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Ghost Bites (Mediclinic | PPC | Spar | Tiger Brands | Woolworths)

The Finance Ghost
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Ghost Bites (Mediclinic | PPC | Spar | Tiger Brands | Woolworths)

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Mediclinic’s earnings are a mixed bag

As the group is currently under offer, there is no dividend

In the six months ended September, Mediclinic’s revenue increased by 10% and the adjusted EBITDA margin fell from 15.8% to 14.2% due to increased operating expenses.

Despite an 8% drop in operating profit, headline earnings per share (HEPS) increased by 36% to 11.3 pence.

Cash conversion was poor in this period, dropping from 104% to 72%. This resulted in a higher leverage ratio vs. the comparable period.

Because of the current offer on the table from Remgro and MSC Mediterranean Shipping Company, no interim dividend has been declared.

PPC expects a substantial drop in earnings

The only good news is that net debt is much lower

The PPC recovery story has had a considerable wobbly this year. The share price has lost more than half its value in 2022, which must be heartbreaking for those who didn’t take profit after a huge 2021 for the stock:

There are significant cost pressures in the group and the competitive nature of the industry means that sales price increases were limited to 5% in the six months to September 2022. This has led to the two words that no investor wants to see: EBITDA compression.

Understanding the numbers is difficult, as hyperinflation in Zimbabwe is skewing the results.

In South Africa and Botswana, sales volumes were down 2.6% and revenue was up 4% thanks to price increases and product mix. The impact on margin is severe unfortunately, dropping from 18.7% to 12.2%. The good news is that positive cash generation resulted in net debt reducing by R140 million to R935 million.

In Rwanda (the CIMERWA business), volumes increased by 11% and EBITDA jumped by 63% to R249 million. Margins increased from 28.3% to 32.3%. This is a terrific result, with the business in a net cash position of R345 million.

In Zimbabwe, a planned kiln shut-down in the first quarter and some other factors led to a decline of 13% in volumes. Reported EBITDA fell by 48%, impacted by hyperinflationary accounting in addition to the pressures in the business. With more foreign currency available, PPC Zimbabwe paid a dividend of $4.4 million to PPC in June. The business ended the period with R253 million in cash.

Group EBITDA fell by 23% for the period. Excluding PPC Zimbabwe, EBITDA fell by 12%. The net debt of the group improved at least, reducing to R677 million from over R1 billion in March.

With Zimbabwe included, HEPS is now negative. Excluding Zimbabwe, the drop in HEPS is still pretty ugly, from 10 cents per share to between 2 cents and 6 cents.

The focus remains on cash generation and operational efficiencies.

I’m glad I gave up on Spar

The market was rather horrified at a 51% drop in the dividend

The Spar announcement started with commentary on a “resilient performance” for the year ended September 2022, yet the market was having none of it. The share price fell 12.3% on the day despite a 6% increase in group turnover.

Margins are under serious pressure at Spar. Operating profit increased by just 1.1%, with Spar taking pain from load shedding and fuel cost pressures in South Africa. Remember, Spar is a wholesaler that supplies franchisees, so this is mainly a logistics play.

Diluted HEPS fell by 2.9% to 1,159.1 cents per share, putting the group on a 12.5x Price/Earnings multiple after the sharp fall in the share price.

Although Spar had previously told the market about an expected decrease in the pay-out ratio, the extent of that decrease was clearly a shock. The group is making a strategic investment in SAP and shareholders will have to stomach a lower dividend for a period of two years.

In South Africa, the core grocery business grew sales by 5.3%. Against a Covid-ruined base, TOPS at SPAR grew by 42.6% and reaffirmed its position as the “number one liquor brand” in South Africa. A far more impressive number is Build it growing by 3.1% at a time when the DIY market has been hammered.

BWG Group in Ireland and South West England grew turnover by 7.6% in euros. The story in Switzerland is far less appealing, with consumers having returned to large supermarkets as the pandemic waned. Turnover in that country fell by 3% in local currency, though it is 14.4% higher than pre-pandemic levels. In Poland, turnover grew by 8.2% and operating losses reduced by 9.5%.

In my view, Spar is stretched thin with many operations and challenges in each one. There are no “easy wins” at the moment and the more focused competitors are winning this fight. As a case in point, Spar reckons that the SPAR2U on-demand offering is achieving positive feedback from consumers.

I just wish I knew who those consumers are, because I don’t know a single person who has used SPAR2U and I’ve never heard anyone talking about it. Meanwhile, the on-demand offerings from Checkers, Pick n Pay and Woolworths are all clearly visible on our roads. When I asked on Twitter, it seems as though some people are impressed with the SPAR2U offering, but few have ever even heard of it.

I’m glad I gave up on Spar after I bought the share in late 2021 after the first set of bad results out of Poland. I sold it a few months later. At one stage, it looked like a cute value play. It turned out to be a value trap of note.

I got it badly wrong with Tiger Brands

The business has achieved more pricing power than I expected

Full credit to the team at Tiger Brands: they managed to pull off a much better result than I anticipated. With consumers clearly under pressure and inflation running away from all of us, I didn’t give Tiger Brands much credit for its pricing power. In the second half of the financial year, the company clearly managed to push price increases through to consumers.

In an updated trading statement for the year ended September, HEPS from total operations is expected to be between 48% and 53% higher than in the comparable year. This suggests a range of 1,668 cents to 1,724 cents. After the share price closed 2.5% higher, the Price/Earnings multiple is between 11.4x and 11.8x.

A 37% increase in the share price in the past six months has been highly rewarding for punters who believed that the worst was behind Tiger Brands.

I remain bearish on the business in general. With a track record that has been in the headlines for all the wrong reasons, Tiger Brands isn’t a company I ever see myself investing in. Those who are interested in this sector should also refer to Brait’s announcements this week regarding the separate listing of Premier, a business that competes directly with Tiger Brands.

Woolworths continues a strong run

I’m becoming increasingly impressed with the new management team

Woolworths has released a trading update for the 20 weeks ended 13 November 2022.

Before you get excited by the percentages that I’ll shortly be giving you, it’s worth remembering that the prior period included terrible lockdowns in Australia and the aftermath of the riots in South Africa. Still, sales are up 23.3% in this period.

Interestingly, online sales fell by 13.7% as customers returned to stores. Online sales now contribute 10.1% to group turnover, which is still a meaningful contribution.

In Southern Africa, the Fashion Beauty Home (FBH) business grew turnover by 10.8%. The biggest win is in profitability rather than sales, with full-priced sales up 15.2% and clearance sales down 20%. This game is all about driving margins, not just revenue at any cost. In a perfect example of why I like what I’m seeing at Woolworths these days, the winter sale was the smallest and most profitable to date. Trading space reduced by 2.4%.

The local Woolworths Food business is still investing in price to be more competitive against the likes of Checkers and Pick n Pay. Product inflation was 7.9% and price movement was 6.3%, which means Woolworths had to eat some of the increases itself. With Food turnover up by 7.3% and online sales up 26% thanks to the success of Dash, we will have to wait for more detailed results to see the net impact on profits.

Comparing the two businesses in terms of online sales is fascinating. Online grew by 26% in FBH, now contributing 4.2% of sales. In Food, online is now 3.6% of total sales. Long-term, I think online penetration in Food will be significantly higher than in FBH. Based on comments on Twitter though, there is still grumpiness around the user experience in Dash and the integration with the broader online offering. Woolworths has more work to do.

Keep an eye on South African consumer health. The annualised impairment rate in Woolworths Financial Services increased to 6.2% vs. 4.1% in the prior period. That’s not good.

In the lands of kangaroos and kiwis, Country Road Group grew sales by 36.2% and reduced space by 5.1%. David Jones increased turnover by 55.3% and decreased trading space by 3.7%. In both cases, the growth rate is flattered by extensive lockdowns in Australia in the comparable period.

For the 26 weeks ending 25 December 2022, Woolworths expects HEPS to be at least 20% higher than the comparable period. This is the minimum percentage that triggers a trading statement. Based on these numbers, I’m expecting a significantly higher growth number than that.

