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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:

Ghost Bites (BHP | Cashbuild | Choppies | Coronation | Glencore | Merafe | Oceana | Purple | Royal Bafokeng | Sasol | Standard Bank)

The Finance Ghost
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Ghost Bites (BHP | Cashbuild | Choppies | Coronation | Glencore | Merafe | Oceana | Purple | Royal Bafokeng | Sasol | Standard Bank)

BHP Group still has a positive outlook on demand (JSE: BHG)

China and India are key offsetting slowing demand in developed markets

With the benefit of another quarter behind the company, BHP Group has made it through nine months of this financial year. Production guidance for the financial year is unchanged, with the usual story of good news and bad news as you dig deeper into the individual operations.

Having a diversified group really pays off in mining. For example, one of the copper assets has performed below expectations but strong performance elsewhere has allowed the group to keep full year copper production guidance unchanged.

Full year unit cost guidance is also unchanged, although a couple of major operations (Escondida copper and Western Australia Iron Ore) are expected to be at the top of their respective ranges.

With the group focusing on the metals of tomorrow, investment is skewed towards copper and nickel opportunities.

Importantly, the group notes that engagements with customers in China and India have reaffirmed the positive outlook for commodity demand.

Cashbuild revenue is still falling (JSE: CSB)

It’s hard to build a bull case in this environment

How many people do you know who are busy with major renovations or building projects? Yup, same here. Practically nobody.

Interest rates are high. Consumer confidence is horribly low. Those who have spare money for projects are buying solar panels and inverters, not adding another room to the house that will be dark for half the day anyway.

This is coming through in the numbers for a company like Cashbuild, where revenue for the third quarter fell by 9% year-on-year. For the nine month period, revenue is down 6%. If we adjust for looted stores, then the decrease is actually 9% over that period.

Transaction volumes fell by 13% in existing stores. Selling price inflation was 6% at the end of March.

Although P&L Hardware is only 8% of group sales, the obvious joke about P&L in an accounting sense (Profit & Loss) is too good to pass up. With more L than P, sales fell by 15% in Q3. Ouch.

I’m not sure what Cashbuild can do to stem the bleeding. It’s a really tough situation to be in.

Choppies gives more details on its planned deal (JSE: CHP)

The Kamoso Group is in the cross hairs

Choppies is in negotiations to acquire a controlling stake in the Kamoso Group, an FMCG business based in Botswana. A quick look online suggests that Kamoso operates a variety of brands through 79 retail locations. There are 1,500 employees. This is by no means a small company.

Choppies was originally negotiating to acquire a 100% stake, but that’s been reduced to a 76% stake now. In the meantime, conditional approval has been received from the Botswana Competition and Consumer Authority.

Coronation: no jewels in this crown right now (JSE: CML)

The tax problem has taken the group into a loss-making position

Coronation’s share price has lost over 30% of its value in the past year. The irony is hard to ignore here, as this is an asset management business after all.

The thing to understand is that these businesses rise and fall with the broader markets. They grow assets under management (AUM) in the good times and earn performance fees on top. In the bad times, the performance fees evaporate and AUM drops. Punters use these stocks for a leveraged view on the broader equity market.

Historically, investors also bought Coronation for the high dividend yield. This makes it even more painful that the interim dividend is gone because of the group’s tax disaster.

In a trading statement for the six months to March, the full impact of that problem has been laid bare. HEPS is expected to drop by between 101% and 111%, which means that the group is officially loss-making. This isn’t an extinction event by any means, but it sure hurts.

Coronation has applied to the Constitutional Court for leave to appeal the Supreme Court of Appeal’s judgement in favour of SARS. If that application is successful, the matter is likely to be heard in the 2024 financial year.

In good news, AUM as at 31 March 2023 was R623 billion. Coronation is too cool to bother giving us comparatives in the SENS announcement, so I have to go digging every time. As at the end of December 2022, AUM was R602 billion. The recent uptick in equity markets has helped here.

Glencore reaffirms full year production guidance (JSE: GLN)

First quarter production was in line with expectations

Production updates for mining houses are highly important. They can’t control the prices of commodities, but they can control their production performance.

Another important point is that production being “in line with expectations” doesn’t mean that it increased. It just means that where decreases were anticipated, these came to pass. This explains why production numbers for many of the commodities have fallen at Glencore, like copper down 5% and zinc down 15%.

The main thing for investors is that production guidance for the full year has been reaffirmed. If you want to see just how detailed these reports get, you’ll find it at this link.

Merafe increases production year-on-year (JSE: MRF)

Prepare yourself for a short and sweet update

When Merafe announces production numbers, there’s no fluff. They don’t wax lyrical about load shedding and all the other joys of life in South Africa.

No, they just give the number. In this case, attributable ferrochrome production was 3% higher year-on-year for the quarter ended March.

We should all regret buying tech stocks in 2020 instead of Merafe. Over three years, the share price is up nearly 260%. Sigh.

Things at Oceana are looking swell (JSE: OCE)

Bad jokes aside – good luck ever forecasting this one with accuracy

Oceana is as unpredictable as the ocean itself. The variables in this business are incredible, ranging from the catch at sea through to international pricing for a variety of seafood products. The swings are breathtaking, with HEPS for the six months to March up by between 127% and 147%.

This performance is thanks to higher inventory levels, favourable international pricing for a variety of seafood products and strong volumes in canned fish. Increased cost pressures were felt as well, but the benefits clearly far outweighed the troubles here.

