970.30 level (red line) midway through June of last year. From that point onward, the price action on Hermès has experienced a persistent uptrend, finding higher highs and higher lows.

Should the recent positive market sentiment around luxury goods persist, bullish investors could further see the share price increase and continue its recent rally. If the current bullish rally loses steam amidst a change in market sentiment, the bears could see the price action on Hermès retrace and decline toward €1,673.20 (black dotted line), which could be the first support level for the bears. Suppose the share price reverts and falls toward the significant support level at €1,673.20. In that case, the possibility exists for either a retracement toward higher levels or, if the support level does not hold, the price action can decline to lower support levels.

LVMH Moët Hennessy Louis Vuitton (EPA: MC) 

LVMH, the French multinational luxury goods conglomerate, has seen its share price soar close to 28% year-to-date as macroeconomic trends favour the luxury goods sector, paving the path for Bernard Arnault, CEO of LVMH, to become the world’s richest man as of 1 April 2023. 

Fundamental Analysis: 

An excellent start to the year is the current theme for LVMH, with the European luxury goods behemoth reporting first-quarter revenue of €21 billion, a significant 17% year-over-year increase compared to the same period in 2022. As of 19 April 2023, LVMH is the twelfth-largest company in the world, with a market capitalisation of $483.67 billion, but the recent share price rally lifted the French luxury giant’s market capitalisation to $486 billion on 13 April, briefly ranking it as the world’s tenth-biggest company. Should the recent positive market sentiment around luxury goods persist, potentially leading LVMH to reach a market capitalisation of $500 billion, it would become the first European company to achieve that milestone.

Looking at LVMH’s 2022 annual financial statements, the luxury giant reported an impressive 23% year-over-year increase in revenue from €64.2 billion in 2021 to €79.2 billion in 2022. Moreover, the group’s basic earnings per share (EPS) figure reached €28.05 in 2022, representing a 17% increase from the prior year’s figure of €23.90 per share. 

Technical Analysis:

Looking at the 1W price chart on LVMH, the luxury giant has seen its share price rise to record levels, experiencing a trend similar to that of Hermès. LVMH saw its share price decline to test the significant support level at €543.80 (red line) in mid-June of 2022, and it has since rallied amidst bullish sentiment around luxuries, much like Hermès. If current market sentiment turns negative, the bears could see the price action retrace and decline toward lower levels, as indicated on the price action chart. However, LVMH is enjoying strong growth momentum amidst robust demand from local customers and international travellers, which may lead to higher levels.

Kering (EPA: KER)

Kering, the owner of world-renowned brands, namely Balenciaga, Bottega Veneta, Gucci, Alexander McQueen, and Yves Saint Laurent, has not enjoyed the same share price rally as Hermès and LVMH as of late, despite boasting relatively robust results for the 2022 financial year.

Fundamental Analysis:

Kering, in its 2022 annual financial statements, reported a 15% increase in revenue from €17.65 billion in 2021 to €20.35 billion in 2022 while enjoying a healthy 13% increase in basic earnings per share (EPS). Despite robust revenue and earnings growth, the famous luxury brand owner saw its free cash flow from operations decline by approximately 19% from €3.95 billion in 2021 to €3.21 billion in 2022, while net debt surged more than 1200% to €2.31 billion in 2022.

Looking at Kering’s revenue breakdown by segment, Yves Saint Laurent returned a 31% year-over-year increase in revenue from €2.52 billion in 2021 to €3.30 billion in 2022, while Bottega Veneta and Gucci returned 16% and 8% year-over-year increases in revenue, respectively.

Technical Analysis:

Despite experiencing a slight rally in the early weeks of January 2023, Kering’s share price has been consolidating sideways between €527.20 and €600.70 (black dotted lines) for the greater part of the 2023 financial year as market participants await a potential breakout in either direction.

For the bull case, a buying opportunity could exist if the price action pushes above €600.70, which could be the first resistance point in the price for the bulls. If the share price breaches this resistance level, it could reach higher resistance levels at €639.00 or €674.10 (black dotted lines), a share level towards the primary price resistance at €718.80 (green line). 

The bears could see the price action continue its long-term downtrend toward the support level of €527.20, which could be the first support level for the bears. Should the price action on Kering trend lower and the €527.20 support level fails to hold, the share price may decline to lower support levels at €480.40 (black dotted line) or €442.05 (red line). 

Compagnie Financière Richemont S.A. (JSE: CFR) 

The South African-founded luxury goods company Compagnie Financière Richemont S.A., more commonly known as Richemont, is making headlines, gaining significant attention and interest from market participants.

The Switzerland-based luxury goods holding company saw its share price surge as its 10-for-1 share consolidation kicked in on Wednesday, 19 April 2023, as the company moved forward with the secondary listing of its A shares on the JSE. With Richemont recently receiving the go-ahead to terminate its South African Depository Receipt programme, the company now has listed shares in South Africa that will trade in tandem with those in Europe.

Find out more about Trive South Africa by visiting the website here

Sources: Bloomberg, Hermès, LVMH, Kering, Richemont, Financial Times, Moneyweb, Cape Talk, The Fashion Law, The Guardian, Luxury Tribune, Reuters, Trive SA, Koyfin, Trading View

Ghost Wrap #21 (Clicks | Nu-World | Purple Group | Cashbuild | Oceana | Raubex | Mining Production (BHP + Glencore + Merafe + Sasol + Royal Bafokeng) | Standard Bank)

The Finance Ghost
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Ghost Wrap #21 (Clicks | Nu-World | Purple Group | Cashbuild | Oceana | Raubex | Mining Production (BHP + Glencore + Merafe + Sasol + Royal Bafokeng) | Standard Bank)

Welcome to Ghost Wrap. It’s fast. It’s fun. It’s informative.

In this week’s episode of Ghost Wrap, we cover:

  • Clicks is still growing but nowhere near quickly enough to justify the valuation, which explains the mediocre investment performance over five years.
  • Nu-World really needs Eskom to switch the lights on and leave them on so that more people are encouraged to buy televisions!
  • Purple Group started the week with great news (the partnership in the Philippines) and ended it with news of a loss-making period.
  • Spare a thought for Cashbuild – I genuinely don’t know what they can do at this point to stop the bleeding.
  • Oceana is unpredictable to forecast but delivered the goods in this period, with HEPS more than doubling.
  • Raubex released strong results, with major contributions from unusual places like Australia (where South Africans normally get hurt) and Zimbabwe.
  • There was a flurry of mining production updates, including BHP Group, Glencore, Merafe, Sasol and Royal Bafokeng Platinum.
  • Standard Bank is still growing earnings strongly, notwithstanding the positive skew from the timing of the Liberty deal.

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.

Listen to the podcast below:

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