Little Bites:

  • Director dealings:
    • A non-executive director of African Rainbow Minerals has sold shares worth R9.7 million (that’s a big one) and a director of a subsidiary of the company has sold shares worth R1.45 million
    • Des de Beer has bought more shares in Lighthouse Properties, this time worth R675k
    • The CEO of Motus has sold shares in the company worth R3.8 million
    • A director of a subsidiary of Shoprite has sold shares worth just under R3 million
    • The CEO of Altron is still buying shares in the company, this time for just over R900k
    • I was waiting for this one – a director of Santova has sold shares to cover the tax on the options trades, but they have retained the rest of the shares (usually the announcements of the award and the sale are made at the same time)
  • After my commentary on Delta Property Fund in yesterday’s Ghost Bites, the CEO responded to me on Twitter (an approach which I always have a lot of respect for). This was in relation to the timing of a share purchase by a director relative to the announcement of a disposal of property. I offered to republish the full response here in Ghost Bites (along with my final comment on the matter):
  • Investec Property Fund released interim results for the six months to September. Distributable income per share has increased by 2.7%. The balance sheet is stable with a loan-to-value (LTV) ratio of 38.3%. The net asset value per share increased by 4% to R17.36 and the current share price is R10.20 – a significant discount to NAV.
  • In good news for Murray & Roberts, the refinancing of debt with South African lenders has been completed and the facility has been upsized from R1.675 billion to R2 billion. The structure is a R1.35 billion term loan facility for 18 months and a R650 million overdraft repayable on-demand. This gives the company breathing room to make progress on the deleveraging plan.
  • Argent Industrial released results for the six months ended September. Revenue increased by 13.5%, EBITDA jumped by 19.5% (so margins improved in the process) and HEPS was 22.4% higher. This is the perfect shape to an income statement, with operating leverage and financial leverage at play. This is why a percentage increase in revenue leads to higher increases in EBITDA (operating profit) and HEPS. An interim dividend of 45 cents per share has been declared.
  • Dipula Income Fund released results for the year ended August 2022. The net asset value (NAV) per share is R6.63 and the share price is R4.15, so this is yet another property fund trading at a discount to NAV. This was an important year for Dipula, as the fund collapsed its dual share class structure into a single share class structure. This limits comparability with previous years. The dividend is 30.977724 cents per share.
  • Reinet Investments released results for the six months ended September 2022. The net asset value has grown at 8.8% in euro terms since March 2009. The latest growth isn’t nearly as pretty as that number, with a decrease of 7.6% between March 2022 and September 2022.
  • Premier Fishing and Brands released results for the year ended August 2022. Although revenue fell by 17%, EBITDA was 11% higher. The group swung into a profit, with HEPS increasing from a loss of 3.39 cents to a profit of 5.65 cents. If you’re wondering how profits improved against that revenue result, the answer lies primarily in a grant from the Department of Trade Industry and Competition.
  • Load shedding is really hurting eMedia’s business, as there are simply fewer eyeballs watching TV. When combined with a more depressed economic environment, market share gains by e.tv couldn’t offset the negative impact on advertising revenue. To add to the struggles, the company is taking MultiChoice South Africa to the Competition Commission regarding the removal of four entertainment channels off the bouquet. Against this backdrop, the earnings for the six months ended September 2022 have taken a significant knock. HEPS from continuing operations will decrease by between approximately 18% and 29%. Even the famous Anaconda reruns couldn’t save this result!
  • Anglo American announced De Beers’ rough diamond sales value for the ninth sales cycle of 2022. Provisional sales of $450 million are higher than $438 million in the comparable cycle last year. This is a traditionally quieter sales cycle, so a drop vs. $508 million in the eighth sales cycle was expected.
  • In a separate announcement, Anglo American announced that it has secured the supply of 100% renewable electricity for the Australian steelmaking operations. The source is two major wind and solar projects in Queensland. From 2025, the company expects 60% of global electricity requirements to be met from renewable sources. As I’ve said before, Anglo is doing a lot more than just paying lip service to the carbon reduction push.
  • The shareholders of African Rainbow Capital Investments were almost unanimous in their approval of the new management fees structure. It’s not hard to improve on the old structure, so I guess they will take whatever they can get.
  • Stefanutti Stocks is executing various disposals in line with a restructuring plan. This has initiated a split of the accounting into continuing and discontinued operations. For the six months ended August, HEPS from continuing operations is expected to be a loss of between 29.47 cents and 18.76 cents vs. a loss of 53.59 cents in the comparable period. From all operations, the loss is between 30.20 cents and 16.78 cents per share vs. 67.12 cents in the comparable period. Either way, it’s all rather ugly.
  • In a rather unusual step, BDO’s status as external auditor of Putprop was terminated with immediate effect because shareholders didn’t approve the resolution to appoint BDO as external auditor.
  • Southern Palladium has released more drilling results. Unless you have a qualification in geology, it’s best to just skip to the commentary by the Managing Director on the results. He sounds happy with the results.
  • Globe Trade Centre’s FFO (Funds From Operations) increased marginally from EUR52 million to EUR54 million in the nine months ended September. I have no idea why the company bothers with a JSE listing as you’re more likely to have two months of no load shedding than see a trade on the local market.
  • In the related party transaction between AEEI and Sekunjalo, Merchantec was appointed as independent expert and has opined that the transaction is fair to shareholders of AEEI.

Unlock the Stock: TWK Investments

The Finance Ghost
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Unlock the Stock: TWK Investments

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.

Unlock the Stock is proudly brought to you by Kuda, a specialist insurance and forex services provider. The South African team from Lumi Global looks after the webinar technology for us.

In this edition of Unlock the Stock, TWK Investments returned to the platform to update us on the latest results and prospects for the business. TWK plays a core role in the South African agriculture industry and offers fascinating business models as a way for investors to gain exposure to this story.

Note: TWK Investments is listed on the Cape Town Stock Exchange

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:

You’ll find all the other Unlock the Stock events at this link>>>

Ghost Bites (Equites | Ninety One | Renergen | Stor-Age | Transaction Capital)

The Finance Ghost
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3
Ghost Bites (Equites | Ninety One | Renergen | Stor-Age | Transaction Capital)

If you enjoy Ghost Bites, then make sure you’re on the mailing list for a daily dose of market insights in Ghost Mail. It’s free! SIGN UP >>>

Equites announces a R1.245bn deal with Shoprite

In line with its strategy, Equites will develop a logistics facility for Shoprite in Gauteng

One of the metrics that investors love looking at is return on equity. There are other metrics like return on invested capital that do a similar (but not quite the same) job.

For a group like Shoprite, the best use of capital isn’t to tie it up in large new properties, as that capital cannot earn the same return that the store operations are able to achieve.

For Equites, the mandate is to invest in property that offers investors a hybrid return between debt and capital. It therefore makes sense for a retailer like Shoprite to use a property fund like Equites to develop its warehousing. With a defensive tenant like Shoprite, the risk profile is appealing for income-focused investors who also want protection against inflation.

The initial lease is for 20 years, with the right to renew for three additional 10-year periods. The contracted initial yield is 7.75% and the rental will escalate by 5% per annum. You can now see how property funds deliver income to investors along with some inflation protection. A loan-to-value ratio of 30% is assumed by the company in its forecasts and the marginal cost of debt is assumed to be 9%.

These things take time to build, with the lease only expected to commence on 1 July 2024. The construction cost is R979 million and it will increase the group loan-to-value ratio by 2.3%. This is a Category 2 transaction, which means shareholders won’t be asked for their opinion on whether they think the deal should go ahead or not.

Ninety One takes a knock to earnings

They say it best: a risk-on business operating in a risk-off environment

Asset management firms simply don’t perform well when markets are heading in the wrong direction. Assets under management (the basis for charging fees) falls as the market falls, with client inflows as a potential mitigating factor.

Ninety One couldn’t even rely on that, with net outflows of £3.2 billion at a time when assets under management fell by 8% in the six months to September. That’s not good, as client flows are usually seen as the best way to assess the performance of an asset manager. Ninety One attributes the outflows to lower levels of new business volumes and clients choosing to derisk their portfolios.

Unsurprisingly, HEPS fell by 7% to 9 pence per share.

The group anticipates that challenging markets will persist for the foreseeable future. The share price has lost nearly 26% of its value this year.

Renergen switches LNG back on

But there is growing impatience for the helium module to be turned on

The market seems to be a little nervous about Renergen. In the past 90 days, the share price has dropped over 23% as jitters have crept in about the helium module being activated.

Recent issues with the liquefied natural gas (LNG) plant did nothing to calm those fears, with Renergen announcing that the LNG system has at least been repaired and turned back on.

To give investors something to hold onto, Renergen noted that the helium separation and recovery module is providing “high levels of confidence with recovery exceeding design parameters” – yet the share price only increased by 0.5% on this news.