It wasn’t long ago that most of the fishing businesses on the JSE were reporting really tough results. I’m genuinely not sure how anyone forecasts the performance of this business with any accuracy.

Purple Group turns red in tough conditions (JSE: PPE)

When bad valuations happen to good people…

I warned over and over again that Purple’s valuation during the pandemic simply wasn’t sustainable. This was no reflection at all on the quality of EasyEquities and the huge strides made during the pandemic. It was simply an example of emotions in the market and how investors tend to fall in love with a story rather than its numbers.

When trade opens on Monday morning, Purple is likely to take a huge knock. You had to be pretty blind to external conditions not to expect ugly numbers here. With consumers and equity markets under pressure, the lack of EasyEquities screenshots on Twitter was perhaps the best indication that investors are licking their wounds.

The challenge in the business is that they need people to be trading in order to be generating an income. This is different to an asset management business that earns fees from assets under management every year, regardless of whether there is churn in the portfolio.

For the six months to February, Purple Group will report a headline loss per share of between -0.82 cents and -0.91 cents. That’s a big swing from HEPS of 1.63 cents in the comparable period.

The group highlights the right things in the announcement, ranging from the number of partners through to customer growth and the general love of the platform. I couldn’t agree more with the product market fit here and how successful it has been.

The trouble is that although R2.9 billion in deposits flowed into investments on the platform, traded value fell to historic lows. When the going got tough, inexperienced investors turned their backs on the markets. To be fair, those investors are also trying to afford their bond repayments and alternative energy solutions thanks to Eskom.

This has been a perfect storm for South African consumers and I’m not surprised one bit to see the drop in Purple’s earnings. This doesn’t change the long-term story either, as the strategy to grow into South East Asia is being implemented and there are good reasons to believe that it could be interesting. Another key part of the model is the low cost to serve clients, along with strategic initiatives to build institutional flows that are less volatile than retail flows.

Purple is down 56% over the past 12 months. The price is up 265% over 3 years. When it comes to popular small caps, volatility is the only certainty.

Royal Bafokeng is struggling with Styldrift (JSE: RBP)

Despite this, full year guidance is unchanged

For the quarter ended March, Royal Bafokeng’s performance doesn’t tell an encouraging story. Goodness knows that the distraction of the Northam Platinum – Impala Platinum battle over the company wouldn’t have helped.

A strong operational performance at BRPM has been unable to offset the problems at Styldrift. A decrease in tonnes hoisted and milled led to a 1.5% decrease in 4E metals in concentrate.

When production falls in an inflationary environment, then it’s basically a guarantee that cash cost per ounce will increase. In this case, it’s a significant jump of 22.1% in cash operating cost per 4E ounce.

The group’s balance sheet is in good shape and full year guidance has been reaffirmed based on operational improvement strategies that have been implemented.

Sasol’s update for the first nine months of the year (JSE: SOL)

Guidance is mostly unchanged, other than Natref which is revised downwards

Fresh from the news of a major refinancing of its dollar debt with several banks, Sasol has released a production update covering the latest quarter and thus the first nine months of the year.

The Energy business is still enjoying relatively high oil prices and a positive refining margin environment. In the Mining operations, there are improvements in the coal delivered to Secunda operations and the coal stockpile remains above target. Export sales were significantly lower though, thanks to Transnet issues and the diversion of export coal to Secunda. Speaking of Secunda, production volumes were 5% higher in Q3 vs. Q2 of this year, as equipment availability improved. The Natref news isn’t positive, with operational challenges that have led to a reduction in full year guidance.

The Chemicals business is suffering from prices, unit margins and demand that are all below historical levels. Volumes were in line with Q2, with year-to-date performance 6% lower year-on-year. External revenue is down 9% for the nine month period.

Transnet is also a problem in the Chemicals Africa segment, but Sasol does make the point that supply chain challenges have improved in the latest quarter. This echoes a recent comment made by Afrimat.

Standard Bank is smashing it (JSE: SBK)

This environment continues to work well for the banks

Standard Bank releases a quarterly update because the company needs to provide information to Industrial and Commercial Bank of China (ICBC). This is helpful because it gives us a more frequent health check on the local banking industry than we get from Standard Bank’s peers.

There are some big swings thanks to changes in IFRS rules (what else is new?), so adjusting for those swings is important when looking at comparable performance. On that basis, attributable earnings are up by a whopping 28% year-on-year. The weak rand helps here, but there’s a great underlying story that includes an “ongoing recovery” in Liberty Holdings. I also must note that the 100% stake in Liberty only reflected from February 2022, so the first quarter view is flattering because Liberty wasn’t fully in the base. Standard Bank doesn’t give us the growth excluding Liberty, unfortunately.

In addition to the traditional banking business doing well in this environment thanks to higher interest rates and balance sheet growth in inflationary conditions, it’s worth highlighting that trading revenue was ahead of the comparative period and ahead of expectations.

As expected, the credit loss ratio was closer to the upper end of the through-the-cycle target range of 70 to 100 basis points. The attributable earnings number is net of impairments though, so there has been major growth for shareholders despite these pressures.

Liberty timing distortions aside, things are looking good. The share price hardly moved on Friday though, suggesting that the market has already priced in substantial growth. Either that, or economic worries are just too severe at the moment for investors to get excited about local banks.

