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Ghost Bites (Altron | Equites | Kaap Agri | NEPI Rockcastle | Oceana Group | Sibanye-Stillwater | WBHO)

The Finance Ghost
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Ghost Bites (Altron | Equites | Kaap Agri | NEPI Rockcastle | Oceana Group | Sibanye-Stillwater | WBHO)

The sale of Altron Document Solutions has fallen over (JSE: AEL)

The buyer couldn’t agree on the way forward with Xerox

In what must be an immensely frustrating situation for all concerned, Altron’s disposal of Altron Document Solutions to Bi-Africa Investment Holdings has been cancelled.

Although several conditions precedent were fulfilled, the buyers and Xerox just couldn’t find common ground on a distribution agreement for the South African market. This was core to the transaction, so the entire thing is now over.

Altron still wants to sell this business, though I do wonder whether this update might scare off potential buyers. It all depends on what part of the distribution agreement was problematic. These conversations happened entirely behind closed doors, so we have no further details.

Equites updates the market on key focus areas (JSE: EQU)

This is a useful update on strategic drivers in the business

I must say, I quite like the way in which Equites Property Fund gives its pre-close update. The company has six strategic “focus points” and reports on each one.

Something I found interesting is that the asset disposal programme (basically just a way of recycling capital) is experiencing strong demand for the assets both in the UK and South Africa. The loan-to-value ratio is expected to increased to between 35% and 40% in the short-term, before returning to the medium-term range of 30% to 35%.

I also noted that the Shoprite relationship is expected to yield internal rates of return of between 13% and 14%. Put differently, you’re looking at a spread of between 300 basis points and 400 basis points over South African government bonds.

If you want to read the full update, you’ll find it here.

Kaap Agri to mop up the odd-lots (JSE: KAL)

An odd-lot offer is designed to save administrative costs

From time to time, listed companies decide to execute an odd-lot offer to buy the shares held by shareholders who each hold fewer than 100 shares. This isn’t great for retail investor liquidity of course, but does save administrative costs.

For example, Kaap Agri has 14,777 shareholders who hold fewer than 100 shares each, representing a total of 0.42% of shares in issue. Repurchasing the shares will result in a cash outflow for the company of R13.37 million for the shares and R716k in transaction costs, which I’m sure was compared to the costs of having those shareholders.

Here’s the thing though: shareholders aren’t forced to sell. With an offer price equal to the volume weighted average price, there also isn’t a huge incentive to let the shares go, even if there are some tax benefits available in this process.

Note that if you hold fewer than 100 shares and you DO NOT want to sell them, then you have to make that election by Friday, 21st April. The default election is to sell your shares so if you don’t specify otherwise, they will be sold.

NEPI shareholders: make your choice (JSE: NRP)

There’s a scrip dividend on the table at a premium to the cash dividend

When a company wants to retain cash, it can try and use a scrip dividend to persuade shareholders to accept new shares in lieu of a dividend. Sometimes, the values of the options are the same, which is the case when the company isn’t pushing the scrip option too hard.

In other cases, the scrip dividend is at a premium to the cash dividend i.e. shareholders are financially better off by choosing the scrip dividend, unless they believe that the shares are going to drop in value soon and they would rather have the cash.

At NEPI Rockcastle, the default option for this distribution is unusual. Unless they say otherwise, shareholders will receive a capital repayment on the shares. If they choose differently, they receive a scrip dividend or a cash distribution.

If you are a shareholder, you need to read this circular.

Oceana Group has been a great catch this year (JSE: OCE)

Strong pricing and demand have led to solid results

The fishing business isn’t easy, that much I can tell you. If you can imagine all the volatility of global markets and the ocean (literally) in one package, you’re on the money here.

Speaking of money, here’s the five-year chart for Oceana Group:

As you can see, recent momentum has been exceptional. Since July 2022, the share price has rallied approximately 55%!

After substantial supply chain disruptions in 2021 and the civil unrest, the company needed to replenish its inventory. Thanks to successfully doing exactly that, canned fish sales volumes were up by 33% in the four months ended January 2023 vs. the prior period. As great as the volumes story is, the selling prices didn’t increase by enough to offset cost pressures. Margins have suffered as a result.

In other local product updates, South African fishmeal and fish oil sales volumes were 23% higher.

In the US, fishmeal volumes were up 43% and fish oil volumes almost tripled! On that side of the very large pond, selling prices were at least higher. Along with the weakening of the rand, this means that Oceana’s best growth numbers were also achieved in the strongest currency.

Finally, horse mackerel and hake sales volumes increased by 43%. High fuel costs have once again been highlighted by the company as a concern.

The good news is that load shedding isn’t much of a worry, as vessel operations rely entirely on self-generated power. The canning and fish meal businesses have coal boilers as the primary source of power.

Despite the potential for volatility in this business, the group is confident enough to put out a trading statement for the six months ending March. HEPS will be at least 20% higher than the comparable year, which is the minimum required to trigger a trading statement. I suspect that they are being conservative here, so this might remain an interesting (but risky) punt for the next few months.

And in strategic news, the disposal of Commercial Cold Storage Limited has achieved regulatory approvals in South Africa. Approval in Namibia is outstanding, with the deadline kicked out to 30 April.

Sibanye-Stillwater signs off on a year to forget (JSE: SSW)

Between floods and labour strikes, 2022 was ugly for Sibanye

With a share price that is down 46% in the past year, there aren’t many positives to take from the 2022 financial year for Sibanye-Stillwater. The first half of the year was hammered by production problems and the second half saw profitability come under pressure despite improved production numbers.

