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Ghost Bites (Brikor | De Beers | Stor-Age)

The Finance Ghost
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Ghost Bites (Brikor | De Beers | Stor-Age)

What’s brewing at Brikor? (JSE: BIK)

Nikkel Trading is nearly at mandatory offer level

Against the backdrop of brick-making business Brikor reporting a 100% drop in HEPS for the six months ended August 2022 (not something you’ll see every day), the share price has lost around 45% in the past year.

With a market cap of R142.5 million, this company really is ripe for a takeover bid.

Nikkel Trading is coming, having entered into agreements with major Brikor shareholders to acquire over two-thirds of the company’s shares. This was announced back in March, so it’s not a surprise to see another announcement that Nikkel Trading’s stake has increased.

This investor now holds 34.2% in Brikor, so the mandatory offer that was alluded to in March is right around the corner. A mandatory offer is triggered once a stake moves above 35%.

De Beers sales in line with expectations (JSE: AGL)

The third sales cycle brings more good news for Anglo American

De Beers really is a fantastic business within Anglo American. The sales cycles are hard to understand though, as I’m never sure how comparable a particular sales cycle in 2023 would be to the same cycle in 2022.

For this reason, I tend to focus on the CEO commentary. In the latest sales cycle (worth $540 million), De Beers sounds happy as sales were in line with expectations. Encouragingly, there are positive trends in demand for diamond jewellery, especially in China where a relaxation of travel restrictions is coming through in consumer confidence.

This is an important read-through for all luxury brands, as China is a huge market.

Stor-Age is doing clever deals in the UK (JSE: SSS)

The company is taking just a 10% stake in four properties and will manage them as well

For Stor-Age to create shareholder value, the company needs to find ways to enhance its yield. One way to do this is to manage properties, not just acquire them. This introduces an element of capital-light earnings, which would go a long way towards injecting some excitement into the share price.

The latest deal in the UK is a good example. Stor-Age is acquiring a 10% interest in a joint venture that is buying four Easistore properties as its first deal. The 90% partner is Nuveen Real Estate, a global investment manager with a whopping $154 billion in assets under management. There’s a very good chance of further deals down the line for this joint venture if the initial acquisition is a success.

Here’s the kicker: the properties will be branded and managed by Storage King under its third party management platform. Storage King is Stor-Age’s brand in the UK. This is why the forecast pre-tax yield on investment is 15%, with Stor-Age contributing £4.4 million (including transaction and rebrand costs).

This deal takes the Storage King portfolio to 39 properties by the end of the year.

The group is still investing locally as well. The development and expansion pipeline of 11 properties is as even a split as you can get: 5 in SA and 6 in the UK.

Looking a bit deeper into this deal, the debt funding is being provided by Natwest in the form of a £41 million five-year bullet facility (i.e. only interest is paid until maturity). There is also considerable room for value creation at property level, with occupancy at the largest property as low as 63.6%. The other properties vary from 84.8% to 93.1%.

Little Bites:

  • Bytes (JSE: BYI has announced the appointment of Sam Mudd as an executive director of the group. Sam is currently the MD of Phoenix Software, a subsidiary of the group. Her CV is a wonderful throwback, with extensive experience including a stint at WordPerfect! If you were around before Microsoft absolutely dominated with its Office suite, you might remember that name.

Investment School with Bruce Whitfield: how to research stocks

The Finance Ghost
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Investment School with Bruce Whitfield: how to research stocks

In my first ever appearance on The Money Show with Bruce Whitfield, he hit me with a left-field pop quiz about Capitec. Then we talked about the topic I was expecting.

When Bruce’s team approached me to be a guest on the show, I jumped at it. The Money Show needs no introduction and this was a golden opportunity to share some insights into researching stocks and why I believe this is so important.

We talked about everything from the importance of common sense through to the different retail categories and their margins. Yes, the conversation was as varied as that.

Get ready to learn and listen to this great Investment School segment:

Ghost Bites (Alphamin | Glencore | Grand Parade | PBT | Primeserv | Rex Trueform | Royal Bafokeng Platinum | Sibanye-Stillwater | Zeder)

The Finance Ghost
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Ghost Bites (Alphamin | Glencore | Grand Parade | PBT | Primeserv | Rex Trueform | Royal Bafokeng Platinum | Sibanye-Stillwater | Zeder)

Records tumble at Alphamin (JSE: APH)

Higher recovery rates drove record tin production

A read through the Alphamin numbers is interesting. They compare the quarter ended March 2023 to the quarter ended December 2022, an approach I enjoy as they are behaving like entrepreneurs. Corporates do the whole year-on-year thing, but hustlers are only worried about how they performed vs. recent months.

Speaking of performance, ore processed actually fell by 10%. But thanks to an improvement in recovery rates, tin production increased by 2% to a record 3,187 tonnes. Sales increased by 1% to 3,161 tonnes.

The real win is the 23% increase in the average tin price achieved, a very happy outcome that is beyond Alphamin’s control. It’s lovely when it happens though, leading to blowout EBITDA of $41.4 million vs. just $27.1 million in the preceding quarter.

Even after paying the FY22 dividend of $28.2 million, the net cash on the balance sheet is $86 million. The company invested $15 million during the quarter in the Mpama South project and capital allocation in FY23 will be prioritised towards that project.

Mpama South’s processing plant is 66% complete overall and is apparently on track for a December 2023 commissioning date.