Little Bites:

  • Wesizwe Platinum (JSE: WEZ) is running behind schedule on the hot commissioning of the BPM Processing Plant. It was meant to take place at the end of March, but several challenges (no further details given) mean that commissioning is only likely by the end of May. Production will commence as soon as possible thereafter.
  • PBT Group (JSE: PBG) is still awaiting SARB approval for the special distribution that has been declared after the sale of a non-core asset. When that approval is obtained, the final dates for payment will be announced.
  • I would always advocate for caution when investing in Trustco (JSE: TTO). There are formal cautionary announcements out there at the moment, so at least we all agree that caution is needed. The management agreement renewal and a potential resources transaction are both in progress, with further announcements expected at some point.
  • Buffalo Coal Corp (JSE: BUC) is about to disappear – the shares will be delisted on the JSE on 28th April as part of a take-private transaction.

Ghost Bites (Clicks | Nampak | Nedbank | Nu-World | Steinhoff)

The Finance Ghost
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Ghost Bites (Clicks | Nampak | Nedbank | Nu-World | Steinhoff)

Clicks continues winning market share (JSE: CLS)

But the earnings growth continues to look too low for the current valuation

Clicks remains an anomaly in the market. Not only does the share price trade at a huge multiple, but there’s a heavy tilt towards foreign ownership in the shareholder base. One would assume that the South African risk premium should hurt the share price here, yet the share price is only down 17% in the past year. That doesn’t seem like enough of a correction when viewed against earnings growth and the state of affairs in this country.

For the six months ended February, group turnover increased by 6.8% if we exclude vaccinations in the current and prior period. Another adjustment is made for insurance proceeds in the comparable period, without which adjusted HEPS is up 10.2%. To be honest, I’m comfortable with both of those adjustments.

The dividend is only up by 2.8% though, which is still higher than unadjusted HEPS which increased by just 0.9%. If you were hoping that the Clicks dividend would help your investments keep pace with inflation, you can officially feel disappointed.

In terms of underlying performance, Clicks surpassed 10 million Clicks ClubCard loyalty members and reported market share gains in all product categories. The wholesale picture is less favourable, with UPD continuing to face pressures on pricing. Operating costs are growing at a rate well above inflation at the moment, thanks to the likes of fuel and security costs.

In acquisition news, you may recall the November 2022 announcement of the R105 million acquisition of Sorbet Holdings. The group is also acquiring 24-hour pharmacy M-Kem, giving you the opportunity to wait in a long and frustrating queue at any time of day now.

Despite the tough consumer environment, Clicks is investing heavily in growth. 50 new stores and 40 pharmacies are planned to be opened this financial year, with record capital investment of R958 million planned. R477 million is earmarked for new stores and refurbishments, while R481 million will be invested in supply chain, technology and infrastructure.

The full year outlook is growth in adjusted diluted HEPS of between 8% and 13%. On an unadjusted basis, diluted HEPS is expected to differ by -2% and 3% year-on-year.

Disappointingly, there is no mention that I could find in the earnings of the recent Constitutional Court judgement against Clicks. The future of Clicks’ ownership of a manufacturing pharmacy division is in doubt, along with any potential penalties for breaching legislation.

Nampak brings in a war time CEO (JSE: NPK)

Erik Smuts has resigned from the CEO role

There are peace time and war time CEOs in this world. Based on the narrative on Twitter, the new interim CEO of Nampak is firmly the latter. Phil Roux has loads of experience in the FMCG industry and in corporate turnarounds as well, a skill that Nampak needs more than ever before.

He will replace Erik Smuts in the top job after Smuts “opted to step down” – with immediate effect. Read into that what you will. The official line is that the restructuring process means that the CEO’s role has changed materially.

After 25 years of service to Nampak, Smuts will hopefully make a better decision than ruining his life by going to run Eskom. That is a path that I suspect won’t be repeated.

Nedbank wants to take out the odd-lots (JSE: NED)

Get ready for another arbitrage opportunity in June

Odd-lot offers have been popular recently on the JSE. Companies use them to remove the administrative burden associated with having a long tail of shareholders with small stakes. I hope that by now, companies are doing the maths properly around what it will actually cost. Inevitably, there’s an arbitrage opportunity that attracts many new shareholders who buy fewer than 100 shares.

Nedbank is likely to be another example, with the odd-lot offer price set to be a 5% premium to the 10-day volume-weighted average price (VWAP) calculated as at 19 June 2023. If shareholders keep a close eye on the pricing, they might be able to generate a modest profit.

At the current price, 99 shares would cost R20.4k and so a 5% profit would be just over R1k. If it works out that way, it’s a useful boost to anyone’s bank account.

Nu-World releases detailed interim results (JSE: NWL)

HEPS has halved and now investors can understand why

It starts right at the top of Nu-World’s income statement, with revenue down by 15.7% for the six months ended February 2023.

South Africa was worse than the international business, with sales down by 26.3%. One of the hardest-hit categories is new TVs, which the company blames on load shedding. That seems sensible to me – nobody wants a decorative TV. That’s not a great read-through for MultiChoice, either.

Offshore, revenue was up 31.5%. This was thanks to new markets being opened up, although profitability suffered due to trading conditions.

I suppose the good news is that inventory fell by 43.5%, so it seems as though a lot of inventory was cleared out and not necessarily replenished. That’s good for working capital.