For the year ended December, headline earnings was R18.4 billion, approximately half of the R36.9 billion achieved in the prior year. This was strongly weighted towards the first six months of 2022 (R11.9 billion) vs. the latter half of the year (R6.5 billion).

This drop in earnings was driven by a 20% drop in revenue in 2022, which led to a 40% decrease in adjusted EBITDA. With the operating leverage that is a feature of mining businesses, you can’t afford major drops in revenue. The gold business was the biggest offender here thanks to labour unrest, with negative EBITDA of R3.5 billion vs. positive R5.1 billion in the prior period. The floods in the US didn’t help either, with EBITDA in the US PGM operations down 47%.

Despite all of this, there’s still a final dividend of R1.22 per share.

WBHO is firmly back in the green (JSE: WBO)

Despite a return to profitability, there’s still no dividend

In the six months ended December 2022, WBHO delivered on the strong order book that was in place at the start of the period. Revenue from continuing operations increased by 15% and earnings from continuing operations was up by 39%.

Even if we look at total operations, the group is profitable again. HEPS came in at 630 cents vs. a headline loss per share of 1,613 cents in the comparable period.

No interim dividend has been declared.

Going forward, a 19% increase in the order book should help with profitability in coming periods. Once the exit from Australia is completed and the associated cash drag is over, there might even be a dividend again!

Little Bites:

  • Director dealings:
    • Aside from a small purchase of shares by an associate of the CEO of Spear REIT (JSE: SEA), there was a much meatier purchase by an associate of a non-executive director to the value of R1m.
    • A non-executive director of Anglo American (JSE: AGL) has bought shares worth £19.8k.
    • A non-executive director of Finbond Group (JSE: FGL) has bought shares worth R100k.
  • DRA Global (JSE: DRA) has very little liquidity, so I’m including a brief reference to results. In the 2022 financial year, revenue fell by 24.6% and underlying EBIT was just A$7 million vs. A$56.4 million in the prior year. There was no dividend.
  • The only certainty in a business rescue process seems to be that the publication of the business rescue plan will be delayed. At Tongaat Hulett (JSE: TON), this has now been pushed out to 31 March.
  • OUTsurance Holdings (JSE: OUT) has appointed Nathaniel Simpson as the new CEO of Youi Holdings, the Australian business within the group. He replaces Huge Schreuder as CEO, the founder of Youi when it launched as a greenfield project in 2008.
  • With the Tradehold (JSE: TDH) strategy now firmly based on the Collins Group, there have been wholesale changes at both executive and non-executive levels to the board.
  • Trustco (JSE: TTO) has released a messy set of numbers for the year ended August that were impacted by the long and painful fight with the JSE over the accounting policies. Although the net asset value increased by 362%, the headline loss per share was 159% worse than the prior period.
  • Obscure and highly illiquid company Putprop (JSE: PPR) released a trading statement noting that HEPS for the six months to December would be down by between 31% and 51%.

Unlock the Stock: Afrimat and Capital Appreciation

The Finance Ghost
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Unlock the Stock: Afrimat and Capital Appreciation

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 fourteenth edition of Unlock the Stock, Afrimat and Capital Appreciation both returned to update us on their businesses. This gives you a wonderful opportunity to learn about two companies with completely different industry exposures, both available for investment on the local market.

Use the link below to enjoy this great event, co-hosted by yours truly, Mark Tobin of Coffee Microcaps and the team from Keyter Rech Investor Solutions:

Ghost Bites (Accelerate Property Fund | Choppies | Clientele | Hulamin | Liberty Two Degrees | Murray & Roberts)

The Finance Ghost
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Ghost Bites (Accelerate Property Fund | Choppies | Clientele | Hulamin | Liberty Two Degrees | Murray & Roberts)

Accelerate Property Fund raised R50 million (JSE: APF)

The underwriter had to take the lion’s share

When a property fund is trading at a huge discount to net asset value per share, you would expect shareholders to jump at a rights offer. After all, it’s the opportunity to buy more shares at a vast discount, especially when the rights offer is priced below the market price.

Not so at Accelerate Property Fund, where the fully underwritten rights offer for R50 million saw the underwriter take up over R38 million worth of shares.

With a share price that has fallen over 86% in the past five years, there isn’t exactly an orderly queue in the market for these particular shares.

Choppy profits at this retailer (JSE: CHP)

Choppies is suffering from margin pressures

Revenue growth of 9%. That sounds lovely, doesn’t it? Sadly, a lot happens between revenue and money landing in the pockets of shareholders.

In the six months ended December, Choppies clearly struggled with margins. Gross margin fell from 21.3% to 21.0% as supply chain costs couldn’t be recovered from customers. It may not sound like a lot, but a 30 basis points deterioration in a retailer is a big deal.

The margin pressure at operating profit level was a lot worse, exacerbated by the opening of new stores that take a while to ramp up to full profitability. Operating profit fell by 22.1% as operating margin contracted from 5.6% to 4.0%.

Remember, by the time we get to operating profit, we haven’t even dealt with interest costs yet. In a higher rate environment, those also went in the wrong direction despite a decrease in net debt over the period.

With all said and done, headline earnings per share fell by 35% and there is no interim dividend.

So much for that revenue growth, huh?

Clientele offers a juicy yield AND growth (JSE: CLI)

Brand ambassador Desmond Dube is clearly doing his job here

Clientele is one of those companies that never comes up as a stock pick. Closing at R10.37 on Monday, the trailing dividend yield is 11.57%. That puts most property companies to shame, plus you must remember that you pay the full income tax rate on a REIT dividend, whereas a Clientele dividend is subject to dividends withholding tax (which is much lower, or zero if you hold the shares through a company).