Tick tock. Tick tock.

And to end off this section by giving you a severe feeling of regret, the share price is up 410% over three years. There we all were, buying tech companies in the pandemic instead of a lucrative tin mine.

Glencore offers another rose to Teck (JSE: GLN)

In this corporate romance, will Teck ever swipe right?

Well, give Glencore some credit here. After arriving at the door with roses the first time and being booted into the mud, our plucky suitor has arrived once more with new flowers and clean clothes. Will it go any better this time around?

Glencore has realised that not all Teck shareholders will be happy holding dirty assets like thermal coal. The proposal is to introduce a cash element to the proposed merger and demerger, which would see Teck shareholders receive 24% of “MetalsCo” and $8.2 billion in cash. In other words, a stake in the transition metals business (copper etc.) and cash to avoid equity exposure to coal.

Glencore is also willing to offer a combination of cash and “CoalCo” shares to those who have no problem holding investments in fossil fuels.

I’m old enough to remember when nobody would touch Thungela because it was dirty. I’m also old enough to remember how that tune changed when Thungela delivered extraordinary share price returns.

It gets a bit technical, but Glencore has also essentially promised not to break the balance sheet in the process of adding a cash element to the offer.

Glencore makes a compelling point around the balance sheets. Although Teck is currently trying to split its businesses anyway, there will be intercompany funding arrangements for 7 – 11 years. Under the Glencore proposal, there would be two separate companies with suitable balance sheets from day one, without cross-holdings.

Glencore proposing a better ESG outcome? Well now, there’s a thing.

Not much of a parade for this mandatory offer (JSE: GPL)

The acceptance rate for GMB’s mandatory offer was low

It seems as though most Grand Parade Investments shareholders aren’t looking for a liquidity event. The mandatory offer by GMB Liquidity Corporation (a very funny name in this context) was only accepted by holders of 4.49% of total shares in issue.

This takes GMB’s stake to 53.65%, so the company has crossed the control threshold.

PBT makes shareholders feel special (JSE: PBG)

After selling Payapps, it’s payday for shareholders

PBT Group has been one of the best small cap success stories on the JSE in the past few years. With the sale of its business in Australia, there is cash on the table and management is giving almost R157 million back to shareholders.

There is a special dividend of 75 cents per share and a special capital reduction distribution of 75 cents per share. The tax treatment is what makes the difference here. The total distribution is obviously R1.50 per share, in case your coffee hasn’t kicked in yet.

On a closing share price of R8.30, that’s special indeed.

Primeserve gives a few more details to chew on (JSE: PMV)

The cautionary is slightly less bland

After Finbond released a bland cautionary and then an updated announcement with ever-so-slightly more in the way of details, Primeserv has done the same.

In this case, Primeserv is negotiating a potential acquisition in the staffing services sector which may have a material effect on the share price. This does sound quite serious, as negotiations are at an “advanced stage” – though any deal can fall over in the dying seconds. Trust me, I’ve watched it happen.

Rex Trueform’s earnings more than double (JSE: RTO)

We will need to wait a few more days to get full details

With interim results due for release on 14 April, Rex Trueform has released a trading statement confirming that HEPS will be 114.9% higher for the six months ended December 2023, coming in at 270.8 cents.

Part of the same group is African and Overseas Enterprises Limited, with HEPS growth for the same period of between 138.7% and 158.7%.

I’m afraid that you’re more likely to find a road in Joburg with no potholes than any liquidity in these stocks.

Royal Bafokeng aims for management stability (JSE: RBP)

The execs are sticking around a bit longer

The CEO and COO of Royal Bafokeng Platinum retired during this difficult period of prolonged corporate action by Northam Platinum and Impala Platinum. With Northam deciding to walk away, the only uncertainty now is the extent to which Impala will achieve acceptances from other shareholders.

The distraction for the company has been severe and would’ve been a lot worse if the executives hadn’t agreed to stay on under fixed term contracts. Of course, such contracts won’t do their pension savings any harm at all.

As a final extension while the Impala offer plays out, the CEO and COO will stay until the earlier of “certainty on the corporate action” and a “transition of the company to its new end state” has been secured (good luck debating that in court), or 7 October 2023.

I would bet on 7 October for the farewell party.

Sibanye is good enough for ten international banks (JSE: SSW)

The revolving credit facility has been refinanced and significantly increased

In this macroeconomic environment, debt is a fun place to play. Yields are strong and in many companies, debt providers are doing better than equity investors at the moment.

So although Sibanye-Stillwater quite rightly points out the macroeconomic uncertainty and reasons to feel proud about a refinanced and enlarged revolving credit facility, the reality is that the banks are loving life at the moment. This is made clear by no fewer than ten international banks participating in the syndication, led to Citi and Royal Bank of Canada.

This is a US dollar denominated facility, so local banks aren’t the focus here. Sibanye needed to raise debt from global markets.

The facility has been refinanced and increased from $600 million to $1 billion, with an option for Sibanye to increase it further to $1.2 billion. The margin (above a benchmark rate i.e. not the total cost of debt) is between 1.60% and 2.00% dependent on leverage. This is essentially Sibanye’s credit spread.

The maturity is three years, extendable to five years at Sibanye’s request in the form of two one-year extensions.

Sibanye loves dealmaking and you can’t do that without access to finance, so this is good news for the group.