Pepco is the irrelevant gem inside Steinhoff (JSE: SNH)

These results are a wonderful example of putting perfume on a pig

I see that Steinhoff is now changing hands at around 21 cents per share. So, only 21 cents to go until it reaches fair value.

It’s such a pity that the holding company is essentially worthless, because an underlying business like Pepco is doing good things in Europe. The company has released its second quarter trading update and growth at Pepco’s European business is sky high, up 30.7% in constant currency. The Poundland business in the UK is moving at a far more sedentary pace, up 6.7% in constant currency.

On a combined basis, Q2 revenue growth is 19.7% in constant currency. Importantly, the rollout of stores is a huge part of the story. To get a sense of how existing stores have been performing, we need to look at “like-for-like” growth. On that metric, group revenue is up 8.5% for the quarter.

This means that things have slowed down a bit, with the growth for H1 (the six-month period of Q1 + Q2) coming in at 22.8% including new stores and 11.1% on a like-for-like basis.

Against a backdrop of inflationary pressures on consumers, the company is pushing forward with a growth strategy focused on new stores. For the first time, new store growth in Western Europe exceeded Central Europe.

At some point, when Steinhoff is owned by its creditors, I’m sure they will be happy with Pepco.

Little Bites:

  • Director dealings:
    • As a reminder of how much richer Des de Beer is than basically all of us, he received almost R95 million worth of shares in Lighthouse Properties (JSE: LTE) just as a scrip dividend.
  • An independent expert has determined that the terms of Exemplar REITail’s (JSE: EXP) small related party transaction with McCormick Property Development Company are fair to shareholders.

Who did what this week across the African continent?

Vanessa Aitken
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Who did what this week across the African continent?

DealMakers AFRICA

Automotive technology company Autochek has entered the Egyptian market through the acquisition of a majority stake in AutoTager for an undisclosed sum. The acquisition expands Autochek’s operations to 9 countries in East, West and North Africa.

CoaChess, a Tunisia-based gaming platform founded in 2021, has received $191,000 in pre-seed funding from Omicrone. The company utilizes AI-powered tools to make the game of chess accessible to players of all skill levels.

Solibra has sold its water bottling business which operates under the Awa and Cristaline brands. The Castel Group subsidiary, based in Côte d’Ivoire is refocusing on its core business. Financial terms were not disclosed.

Development Partners International, South Suez and DEG have acquired 100% of the Solevo Group from Helios Investment Partners for an undisclosed sum. Helios first invested in the specialty chemicals distribution platform in 2017. Solevo operates across eight countries in West and Central Africa.

Chekkit, a Nigerian anti-counterfeiting startup, has raised an undisclosed amount of funding from Adaverse and existing investors RTA, HoaQ, Launch Ventures and Blockchain Founders Fund.

AgDevCo has invested in a new joint venture between Agris and Granot to develop a 390 hectare avocado plantation at Agris’ Ndabibi farm in Naivasha, Kenya. The US$8m mezzanine loan by AgDevCo adds to its existing avocado investments in Tanzania and Mozambique.

AFC Equity Investment (Africa Finance Corporation (AFC)) has acquired 100% of Aker Energy AS from Aker Capital AS (50.79%) and The Resource Group (49.21%). This will give AFC a 50% stake in the Deepwater Tano Cape Three Points block offshore Ghana. The share purchase consideration has been structured as an earn-out deal.

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

AIIM targets NOA to overcome flood of load shedding inaction

Michael Avery
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AIIM targets NOA to overcome flood of load shedding inaction

The extent of South Africa’s ongoing electricity crisis was captured by Reserve Bank Governor, Lesetja Kganyago during his first press conference of the year, following the Bank’s decision to hike rates by another 25 basis points. Kganyago speaks with authority and breeds confidence, so when he said that South Africa’s prospects for growth were more uncertain than normal, in part due to extensive load shedding, pushing the bank to lower its GDP growth projections for the year to 0.3%, the market was paying attention.

However, the Governor hastened to add that a “material reduction in load shedding would significantly raise growth. There could also be higher investment in alternative energy sources as firms and households offset the impact of load shedding”.

As the energy industry continues to evolve, companies are looking for new ways to establish themselves as leaders in their field. One such company, NOA, is taking an innovative approach to scaling up its operations and establishing itself as a major player in the African energy market.

NOA has recently announced that it has entered into a partnership with African Infrastructure Investment Managers (AIIM), a leading investment management firm. Through this partnership, NOA will have access to new investment prospects in key African markets where AIIM already has a presence. This will allow NOA to expand its reach and become a regional energy solutions provider in areas of high energy demand across the continent.

AIIM agreed to provide initial equity funding of up to $90m, which will be used to deliver net zero energy solutions for Africa, and will be financed through a mix of equity provided by AIIM’s South African IDEAS Fund and the latest iteration of AIIM’s USD denominated pan-African investment fund, AIIF4.

NOA is a vertically integrated energy platform that provides net – zero oriented renewable energy solutions to customers in the commercial and industrial sectors of the economy. It has developed a comprehensive and innovative range of solutions for customers through the provision of large-scale wheeled energy generation utilising wind, solar and storage technologies. The investment will help strengthen AIIM’s position as one of the leading investors in South Africa’s renewable energy landscape, with projects representing over 1.9GW of solar and wind generation capacity.

