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Ghost Global (Domino’s | TSMC)

Karel Zowitsky
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Ghost Global (Domino’s | TSMC)

This week, Karel Zowitsky focused on cheese and chips. Before you get too hungry, these aren’t the chips that you’re thinking of.

Less cheese to make more dough

Even pizza isn’t immune to input cost pressures

If you have ordered a pizza recently, you might have noticed that the cheese isn’t as thick or that the toppings are thin. Restaurants are under pressure and with consumers struggling, the way to improve margins is to cut costs.

Domino’s Pizza, listed on the NYSE, hasn’t been immune to rising interest rates and the effects of inflation. The share price has fallen by over 40% this year. The franchise group has a market capitalisation of around $11.4 billion and is trading on a P/E ratio above 25x. Although food groups tend to trade at structurally high multiples, you need to sell a lot of pizzas to justify a multiple like that.

The pizzas must be priced to perfection. At the very least, Domino’s committing the egregious sin of offering pineapple on pizza might break the share price even further.

In its third quarter, Domino’s reported revenue of just over $1 billion. This is slightly up year-on-year. The gross margin has decreased from 38.6% to 35.7%, largely attributable to increases in input costs and supply chain pressures.

As much as we would love it to be, pizza is not immune to inflation. The good news is that the group is still profitable, with net profit for the quarter of $100 million.

Taiwan Semiconductor Company (TSMC) is still printing cash

The biggest risk is the first part of the name

TSMC is listed on the NYSE with a market capitalization of around $322 billion. In a nutshell, TSMC is the largest manufacturer in the world of electronic chips. These chips are required in almost every single piece of electronic equipment from your smartphone and laptop to your automated vacuum and electric car.

We are currently in a worldwide chip shortage as a result of supply disruptions that were caused over the last two years. This has massive ramifications for manufacturing. Although the chip is one of the smallest components, it is absolutely crucial for essentially every electronic device. If you haven’t been able to get your hands on the latest Playstation 5, now you know why.

Revenue for the third quarter saw a 35.9% increase year-on-year to $20.2 billion. Management expects revenue to be between $19.9 billion and $20.7 billion in the fourth quarter. The most impressive feat for TSMC is that the company is able to produce a net profit margin of 45.8%. The operating margin was 50.6% and management expects it to remain between 49% and 51% for 4Q22.

The share price has lost 50% this year despite the strong financial results. This is partly because the valuation was simply too high. We can’t ignore the fact that geopolitical risks around Taiwan are heating up, with China making worrying noises about the region.

Many of these concepts (as well as the capital intensity of the model) were covered in Magic Markets Premium, with TSMC as just one example in the extensive library of reports. Even though it was covered back in January, the insights are just as relevant today.

You’re obviously interested in global stocks if you’ve made it this far. There’s a library of 50 research reports and podcasts produced by The Finance Ghost and Mohammed Nalla in Magic Markets Premium. For R99/month or R990/year, the full library is available, along with a new show each week.

Ghost Bites (BHP | DRDGOLD | MTN and Telkom | Quilter | Standard Bank)

The Finance Ghost
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Ghost Bites (BHP | DRDGOLD | MTN and Telkom | Quilter | Standard Bank)

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BHP operational review

Other than coal, production is higher

If you plan to read the entire review in detail, you’ll need to set aside a lot of time. BHP releases quarterly announcements that Tolkien would’ve been proud of.

I’ll focus on some key highlights here:

  • Production and unit cost guidance is unchanged for the 2023 financial year
  • Copper production is up 9% year-on-year and 11% vs. the preceding quarter (sequentially)
  • Western Australia Iron Ore is up 3% year-on-year and 1% sequentially
  • Metallurgical coal production is down 1% year-on-year and registered a significant drop of 19% sequentially
  • Energy coal production fell 38% year-on-year and 33% sequentially
  • Nickel production increased 16% year-on-year and 10% sequentially
  • Jansen potash project is tracking well
  • There are several initiatives underway to reduce group emissions

The sharp contraction in coal production was attributed to several factors including wet weather. It’s not just Eskom who struggles with wet coal.