Zeder: read this one carefully (JSE: ZED)

The trading statement is no reason to panic

At first blush, the trading statement from Zeder looks like a reason to run for the hills. Or perhaps away from the hills, since the investments are agricultural in nature.

Luckily, the reason for the huge drop in net asset value (NAV) per share is that the company simply became smaller through deliberate actions. When investments are unbundled (as was the case in KAL Group – previously Kaap Agri) or sold and then paid to shareholders as special dividend, Zeder has transferred value from itself to shareholders.

The net result is a drop in NAV per share for reasons other than performance. With an expected drop of between R2.04 and R2.10 per share in this trading statement, it helps that R2.06 is because of corporate actions. In other words, NAV is approximately flat with a bias towards slightly lower.

Not great, but not a panic.

Little bites:

  • It’s been a while since I made all of us feel poor by noting the share repurchases by Naspers (JSE: NPN) and Prosus (JSE:PRX). Between 3 April and 6 April, Naspers repurchased R1.15 billion in shares and Prosus repurchased $138.6 million worth of shares. Interestingly, Prosus put another 96 million Tencent shares in certificated form into the Hong Kong Central Clearing and Settlement System – this step is necessary before selling those shares to continue funding the repurchase.

Trimming the Hedges: What to Do with the Rand in Your Portfolio?

Nico Katzke
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Trimming the Hedges: What to Do with the Rand in Your Portfolio?

By Nico Katzke, Satrix

Few need reminding of the volatility of our currency and the devastating impact it has on imported goods prices, and our ability to travel in comfort. The rand has slumped to its second lowest average monthly value to the USD in March, and few will dare make a case for the prospect of significant strengthening in coming quarters. With this in mind, we tackle the question of what to do with the rand in your investment portfolio, given its volatile nature – and the answer might surprise you.

The TL;DR summary of this piece follows:

  • Hedging the rand exposure of offshore assets systematically (i.e., as a rule over the long term) reduces returns and increases volatility;
  • Empirical evidence clearly shows that currency hedging should be a tactical short-term call on the currency, not a hard rule.

We unpack this somewhat unintuitive conclusion below.

The Volatility Paradox

If you are invested in a balanced fund, chances are your manager increased offshore exposure in the last year given changes in Regulation 28. A key question is how to treat the currency exposure from those offshore assets. Some managers have chosen to partially hedge out the currency exposure systematically – which is typically motivated by trying to reduce overall volatility.

But how does currency hedging work? If you held the MSCI All Country World Index (ACWI) in your balanced fund – the return for this index would be in USD (say 6%). If the rand depreciates, the offshore holding is now worth more in rands, and vice versa. Hedging this exposure would mean you neutralize (in full or in part) the movement of the rand, so that you only earn the USD returns.

With the rand being volatile, it seems perfectly reasonable to reduce currency exposure in order to achieve smoother returns. The data, however, suggests otherwise.

This follows due to a volatility paradox. Simply put, we tend to incorrectly think of volatility in a linear way similar to returns. If I hold two assets, with one returning 10% and the other 20%, holding both in equal proportion leads to an overall return of 15%. Volatility does not work this way, as co-variance needs to be considered too. If we hold two assets (A and B) in a portfolio with annualised volatility of 10%, then adding an asset (C) with a volatility of 20% does not necessarily increase the portfolio’s volatility. This seems unintuitive but can be understood simply. If A and C were strongly negatively correlated, then movements in A (say +10% return) would be offset by movement in C (say -9% return). This way, adding a volatile asset could actually reduce overall portfolio volatility – depending on its co-movement with other assets in the portfolio. Think of waves cancelling each other out, which is exactly what noise cancelling headphones do.

This follows similarly for global holdings and their typical relationship to the volatile rand. We’ve mostly seen a strong negative correlation between offshore USD returns (say for the MSCI ACWI) and the rand. When global equities rally, the rand most likely strengthens (risk-on sentiment), with the opposite holding more likely too. To better visualize this relationship and understand the impact of the rand’s movements, consider a simple 60 / 40 equity and bond portfolio, with a 70% local and 30% global allocation. 1

The following scatter plot shows the strong negative relationship between the global allocation and the rand since 2004 – with labels at the top shown to help with interpreting the impact of rand hedging.

Source: Bloomberg. Calculation Satrix. (31 December 2004 – 31 January 2023).

The reason for the strong negative correlation (grey line) is simple to understand and persistent. The rand does not move in isolation. The same global factors underpinning global asset returns also influence the rand. Amongst other, positive risk sentiment tends to favour both (and vice versa). Also note the strong right-tail in the scatterplots – meaning the rand experiences far deeper monthly depreciations than appreciations: meaning the cost of getting the hedge wrong (right side) is mostly far greater than the benefit of getting it right (left-side).

But what about overall portfolio returns and volatility? If we rebalanced our simple 60/40 : 70/30 portfolio quarterly and compared a fully hedged and unhedged alternative – the results are clear. It shows that the strong negative correlation between the rand and USD returns of global equities and bonds serve to reduce portfolio volatility. Also, the rand’s general weakening trend means it generally serves to increase overall returns when left unhedged.

Source: Bloomberg. Calculation Satrix. (31 December 2004 – 31 January 2023).

Conclusion

The rand is a volatile currency, and carefully managing currency exposure can be a very important tactical tool for short-term risk-mitigation. The motivation for longer-term strategic hedging is more problematic though. It is mostly put to investors that hedging the volatile currency reduces portfolio risk (few would take comfort from shielding against significant rand strengthening) – which seems perfectly plausible. Yet the data simply does not support this.