NOA aims to develop, finance and operate a portfolio in excess of 1GW of renewable energy assets over time. The initial funding will be utilised to conclude the construction of existing projects and achieve financial close on projects amounting to almost 100MW. NOA will be launched by a team comprised of veterans of the South African renewable, commercial and industrial energy sectors, and is led by Karel Cornelissen, the former Chief Executive Officer of Energy Partners.

The transaction comes as the liberalisation of South Africa’s energy markets is accelerated by impending regulatory changes which permit self-generation without the need for a generation license, and the removal of size limits of such facilities, announced by President Cyril Ramaphosa in July 2022. These projects may now also be grid connected and sell to multiple customers through wheeling, the act of transporting electricity from a generator to a remotely located end-user through the use of an existing transmission and distribution system. Rapidly declining costs of renewable energy technology further enable NOA to provide its customers with renewable energy at competitive tariffs.

South Africa has a large and growing shortfall in energy availability. Between 30GW and 50GW of new capacity is likely to be required over the next 10 years if South Africa is to meet its nationally determined contributions under the Paris Climate Agreement, and to mitigate the current energy crisis.

Investment Director at AIIM, Ed Stumpf commented,

“South Africa is at a pivotal point in the evolution of its energy landscape, with the imminent retirement of ageing coal power stations, a significant energy sector infrastructure deficit, and increasing liberalisation of the market paving the way for an acceleration of investment in net-zero oriented businesses such as NOA.”

Karel Cornelissen, CEO of NOA, expressed his excitement about the acquisition, stating, “We are thrilled to be joining forces with AIIM. This partnership will allow us to accelerate our ambition to work with our clients on their journey to Net Zero, while also making a meaningful contribution to addressing South Africa’s current energy crisis.”

NOA’s innovative approach and strategic partnership with AIIM positions the company for growth and success in the competitive African energy market.

Michael Avery, is the editor of Catalyst

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

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

United States and Africa: Building strong partnerships

James P Brien
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United States and Africa: Building strong partnerships

The United States (US) and countries in Africa are building strong partnerships that boost sustainability, empower local communities with a focus on opportunities for women and youth, and provide benefits for both African and US citizens. Recently, the US has made numerous announcements regarding cementing its strong ties with Africa via, for example, increased climate financing, infrastructure development support, food security initiatives, development of new innovation and technology, strengthening of healthcare systems, and reciprocal trade and investment initiatives.

At the US-Africa Leaders’ Summit in December 2022, a memorandum of understanding (MoU) was signed between the US Trade Representative and the African Continental Free Trade Area (AfCFTA) Secretariat to expand engagement and “promote equitable, sustainable, and inclusive trade; boost competitiveness; and attract investment to the continent.” It was also announced that the US intended to invest US$55 billion in Africa over the next three years, and that $15 billion would be deployed in “two-way trade and investment commitments, deals, and partnerships that advance key priorities, including sustainable energy, health systems, agribusiness, digital connectivity, infrastructure, and finance.”

In August 2022, a fact sheet issued by the White House noted that sub-Saharan Africa (SSA) played “a critical role in advancing global priorities to the benefit of Africans and Americans. It has one of the world’s fastest growing populations, largest free trade areas, most diverse ecosystems, and one of the largest regional voting groups in the United Nations. It is impossible to meet today’s defining challenges without African contributions and leadership.”
The White House further noted that its Africa strategy articulated the new US vision for a 21st century US-African Partnership and the “tremendous, positive opportunities that exist to advance shared interests alongside our African partners.”

CLIMATE FINANCE
Developing countries are among the most vulnerable in the world to the effects of climate change, especially with regard to adapting to weather extremes and finding solutions that address food insecurity and energy and water scarcity. The availability of climate financing to assist developing countries with the transition to a low-carbon, climate-resilient future was one of the key topics under discussion at last November’s United Nations Climate Change Conference (COP 27) in Egypt.

In a speech at COP 27, US President Joe Biden said that the US Emergency Plan for Adaptation and Resilience Fund (PREPARE) had already deployed $2 billion in financing to help developing countries prepare for climate change. He announced a $150 million down payment to support PREPARE’s adaptation efforts in Africa, including for the Accelerating Adaptation in Africa project that was launched by the US and Egypt earlier in 2022. Other US climate initiatives in Africa include expanding access to early warning systems, building capacity for African decision makers to accelerate climate adaptation, supporting locally led adaptation efforts, expanding access to risk-based insurance for the most vulnerable, mobilising private sector support, and supporting climate-smart food systems, as well as the ‘Advancing Climate Security Through Sahel-Climate Advocacy and Peacebuilding with Pastoralists’ initiative.

POWER AFRICA
Power Africa – a US government-led programme that focuses on addressing Africa’s access to electrical power – has provided significant support to African countries since its launch in 2013.

A US Agency for International Development (USAID) report shows that, since then, Power Africa has helped to bring more than 5,500 megawatts (MW) of cleaner and more reliable power generation and first-time electricity to 127,7 million people across sub-Saharan Africa. A White House fact sheet detailed how Power Africa had helped to close 145 power generation investments with a value of $24 billion. The programme is a partnership between the US government and the governments of Ethiopia, Ghana, Kenya, Liberia, Nigeria, Tanzania, and the private sector.

At the Summit, the launch of the Clean Tech Energy Network was announced as part of the Power Africa initiative. This is a collaboration between the US Government, US clean tech energy companies, and African energy stakeholders. Around $350 million is expected to be mobilised via this initiative. Further, it was announced that a $150 million public/private partnership has been operationalised to provide clean power to 10,000 health care facilities in SSA.