DRDGOLD continues to struggle with margins

The gold price needs to stop this nonsense now

In an operating update for the quarter ended September, DRDGOLD reported a 1% sequential increase in production (i.e. vs. the quarter ended June) and a flat performance in gold sold. That’s not good when inflation is going through the roof and the gold price isn’t behaving, as the only way to then close the profitability gap is to ramp up production (easier said than done obviously).

Although the average gold price received was 1% higher than the preceding quarter, the inflationary pressures noted above led to cash operating costs increasing by 2% per kilogram. That’s not happy news for margins per kilogram, now is it?

To make the quarter-on-quarter view look even worse, there was an insurance claim of R84.7 million in the second quarter that obviously didn’t repeat in this quarter. This was the primary driver of adjusted EBITDA falling by 19%.

All-in sustaining costs per kg fell by 14% due to a significant decrease in sustaining capital expenditure. All-in costs per kg were 9% lower.

DRDGOLD remains cash flush (R2.24 billion in the bank) and still expects to declare an interim dividend in February 2023.

The share price has lost 28% of its value this year and I’m glad I got out of the way at the start of the year when I could see that gold wasn’t behaving the way it should during high inflation.

MTN has achieved the near-impossible

Yes, we finally have evidence of someone successfully cancelling a deal with Telkom

It’s time to bring out this gem from my Twitter timeline:

Based on the level of engagement it achieved back in July, it seems that many other people have also experienced the joy of the Telkom cancellations department.

Telkom’s share price tanked more than 21% in morning trade as the news broke of MTN calling off a potential deal with the company. There aren’t many details given in the announcement, other than that the parties failed to “reach agreement” to “mutual satisfaction” on the terms and process going forward.

If you only read the MTN announcement, you might speculate that this could’ve been related to price or other elements of the deal. There was perhaps some concern around how the competition regulators would view the deal, something that many highlighted as a deal risk.

If you read the Telkom announcement, you’ll see that Telkom wasn’t able to provide MTN with exclusivity around discussions and this apparently killed the deal. Before you lay the blame at Telkom’s door, it’s quite right not to grant exclusivity when there isn’t even a binding offer on the table. The board has a fiduciary duty to consider all potential offers.

Speaking of other potential deals and in case you’ve forgotten, Rain has thrown its hat in the ring with Telkom. The idea would be to merge the groups and retain Telkom’s listing. This must’ve played a role in MTN pushing for exclusivity.

With MTN having left the boardroom table, perhaps it’s time for Telkom to make it rain?

Quilter has lost half its market value this year

When markets are falling, you don’t want to own an asset manager

When looking at asset management firms, you have to distinguish between assets under management (or even assets under management and administration – “AuMA” in Quilter’s language) and net flows. AuMA will fluctuate as the market prices of all the underlying investments change. Net flows will tell you whether that asset manager is still attracting money from investors.

Over the course of the third quarter, Quilter’s AuMA fell 2%. There were net inflows representing 1% of opening AuMA, though they were lower than net inflows in the prior period.

Productivity per advisor (measured by gross flows vs. the number of advisors) has been consistent.

Paul Feeney has been at the helm for a decade and is stepping down on 1 November 2022. Steven Levin will take the top job in a difficult market environment. Quilter fell 5.5% after announcing the quarterly numbers and is down a whopping 51% this year.

Standard Bank signs off on another strong quarter

Year-to-date earnings are 42% higher than the comparable period

Each quarter, Standard Bank provides sufficient information to the Industrial and Commercial Bank of China (ICBC) to enable that bank to meet its reporting requirements. The benefit for local investors is that we get quarterly updates from Standard Bank rather than only interim and final reports.