Another solid result from Stor-Age

The share price drifting lower this year is a function of valuation, not the business model

For the six months ended September, Stor-Age achieved a dependable 6.1% increase in distributable income per share. It won’t set your hair on fire but won’t set your portfolio on fire either, with Stor-Age known for being a solid business.

The group owns 86 self storage properties, of which 56 are in South Africa and 30 are in the UK. The UK portfolio (branded Storage King) is worth R5.8 billion and the local portfolio is worth R5.1 billion. Growth in the portfolio is achieved through developments (eight new properties are scheduled to open in the next 18 months) and acquisitions of existing storage parks.

Same-store occupancy in South Africa increased from 87.6% to 89.4%. In the UK, that metric decreased from 94.1% to 91.8%. Overall portfolio vacancy is lower because new properties take a while to fill up. It’s interesting to note that commercial tenants contribute 38% of total tenants in South Africa and only 22% in the UK. The average length of stay for existing tenants is 24.4 months locally and 29.2 months in the UK, so churn is surprisingly low.

In a move reminiscent of how hotel groups like Hyatt operate, Stor-Age is now offering third-party management contracts to independent operators, developers and private equity owners. This is helping Stor-Age earn revenue in various European countries without deploying capital. This is a tiny part of the group (less than 1%) but looks like an interesting source of future returns.

The balance sheet is strong, with a loan-to-value (LTV) ratio of 30%. Over 85% of net debt is subject to interest rate hedging.

Growth in headline earnings per share (34.77%) and net asset value per share (10.17%) has far outpaced the dividend per share (6.1%). The net asset value per share of R14.79 is higher than the current price of R13.69, which is what an investor wants to see in a property fund before taking a position.

The share price is down 6% this year and the annualised dividend yield is around 8.8%. I made good money on Stor-Age during the pandemic and then sold as the share has looked fully priced to me since then. It turned out to be the right decision.

Transaction Capital gives the market a scare

I’m keeping a close eye here to potentially add to my position

The Transaction Capital share price is down nearly 16% this year, with a rude awakening for those who got way too carried away with the valuation earlier this year. If you bought at the peak, this is an ugly chart:

With results for the year ended September now available, we see an increase in core earnings per share from continuing operations of 17%. Notably however, return on average equity has dropped from 15.1% to 14.0%, although return on assets is steady at 4.4%. The dividend per share increased from 52 cents to 70 cents.

The issues this year were felt in the SA Taxi business, as the floods in KZN that shut the Toyota factory had a knock-on effect on a business that makes money from financing taxis. Core earnings in this business fell by 26%.

I found it very interesting that the SENS announcement deals with the Nutun division first, previously called TCRS. This division was all but ignored over the pandemic, yet it now features right up front. I guess that with earnings growth attributable to the group of 28%, that position has been earned.

The company has been acquiring non performing loan portfolios more frequently in South Africa this year and has sold its Australian book. Nutun is focused on providing services internationally (including the new push into customer engagement services that clients can outsource to South Africa) rather than buying books abroad.

WeBuyCars is up next as the largest contributor to the group (43% of earnings), growing earnings by 41% and earnings attributable to Transaction Capital by 100% as the stake in the business has been increased. All metrics are heading in the right direction, with F&I penetration (the percentage of sales with finance and insurance products in addition to the car) increasing from 13.6% to 18.2%.

Overall though, the market is worried about WeBuyCars in this environment. The contribution to group earnings is huge and if used car prices drop in anywhere near the same fashion as in the US, things could get ugly. On the plus side, SA Taxi is likely to have a better year after such a terrible 2022.

I’m holding my shares and chewing on whether to add to the position.

Little Bites:

  • Director dealings:
    • The CEO of Grindrod bought shares in the company worth R1.3 million.
    • The CEO of Altron has acquired shares worth R16k (one of several recent purchases).
    • A director of AB InBev exercised options for 140,000 shares and sold all of them.
    • Two directors of Impala Platinum have sold shares worth R6.9 million. That sends a pretty strong message about how Impala has been outgunned by Northam Platinum on the Royal Bafokeng Platinum deal.
    • A director of ADvTECH exercised share options and then sold all the shares received.
    • A director of Delta Property Fund has acquired shares worth R28k.
    • Directors of Santova exercised share options worth an aggregate of nearly R1.6 million.
  • Of concern in the context in the director dealing above, Delta Property Fund announced the disposal of the Standard Bank Greyville building in Durban for R44 million. This will reduce the fund’s loan to value by 20 basis points from 58.2% to 58%. Vacancy levels will reduce by 40 basis points to 33.5%. The property has a vacancy rate of 64.4% so the buyer (a private individual) will have to work hard to make this asset a success. This is a category 2 transaction as it is significant for Delta, which is why I’m surprised to see a director buying shares just days before this announcement.
  • Trematon released a trading statement for the year ended August 2022 and the company wants you to focus on intrinsic net asset value (INAV) as the most sensible financial metric. INAV is expected to be between 485 cents and 495 cents, between 8% and 10% lower than the comparable period.
  • In the Tongaat Hulett business rescue process, the first meetings of employees and creditors have taken place. Post commencement finance has been advanced by lenders and will be used to pay salaries and critical suppliers. Naturally, funding operating costs through further debt won’t do any favours to whatever equity value might still be left in this thing.
  • With terrible news coming out of Poland, I suspect the NEPI Rockcastle share price is going to take a dive. This is such unlucky timing, as the company has announced an agreement to acquire 100% of the Atrium Copernicus Shopping Center in Torun, Poland. The deal value is €127 million, which is too small to even be a Category 2 deal under JSE rules. The acquisition will be funded by existing cash resources.
  • Premier Fishing and Brands released a trading statement for the year ended August 2022 that shows a strong swing back into profitability. After posting a headline loss per share of -3.39 cents in the comparable period, headline earnings per share is up to 5.65 cents.
  • Deneb Investments released a trading statement for the six months ended September 2022 that anticipates HEPS growth of between 49% and 69%, with an expected range of between 15 cents and 17.1 cents per share. The story looks very different if you exclude the insurance claim received in this period for Covid business interruption, as HEPS would then be down by between 30% and 50%.
  • Safari Investments released a trading statement for the six months ended September 2022 that reflects growth of between 28% and 36% in the distribution per share. The distribution will be between 32 cents and 34 cents per share and the share price closed at R5.60.
  • African Media Entertainment, owner of several major radio stations among other assets, has released a trading statement for the six months ended September 2022. HEPS will be between 140 cents and 160 cents per share, an increase of between 43.9% and 64.4%. The share price closed 6.7% higher at R37.25.
  • In a complicated restructure of its treasury function, Invicta needed to announced the steps in detail as one of them triggers a Category 2 announcement under JSE rules. Ultimately, a wholly-owned subsidiary is disposing of a R2.355 billion preference share to a part of the group that has 25% B-BBEE ownership. This is like selling off 25% of the preference share and the value is high enough to trigger the Category 2 announcement. Invicta’s group structure has always been complicated, so a restructure isn’t anything surprising.
  • Trustco is busy with a deal related to the Meya business that would give SJSL an option to become a 70% shareholder in Meya for up to $50 million. There are now discussions around a larger deal and Trustco believes that definitive agreements may be concluded by the end of December 2022.
  • Mantengu Mining is looking to raise R15 million through a fully underwritten, renounceable rights offer. There are several underwriters who have agreed to underwrite the rights offer in a way that would reduce or settle their loan balances.
  • Sebata Holdings has lifted its cautionary announcement as negotiations related to the potential disposal of one or more businesses have been terminated. Predictably, the website isn’t even working.
  • Nutritional Holdings has been a soap opera for ages now, with a liquidation court date set for 20 January 2023 and the JSE at advanced stages of considering a delisting of the company. In the meantime, a new firm of auditors has been approached to assist with audits and accounting consultants have been engaged for the consolidation of certain subsidiaries.
  • If I understand the legal position correctly, it looks like PSV Holdings may yet be saved in a business rescue process. A material shareholder appears to have secured enough funding to keep the lights on.
  • I always include the Naspers and Prosus share repurchase numbers because they are so utterly enormous. Between 7 November and 11 November, Naspers shares worth R1.74 billion and Prosus shares worth $276 million were repurchased.

Ghost Bites (Purple Group | Brait | Shoprite | Telkom | Vodacom)

The Finance Ghost
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Ghost Bites (Purple Group | Brait | Shoprite | Telkom | Vodacom)

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A Premier listing

Brait is finally giving Premier the wings to fly (hopefully)

This has been a long time coming. Premier is one of the two major investments in the Brait portfolio and will now have its own listing. The company produces and markets key FMCG brands like Snowflake, Blue Ribbon, Iwisa, Manhattan, Super C, Dove cotton wool and others. The group holds market share of 24% in bread, 32% in flour, 20% in maize, 18% in sugar-based confectionary and 18% in feminine care.