Now, this isn’t to say that Clientele has been a fantastic investment. The share price hasn’t gotten back to pre-pandemic levels, as evidenced by this chart:

Still, with that dividend yield, you would expect the company to be ex-growth. Instead, we find a business that just grew its HEPS by 14% in the six months ended December. This bodes very well for the next dividend!

Despite Desmond Dube’s best efforts on daytime television, the company is dealing with higher than expected policyholder withdrawals as its customers face economic pressures.

I’m also not sure what the investment funds were invested in, as they somehow achieved an annualised investment return for the period of 12%. Every other insurance company has been complaining about investment returns in 2022.

Looking deeper, the long-term insurance segment remains the largest contributor, with net profit of R180.8 million and growth of 16% in that number. The short-term insurance business (Clientele Legal) recorded a 26% drop in net profit to R45.1 million.

Despite these numbers, the share price fell 0.3%. Volumes are thin here, despite the market cap of nearly R3.5 billion.

This is an interesting, off-the-radar company.

Hulamin: all about the “metal price lag” (JSE: HLM)

The concept of “normalised earnings” gets taken to the next level here

For the year ended December, Hulamin’s earnings as reported will drop by between 49% and 41%. If you apply normalisation adjustments to that HEPS number, then it looks very different.

The major adjustments are both related to the base year (2021) rather than the 2022 earnings. Hulamin talks about the Metal Price Lag (and even gives it capital letters), which is the timing difference between the purchase and sale of metal. I think most companies call this Normal Business.

If you are willing to work with Metal Price Lag, then you’ll be pleased to note that normalised HEPS has increased by between 20% and 38%.

The share price was trading around 3.5% lower in afternoon trade. This is called Share Price Lag.

Liberty Two Degrees is robust but perhaps expensive (JSE: L2D)

Operating costs are under serious pressure and the trailing yield isn’t juicy enough for me

Liberty Two Degrees makes for fascinating reading, as the property fund owns some of the most iconic properties in South Africa, including Sandton City and Melrose Arch. This is a mix of really desirable retail and office space, although the portfolio also includes a few other malls that aren’t nearly as prestigious.

Importantly, consumers have returned to malls and key retail metrics are running ahead of pre-pandemic levels. Turnover is up 21.9% vs. 2019 and footcount is up 9.9% vs. that year in the retail portfolio. Despite this, rental reversions were -9.7% for retail space, so tenants are still negotiating hard with landlords.

The situation in the office portfolio is still horrible, with negative reversions of -25.5% vs. -24.8% last year. Office occupancy has dropped year-on-year from 86.2% to 80% because the fund sold the fully let Standard Bank building. This “reveals” the occupancy in the rest of the portfolio. Leaving aside that building, like-for-like office occupancy has improved at least, though one would certainly hope so based on the negative reversions!

The trouble lies in operating costs, which have come under substantial inflationary pressure. We can see this in Net Property Income, which is still much lower than in 2019 despite the improvement in rental turnover and footfall. Here’s the real story vs. pre-pandemic numbers:

You also need to keep a close eye on interest costs, with a higher interest rate environment adding to the pressures. Net interest expense is 12.13% higher year-on-year, an unpleasant outcome when Net Property Income was only up 7.3%.

The good news is that the Loan to Value ratio is modest at 24.4%, so the fund isn’t carrying too much debt. This has helped support a 100% distribution pay-out for the year of 36.47 cents per share, which is 6.95% higher than in 2021. Under the circumstances, that’s a decent outcome.

The share price is trading at R4.30 which implies a trailing yield of 8.5%. Is that enough in this environment, particularly with load shedding pressures on operating costs? I don’t think so.

As this share price tells us, we are still a long way off pre-pandemic levels:

Murray & Roberts is losing money (JSE: MUR)

Is a rights offer coming at some point?

Murray & Roberts released an updated trading statement that treats the Australian business as a discontinued operation in this period and the prior period. This allows the market to isolate the rest of the business and see how that is performing.

The answer is: not well.

From both continuing and discontinued operations, the company is expected to report a headline loss in the six months to December of between -323 cents and -321 cents. From continuing operations only (i.e. ignoring the Blunder Down Under), the headline loss is -33 cents to -28 cents.

When a company says that it will “evaluate options to de-lever the balance sheet to achieve a long term capital structure”, it’s time to accept that the risk of a rights offer is very high. Have a look at the EOH share price to get a sense of what that looks like for shareholders.

Little Bites:

  • Director dealings:
  • If you’re a Kibo Energy (JSE: KBO) shareholder or perhaps an energy junkie, you’ll be interested to know that Kibo subsidiary, Mast Energy Developments, exceeded expectations in 2022 at the Pyebridge synchronous gas-powered flexible generation facility. I’m not going to pretend to understand this stuff, so read the full details here if this interests you.
  • Acsion Limited (JSE: ACS) has renewed the cautionary announcement related to a potential cash offer and delisting of the company.
  • Chrometco (JSE: CMO) has renewed the cautionary announcement relating to a material subsidiary of the company. The company is suspended from trading on the JSE.

Ghost Stories #7: Growth, Value and Markets (Nico Katzke, Head: Portfolio Solutions at Satrix)

The Finance Ghost
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Ghost Stories #7: Growth, Value and Markets (Nico Katzke, Head: Portfolio Solutions at Satrix)

In this episode of Ghost Stories, Nico Katzke (Head of Portfolio Solutions at Satrix) joined me to unpack a wide variety of investment topics.