Considering the consistent interactions between the rand and offshore asset returns, the rand’s variability actually serves as an important cushion against both losses and volatility. Neutralising this benefit through hedging should be very carefully considered – and only done tactically (applied through strong short-term conviction). The data on this is simply too clear to ignore.

1 This translates to a 42% allocation to FTSE/JSE All Share equities Index, 28% to the FTSE/JSE All Bond Index, 12% to the Bloomberg Global Aggregate Bond Index, 18% to the MSCI ACWI Equities Index.

Disclosure

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

View the disclaimer here >>

Ghost Bites (Eastern Platinum | Finbond | Harmony | Kibo Energy | Nu-World | Rebosis | WBHO)

The Finance Ghost
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Ghost Bites (Eastern Platinum | Finbond | Harmony | Kibo Energy | Nu-World | Rebosis | WBHO)

Eastern Platinum releases annual results (JSE: EPS)

The outstanding amounts from Union Goal remain a major problem

The cash flow picture at Eastern Platinum is concerning. In the year ended December 2022, the company burnt through $5.4 million in cash from operations, after generating $890k in the prior year.

One of the major problems is that customer Union Goal hasn’t been paying Eastern Platinum, leading to a suspension of shipments to that customer in the third quarter of 2022. The company is now relying on free market sales and this introduces uncertainty into the business.

Revenue for the year fell by 27% and the headline loss worsened from $0.01 per share to $0.02 per share.

Finbond’s slightly-less-bland cautionary (JSE: FGL)

There still aren’t many details to work off here

A “bland” cautionary is a horrible thing. Basically, a company releases an announcement warning shareholders to be cautious because something may or may not be happening. Nobody even knows if it is a positive or negative step.

The market hates these announcements and with good reason, as they tend to do more harm than good. Finbond has at least improved on its cautionary that was released on 4th April, with an almost immediate follow-up that gives some information at least on what the company is up to.

The cautionary relates to potential acquisitions in Southern Africa. It’s still bland, with some salt and pepper at least added to it.

Harmony makes progress in Papua New Guinea (JSE: HAR)

The Tier 1 Wafi-Golpu Project is a copper-gold deposit

Developing mining assets really isn’t a simple process, especially in emerging and frontier markets that introduce many sensitivities around state participation and development of local communities. Harmony Gold has a joint venture in Papua New Guinea with Newcrest Mining and the parties have signed a Framework Memorandum of Understanding with the government. The terms demonstrate how challenging the process can be.

Aside from social contributions that need to be made by the project, equity participation by the fiscus is also covered in the agreement both in terms of royalties and the option to buy an equity stake. The State of Papua New Guinea has the right to purchase up to 30% in any mineral discovery at the project, exercisable at any time before the commencement of mining. The price would be based on a pro-rata share of accumulated exploration expenditure.

In other words, Harmony and Newcrest would carry all the development risk, with the government able to invest at the last minute at a price that only reflects the costs to date, not the risk that was taken along the way.

The company describes the project as “one of the world’s premier, undeveloped copper-gold deposits” – so it must be worth it!

Kibo Energy releases an update on its projects (JSE: KBO)

The company is still confident that deadlines set for 2023 will be met

Kibo Energy has various projects in the UK and South Africa.

In this update, the company didn’t give any further information on the MAST Energy Developments projects. At the Sustineri project, the company is awaiting final laboratory results to finalise an off-take agreement for synthetic oil production in phase 1. At National Broadband Solutions (a long duration energy storage project), a change in ownership at the client has necessitated additional reciprocal due diligence processes. And in the UK portfolio, there is slower progress than expected in the engineering and design study, with funding constraints as one of the concerns.

Still, the CEO sounds upbeat, noting that the company is confident of meeting deadlines in 2023. Kibo has been struggling with a very weird issue in its shareholding voting mechanisms which has been forcing the adjournment of meetings. This needs to be resolved soon or it will start impacting the company.

Nu-World’s profitability has taken a big knock (JSE: NWL)

Get ready for pain after Easter in this share price

Before a long weekend, there’s a graveyard shift on SENS where companies release bad news in the hopes that nobody will notice. This time around, Nu-World was the culprit.

For the six months ended 28 February 2023, HEPS fell by an abysmal 45% to 55%. The company blames broader economic circumstances, high inflation and rising interest rates.

Nu-World is a consumer goods business that sells a variety of mainly durable products, like appliances. That’s not an appealing business model when consumers are taking strain.

The great Rebosis fire sale is now on (JSE: REA | JSE: REB)

The business rescue plan is being implemented

The Rebosis business rescue plan was almost unanimously accepted by creditors. There’s always that one person in every residential complex, WhatsApp group or “I demand to the speak to the manager” setting that refuses to conform, with no better example than this:

Someone out there is very angry about that R22.8k!

The business rescue practitioners are now being paid the princely sum of R4,000 per hour. What do you get for this amount? Well, a plan to settle debt by selling as many of the properties in the group as possible.

I know, right? I also suddenly feel like I’m working too hard for my money.

In a separate announcement, Rebosis invited members of the public to apply for the public sale process. There’s a non-refundable registration fee of R5,000, presumably to weed out opportunists and those with nothing better to do with their time.