In bread, Premier holds the market-leading position in the Western Cape (37%) and the second-largest share in KZN (30%) and the Eastern Cape (34%). With the recently commissioned Pretoria-based bakery, the company is ready to expand its inland market share.

Brait Mauritius will offer shares in Premier worth up to R3.7 billion in the market. The proposed pricing range equates to a valuation of R6.9 billion to R8.6 billion and reflects an EBITDA multiple of between 6x and 7x. This is a discount of between 10% and 28% to Brait’s latest valuation of Premier, so perhaps that traded discount to NAV for Brait is justified after all?

The R3.7 billion gross proceeds, combined with the distribution from Premier of R950 million in November, will address Brait’s future liquidity requirements. Titan Premier Investments (a Christo Wiese investment entity) will purchase 36.2% of the shares on offer. Titan Cornerstone (which sounds a lot like another Wiese entity) has agreed to purchase a further 2.4% of the shares, so 38.6% of the offer is covered throughout the price range.

At the bottom of the price range, Titan and RMB have committed to underwrite R2.9 billion and R0.5 billion respectively.

In the past two years, Premier achieved revenue growth of 13.4% and 16.1% respectively. Adjusted EBITDA margin expanded from 9.3% to 10.3% (admittedly with a dip in FY21). In the last year, the adjusted return on invested capital increased from 11.1% to 14.8%.

The leverage ratio after the refinancing of long-term debt increased to 2x. To help the company reach the targeted gearing of 1.5x net debt : EBITDA by 2025, the dividend pay-out ratio will be between 30% and 60% and the rest of the earnings will presumably be used to reduce debt.

Importantly, Brait will retain a significant shareholding in the company post implementation.

Yes, Purple Group is profitable in a post-pandemic world

There are many positive signs in the core business

You would struggle to find a company on the JSE that is more relevant to individual investors than Purple Group. The company owns a 70% stake in EasyEquities, the platform that is responsible for introducing many South Africans to the world of investing.

The results for the year ended August are full of noise.

There are fair value adjustments and acquisitions, with a huge drop in HEPS because of the issuance of shares to pay for acquisitions. We then have GT247, a business that is more volatile than American politics. This year, it did incredibly well. Next year? Who knows.

Investors will likely focus on the EasyEquities metrics, which includes ancillary businesses EasyProperties, EasyCrypto and RISE. The rest of the group should probably be treated as an option (potential upside but difficult to quantify), along with the potential for long-term growth in EasyEquities in markets like the Phillipines. There is also a pipeline of new products coming to the user base, which I would also see as having significant option value.

For now at least, the management team can take a bow for growing registered clients by 41% and active clients by 50.4%, which means greater penetration of active accounts. Platform assets and retail inflows both increased (albeit at lower rates), a solid result in a horrible equity market.

The average revenue per user (ARPU) increases over time, as new clients get to grips with the market and feel more confident. This means that each new cohort of users (people who create accounts each year) becomes more valuable as years go on. With strong growth in the client base, this is obviously encouraging.

A critical metric is the cost of service per average client. By bringing the cost per client down, the group’s unit economics (the value of adding one more customer) improve. Cost per client decreased by 15.6% to R173, mainly as a result of the benefits of scale.

The 38.1% increase in operating expenses includes R20 million to integrate into new partners and R31 million spent on onboarding a client cohort that is not yet profitable.

At 0.25% brokerage, this implies a break-even of R69,200 in value traded per year per active client. Of course, some clients have annual value traded of many times higher than that. Some will do very little. This is the joy of averages.

There is also client growth in EasyProperties and even EasyCrypto, though recent events in the crypto market may put a dent in the future of that “asset” class. Yes, I remain highly skeptical of crypto.

Investors will also keep an eye on RISE, the retirement business that gives Purple an interesting platform in the market that is clearly distinct from the EasyEquities business.

The share price has lost more than 40% of its value this year. As I’ve said for a long time, the share price ran too far ahead of the story and the market movement this year proves it. Although I’m not buying just yet, there’s no doubt in my mind that the gap between the story and the share price has dropped considerably this year.

That’s a good thing!

Shoprite gets some love from the market

A 7.8% rally was the reward for a strong operational update

For the quarter ended September (the first quarter of the financial year), Shoprite managed to increase sales by 18.6%. That’s a big number, even when you exclude the local liquor business to arrive at growth of 15.9%.

When you see a number like this, you need to think about the base effect. In this case, it’s a double-whammy of the unrest in KZN and Covid lockdowns. In the world of retail, the comparable quarter was awful. This explains the high growth numbers.

Supermarkets RSA grew by 16.6% excluding LiquorShop and 19.9% including LiquorShop. Supermarkets non-RSA grew by a delightful 18.8%. Even the Furniture segment managed to grind out 5.2% sales growth, with other operating segments up 10.8%.

Food costs are hitting households in South Africa, with internal selling price inflation in Supermarkets RSA of 8.2%. With a large chunk of Shoprite’s business being in stores aimed at lower-income consumers, you can safely assume that much of the inflation is in core items rather than salmon and hummus.

Here’s a rather incredible statistic: Supermarkets RSA has increased its market share for 43 months in a row! That is extraordinary.

I also found it interesting that the first Checkers Sixty60 dark store has been opened in Cape Town. This is a store designed for online shopping fulfilment rather than walk-in customers. Instead of a normal store that makes you walk from one side of the other to get your shopping done, the design of a dark store is all about efficiency in picking the most common items.

In the Furniture business, credit sales are only 14.9% of total sales. This is important, as furniture is often built around a credit model. Within Shoprite, the focus is on cash sales.

The OK franchise business seems to be doing well, with wholesale sales to that division up by 13.6%.

There’s an important warning in the numbers that the market seems to be ignoring. The 56% increase in fuel cost year-on-year is impacting supply chain and general operations, with the monthly spend on diesel generators during load shedding coming in at R100 million per month. This is a massive burden, brought to you proudly by Eskom.

On the plus side, the group is well stocked for the festive period despite issues at Transnet’s ports.

In summary, we can assume that whilst Shoprite is achieving top-line revenue growth, there must be pretty severe pressures coming through in supply chain and operating costs. It will be interesting to see where the margins end up.

Investors put the phone down on Telkom

A substantial drop in earnings wasn’t happy news

Telkom’s share price closed 6% lower after reporting an expected drop in HEPS for the six months ended September of between 45% and 55%.

The trading statement gave several explanations for this, ranging from revenue deferral (the shift in mix from prepaid towards post-paid i.e. mobile contracts) and the upfront cost of handsets through to substantial growth in maintenance and service costs, not least of all due to backup energy costs.

Mitigating factors included some cost savings, favourable foreign exchange hedging positions and lower tax.

The share price is down 37.8% this year, having been on a wild ride thanks to a potential deal with MTN that subsequently fell through. After these results, one wonders if a potential transaction with Rain is still on the table.

Either way, this is quite a chart:

Vodacom’s corporate colours were reflected in the share price

A painful drop of over 6% made the share price chart as red as Vodacom’s logo

Although Vodacom achieved revenue growth of 7.7% (of which 5% is normalised growth and the rest is currency related), the problem is that normalised EBITDA decreased by 1.8%. This was driven by once-off factors and higher energy and network costs, with an aggregate negative impact of 270 basis points on EBITDA margin.

Once the startup costs in Ethiopia and higher finance costs are also taken into account, HEPS fell by a nasty 9.5%. The share price move starts to make sense now, doesn’t it?

To put further pressure on cash flow, capital expenditure increased by 9.8%. This took capital intensity (capital expenditure as a percentage of revenue) from 13.9% to 14.1%, an increase of 20 basis points. The net impact on free cash flow (pre-spectrum) is a 54.5% drop.

The R5.8 billion investment in the South African network is the most in a six-month period, with over R2 billion invested in batteries to keep customers connected during extended loadshedding. To try and improve the situation going forward, Vodacom has announced an in-principle agreement with Eskom that would see Vodacom source electricity from renewable independent power producers and contribute this into the national grid.

Everyone gives MTN the credit as a fintech player, yet Vodacom claims to be the leading African fintech player measured by a processed transaction value of $355.2 billion over the last twelve months, a number which grew 17.6% vs. the comparable period. Unlike the issues plaguing MTN in some markets, Vodacom highlights that Tanzania implemented a significant reduction in mobile money levies of up to 43%. This drove a 19.5% increase in the number of Tanzanians using M-Pesa.