There is something in here for literally everyone, with numerous insights available to you in this detailed discussion.

We covered topics like:

  • A brief overview of why 2022 was so hard for investors.
  • The difference between growth and value investing, explained in a way you likely haven’t heard before.
  • The VIX and the DXY and why these market metrics are useful in practice.
  • The disappointment of gold over this period.
  • Equity investing in the context of higher rates in the market, both over the short- and long-term.
  • Being careful of the growth component that is found in most leading indices.
  • The relative outlook for value vs. growth.
  • Artificial Intelligence as a theme and the potential disruption of Google.
  • Achieving real diversification through suitable portfolio allocation.
  • The importance of consistently investing over a long period of time.
  • The misconception of active vs. passive investing and how passive should rather be thought of as “rules-based” investing.

Listen to the discussion using this podcast player:

Disclaimer
Satrix Investments (Pty) Ltd is an approved financial service provider in terms of the Financial Advisory and Intermediary Services Act, No 37 of 2002 (“FAIS”). Satrix Managers (RF) (Pty) Ltd (Satrix) is a registered and approved Manager in Collective Investment Schemes in Securities. The information above does not constitute financial advice in term of FAIS. Consult your financial advisor before making an investment decision. Past performance is not indicative of future performance.

Ghost Wrap 13 (Adcock Ingram | KAP Industrial Holdings | Motus | Tiger Brands | Quantum Foods | Libstar | Bidcorp | City Lodge)

The Finance Ghost
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Ghost Wrap 13 (Adcock Ingram | KAP Industrial Holdings | Motus | Tiger Brands | Quantum Foods | Libstar | Bidcorp | City Lodge)

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

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

  • Adcock Ingram has put in a great performance under tough conditions.
  • KAP Industrial Holdings is a case of di-worsification at the moment, with practically all the businesses struggling.
  • Motus released strong operating results, but keep an eye on the debt.
  • Tiger Brands has shown excellent pricing power, though I worry about how long consumers can keep this up for.
  • Quantum Foods has had its profitability destroyed by feed costs and load shedding.
  • Libstar’s business model doesn’t have sufficient pricing power in this environment.
  • Bidcorp reported exceptional numbers, reminding the market just how good the business is.
  • City Lodge’s results have divided the bears and bulls even further – and with good reason.

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 (AECI | BHP | Buka | City Lodge | Libstar | Old Mutual | Royal Bafokeng Platinum | Spur | Steinhoff)

The Finance Ghost
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Ghost Bites (AECI | BHP | Buka | City Lodge | Libstar | Old Mutual | Royal Bafokeng Platinum | Spur | Steinhoff)

AECI: the German business is the wurst (JSE: AFE)

HEPS is higher, but there were substantial impairments

For the year ended December 2022, AECI grew HEPS by between 12% and 18%. That’s a solid result under these economic conditions, especially with higher funding costs brought on by working capital pressures.

Importantly though, HEPS excludes the impact of impairments, which were large enough in Germany to cause EPS to drop by between 18% and 24%. There’s a new management team in place in Germany and that will hopefully improve matters.

BHP shows us what the yield curve looks like (JSE: BHG)

The company has raised $2.75 billion in debt through the US market

Large companies with debt programmes actively manage their exposure in terms of maturity dates and costs. You’ll often see bond repurchases or issuances from the largest companies in the world.

This usually isn’t notable for equity investors, unless the company is materially increasing or reducing the overall level of leverage.

From the latest BHP update, I thought it was worth including the details of the debt issuance to show you how funky the US yield curve looks at the moment. The company raised as follows:

  • $1bn in three-year bonds at 4.875%
  • $1bn in five-year bonds at 4.750%
  • $750m in ten-year bonds at 4.900%

I’m certainly no debt or yield curve expert, but note how three-year money is more expensive than five-year money. This is the impact of an inverted yield curve.

Buka: no deal and a suspended listing (JSE: BKI)

The owners and directors of this cash shell will have to tread carefully

Back in July 2022, Buka Investments announced the acquisition of the Socrati Group from B&B Media and Moltera Group. B&B Media is in the final stages of discussions to acquire a shoe manufacturing business that would be merged with Socrati Group.

In order to complete that transaction first, B&B Media has requested Buka Investments to put the Socrati deal on ice. This means that Buka Investments has not met the JSE requirement for a cash shell to execute a transaction within six months of that classification, so the listing has been suspended.

City Lodge’s detailed results couldn’t stop the bleeding (JSE: CLH)

The share price has lost over 12% in the past week as earnings disappointed

The market was looking for a major recovery in City Lodge’s earnings as tourists returned to our shores and business travelers ditched Zoom and got back to doing things face-to-face.

For the six months ended December 2022, average group occupancies were up from 30% to 57%. The trend is important here, with second quarter occupancies ahead of the equivalent quarter in 2019. The challenge lies in pricing, as average room rates are up 10% year-on-year but only 1% vs. 2019. This suggests that City Lodge has achieved the volume recovery through potentially unsustainable pricing.

A good news story is food and beverage revenue, with the group putting in a proper effort to become more than just a bed for tired business people. Food and beverage revenue increased by 132% and now comprises 16% of total revenue.

The COVID business interruption claim was received in this period. To give it context, the claim was R27 million and EBITDAR was R304 million. That “R” isn’t a typo by the way – EBITDAR is a standard metric in the hotel industry and removes rent costs from operating profit.

Here’s another important number: the cost of generators in this period was a whopping R7 million vs. just R0.9 million in the prior period. This doesn’t help the profit performance.