INFRASTRUCTURE FINANCE
At the G7 Summit in June 2022, it was announced that a $600 billion lending initiative, the Partnership for Global Infrastructure and Investment (PGII), would be launched to fund infrastructure projects in the developing world, with a particular focus on Africa. The G7 countries – Canada, France, Germany, Italy, Japan, the UK, and the US – explained that the PGII would help address the infrastructure gap in developing countries, with a core focus on sustainability.

At the same time, the US announced that as part of the PGII, it would mobilise $200 billion for developing countries over the next five years. This funding will be in the form of grants, financing and private sector investments. One of the priority pillars of this funding will be “tackling the climate crisis and bolstering global energy security through investments in climate resilient infrastructure, transformational energy technologies and developing clean energy supply chains across the full integrated lifecycle.” Some deals have already been announced, including a $2 billion solar energy project in Angola, and the building of multiple hospitals in Côte d’Ivoire.

TRADE AND INVESTMENT
In July 2021, the Biden Administration announced that it would renew the US Prosper Africa initiative, started in 2019, with a focus on increasing reciprocal trade and investment between the US and African countries. At the time, the US said that the initiative would focus on improving trade and investment in sectors such as infrastructure, energy and climate solutions, healthcare and technology. Seventeen US government agencies working as part of this initiative were given a mandate to, among other things, empower African businesses, offer deal support, and connect investors from the US with those in Africa.

Also noted at the renewed Prosper Africa launch was the intention to focus on projects that supported women, and small and medium enterprises in Africa. Under the Biden Administration, US engagement with African countries has focused on strengthening these trade and investment relationships in a strategic, cooperative and reciprocal way, with a vision of shared prosperity between Africa and the US.

At the Summit, Prosper Africa announced plans to boost African exports to the United States by $1 billion through investments and partnerships, and to mobilise an additional $1 billion in US investment in Africa.

TRADE
The US has often expressed its support for AfCFTA, the Africa-wide free trade zone, stating that it wants to see the growth of Africa’s economic power in the world. All future trade agreements signed between the US and African countries will have to align with AfCFTA’s trade stipulations and, considering the Biden Administration’s environmental stance, new agreements will likely also include climate change provisions and tariffs on high-carbon imports.

The Administration is also focusing on trade agreements that don’t disadvantage US businesses and consumers. For example, the US-Kenya Strategic Trade and Investment Partnership (STIP) was signed in July 2022. The agreement outlined the enhanced engagement and high standard of commitment between the two countries, and focused on increased investment and sustainable and inclusive growth that will be of benefit to both countries’ citizens and businesses. The agreement also included the intention to support regional economic integration in East Africa.

Further reciprocal bilateral and regional trade agreements between the US and African countries are expected to be signed in the near future. Such agreements are expected to eventually replace the non-reciprocal African Growth and Opportunity Act (AGOA), which allows duty- and quota-free exports from eligible African countries into the US, and which is due to expire in 2025.

At the Summit, the Biden Administration noted that since 2021, the US Government has assisted in closing more than 800 two-way trade and investment deals worth around $18 billion across 47 African countries. In addition, the value of private investment deals from the US into Africa since 2021 is $8,6 billion. According to a White House Fact Sheet, the value of goods and services traded with Africa as part of the PGII, Prosper Africa and Power Africa totalled $83,6 billion in 2021.

Further, the Export-Import Bank of the United States (EXIM) announced at the Summit that it had signed a number of MoUs with African partners, including a $500 million MoU with the African Export-Import Bank (Afreximbank) to support diaspora engagement and strengthen EXIM’s commercial ties to the continent, as well as other MoUs focusing on trade, and the support of infrastructure, transportation, digital technology and renewable energy projects.

INVESTMENT
US investment in Africa has grown in recent years. According to Refinitiv data, Prosper Africa’s focus on improving investment between the two regions appears to be working. The value of M&A transactions in SSA, where the acquirer or the acquirer’s ultimate parent were based in the US, was $3,6 billion in the 2022 year to date, with 94 deals announced in 2022. The only time in the last few years that the deal value has been higher was in pre-pandemic 2017, when 58 deals were announced, valued at $4,9 billion. In 2021, the value of deals from US acquirers into Africa was slightly lower than in 2022, at $3,3 billion, but the volume was higher, with 97 deals announced. In 2020, both the volume and value of deals were lower, with US-based acquirers announcing $1,5 billion in deals in SSA, spread over 42 deals. This was much lower than in 2019, when $2,9 billion in US-originated M&A deals were announced in SSA, spread over 38 deals. The volume of deals was higher in 2018 than in 2019, but the value was lower – 55 deals valued at $2,4 billion were announced that year. With both the volume and value of US M&A deals in Africa climbing once again, an increasing number of US investors are clearly looking to launch and grow African operations.

The US focus on increased engagement and continued trade and investment in Africa is good news for the continent. Africa needs strong partnerships to address its development challenges and reach its full potential, and it has a solid ally in the US. The numerous US-Africa initiatives and partnerships that have launched as part of the US’s renewed, sustainable and reciprocal approach to Africa are leading to a plethora of opportunities for both regions.

O’Brien is a Partner, Baker McKenzie Chicago, and formerly Chair of the Sub-Saharan Advisory Committee of the Export-Import Bank of the United States (EXIM).