To put things in perspective, M-Pesa is nearly a quarter of International service revenues!

In South Africa, revenue generated from financial services increased by 8.1% and there was a nearly 20% increase in insurance policies. “Super-app” VodaPay has achieved 3.5 million downloads and 2.2 million registered users.

Looking ahead, the major strategic focus areas are the acquisition of Vodafone Egypt and the joint venture with Community Investment Ventures Holdings, both of which are busy with regulatory approval.

An interim dividend of 340 cents per share has been declared.

Little Bites

  • Director dealings:
    • A director of Gold Fields has sold shares worth R8.6 million.
    • The CEO of Altron has bought shares worth nearly R1 million.
    • The company secretary of Datatec sold shares worth nearly R5 million.
    • An associate of a non-executive director of Afrimat has sold shares worth R3.8 million.
    • A prescribed officer of Standard Bank sold shares worth R2 million.
    • Followings a rights issue, MC Mining announced that Senosi Group (controlled by a director of MC Mining) now holds 23.98% in the company and that a consortium of six parties (collectively the Dendocept Group) includes an entity linked to a director that owns 0.07%.
  • Barloworld closed 5% lower after releasing a trading statement for the year ended September 2022. Group headline earnings per share (HEPS) is expected to be 47% to 55% higher. Normalised HEPS from continuing operations is perhaps a better measure, up by 12% to 17%.
  • Omnia fell 5.7% after releasing a voluntary market update for the six months to September 2022. The group has indicated that results will be positive, driven by an improvement in the volume-margin mix and supportive community prices. The blemish (and perhaps the cause of the share price drop) is the business in Zimbabwe, which is expected to report a loss after tax of R172 million vs. a loss of R29 million in the comparable period. Much of the pain is due to unrealised foreign exchange losses. HEPS from continuing operations will be between 1% and 11% higher. Adjusted HEPS from continuing operations (which excludes Zimbabwe) will be between 26% and 36% higher.
  • RFG Holdings released a trading statement with estimated growth in headline earnings for the year ended 2 October 2022 of between 54% and 59%. There’s a lot of noise in these numbers, like an extra week of trading this year vs. last year and the acquisition of the Today business. There was also a hefty insurance receipt for loss of profits during lockdowns. Operating profit margin in the regional business was impacted by significant input cost inflation. The international segment had a much better time vs. the prior year, thanks to higher global demand for canned fruit and fruit puree products.
  • Orion Minerals announced that the pre-development funding for the Okiep Copper Project has been secured, as the IDC has completed the acquisition of 43.75% in the New Okiep Mining Company from Orion. The IDC will now put in its pro-rata share of the R79 million total budgeted pre-development operating costs. The IDC will offload a substantial portion of its stake to B-BBEE investment groups. In addition to this deal, the team is working in parallel with the IDC for the R250 million funding of the Prieska Project.
  • Sephaku Holdings has released interim results for the six months to September 2022. This is one of those irritating announcements where the company neglects to give year-on-year growth rates, so we are forced to get the calculator out. Group HEPS increased by a whopping 60% to 11.26 cents thanks to higher EBITDA margin in both major operations. The sales story is a mixed bag though, with Métier up strongly and SepCem slightly lower because of declining demand for building materials.
  • Fortress REIT is still trying to solve its capital structure issues. In the meantime, the JSE has warned that REIT status will be removed by the JSE if a compliance declaration isn’t submitted by 30 November 2022.
  • Dipula Income Fund released a trading statement, but not because of huge growth in earnings. Far from it, in fact. Distributable earnings for the year ended August 2022 are expected to be just 0.1% higher than last year, in line with prior guidance. Due to the corporate action that combined two share classes into one, the dividend for the remaining share class will be 30.5% lower at 30.97724 cents. This is because of a change in the capital structure rather than an issue in the business,
  • Huge Group announced that wholly-owned subsidiaries Huge Networks and Huge Telecom will be combined into one business. The combined business will service a customer base of over 19,000 businesses and will have combined turnover of over R300 million per annum. Although this is a paper-shuffling exercise of note, the group does make a song and dance about “significant operational benefits and synergies” – let’s wait and see.

What is Du Pont of it all?

The Finance Ghost
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What is Du Pont of it all?

When analysing the financial performance of retailers, it helps to know how to work with Return on Equity and other key metrics. Chris Gilmour gets the calculator out.

The Food and Drug and General Retailers listed on the JSE often trade at highly rarefied Price/Earnings (P/E) ratios. In the normal course of events, considering the less than stellar earnings performance of most of them over the past five years, one would intuitively expect to see these ratings decline.

But they haven’t.

They have largely stayed intact and in certain instances (as with Clicks and DisChem) they are trading on P/E ratios close to 30 times. In an attempt to discover whether or not there is a rational investment basis for these rarefied ratings, I have used a modified Du Pont analysis, which ranks each share by its sustainable growth rate (SGR) and then compares that to its P/E.

This throws up some interesting results.

Get the textbook out

In the equation below, I refer to Return on Equity (RoE) and the Payout Ratio, which is the percentage of profits paid out as distributions to shareholders.

As a refresher, the SGR = RoE * (1-Payout Ratio). In other words, the SGR is the Return on Equity times the retention ratio.

Return on Equity can be further broken down using the Du Pont formula:

RoE = Net Profit Margin * Asset Turnover * Leverage

How does this work, you ask?

It can be rewritten as RoE = (Net Profit/Sales) * (Sales/Assets) * (Assets/Equity)

If you remember your school maths, Sales and Assets cancel out in the formula and you are left with Net Profit / Equity, which is RoE!

The point of Du Pont is that you can properly assess the components of RoE.

Applying this to JSE retailers

I have taken the four most expensive retail shares on the JSE in terms of P/E ratio and calculated a SGR for each one:

 Price (c)PE (x)RoE (x)Payout ratio (%)SGR (%)
Clicks3048629.5348.062.018.2
Dis-Chem309425.6132.7237.620.4
Shoprite2360222.3424.7757.210.6
Pick n Pay588219.6736.685.05.5

Clicks vs. Dis-Chem

The first thing to notice is that Clicks has by far the highest RoE of any of these retailers at 48%. The second really interesting point is the vast differences in the payout ratios from just under 38% in the case of Dis-Chem to 85% in Pick n Pay.

One can reasonably argue that Clicks is especially generous to its shareholders, with a relatively high dividend payout ratio, and that it is one of the main reasons why it enjoys such a high rating. But even with such a high payout ratio, it still manages to achieve a decent SGR of 18.2%. Clicks also has an ongoing share buyback programme that enhances shareholder wealth.

Dis-Chem, too, has a relatively high RoE and combined with a relatively low payout ratio, ends up with the highest SGR in this exercise.

Pick n Pay vs. Shoprite

Contrast this with Pick n Pay, which also has a high RoE of 36.6%. It pays out such high dividends that SGR is left at a very low 5.5%. That was fine in the days when the company was being streamlined but now it’s in an investment phase with much greater capital requirements. This company has a number of options available to it when trying to improve its SGR.

Two elements stand out immediately, the first of which being that it can attempt to greatly improve its operating profit margin and in so doing boost its RoE. The group has been struggling with an exceptionally low operating profit margin for many years and it’s not immediately obvious how it can improve this metric substantially in the short term. At 3.1%, Pick n Pay’s operating margin is roughly half of Shoprite’s operating margin of 6%.

By greatly increasing the penetration of clothing in its portfolio, it can significantly improve its operating margin, but this won’t happen overnight.

As Pick n Pay’s Boxer chain grows in comparison with the rest of the group, it is likely that the profit margin will also improve. Discounters, perhaps somewhat counter-intuitively, have a somewhat higher profit margin than traditional supermarkets.   

The easier, second option would be to reduce the dividend payout ratio and apply the proceeds to debt reduction. Of course, this is easier said than done in a situation where the controlling family naturally wants a high payout ratio.

Debt/equity in Pick n Pay is high at 108%. That’s fine when interest rates are low and stable but once in an upwards trajectory, as they are now, this could come back with a vengeance.

Shoprite’s SGR is surprisingly low, at only 10.6%. Of course, its RoE was the smallest of the four to begin with. This in itself is also surprising, considering that Shoprite has a particularly high operating profit margin of 6%. It’s difficult to see how Shoprite can squeeze a higher operating margin out of the business, especially against such a difficult trading environment. And the operating profit margin does appear to have hit a ceiling of around 6% for the past few years now.