Salaries and wages were up 43%, but there was a substantial salary sacrifice in the comparable period with 30% salary reductions. This explains the year-on-year move. The utilities bill is up 25%, a function of inflation and higher occupancies.

The company reported profit of R97.9 million in this period vs. a loss of R33.8 million in the prior period. This means that the COVID claim contributed 27.5% of profits in the current period. I would focus on HEPS excluding that claim which is 14 cents.

Thanks to an improved balance sheet after selling off assets and reducing debt, there’s a perhaps surprising dividend of 5 cents per share for shareholders.

The share price of R4.35 is very hard to justify against interim earnings of 14 cents per share. Investors also look at net replacement value per share based on insured values of the hotels, which is R10.60 per share. Personally, I look at earnings. The cost of building something again is irrelevant if that “something” can’t deliver attractive returns.

Keep an eye on this chart:

Libstar needs more pricing power (JSE: LBR)

Revenue is higher but gross profit margins have deteriorated

In inflationary times, we quickly find out which companies have pricing power and which don’t. With Libstar helping retailers execute private label strategies as a meaningful part of its business, the company is sadly a price taker from those retailers.

We can see this clearly in the year ended December, where revenue growth was 10.7% but gross profit was only up by 3.9%. This is despite 7.7% of the growth being attributed to pricing increases (and 3% to volume growth), which tells you how severe the cost pressure on manufacturing was in this period.

The other issue is that export sales were lower, leading to an under-recovery of overhead costs. This double-whammy impact in manufacturing businesses can really bite, as the combination of volume pressure and a deteriorating gross margin can cause havoc with profitability.

Load shedding also didn’t do gross margins any favours, with R39 million in operating costs related to generators and a whopping R31 million of that amount coming through in the second half of the year. This is worrying for the current gross margin under Stage 6 load shedding.

The 3.9% increase in gross profit wasn’t enough to offset a 6.5% increase in operating costs. Although cost control was solid at Libstar, the company still saw a drop in normalised EBITDA of between 2.6% and 5.6%.

Impairments of R277 million were recognised, of which R98 million was attributed to the Denny mushroom business that suffered a fire.

Those impairments don’t impact the HEPS line, which is expected to decrease by between 8.6% and 13.6%. The share price fell 3.4% in response.

Old Mutual: read carefully (JSE: OMU)

The unbundling of 12.2% in Nedbank in 2021 makes a big difference

You know my views on “adjusted” or “normalised” earnings in general and how this term gets abused by listed companies. For some reason, Old Mutual went too far in the other direction here and made very little effort to highlight a critical adjustment that is justifiable.

In a trading statement for the year ended December, profit from operations could as much as double based on an improved mortality experience from COVID. Although conditions have clearly improved, Old Mutual highlights persistency (customers continuing to pay premiums) as a worry, as consumers are under so much pressure.

Adjusted HEPS will be up between 7% and 27% and in this case, the adjustment has to do with the number of shares in the calculation and the exclusion of earnings in Zimbabwe. As reported, HEPS is up between 0% and 20%.

But the adjustment I care about is the unbundling of the 12.2% stake in Nedbank in 2021. That stake contributed R646 million of the R5.4 billion of adjusted headline earnings in the prior period, so it was a huge contributor.

If the impact of Nedbank is excluded, adjusted headline earnings would be between 23% and 43% higher. You just have to read the announcement very carefully to know this.

HEPS drops sharply at Royal Bafokeng Platinum (JSE: RBP)

The joy of cyclical mining groups is on display once again

For the year ended December, HEPS at Royal Bafokeng Platinum fell by a rather ugly 48.2%. Ouch.

The company attributes this to a number of factors and most of them sound internal, like operational issues at Styldrift and a higher income tax expense. Inflation at the mines is also running ahead of CPI, which doesn’t help much.

The share price has dropped 11.5% in the past year. The bidding war between Impala Platinum and Northam Platinum over the company has helped shield the share price from a much greater drop. In case you don’t believe me, here’s a chart of Royal Bafokeng vs. its potential suitors:

Spur feels “cautiously optimistic” (JSE: SUR)

These are meaty numbers, achieved despite consumers being under such pressure

Spur’s results for the six months ended December 2022 are obviously being measured against a base period that was absolutely ruined by COVID. It’s not surprising to see big year-on-year growth numbers.

To ground us in reality before getting into details, diluted HEPS in the six months to December 2019 was 124.9 cents. In the latest period, it was 136.65 cents. This puts Spur ahead of pre-pandemic levels, but HEPS is up only 9.4% in total over three years. It certainly hasn’t been a happy period even before we take into account the absolute disaster that was the pandemic itself.

As reported though, the year-on-year numbers like revenue up 35%, diluted HEPS up 198.5% and the interim dividend per share up 67.3% are all exciting. I would take note of how the dividend growth has trailed earnings growth and the message this sends about management’s confidence in these conditions.

Spur is “cautiously optimistic” going forward, with a warning given in the outlook regarding disposable income among consumers. Importantly, the balance sheet is ungeared. This means that there is no debt, which is a great position for a restaurant group to be in.

Steinhoff jumps 13.3% after a trading update (JSE: SNH)

And truly, I have no idea why

Steinhoff continues to confuse me. I think it’s worthless and the market now thinks it is worth 34 cents per share. I guess time will tell.

In a trading update for the first quarter of the year, the group disclosed a 14% increase in revenue. Pepco Group is the shining star, up 22% for the quarter. Mattress Firm was anything but firm, with a 14% drop in constant currency revenue. It’s little wonder that the IPO was pulled, even though Steinhoff blamed market conditions for that issue. I don’t care how good the conditions are, an IPO won’t be a happy experience when revenue has dropped like that.