The entire process should be wrapped up by the end of July.

If you are wondering what the business plan looks like (and what the practitioners really get paid for), you’ll find it here>>>

WBHO looks to implement a follow-on B-BBEE deal (JSE: WBO)

The original transaction was implemented in 2006 and is about to expire

With WBHO’s first B-BBEE deal on the verge of being wound up, the company is proposing a new deal that includes three different trusts.

There is a share incentive trust that will operate for the benefit of employees up to junior management level who meet certain minimum qualifying criteria, including having been employed by the group for at least five years. There is also a trust that will benefit employees above junior management level, but excluding prescribed officers and directors. These trusts will own 90% and 8% in the new scheme respectively.

The remaining 2% will be held by a defined beneficiary trust that will operate for the benefit of black women, youth and black people living in rural and under-developed areas.

The deal will be implemented through WBHO issuing 4,000,000 shares to the special purpose vehicle (SPV) through which the three trusts will hold their stakes. The price will be R0.01 per share. WBHO also reserves the right to issue further shares to the SPV to maintain its B-BBEE score, for a period up to 15 years after the deal is implemented.

This is a notionally funded structure, which means the SPV needs to pay off imaginary debt for the shares over 15 years based on the 30-day VWAP, minus R0.01 per share. Inevitably, these deals fail to pay off the debt within the stipulated period, leading to only a portion of the shares eventually vesting in the hands of participants.

This complicated structure is expected to result in a 3.0% decrease in diluted HEPS for WBHO.

Little Bites

  • Director dealings:
    • The company secretary of Sasol (JSE: SOL) sold shares worth R382k.
    • An associate of a director of Ascendis Health (JSE: ASC) bought shares worth R95k.
  • Philip Kotze, CEO of Clover Alloys (SA), has joined the board of Orion Minerals (JSE: ORN). This is part of the broader strategic partnership between the companies that saw Clover Alloys invest around R80 million in Orion’s recent capital raise.

Ghost Wrap #19 (Investec | CMH | Northam Platinum + RB Plats + Implats | Pick n Pay | EOH | Nampak | Murray & Roberts | Glencore | Rebosis)

The Finance Ghost
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Ghost Wrap #19 (Investec | CMH | Northam Platinum + RB Plats + Implats | Pick n Pay | EOH | Nampak | Murray & Roberts | Glencore | Rebosis)

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

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

  • Investec is combining its Wealth & Investment business in the UK with Rathbones, taking a substantial equity stake in what will be the UK’s leading discretionary wealth manager.
  • Combined Motor Holdings has delivered an incredible year, managing to grow HEPS vs. a comparative year that was already a blowout performance.
  • Northam Platinum has used the MAC clause to get out of its Royal Bafokeng Platinum offer, leaving Impala Platinum as the only bidder in town after such a long and painful process.
  • Pick n Pay’s update for the 52 weeks ended 26 February doesn’t look good, especially compared to Shoprite’s recent numbers.
  • In tales from the restructuring crypt, EOH has emerged from the darkness with a successful debt restructure and Nampak remains firmly in trouble, with a temporary reprieve on its debt provided a significant amount of equity is raised.
  • Murray & Roberts has received resounding shareholder approve to sell Bombela Consortium, a critical step in reducing debt.
  • Glencore made a opportunistic play for Teck, a Canadian copper, zinc and steelmaking coal group.
  • Every single Rebosis property is officially for sale, with the business rescue plan approved by almost every creditor – except for one!

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 (Combined Motor Holdings | EOH | Europa Metals | Industrials REIT | ISA Holdings | Northam Platinum | Texton)

The Finance Ghost
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Ghost Bites (Combined Motor Holdings | EOH | Europa Metals | Industrials REIT | ISA Holdings | Northam Platinum | Texton)

Combined Motor Holdings has another massive year (JSE: CMH)

I decided to go back to the annual report for the 2022 financial year to look for a chart that I remembered seeing previously. Here it is:

This sets the scene for the 2023 numbers, which I really didn’t expect to post much growth on top of the 2022 performance. I was absolutely wrong, with CMH expecting headline earnings per share (HEPS) of between 601.2 cents and 651.3 cents, a jump of between 20% and 30% vs. that ridiculous 2022 base.

Based on this, you might expect the share price to have reported massive growth over the last five years. Instead, here’s your chart:

All revved up and nowhere to go…the market has been skeptical of these high earnings continuing, with the company trading on a modest multiple and substantial dividend yield. The share price did close 4.9% higher after this trading statement, so there was some positive surprise in the market, but not much.

Copper 360 Limited is coming to the market (JSE: CPR)

I’m really hoping that the share code isn’t a sign of pain to come

Will shareholders need CPR? I hope not. It’s rare to see a new listing on the JSE and I wish Copper 360 Limited all the best with this.

Unless you’re an “invited investor”, you’ll have to wait to buy shares on the open market. Genuine IPOs are more unusual on the JSE than an honest politician, as our market just isn’t supportive of those deals. The company will raise around R152.5 million from investors.

To find out more about this pure-play copper opportunity, refer to the pre-listing statement here.

EOH catches another bid (JSE: EOH)

The release of detailed results added another 4% to the share price

EOH had given us a very good idea of what was coming in these numbers, with a recent update suggesting growth in operating profit and a far stronger platform going forward.