Unlike Pick n Pay, Shoprite doesn’t have a higher margin clothing chain to fall back on. But it does have Usave, the main rival to Boxer in the discounter arena. That could conceivably help to sweeten the overall group margin a bit as the penetration of Usave relative to the rest of the group increases.

Shoprite has an entirely different balance sheet structure to Pick n Pay. With total borrowings of R4.5 billion, its debt/equity is just under 18% and it has lower gearing than Pick n Pay. If it geared up to the same level as Pick n Pay, its SGR would rise considerably as this would drive a higher RoE.

But Shoprite has a culture of installing CAs as CEOs of the company. Current CEO Pieter Engelbrecht is a CA as was his predecessor James Wellwood “Whitey” Basson. CAs tend to be conservative individuals and don’t go looking for risk if they don’t feel it is warranted.

The bottom line

The bottom line in this exercise is that Pick n Pay appears to be trading on a P/E ratio that is way out of line with what can reasonably be expected in terms of its sustainable growth rate. Shoprite is not an awful lot better, though at least it has the balance sheet capability to change quickly if it so desired.

Both of the pharmacy chains, while expensive on PE basis, at least have sustainable growth rates that approximate to that type of rating.

This article reflects the independent views and opinions of Chris Gilmour, which are not necessarily the same as The Finance Ghost’s opinions on these stocks. For equity research on South African retail and other stocks, go to www.gilmour-research.co.za.

Ghost Wrap #1 (Purple | Northam | Sappi | Novus | AVI | Transaction Capital | MUR | EOH | Foschini | MultiChoice)

The Finance Ghost
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Ghost Wrap #1 (Purple | Northam | Sappi | Novus | AVI | Transaction Capital | MUR | EOH | Foschini | MultiChoice)

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

Ghost Wrap is your weekly summary of the most interesting and important stories on the JSE. This week, we cover:

  • Sappi vs. Novus at opposite ends of the value chain
  • AVI inching forward with margins under pressure
  • Transaction Capital under pressure in SA Taxi, with the market also focusing on WeBuyCars
  • Murray & Roberts selling the Aussie business and making some progress in infrastructure
  • EOH needing to raise R500 million through a rights offer
  • The Foschini Group being priced for perfection – a risk for any share price
  • MultiChoice’s subscriber growth
  • Purple Group’s latest HEPS guidance and the profitability of EasyEquities and GT247
  • Northam Platinum shooting an Impala and making a play for Royal Bafokeng Platinum

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:

Add it to your playlist on Spotify. It will be available on Apple soon!

Ghost Bites (EOH | Murray & Roberts | Richemont | The Foschini Group)

The Finance Ghost
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Ghost Bites (EOH | Murray & Roberts | Richemont | The Foschini Group)

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EO-eish: don’t say I didn’t warn you

For many months, I’ve been writing about an inevitable capital raise at EOH

So here we are: EOH is trading at R3.80 per share. I got out at breakeven (above R7 per share) some time ago. Just three months ago, there was still the chance to get out at over R5 per share when it was extremely obvious that an equity capital raise would be unavoidable.

All I can hope is that a few lessons have been learnt here by investors.

EOH tried its very best to deal with the enormous amount of debt on the balance sheet. Disposals of assets were achieved at modest multiples, so that didn’t do any favours for the investment story. There were also delays in closing certain disposals, which is a disaster when the balance sheet is a ticking timebomb.

We’ve now reached a point where the company needs a rights offer of R500 million in addition to a R100 million issue of shares to Lebashe Investment Group, EOH’s empowerment shareholder. With a market cap of just R680 million, the capital raise is almost equal to the current market cap.

Lebashe has saved the company before, putting in R750 million in 2018 in a “necessary capital injection for an unsettled EOH” – an interesting choice of words. The original deal allowed for a further issuance of shares to Lebashe provided the EOH share price reached R90. Needless to say, that share price is now an utter joke vs. current levels. The proposed new deal resets that strike price to approximately the current share price plus a 25% compound annual growth rate (CAGR). The maturity has also been extended by a further 5 years.

Nodus was appointed as independent expert in relation to the Lebashe deals (the specific issue and share amendment) and has opined that the transactions are fair.

Underneath all of this, there is a sustainable business that generated R282 million in operating profit for the year ended July. This is before interest costs, of course. If all goes well with the rights issue, those who follow their rights will have exposure to a much healthier balance sheet and a company that generates cash. Losses incurred up until now may never be recovered, sadly.

The proceeds from the capital raise will be used to repay R563 million of its bridge facility (of which R728 million is outstanding), with the remaining cash used to improve other elements of the balance sheet.

Although pricing for the rights issue hasn’t been finalised yet, the scenarios in the announcement assume a range of discounts from 20% to 40%.

Most importantly, there is no mention at this stage of an underwriter. There’s no guarantee here of the full R500 million being raised. Lebashe has agreed to follow its rights, so that’s something at least.

Murray & Roberts gets some momentum in renewables

The Power, Industrial and Water platform is making some progress

OptiPower (a division of Murray & Roberts), in consortium with Concor Construction, has been awarded contracts by EDF renewables with a combined value of R1.2 billion. This is a result of ongoing engagement by the Power, Industrial and Water platform with Independent Power Producers who were shortlisted for renewable energy projects in South Africa.

The engineering, procurement and construction contracts relate to the Koruson Main Transmission Substation and the San Kraal and Phezukomoya Wind Energy Facilities.

EDF Renewables currently operates four wind farms in South Africa.

This is useful momentum in a platform of Murray & Roberts that has been struggling to get traction thanks to ongoing delays in project approvals and a generally low level of investment in South African infrastructure.

Richemont makes investors richer

Performance for the six months to September looks excellent

Luxury goods are known for being almost immune to economic downturns. If you’ve got literally millions for jewellery, then chances are good that interest rates don’t bother you too much.

Sales in this period were up by 24% at actual exchange rates and 16% at constant rates. There were double-digit increases in all regions except Asia, which only grew by 3%. Retail sales are 67% of group sales and grew by 30% at actual rates and 21% at constant rates.

Operating profit from continuing operations was up 26%, with operating margin of 28.1%. It’s as though Richemont operates in a different world to everyone else. This is the joy of luxury goods.

If we look at operating segments, Jewellery Maisons grew sales by 24% at actual exchange rates and delivered a 37.1% operating margin. Specialist Watchmakers grew sales by 22% at actual exchange rates and achieved a 24.8% operating margin.

The focus on continuing operations is key here, with a 40% jump in profit to €2.1 billion. With discontinued operations included, the group result looks very different. The loss from discontinued operations is €2.9 billion, primarily due to a €2.7 billion write-down of YNAP net assets as part of the deal with FARFETCH to sell a controlling interest in YNAP to that company.

If you’re interested in learning more about that deal, we covered FARFETCH in Magic Markets Premium when news of the deal broke in September 2022.

The Foschini Group falls 7% despite solid results

The market saw something that it didn’t like – perhaps the inventory levels?

In the six months to September, The Foschini Group (TFG) reported revenue growth of 23% and headline earnings per share (HEPS) growth of 18.1%. Despite the jump in profits, the interim dividend of 170 cents per share is identical to last year.

A lower payout ratio tells you that the balance sheet has come under some pressure. You have to go digging in the cash flow statement to find the problem and in doing so, you’ll also see why the share price dropped.

To help you learn where to find this stuff, I’ve highlighted it below:

When you see a swing like this, there are only three possible explanations: higher debtors, higher inventory or lower payables. In a retail business, it’s almost always inventory.

Aaaaaand…bingo:

The announcement doesn’t give many details on the inventory balance. Again, you need to get your inner sniffer dog out to find the details.

If you dig through the results presentation, you’ll find a slide that discloses 29.3% growth in inventory and 22.7% if you exclude the acquisition of Tapestry Brands. When you see huge balance sheet movements like this, always keep in mind whether there are acquisitions, as that can explain a large jump. In this case, the acquisition is only part of the reason.

Inventory days increased from 140 days to 154 days, as the group bought in inventory ahead of price increases and peak trading period. It’s also worth noting that merchandise inflation is 14%, so that sucks a lot of cash to keep the stores well stocked.

Here’s where I got these stats:

Did the market overreact? TFG has been priced for perfection for a long time now, so the smallest blemish in the results gets punished. Provided sales go as planned over the festive season, I suspect that the company will be ok.