I just hope that anyone buying shares at the moment has read the terms of the proposed capital restructuring very carefully.

Little Bites:

  • Director dealings:
    • RBFT Investments, an associate of a director of Salungano (JSE: SLG), has bought shares worth nearly R6m. There is still plenty of appetite to buy more, with the company looking for up to R84m worth of shares in the open market, as explained here.
    • Worryingly, David McAlpin (who runs the Nutun business in Transaction Capital) has sold another big chunk of shares in Transaction Capital (JSE: TCP), this time worth R4.2m.
    • An associate of a director of Huge Group (JSE: HUG) has bought shares worth R116k.
  • DRA Global (JSE: DRA) has been notified of a claim by Andrew Naude for breach of employment causing a loss of present and future income. The amount has been quantified as over $9 million. Naude served as CEO of DRA Global until stepping down in 2022.
  • If you’re a shareholder in Advanced Health (JSE: AVL), you’ll want to know that the circular dealing with the proposed disposal of PresMed in Australia has been released. This is a Category 1 transaction, so the circular goes into plenty of detail about the transaction. You’ll find it here.
  • There’s a new independent executive director appointment at Transcend Residential Property Fund (JSE: TPF). I usually ignore non-exec appointments, but this one is interesting as the director is active in the corporate finance advisory industry. This points to potential corporate actions coming at the fund.
  • After the unwind of the B-BBEE transaction, Remgro (JSE: REM) holds 80.22% of the shares in RCL Foods (JSE: RCL) and MandG Investment (that is the correct spelling) holds 5.24%. Like a fluffy toy being cuddled by a kid, this share register is tightly held.
  • Luxe Holdings (JSE: LUX) continues to be a hot potato on the JSE, with Merchantec Capital resigning as the Sponsor. The announcement doesn’t give any indication of who the replacement Sponsor will be.

TreasuryONE Budget Conference

The Finance Ghost
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TreasuryONE Budget Conference

If you’re looking for great insights into the Budget Speech, this is the right place. In this article, I set out what I learnt from the TreasuryONE Budget Conference. You’ll also find the video recording of the entire event.

Load shedding. Transnet. The rand. These are the headline-grabbers that cause grey hairs for most South Africans and especially for business executives and entrepreneurs.

With the budget speech now out in the wild, we have a view on government’s latest fiscal policies. TreasuryONE hosted an excellent panel discussion on this topic that I had the pleasure of watching on Thursday morning. I thought I would share some of my key takeouts before giving you the opportunity to watch the discussion yourself.

We did well during the pandemic

As a country, the pandemic was relatively kind to us. We didn’t print crazy amounts of money. We spent less than many other countries and the commodity cycle was great for South Africa, with commodities like coal and PGMs pulling us out of trouble.

The reduced pressure on our interest bill after such a strong period is really helping us with navigating the current global climate.

We score a lot of own goals

Kumba Iron Ore. Thungela. If you’ve been reading the recent updates from these companies, you’ll know that Transnet is severely hindering our exports. In the Unlock the Stock event that I co-hosted later in the day on Thursday, the CEO of Afrimat highlighted that even the commodities being consumed domestically are being severely impacted, so it’s not just the export lines.

During the TreasuryONE panel discussion, it was estimated that we’ve lost up to R100 billion in coal export opportunities because of Transnet. To make it worse, our road infrastructure isn’t coping with the additional load that should be running on our railways.

The great balance sheet roll-up continues

For years now, we’ve been dealing with failing (or failed) SOEs and moving their debt onto the fiscal balance sheet. Bluntly, taxpayers suffer when companies like SAA lose a fortune.

Eskom dwarfs all these issues, with R254 billion worth of debt being moved onto the country’s balance sheet over three years. This is a necessary step to reduce risk of an Eskom default and related cross-defaults. It allows for more funding to go into maintenance and diesel rather than interest payments.

The debt alleviation comes with a strict set of conditions. But as was pointed out by political analyst Songezo Zibi during the panel discussion, what actually happens if Eskom doesn’t meet the conditions? It’s not as though government will switch the entire country off… not by choice, anyway!

Are the winds of change blowing?

Overall, the mood of the panel was that this was a less populist budget than we might have seen in recent years. Government is reigning in public sector wage spending and is pursuing policies aimed at encouraging investment, not consumption. There was no mention at all of NHI, land reform or nationalisation of the Reserve Bank.

Are we seeing a significant shift in policy here?

There are incentives in place for solar, so the government is trying to address the energy crisis. Although the incentive for individuals was a little soft, the business incentives are strong. Of course, what would really help is if people could effectively sell back into the grid. Cape Town will be the test case for that!

One area where government recognised the needs of the voter base was in the fuel levy, which hasn’t had an increase for the second year running. Together with diesel rebate initiatives, this helps with managing food inflation.

But be careful…

Debt to GDP is forecast to be higher than in the 2022 Medium-Term Budget Policy Statement (MTBPS), a direct result of the large chunk of Eskom debt moving onto the fiscal balance sheet. The difference vs. the MTBPS is 360 basis points at the peak debt to GDP ratio in 2025/26.

The trouble is that the economic growth forecasts used by Treasury are higher than those used by the SARB. It’s not clear whether Treasury has fully considered the impact of current levels of load shedding.

The other issue is that commodity prices have tapered off from pandemic levels. Commodities are notoriously cyclical, so assuming growth off the pandemic revenue base is brave.