Detailed numbers have confirmed this, with operating profit for the six months ended January 2023 of R110 million. I misread the original announcement, as operating profit for FY22 was R100 million, not just for the comparable half-year. The comparable half-year profit was actually much higher, which shows how messy these numbers have been, as profits are actually lower year-on-year when looking at just the interim period.

The principle is unchanged, which is that EOH now has a profitable core business. Although this period doesn’t reflect the benefit of the rights issue in reducing debt, the next period will.

Europa Metals doesn’t waste any time (JSE: EUZ)

The drilling campaign at Toral has begun

With the twelve month joint venture budget with partner Denarius Metals now agreed, Europa Metals has moved quickly in getting the drilling programme underway.

This initial programme forms the bulk of the €1.8m budget agreed with Denarius. There are two rigs onsite and the company will update the market as results come in.

Industrials REIT is now a pure-play business (JSE: MLI)

But that benefit is most likely to accrue to Blackstone over time

A focused strategy doesn’t just make you a better business; it can make you a better acquisition target as well. Industrials REIT is proof of that, with a potentially huge offer on the table from Blackstone that sent the share up over 35% in recent days.

If the Blackstone offer goes ahead, the company would be buying a pure-play view on multi-let industrial property in the UK. This is the case after Industrials REIT announced the sale of the German care home joint venture for net proceeds of £15.6 million, which the company will use for further acquisitions in the UK.

It hasn’t been an easy journey, with a disposal programme to get to this point of more than £600 million over five years.

ISA Holdings plays its cards close to its chest (JSE: ISA)

The initial trading statement has the bare minimum details

Under JSE rules, a company needs to release a trading statement when it believes that earnings for a period will differ by more than 20% vs. the comparable period.

For the year ended February 2023, IT company ISA Holdings expects headline earnings per share (HEPS) to be at least 20% higher. As I said, this is literally the bare minimum disclosure. It could be 21% and it could be 50% – we just don’t know until a further update is released.

After all that, Northam Platinum walks away (JSE: NPH)

RIP to this year’s One Capital corporate finance budget

This is incredible, really. After a monumental fight at the regulators that must’ve cost an absolute fortune in professional fees, Northam Platinum has walked away from the Royal Bafokeng Platinum deal. This leaves Impala Platinum’s offer as the only one in the market.

Northam was able to do this because of the drop in prevailing PGM prices, with a sustained drop below a certain level being considered a material adverse change (MAC).

A MAC clause is there to protect the potential buyer of an asset. If a MAC occurs, the buyer has the option to walk away from the deal. Although it provides a convenient escape hatch, buyers don’t easily invoke these clauses unless they were looking for a way out.

In the case of Northam Platinum, they used the MAC clause to walk away. The biggest loser here is surely One Capital, with a history of charging eyewatering advisory fees to Northam. I hope they got decent retainers along the way, as that success fee has got to sting.

Texton sells Alrode Business Park (JSE: TEX)

The focus is on office assets – an interesting play in this environment

Texton is one of the stranger property companies on the local market. A rally of 16% was the market’s response to this latest update, but huge amounts of value have been lost over the years.

The latest news is the sale of Alrode Business Park for R50 million. That may not sound like much, but the market cap is around R770 million. With a book value of R55 million, capital has been recycled at fairly close to book value and the share price responded positively.

I’m not convinced by this rally, as the cash isn’t going to be paid to shareholders. Instead, it will be used to repay debt and “develop its SME strategy” – hmmm.

Little Bites:

  • Director dealings:
    • Value Capital Partners has bought R7.1m worth of shares in ADvTECH (JSE: ADH)
    • The Group CFO of MTN (JSE: MTN) has bought shares worth R4.4m.
    • A director of Lewis (JSE: LEW) has sold shares worth R695k.
    • Several NEPI Rockcastle (JSE: NEP) directors have made the scrip distribution election, as one would expect.
  • Novus Holdings (JSE: NVS) is busy selling a letting enterprise for R125 million. The due diligence deadline has been pushed out to mid-April and other conditions to June.
  • Conduit Capital’s (JSE: CND) sale of wholly-owned subsidiary Constantia Life and Health Assurance Company Limited has been delayed, with the fulfilment date for suspensive conditions pushed out to the end of April.
  • The CEO of Grand Parade Investments (JSE: GPL) has resigned from his position, having achieved the turnaround strategy that he set out to achieve. A replacement will be named in due course.
  • If you are a shareholder in Calgro M3 (JSE: CGR) then keep an eye out for the circular related to the introduction of an employee share incentive scheme.

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

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

At last, and not a moment too soon, a busy week for the companies on South Africa’s stock exchanges.

Exchange-Listed Companies 

Investec plc and Rathbones Group plc have reached an agreement regarding an all-share combination of Investec Wealth & Investment (Investec W&I UK) and Rathbones to create a leading discretionary wealth manager in the UK. Under the terms of the combination, Rathbones will issue new shares in exchange for 100% of Investec W&I UK. On completion, Investec will own 41.25% of the economic interest in the enlarged Rathbones Group, with voting rights limited to 29.9%. The terms of the combination imply an equity value of c. £839 million for Investec W&I UK. The transaction includes Investec’s wealth and investment businesses in the UK and Channel Islands but excludes those in Switzerland and South Africa.