For those who are feeling bullish on consumers in this environment, or those who enjoy trading ranges, the share price is at an interesting level:

Little Bites:

  • Director dealings:
    • A director of Gold Fields joined me in selling shares after the juicy jump in the past week. Unlike me, the director sold shares worth a whopping R3.9 million.
    • A director of Sappi has sold shares worth R962k – I would take careful note of this when read in the context of the company outlook that was covered in Ghost Bites earlier in the week.
    • A director of a subsidiary of Santova has sold shares in the company worth R923k.
    • The CEO of Altron has purchased shares worth nearly R46k.
    • As I expected to see as a Hyprop shareholder, many of the directors elected the dividend reinvestment alternative (just like I did).
    • A director of a subsidiary of African Rainbow Minerals has sold shares worth R2.75 million
  • There seems to be action brewing in the Grand Parade Investments shareholder register. Sun International now holds 10.56% in the company. Is this the start of a play by Sun International for Grand Parade? The assets certainly make a lot of sense together. In the meantime, GMB Liquidity (which has made a mandatory offer to shareholders) now holds 35.1404%.
  • The board of Kore Potash must be holding its breath to see what happens next with the Minister of Mines in the Republic of Congo. In early October, the company received a letter from the Minister “expressing his discontent” with the administration of the companies in the country and the lack of progress being made towards the financing of the Kola Project. The company has formally responded to the Minister with a view to continuing the historically “strong and constructive” relationship with Kore Potash. In Africa, being on the wrong side of the government is never a good thing. Sadly, it’s often not the fault of the company, with many African governments well known for shaking the tree to see how much money falls out in the right places.
  • Eastern Platinum has reported results for the third quarter of 2022. Revenue increased by 8.1% year-on-year in this quarter and from a year-to-date perspective, revenue is up 4.8%. Gross margins are higher and the group is making operating profits this year vs. operating losses in the comparable period. Due to a large foreign exchange loss, the group reported a net loss as it reports in dollars. The working capital picture isn’t great at all, with the company owed $16.4 million from a key customer. The group is busy raising capital to accelerate the restart of the Zandfontein underground operation.
  • ISA Holdings released results for the six months ended August. Turnover increased by 9% and HEPS was 40% higher at 6 cents, with a particularly strong contribution from the investment in cybersecurity and records management business DataProof. In something you really won’t see every day, the payout ratio is 100%. Yes, the interim dividend is equal to HEPS at 6 cents per share!
  • Unsurprisingly, the shareholders of Cognition Holdings voted almost unanimously in favour of the disposal of Private Property. I think that the company achieved a great price for this asset.

Multichoice Reviewed Interim Results Announcement

Sponsored Content
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Multichoice Reviewed Interim Results Announcement

Condensed consolidated Interim financial results for the year ended 30 September 2022

MultiChoice is a powerful business with incredible reach on the African continent. There are over 22 million households that enjoy a strong combination of live sport, regional content and international shows.

With growth in subscription revenue and some normalisation in advertising, revenue has grown considerably. There is pressure on earnings and cash flow though, as the company has invested heavily ahead of the 2022 FIFA World Cup. With the best broadcasting rights in 50 markets in Africa, that’s an investment that makes sense.

Refer to the results below for all the details:

multichoice-reviewed-interim-results-announcement

Ghost Bites (AVI | MultiChoice | Purple Group | Sappi | Transaction Capital)

The Finance Ghost
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Ghost Bites (AVI | MultiChoice | Purple Group | Sappi | Transaction Capital)

If you enjoy Ghost Bites, then make sure you’re on the mailing list for a daily dose of market insights in Ghost Mail. It’s free! SIGN UP >>>

AVI inches forwards despite tough conditions

After a rollercoaster year in the share price, performance is flat year-to-date

AVI released the chairman’s comment that was made at the AGM on Tuesday. It starts with the usual bad news (consumer pressure / load shedding / Transnet) and ends off with a positive, albeit modest story at operating profit level.

Revenue for the quarter ended September increased by 9.7% year-on-year, a strong result driven by price increases. Revenue growth was achieved in all categories except I&J which was impacted by poor catch rates and an unfavourable abalone sales mix. The group focused on protecting margins even where volumes were impacted, which is the mature (and painful) approach to take.

In the footwear and apparel business, the year-on-year numbers were flattered by the disruption from civil unrest in the base period.

Group gross profit margin fell slightly as not all cost pressures could be recovered. Operating expenses increased at a rate above inflation, mainly because of exposure to fuel prices among other costs. Consolidated operating profit increased by just 2.1%. If we exclude I&J, the branded consumer business grew operating profit by 9.5%.

The share price closed 2.5% higher on a day where the ALSI closed 1.5% higher.

MultiChoice reports results ahead of the FIFA World Cup

Sport is big business and the group has invested heavily ahead of the soccer

In the six months ended September, MultiChoice reported growth in the user base of 5%. There are now 13 million households in Rest of Africa and 9.1 million households in South Africa that have DSTV. Both segments are still growing, although the average revenue per user (ARPU) is much higher in South Africa (R290) than in Rest of Africa (R183).

Subscription revenues were up 8% year-on-year, with Rest of Africa growing far more quickly with 27% growth. Advertising revenue only increased by 5%, which isn’t bad in this consumer environment. As we can see from tech company results in the US, there has been a normalisation of advertising spend as sport has returned. Advertising contributes around 7% of MultiChoice’s revenues.

Irdeto reported a 13% decline in revenue, which was more than offset by 19% growth in insurance premiums and other revenue.

Earnings and cash flow were impacted by the investment ahead of the FIFA World Cup. With significant anticipated subscriber growth, the group isn’t taking any chances with global chip shortages. The investment in decoder subsidies reduced trading profit by R0.7 billion and free cash flow by R0.8 billion, particularly in Rest of Africa. The opportunity is clear though: SuperSport is the only place to watch every match of the FIFA World Cup in an African time zone across 50 markets.

With a reduction in losses in Rest of Africa, group trading profit increased 2%. The impact on margin of the decoder investment is expected to unwind in the second half of the year, delivering even more positive operating leverage.

Consolidated free cash flow fell by 44% because of the investment in decoders. The balance sheet is still strong, boasting R7.5 billion in net assets including R7 billion in cash.

A key competitive advantage for MultiChoice vs. the likes of Netflix is the investment in local content. 48% of general entertainment spend was on local content, something that international streamers really struggle to compete with.

A challenge faced by the company lies in repatriation of cash from African countries and especially Nigeria. This is something that investors keep a close eye on.

Purple Group is still profitable in a tough market

The share price has lost 40% this year as markets cooled down

For the year ended August, Purple Group expects to report a drop in earnings per share of between 10% and 20%. This includes substantial fair value adjustments. Most investors look at headline earnings per share (HEPS) to ignore these adjustments, in which case the drop is between 67% and 77%.

This is a year-on-year movement and markets were absurd during the pandemic, so I’m not surprised to see a drop. The announcement came out after market close, so the share price hasn’t had an opportunity to react to this news. Selling pressure is likely on Friday.

If we look at EasyEquities specifically, the group’s operating profit before tax of between R29.8 million and R33.0 million demonstrates that a sustainable business has been built. This is a drop of between 31.3% and 38.0%, which is as expected in this market. Client numbers increased but so did expenses, up by 56.5% in the development of future revenue opportunities.

EasyEquities is still a startup at heart and needs to invest in the future. Leaving aside my appreciation for what they’ve done for South African investors, I think being profitable in this environment is an achievement of note.

The fair value gain relates to the shareholding in the RISE business. EasyEquities previously held a 50% stake and then acquired the remaining 50%, leading to a revaluation of the original stake to a value in line with the price paid for the rest. This led to a positive fair value adjustment of R48.9 million. The company paid for the stake by issuing shares at R2.50, which looks like a good deal based on the current traded price.

In the prior period, there was a fair value adjustment of R50 million related to EasyCrypto. This means the fair value adjustments are consistent year-on-year.

Looking at other business units, GT247.com achieved an incredible turnaround. After a loss of R8.7 million in the prior period, profits are now between R13.4 million and R14.8 million. This is a huge swing achieved through a revenue recovery to historic levels.

Emperor Asset Management went the other way, with a loss of between R5.6 million and R6.2 million vs. a profit of R0.9 million in the prior period. The loss includes an impairment adjustment of R3.8 million.

The head office and investments segment recorded a significantly lower loss of between R3.4 million and R3.8 million, an improvement of 54% to 59%. This includes the investment in Real People Investment Holdings.