GDP is ahead of pre-COVID levels but employment is down 4% – 5% and investment is 12% lower. This is a recipe for danger.

And finally, the biggest positive of all

Unlike so many other countries in the world that are in difficult economic circumstances, we still enjoy one critical element of our beloved country: free press.

In what turned out to be Andre de Ruyter’s exit interview, we saw that shining through.

You can watch the entire discussion below:

https://www.youtube.com/watch?v=oBS6sT4_OS0

Ansarada DealMakers Annual Results 2022

Marylou Greig
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Ansarada DealMakers Annual Results 2022

Facts are facts, and while they can be dressed up or down, they reflect the naked truth – dealmaking in South Africa is in steady decline. All but for a slight correction in 2021, due to the release of deals delayed by pandemic lockdowns, the effect of the political and energy related woes faced by ‘SA Inc’ on investor confidence is clearly seen in the number of local M&A deals captured for 2022 – down 7% on the numbers recorded in 2020 and that at the height of the COVID-19 pandemic! The start of 2023 offers insight as to what is to be expected – only four deals were announced during January, this compared with the 26 announced in January the previous year.

The take private of Mediclinic International, shortlisted for the Brunswick DealMakers Deal of the Year 2022, was the largest deal by value for 2022 at £2,05bn (R41,8bn). Gold Fields’ unsuccessful acquisition of Canadian Yamana Gold would have taken top spot at R103bn. The fact that, of the top 10 deals by value for 2022, only three were by SA companies, speaks to the decline in dealmaking in the listed space.

50% of deals used for league table purposes in 2022 fell into three categories. Deals in the Real Estate sector dominated representing 21% of the deals recorded valued at R93,6bn followed by Resources & Energy at 15% (this sector was the highest by value at R203,5bn).  Tech deals represented 14% of transactions recorded valued at R39bn.

Behind the scenes – in what DealMakers categorises as general corporate finance activity, companies focused on value creation for shareholders by undertaking share repurchase programmes (R265,9bn versus R115,3bn in 2021) and the distribution of special dividends and unbundlings (R464,2bn versus R63bn in 2021)  – most notable being the unbundling by Rand Merchant Investment of its stakes in Momentum, Metropolitan and Discovery, and PSG Group’s distribution of its stakes in its listed portfolio (also shortlisted for Deal of the Year 2022). For the most part, the uptick in the number of listings recorded reflects the growing number (19) of secondary listings undertaken by JSE-listed companies on A2X. But part of the picture is also the increased opportunities now available for domestic investors in the form of new disrupters and innovators.

Private equity continues to be an important driver in the dealmaking space across the continent. In South Africa, two sizeable transactions were recorded: Digital Realty’s acquisition of a majority interest in Teraco Data Environments (R56bn), and the exit by Actis and Mainstream from Lekela Power (R25bn) – the 2022 winner of the DealMakers Private Equity Award.

Given that more than 50% of adults in sub-Saharan Africa remain unbanked, the scope for investment in the fintech space is compelling, and as this number decreases, so the number of opportunities will grow.

Also on the radar of institutional investors are the venture capital alternative investment asset class – although the tough macroeconomic environment and associated rising interest rates will likely curb fundraising outcomes.

The winners of the platinum medal subjective awards are as follows:

Ince Individual DealMaker of the Year

(L-R) Arie Maree (Ansarada), Marylou Greig (DealMakers), Johan Holtzhausen (PSG Capital) and Andile Khumalo (Ince).

Brunswick Deal of the Year – Sanlam Allianz joint Venture

L-R Arie Maree (Ansarada), Iris Sibanda (Brunswick) and the local advisory teams to the deal – Standard Bank, J.P. Morgan, Webber Wentzel, Bowmans and PwC.

Exxaro BEE Deal of the Year – Shoprite Checkers’ evergreen B-BBEE transaction

Arie Marie (Ansarada), Sacha Allie (RMB), Mzila Mthenjane (Exxaro) and Warran Dukas (Shoprite).

Catalyst Private Equity Deal of the Year – Actis exit of Lekela Power

Marylou Greig (DealMakers), Arie Maree (Ansarada), David Cooke (Actis) and Michael Avery (Catalyst).

Business Rescue Transaction of the Year – CIG and CONCO

Marylou Greig (DealMakers), Arie Maree (Ansarada), Martin Liebenberg (Metis), Dean McHendrie (Birkett Stewart McHendrie), Josh Cunliffe (Metis) and Gerhard Albertyn (Metis).

2022 M&A award winners (listed companies)

The category of Investment Adviser (by deal value) was won by Standard Bank. (L-R) Arie Marie (Ansarada), Marylou Greig (DealMakers) and Khutso Manthata (Standard Bank).

The category of Investment Adviser (by deal flow) was won by Investec Bank. (L-R) Arie Marie (Ansarada), Marylou Greig (DealMakers) and Marc Ackermann (Investec Bank).

J.P. Morgan was the winner of the Sponsor category (by deal value). Olwethu Matoti, Otsile Matheba (A2X), Thembeka Mgoduso, Athi Ayabulela Noah and Thusani Tshivhase (J.P.Morgan).

The Investec team received the award for top Sponsor (by deal flow). L-R: Rob Smith, Buhle Sithole, Otsile Matheba (A2X), Masetshaba Mabaso and Monica Griessel.

Top Legal Adviser (by deal value) was won by Webber Wentzel.

Roxanna Valayathum received the award on behalf of Cliffe Dekker Hofmeyr for Top Legal Adviser (deal flow) from Marylou Greig.