Absa proposes to implement a c. R11,16 billion deal which will distribute a 7% stake in the company to a Corporate Social Investment trust (4%) and a further 3% to its staff trust. The company says that the CSI scheme and the SA Staff scheme will enhance its B-BBEE credentials to at least 25%. The 62,6 million shares (7%) will be sourced from the existing 16 million shares currently held in the Absa Empowerment Trust, 12,7 million of which were obtained as part of the separation from Barclays in 2017 (currently held by Newshelf 1405) and 46,6 million new shares which will be sourced through a specific issue of shares for cash to Newshelf 1405.

Glencore has made an unsolicited proposal to the Board of Canadian miner Teck, which contemplates an all-share acquisition of Tech by the company followed by a demerger of the combined coal business. Glencore and Teck shareholders would own c. 76% and 24% of the merged entities, respectively. The Teck Board has rejected the proposal advising its shareholders to do the same.

Outsurance Holdings, an 89,7% owned subsidiary of Outsurance Group, is to acquire 50% of a stake held by former CEO and founder of Outsurance Holdings in Australian insurance operation Youi. He holds an equity stake of 5.3%. The stake will be acquired for A$36 million in cash.

Omnia, via its subsidiary MBE, has signed a conditional sale and purchase of shares agreement with Indonesian MNK which will see the companies combine their explosive businesses in a move to enhance opportunity for growth and expansion in the global mining market. The joint venture will combine BME’s technology and innovative products and systems with MNK’s local networks, experience and resource, creating a highly differentiated and integrated offering with an expanded suite of products and services for both surface and underground mines.

Blackstone and the Board of Industrials REIT have reached an agreement on key financial terms of a possible cash offer to the company’s minority shareholders. Under the terms of the final offer, shareholders would receive 168 pence per ordinary share in cash. The companies expect to make a firm intention announcement by 14 April, 2023.

Old Mutual Alternative Investments fund, Hybrid Equity, has invested R150 million into Enable Capital, a funder in national fibre network infrastructure in South Africa. The investment allows Enable Capital to find solutions for specific challenges faced by the subcontractors involved in the physical construction and deployment of local, regional and national fibre network infrastructure in the country. 

Hammerson plc has completed the disposal of its 25% stake in Italie Deux, a shopping centre in Paris and 100% of Italik extension for a cash consideration of €164 million. This represents a 4% discount to the December 2022 book value and a net equivalent yield of 5%.

Industrials REIT has disposed of its interest in German care home joint venture for £15,6 million. The disposal marks the transition for the company into a 100% UK multi let industrial business. For the past five years, the company has been disposing of assets valued in aggregate at c.£600 million as part of its strategy to dispose of non MLI investments.

Texton Property Fund has disposed of Alrode Industrial Park to Benav Properties for R50 million. The disposal proceeds will be used to repay debt and further develop its SME strategy.

Sirius Real Estate has disposed of a mixed-use business park in Wuppertal, in North Rhine Westphalia, Germany for €8,8 million.

In a related party announcement Visual International is to acquire a 20% interest in Tuin Huis, a residential property development company, for a nominal sum. Tuin Huis has undertaken two trial Infill Housing Projects in the Durbanville area. Visual will be responsible for building and/or project managing all the development projects undertaken by Tuin Huis at cost.

In another related party transaction, Grindrod has disposed of a London residential property to the Grindrod family for £1,65 million (R35,56 million). The reason for the disposal – the company no longer has London-based operations following the spin-off of Grindrod Shipping.

Oceana has advised shareholders that the disposal of the Commercial Cold Storage business, announced in October 2022 is now unconditional. In addition shareholders were informed that Mokobela Shakati, a member of the purchasing consortium had been replaced by Ntiso Investment, sponsored by Mcebisi Jonas.  

Unlisted Companies

Peach Payments, a local digital payment service provider enabling seamless, secure transactions for business and consumers in Africa, is to receive €29 million in Series A funding from Apis Growth Fund II. Peach Payments currently operates in South Africa, Kenya and Mauritius. The funds will be used to expand its product offering and reinforce its merchant value proposition. Other investors in Peach include Launch Africa, AG Venture and UW Ventures.

DealMakers is SA’s M&A publication.

www.dealmakerssouthafrica.com

Weekly corporate finance activity by SA exchange-listed companies

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

Orion Minerals has raised A$8,9 million via the placement of 593,499,999 shares at an issue price of A$0.015 (R0.18). The placement introduces Clover Alloys (SA) as a new cornerstone investor which will enable Orion to accelerate the development of both of its key base metal production hubs in the Northern Cape province.

Dipula Income Fund has reached a settlement with Breede Coalitions, following the shareholders notification to the company that it intended to exercise its Appraisal Rights. In March the company made an offer to repurchase all of the Dipula A shares for a consideration of 2.4 Dipula B shares for every Dipula A share held. In terms of section 164 of the Companies Act, shareholders of a scheme are afforded the right to demand that the company pay fair value for all DIA and DIB shares. In terms of the agreement reached, Dipula has paid an all-inclusive amount of R34 million for the 1,715,000 DIA shares and 2,000,000 DIB shares held by Breede Coalitions.

Ayo Technology Solutions has disclosed more information on its settlement with the Public Investment Corporation (PIC) following negative press around the scanty details of the agreement reached with the PIC. Ayo will repurchase 17,202,756 ordinary shares from the Government Employees Pension Fund (GEPF) for a total repurchase consideration of R619,42 million. The GEPF will retain a minimum stake of 25.01%.