My view hasn’t changed. Purple Group has a great business and a very overvalued share price. I’ve been consistent in that view throughout the pandemic and the chart this year supports it. At the right price, I can’t wait to invest in Purple and get exposure to the global expansion of EasyEquities.

Sappi reports another record quarter

Take note: the company has given a sobering market outlook

In a cyclical industry, you have to be very careful in extrapolating earnings. A great quarter can become a distant memory if things turn quickly enough.

In the quarter ended September, Sappi reported a 35% jump in sales and 121% increase in EBITDA excluding special items. HEPS was 311% higher, although “special items” means that reported profit was 26% lower.

Importantly, net debt is down 40% year-on-year and the net asset value is up by 19%.

Excluding special items, this was a record quarter for EBITDA, driven primarily by improved profitability for the pulp segment and a strong performance in North America that offset the cost challenges in Europe.

Graphic paper sales saw order activity slow down towards the end of the quarter, with Sappi noting that this is an industry in terminal decline. At the end of the quarter, Sappi agreed to sell three European mills to Aurelius Investment Lux One, reducing exposure to this market. Proceeds will be used to reduce debt.

To give you an idea of how cyclical this industry is, net cash generated for the year of $506 million is vastly higher than just $29 million last year. This is how the business managed to reduce debt to such a large extent.

The strong balance sheet will be needed, as the outlook section notes that macroeconomic uncertainty has increased considerably in recent weeks. Order activity in dissolving pulp and graphic paper has declined, with destocking across the vale chain. On the plus side, demand for packaging and speciality papers is more resilient in a downturn.

Further good news is that North American demand is robust and Sappi is investing $418 million at Somerset Mill to respond to this demand, with an expected completion date in 2025. Capital expenditure for FY23 is estimated to be $430 million, of which $70 million relates to next year’s spend on Somerset.

Despite rising input costs that are a concern for production efficiencies, Sappi expects EBITDA for Q1’23 to be ahead of Q1’22.

A dividend of 267.28155 cents per share will be paid in January.

Transaction Capital is growing in the high teens

It’s tricky to know which earnings measure to focus on

Having studied accounting, I can tell you with certainty that most of it is ignored by the market. People look at key metrics and ignore the noise, as many accounting standards have become so complicated that they just aren’t useful.

One of the big wins on the JSE is that companies need to report headline earnings per share (HEPS), a standardised metric designed to improve comparability. It works well.

In Transaction Capital’s trading statement for the year ended September, my favourite local company reported HEPS growth of 49% to 54% from all operations and 51% to 55% from continuing operations. To show you how distorted numbers can become, basic earnings per share (EPS) is down 34% to 30%.

To help make sense of it all, the company suggests using core EPS from continuing operations to assess performance. This metric excludes adjustments on put and call option structures, once-off transaction costs and other non-core items.

With an increase of 15% to 19%, this means that the group is growing in the high teens.

I look forward to the release of full results on 15 November so that I can see how things are going at SA Taxi in particular.

Little Bites:

  • Director dealings:
    • Des de Beer has bought another R2.4m worth of Lighthouse Properties shares
    • A prescribed officer of Impala Platinum has disposed of shares worth nearly R996k
    • Associates of Piet Viljoen and Jan van Niekerk have acquired Astoria shares worth R1m and R66k respectively
    • The family trust of the CEO of Altron has bought more shares in the company, this time worth over R50k
    • An associate of directors of Octodec has acquired shares worth R1.06m
    • An associate of Jacob Wiese has bought shares in Shoprite worth R695k
  • Sephaku Holdings released a trading statement for the six months ended September 2022. The group expects headline earnings per share to jump by between 58% and 66%, coming in at between 11.11 cents and 11.67 cents. There’s a slight timing complication in the group results as one of the subsidiaries as a different year-end to the holding company.
  • There’s yet more drama in the Northam Platinum / Royal Bafokeng Platinum story. Back in April, the CEO and COO of Royal Bafokeng retired and the company concluded new fixed term contracts with those executives. This led to accelerated vesting of shares, a move which Northam complained about to the TRP as a frustrating action under the Companies Act. After the TRP dismissed Northam’s claim, a subsequent appeal to the Takeover Special Committee (TSC) was successful. The TSC found that the share issuance contravened the Companies Act and that Royal Bafokeng must correct this contravention. Royal Bafokeng believes that the ruling is “legally and factually flawed” and will be consulting with advisors re: next steps. Interestingly, the TSC further ordered the TRP to investigate Northam’s full complaint in its entirety as expeditiously as possible.
  • In further platinum news, Eastern Platinum announced a pipeline finance agreement with Investec. The credit facility was reduced from R150 million to R110 million and will be used for working capital purposes and the restart of the Zandfontein underground section of the Crocodile River Mine. This renewable 12-month revolving commodity finance facility is secured by PGM production from the tailing storage facility at the mine. A hedging structure on the underlying minerals means that the commodity pricing is guaranteed.
  • Montauk Renewables released quarterly results for the period ended September. Net income increase from $8.9 million to $11 million. If you are keen to see what US reporting looks like (as the company has a secondary listing on the JSE and reports under US rules), you’ll find it at this link.
  • If you are a shareholder in BHP, you may be interested in the presentation and the speech from the AGM that you’ll find at this link.
  • Advanced Health Limited reminded the market that a strategic review of the business is still ongoing. Approaches from several parties re: a potential acquisition of Presmed Australia have been received. The board is evaluating the proposals with its advisors.
  • I quite enjoyed the outcome of the Quilter vote on the resolution authorising political donations or expenditure. The company says that the resolution is to avoid inadvertent breaches of the law, as it doesn’t actually make donations. Still, shareholders on the South African register only gave it 63.77% vs. 99.94% support on the UK register. We are well aware in SA of what “political donations” actually means.
  • Libstar has announced that the acquisition of Cape Foods has become unconditional.

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

Resource counters were in the spotlight this week making the headlines on two occasions

Northam Platinum announced on Wednesday, exactly one year to the day after the announcement of the initial acquisition of a 32.8% stake in Royal Bafokeng Platinum (RBPlat), that it would bid for control of RBPlat in a voluntary offer worth R31,7 billion. The offer of R172.70 per RBPlat share is on the same terms as its acquisition made in November last year, less the dividend paid out by RBPlats. The offer (cash and shares) is significantly higher than that of Impala Platinum of R150 per share (R90 per share plus 0.3 shares in Impala). The minimum cash consideration offered by Northam is R54.40 assuming full acceptance of the offer, however, if acceptance rates are low, then the full amount will be paid in cash. Northam currently owns 34.52% of RBPlats (37.8% if call options granted are exercised) with Impala having secured 40.71%. The Public Investment Corporation stake of 9.42% makes it an important cog in this bidding war. As a category one transaction in terms of the JSE Listing Requirements, Northam plans to issue a circular by December 7 with shareholder approval required in due course.

Gold Fields has terminated its proposed acquisition of Yamana Gold following the recommendation by the Yamana Board to its own shareholders to accept the recently announced competing bid from Pan American Silver and Agnico Eagle Mines. One can’t help feeling that Gold Fields has dodged a bullet – for months Gold Fields has been trying, with limited success, to persuade its shareholders that it was not overpaying for the Canadian assets. Had shareholders not voted in favour of the $6,7bn deal later this month, Gold Fields would have had to pay Yamana a break fee of $300 million – the turn of events will see Gold Fields and its shareholders benefitting from Yamana’s termination fee.

Murray & Roberts (M&R) has signed an agreement with Webuild, an Italian construction a civil engineering group, to dispose of its interests in Australian company Clough, which has for some time experienced acute working capital pressures. Although the business is valued c.A$350 million, the cancellation of an outstanding intercompany loan account will see M&R receiving just A$500,00 in cash.

GMB Liquidity has made a mandatory offer to minority shareholders of Grand Parade Investments (GPL) at an offer price of R3.33 per share – in line with the current market price. The recent on-market acquisition of GPL shares by GMB increased its stake to 35.14%, over the 35% threshold requiring GMB to make mandatory offer. It is however, not GMB’s intention to apply for the delisting of the company from the JSE.

African Equity Empowerment Investments has entered into a small, related party transaction with majority shareholder (66%) Sekunjalo Investments to dispose of 1,188,916 ordinary shares in Sygnia.

Unlisted Companies

In a statement released this week, the Competition Commission has prohibited the proposed deal by Amsterdam-based AkzoNobel to acquire Kansai Plascon Africa and Kansai Plascon East Africa saying it would substantially lessen competition in the manufacturing and supply coatings market.

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

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