This article first appeared in the DealMakers AFRICA 2022 Annual.

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

Ghost Bites (British American Tobacco | Exemplar REITail | Glencore | Purple Group | Raubex | TWK | Zeder)

The Finance Ghost
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Ghost Bites (British American Tobacco | Exemplar REITail | Glencore | Purple Group | Raubex | TWK | Zeder)

British American Tobacco: the Chair’s address (JSE: BTI)

It’s useful to assess the narrative here

As is standard procedure at British American Tobacco (BAT), the focus is on the transformation of the business. If ever you wanted to see a goldmine for ESG consultants, look no further than BAT. The corporate imagery will make you feel like you’re reading about a group that builds schools in Africa, not one that produces a way for people to hurt themselves.

A version of this argument can be made for the liquor companies as well. At the end of the day, it comes down to personal preferences in terms of what you will or won’t invest in.

At BAT, the New Category business is where the company scores brownie points. Supposedly healthier than cigarettes, these vape and associated products are big on ESG progress and low on profitability – the goal is for this segment to be profitable in 2024.

Make no mistake: the core business is tobacco. The rest is only 15% of revenue, with a goal to grow from 22.5 million customers of “non-combustible products” to 50 million customers by 2030.

That core business is a cash cow of note, which is why people buy shares in BAT. Adjusted operating margin improved by 150 basis points in the 2022 financial year and there was a 100% operating cash conversion rate. 100%! This is how the company managed to return £6.9 billion to shareholders in the form of dividends and buybacks.

Smoking isn’t exactly a fast-growing hobby (thankfully), so the company needs to drive growth in earnings by becoming more efficient. In the coming year, the goal is to increase diluted EPS by mid-single digits on a constant currency basis. Over the next few years, the strategic focus is on reducing the number of regional structures and business units, creating a lower cost base.

Thus far in the 2023 financial year, the US market has been problematic. The premium segment in that country has been under pressure and BAT has had internal inventory issues with the implementation of the global SAP platform. The second half of the year is expected to be better than the first half.

Guidance for 2023 has been reaffirmed, which would’ve been the comment from the Chairman that drove a 3.7% increase in the share price.

Exemplar REITail grows earnings (JSE: EXP)

As the too-cute name suggests, this is a retail property fund

There is practically no liquidity in Exemplar REITail, so there isn’t much you can do with this trading statement other than add it to your knowledge base on the current performance of local property.

This makes it useful for anyone with a position in retail property, as the fund has indicated growth in its distribution per share of between 15.6% and 20.0% for the year ended February 2023.

The fund owns retail properties in townships and rural areas, so this is different exposure to what you might get from the likes of Hyprop.

Glencore needs to get a new dating app (JSE: GLN)

Yet another attempt has been made to seduce Teck shareholders

Flowers. Chocolates. A cash payout for the fossil fuels side of the business. Glencore has tried it all, yet the board of Teck Resources in Canada just won’t go with Glencore to the dance.

In an act of defiance and desperation, Glencore has released an open letter to Teck shareholders. This is a bit like going to the parents of your desired date and asking them to talk some sense into their offspring.

This letter isn’t an improvement on the revised offer. Instead, it is designed to get shareholders to put pressure on the board to consider the Glencore proposal. To be fair to Glencore, there are elements of the proposal that shareholders in Teck should pay attention to.

For example, unlike the current restructuring proposal at Teck, the Glencore structure would achieve a full separation of “CoalCo” and offer a cash option in lieu of that exposure. There are also synergies (like in every deal ever – easier said than done) and there is the creation of a scaled “MetalsCo” – the transition metals business.

Here’s the interesting thing: if Teck shareholders vote down the current board proposal on 26 April, then Glencore is willing to make an offer directly to shareholders. That would be a full-on hostile takeover, or arranged marriage to keep our analogy going!

It’s also worth noting a comment from Glencore that the company is willing to improve the terms of the proposal, provided there is engagement with the Teck board.

I actually need to quote this paragraph verbatim, as this is the beauty of top corporate financiers operating at full flight:

Glencore is prepared to meet anytime and anywhere that is suitable for the Teck Board and/or its management team to explore our proposal. If the Proposed Teck Separation proceeds, the Glencore proposal cannot proceed and potential future offers for Teck Metals would likely look very different given the friction costs, the complexity of the two companies, the time delay involved and the impact of two new management teams and boards.

In addition to what I think is a rather brilliant letter, Glencore also released a presentation that you’ll find here if you are interested.

EasyEquities opens the door to 70 million Filipinos (JSE: PPE)

The ever-faithful Purple Group investors rewarded the company with a 3.9% gain

Purple Group has built the EasyEquities client base in several ways, with partnerships high on the priority list. When entering a new market, a partnership is practically a necessity. It’s just too hard and risky to start from zero.

Back in August 2022, the company gave the market an indication of a partnership in the Philippines. It’s taken a few months to get it across the line, with details now announced on SENS. The partner is GCash, the largest and fastest growing mobile wallet in the Philippines. Astonishingly, GCash has over 70 million active clients. That’s bigger than the population of South Africa!

The activation strategy is a fantasy investing game launching in June 2023, which will educate Filipinos on the US market – the area of focus in this partnership.

At this point, there’s no confirmation of when the real product will launch. The regulator in the Philippines is playing this carefully, which makes sense. It also means that if Purple Group can get this right, there’s an instant moat. It’s clearly not easy to enter this market based on the time taken thus far.