NEPI Rockcastle will issue 28,830,268 new shares in terms of its scrip distribution alternative. The scrip dividend shares will be issued at R92.82 per share for an aggregate R2,68 billion. The total number of ordinary shares in the company following the issue will increase to 635,830,268.

Cashbuild has repurchased 89 164 shares in terms of its odd-lot offer to shareholders, representing 0.37% of the total issued share capital of the company for a total consideration of R17,59 million.

Shoprite is yet another blue-chip company to announce it will take a secondary listing on A2X. Currently the company’s stock trades on the JSE, the NSX and the LUSE. It will trade on A2X with effect from 11 April, 2023.

A number of companies listed on one of South Africa’s Stock Exchanges have initiated share buyback programmes and each week update shareholders. They are:

South32 has increased its share repurchase programme by c. $50 million in anticipation of a stronger outlook for commodity prices in the second half of its financial year. This will enable the company to return $158 million to shareholders before September 2023. This week the company repurchased a further 1,287,351 shares at an aggregate cost of A$5,63 million.

Glencore this week repurchased 8,280,000 shares for a total consideration of £38,24 million. The share repurchases form part of the second phase of the company’s existing buy-back programme.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 27 to 31 March 2023, a further 3,883,762 Prosus shares were repurchased for an aggregate €272,23 million and a further 485,830 Naspers shares for a total consideration of R1,60 billion.

Two companies issued profit warnings this week: Advanced Health and Pick n Pay. 

Five companies issued or withdrew cautionary notices: Tongaat Hulett, Conduit Capital, Primeserv, Finbond and Ayo Technology Solutions.

DealMakers is SA’s M&A publication.

www.dealmakerssouthafrica.com

The African Exchanges Linkage Project: A viable solution to boost liquidity levels in African stock markets?

Dimitri Cavvadas and Obakeng Phatshwane
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The African Exchanges Linkage Project: A viable solution to boost liquidity levels in African stock markets?

Africa has seen an increase in the number of stock markets and the level of market capitalisation over the last two decades, with improvements to market infrastructure across the continent.

Yet, with certain exceptions, liquidity levels remain a primary concern for investors on the continent, exacerbated by factors such as inefficient trading systems, high transaction costs slowing the velocity of trade, the lack of participation of retail investors on the markets, and long-term and large holdings of pension funds.

Against this background, efforts have been made to tackle the liquidity challenge. Most noteworthy is the launch of the African Exchanges Linkage Project (AELP) on 7 December 2022, an initiative which could, over time, boost liquidity by facilitating cross-border African investment, and attract more international investors if liquidity levels increase.

The AELP, a joint initiative of the African Development Bank and the African Securities Exchanges Association, launched an e-platform (The AELP Trading Link), which allows investors in different countries to buy shares on other exchanges through a common platform. The AELP Trading Link, which is hosted on Oracle Cloud Infrastructure, has been designed to integrate with exchange and stock broker trading systems, and is available in English, French and Arabic. It aggregates live market data from the exchanges and enables stock brokers to access information and see the market depth and liquidity of the foreign market of interest. The AELP Trading Link essentially enables seamless cross-border securities trading between seven African stock exchanges, which together represents 2,000 companies with roughly US$1.5 trillion market capitalisation.

The linkage project is not the first regional linkage initiative to boost liquidity in African Stock Markets. The Bourse Régionale des Valeurs Mobilières, which links the exchanges of eight West African nations, namely Benin, Burkina Faso, Côte d’Ivoire, Mali, Niger, Senegal and Togo, is the only exchange in the world shared by several countries, and has been most successful.

In its initial phase, seven stock exchanges in fourteen African countries will be linked by the AELP. The participating exchanges include the Bourse Régionale des Valeurs Mobilières, integrating the eight West African countries: the Casablanca Stock Exchange, The Egyptian Exchange, the Johannesburg Stock Exchange, the Nairobi Securities Exchange, The Nigerian Stock Exchange and the Stock Exchange of Mauritius.

Ultimately, the AELP is expected to, among other things, promote innovations in product creation that would support the diversification needs of investors in Africa and address the lack of depth in African capital markets. It is understood that once the necessary infrastructure has been created, institutional participation is also potentially contemplated, enabling institutions to settle trades directly.

The current framework for the linkage between the exchanges is “sponsored access”. This is based on the model where a registered stockbroker or “originating broker” in one participating securities exchange takes an order from a domestic client and sends a registered stockbroker on another exchange a request to execute the trade in that market. The executing or “sponsoring broker” is responsible for ensuring compliance to the rules, settlement and practice of the market where the security is bought or sold. Therefore, the sponsoring broker will clear and settle trades in the host market, using their local currency, in compliance with the host market’s rules and practices, and the regulatory bodies in all the participating markets are apprised of the progress.

The securities are to be held in the central securities depository where the security was traded, reducing cross-border movement of securities, and streamlining settlement and clearing to comply with only one market; that being the market where the trade is executed and the security is held.

While a project to link trading on seven of Africa’s largest and most liquid stock exchanges has the capacity to boost liquidity by encouraging cross-border African investment and attract more international investors, the AELP is still in its infantile stages and still faces roadblocks on a continent with disparate regulatory regimes and trading rules, and historical capital market challenges. Nevertheless, it is a step in the right direction.

Dimitri Cavvadas is a Partner and Obakeng Phatshwane an Associate | Fasken

This article first appeared in DealMakers AFRICA.

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

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