The award for Transactional Support Services Adviser (by deal value) was presented to PwC. Anneke du Plessis received the award from Hoosain Karjieker (Mail & Guardian).

Nicky Theori received the award for the top Transactional Support Services Adviser (by deal flow) on behalf of BDO from Hoosain Karjieker (Mail & Guardian).

Top Legal Advisers in unlisted M&A

This is the first time awards for unlisted M&A have been awarded.

Top Legal Adviser (by deal value) in unlisted M&A went to Bowmans. Ryan Wessels accepted the award.

Top Legal Adviser (by deal flow) went to Bowmans. Lerato Thahane accepted the award.

Top BEE Advisers in 2022

DealMakers recorded 29 BEE deals during 2022 in the exchange-listed and unlisted M&A space. The top two BEE deals by value were the disposal of 40m Shoprite Checkers shares (a 5.7% stake) to the Shoprite Employee Trust and Anglo American Platinum’s replacement ESOP representing a 2% stake in Amplats to B-BBEE employees.

Irshaad Paruk accepted the award on behalf of RMB for the top BEE Adviser (by deal value) from Marylou Greig.

RMB was awarded top BEE Adviser (by deal flow). Krishna Nagar accepted the award.

Sally Hutton received the award on behalf of Webber Wentzel for top BEE Legal Adviser (by deal value).

Webber Wentzel was awarded the top BEE Legal Adviser of the Year (by deal flow). Ziyanda Ntshona accepted the award.

2022 M&A League Tables: SA advisory firms (in relation to exchange-listed companies)

*Investment Advisers include Financial Advisers and all others claiming this category.

2022 General Corporate Finance League Tables: SA advisory firms (in relation to exchange-listed companies)

*Investment Advisers include Financial Advisers and all others claiming this category.

Weekly corporate finance activity by SA exchange-listed companies

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

Sable Exploration and Mining is to undertake a fully underwritten rights offer. The company will offer 52,210,464 ordinary shares, in the ratio of 12 new shares for each existing share at a price of R1 per share. The company aims to raise R52,2 million. The offer will be underwritten by James Allan, a director of the company.

Castleview Property has issued 47,839,506 shares at an issue price of R6.48 per share for an aggregate R310 million. The purpose of the issue is to build cash reserves for liquidity management purposes.

Salungano shareholders have been informed that RBFT Investments, which currently holds 18.1% of the issued shares in the group, wants to increase its shareholding and to ultimately delist the company from the JSE. RBFT proposes to acquire on the open market up to 60 million Salungano shares at R1.40 per share. RBFT Investments says the bid is an exempt partial offer and should not be construed as a general offer by RBFT.

Balwin Properties is to take a secondary listing on A2X with effect from 28 February 2023.

Capital & Counties Properties plc will trade on the JSE under its new name Shaftesbury Capital plc with effect from 9 March 2023. The share code will change from CCO to SHC and the company will remain listed in the same sector subsequent to the name change.

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:

Finbond repurchased 45 million shares in the period 14 – 16 February 2023, representing 4.95% of the company’s issued share capital. The shares were repurchased at a price of R0.26 per share for an aggregate R11,7 million. Of the shares repurchased, 25 million will be delisted and cancelled while the remainder will be held as treasury shares which will, following the repurchase represents 9.81% of Finbond’s issued share capital.

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 1,119,759 shares at an aggregate cost of A$5,1 million.

Spear REIT repurchased 6,941,385 at an average price of R7.62 per share representing 2.83% of the issued ordinary share capital. The shares were repurchased during the period 1 July 2022 to 17 February 2023.

Glencore this week repurchased 11,576,699 shares for a total consideration of £59 million. The share repurchases form part of the second phase of the company’s existing buy-back programme which is expected to be completed this month.

Investec repurchased a further 909,645 Investec shares for a total consideration of R104,28 million. The shares were repurchased during the period 13 February to 17 February 2023. In addition, the company announced that it had repurchased over the period 30 November 2022 to 20 February 2023, 945,321 preference shares for R89,48 million.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 13 to 17 February 2023, a further 2,629,344 Prosus shares were repurchased for an aggregate €74,37 million and a further 317,713 Naspers shares for a total consideration of R1,09 billion.

Seven companies issued profit warnings this week: Aveng, Discovery, Jasco Electronics, Sibanye-Stillwater, Sasfin, Choppies Enterprises and Quantum Foods.

Four companies issued or withdrew cautionary notices. The companies were: Conduit Capital, Brikor, Coronation Fund Managers and Choppies Enterprises.

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

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

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

Exchange-Listed Companies

Sibanye-Stillwater which has a 19.9% stake in Australian retreatment mine New Century Resources, has made an unsolicited offer to acquire the remaining stake. The reason given for the offer is that Sibanye is unhappy with the company’s strategic direction and this tailings retreatment and recycling mine fits nicely into Sibanye’s ‘circular economy’ strategy. At an offer price of A$1.10, representing a large premium, the company will pay up to A$120 million (R1,5 billion) if the deal is accepted.

Delta Property Fund’s announced deal to dispose of a property situated at the corner of CJ Langehoven and Cape Road, Gqeberha has been terminated. The sale of the property to Rivadex has been cancelled due to the purchaser’s inability to meet their obligations relating to the cash disposal consideration of R38 million.

Planet42, the car subscription startup addressing transport inequality by putting cars in the hands of people who are unable to access traditional bank credit, has raised $100 million in combined equity and debt funding. The $15 million equity round was co-led by Naspers and ARS Holdings with participation from existing and new shareholders.

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

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