Raubex is making money everywhere – even Australia (JSE: RBX)

Full year HEPS will be much higher than in the previous year

Raubex is showing strong growth in the year ended February 2023, with HEPS expected to be between 25% and 35% higher. That’s a proper result in this environment.

There were a number of positive contributors. The decision to diversify into Australia is working out, which isn’t something you’ll hear often from South African corporates. The Australian business contributed 20% to group operating profit.

But the major contributor was the flagship project at the Beitbridge Border Post in Zimbabwe, a project that was awarded at the end of 2020.

In the Materials Handling and Mining division, it sounds like the Bauba Resources acquisition is going well. The turnaround strategy has been successful and additional working capital from Raubex has had a positive impact.

In the Roads and Earthworks business, Raubex has been awarded R2 billion in SANRAL contracts since October 2022 and the company is happy with the activity in tender awards.

Construction Materials suffered most from load shedding and inflationary pressures. This had a negative impact on margins, as one would expect. Ironically, the slow roll-out of IPP renewable energy projects has negatively impacted performance there as well. The group has shifted to concentrate on private renewable projects.

The share price increased by 5.4% off the back of this announcement.

TWK is proof of how cyclical fertiliser demand is (CTSE: 4ATWK)

Read that ticker carefully: TWK is listed on the Cape Town Stock Exchange and A2X, not the JSE

If you’ve been paying attention to your Ghost Mail mailers, you’ll know that TWK is due to appear on Unlock the Stock on 20th April. This will give investors great insight into the agriculture industry and particularly fertiliser, which is the part of the business that broke in the six months to 28 February 2023.

Group revenue from continuing operations increased by 7.6%, but EBITDA fell by 13.1%. Basic earnings per share fell by almost 21%.

The Timber segment wasn’t the problem child. Far from it, in fact, with revenue up 28.7% and EBITDA up 21.6%. There was some margin compression here, but strong demand from pulp manufacturers continued to drive growth in wood chip exports and local timber sales.

Retail and Mechanisation is a totally different story. Revenue fell by just 0.3%, yet EBITDA tanked by 72.6% to a margin of just 1.8%. That revenue number was driven by many sales of fertiliser below cost just to reduce stock levels, so gross margins fell over and load shedding didn’t help either. The fertiliser market is affected by many global factors, so this is a risky and cyclical game.

The Financial Services segment grew revenue by 27.3% and EBITDA by 35.8%. It’s very unusual to use EBITDA as a measure in financial services, but this is primarily an insurance business rather than a lending business.

The Grain segment increased revenue by a lovely 57.9%. It didn’t help much, with EBITDA down by 48.2% under immense cost pressure.

The Motors segment saw a drop in revenue of 36.1%. EBITDA fell by 70.1% in a year that this segment will want to forget. The floods at the Toyota manufacturing facility were a major contributor to stock shortages and poor performance.

In Zeder’s results, you need to read carefully (JSE: ZED)

The drop in NAV per share isn’t nearly as bad as it looks

Zeder is an investment holding company, so net asset value (NAV) per share is the right measure. It has dropped by 44.2% in the year ended February 2023, but there are good reasons for this. The company has been on a value unlocking journey, so it has deliberately made itself smaller.

For example, the unbundling of the stake in KAL Group (previously Kaap Agri) contributed a drop of R1.03 per share. There was also a special dividend of R1.03 per share. Guess what? The drop in NAV per share was R2.06, so this explains the entire decrease.

This also means that the rest of the business didn’t grow, which obviously isn’t good. There seems to be significant uncertainty, with supply chain and load shedding considerations. A dividend has not been declared for this period.

Zeder is engaging with third parties regarding the remaining portfolio investments.

Little bites:

  • Director dealings:
    • A director of a subsidiary of MTN (JSE: MTN) has sold shares worth over R5.2m.
    • Directors of Old Mutual (JSE: OMU) collectively bought shares worth nearly R2.1m.
    • An associate of a director of Ascendis Health (JSE: ASC) has bought shares worth R203k.
    • Weirdly, a director of Dis-Chem (JSE: DCP) bought shares worth R10k without clearance. Finger trouble?
  • Chrometco (JSE: CMO) is in business rescue and the business rescue plan was published a few weeks ago. The meeting of creditors was due to take place on 18th April, but the Industrial Development Corporation (the largest creditor) proposed an adjournment to consider the plan in more detail. The meeting was adjourned to 16th May.

Unlock the Stock: Astoria

The Finance Ghost
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Unlock the Stock: Astoria

Unlock the Stock is a platform designed to let retail investors experience life as a sell-side analyst. Corporate management teams give a presentation and then we open the floor to an interactive Q&A session, facilitated by the hosts.

This year, Unlock the Stock is delivered to you in proud association with A2X, a stock exchange playing an integral part in the progression of the South African marketplace. To find out more, visit the A2X website.

We are also very grateful to the South African team from Lumi Global, who look after the webinar technology for us.

In this seventeenth edition of Unlock the Stock, Astoria joined us for the first time to talk about the investment portfolio that offers exposure to a range of sectors through both listed and unlisted investments. For everything from specialist retail through to marine diamond operations, Astoria has a lot to talk about!

I couldn’t join this event unfortunately, but my usual partners Mark Tobin of Coffee Microcaps and the team from Keyter Rech Investor Solutions did a wonderful job with it. Watch the recording here:

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