For the nine months to September (i.e. the year-to-date period), net interest income (NII) achieved double-digit growth thanks to higher average loan balances and average interest rates. This is in line with what I wrote about the banks earlier this year, as inflation drives larger balance sheets for corporates.

Encouragingly, non-interest revenue (NIR) continued its strong growth, with market volatility leading to trading revenue growth. Banks love volatile markets with high trade volumes.

Another impressive aspect to the update is positive jaws, which means expense growth was lower than income growth. This suggests an expanding operating margin. I have no idea why the term “jaws” is only seen in the banking sector and hardly anywhere else.

It’s all good and well for balance sheets to grow, but if credit losses increase too quickly then the net impact on profits can be negative. Thankfully, Standard Bank’s credit loss ratio for the nine-month period is in the lower half of the through-the-cycle credit loss ratio range of 70 to 100 basis points.

Looking at other business units, Liberty’s performance improved vs. the comparable period that was impacted by the pandemic provisions. ICBC Standard Bank plc continued to report an operational profit for the nine months.

Return on equity for the nine-month period is higher than the 15.3% achieved in the first six months. The group doesn’t disclose how much higher.

With earnings attributable to ordinary shareholders up 42% year-to-date vs. the comparable period, this is proving to be an excellent year for Standard Bank.

The share price rallied more than 6.5% in response, taking the year-to-date growth to 12%.

Little Bites:

  • Adcorp has released a trading statement for the six months ended August. Revenue is up by between 1.2% and 5.2% which isn’t thrilling. HEPS from continuing operations is expected to be between 2% and 14% lower than in the comparable period. Sadly, because of “exceptional losses” in allaboutXpert Australia (classified as a discontinued operation), the group HEPS result is expected to be between 54% and 74% lower. At the end of August, Adcorp was in a net cash position of R144.8 million.
  • Delta Property Fund has agreed to dispose of 15 Simba Road, Sunninghill for R39 million. The property was valued at the end of February 2022 at R45.4 million. The buildings are vacant are need significant refurbishment. The proceeds will reduce the loan-to-value from a horrible 57% to a marginally less horrible 56.8%. Fund vacancy levels will reduce by 70 basis points to 30.6%. The buyers include a few names that I remember from my varsity classes at Wits, but that’s my little secret.
  • Kore Potash is a reminder of why doing business in Africa is fraught with risks. The Minister of Mines of the Republic of Congo has “expressed his discontent” with aspects of the administration of subsidiary companies and the lack of progress made towards financing the Kola Project. This comes after two senior employees were arrested and released without charge. The government has the “right to take measures” if the company doesn’t respond within 30 days. Kore Potash has actually made great progress in this project, so this feels like an African government just doing what so many of them are famous for: shaking the foreign corporation tree to see how much money falls out of it.
  • Specialist property developer Acsion Limited has released a cautionary announcement related to a potential cash offer for the company and subsequent delisting. There are such thin volumes in this company that it wouldn’t be much of a loss to the market. I’m not surprised to see this one potentially leaving the market.
  • Brikor released a textbook “bland cautionary” – there are literally no details. At all. We only know that the company has entered into negotiations that may impact the share price. Watch this space.
  • After uncovering gross misconduct by the leadership team in Jasco’s security and fire business, the board planned to restructure the business and exit this market segment. On further scrutiny though, the board has decided to rather place the business into voluntary liquidation. This can only mean that things were so bad that the business couldn’t be salvaged. The share price fell 30% as another reminder of the risks of investing in marginal microcaps.

British pound: the new emerging market currency?

Andre Botha
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British pound: the new emerging market currency?

TreasuryONE’s Andre Botha highlights the volatility in the pound in a week that is almost devoid of data.

As we move through this week of relative calm in the market, it is important to reflect on some of the key themes of the market over the last couple of weeks. Central to the whole market movement currently is the Fed and its reaction to both higher inflation and the fear that inflation puts into the market.

No sharp reversal in inflation

Last week, we saw that inflation in the US printed a little higher than expected at 8.2% vs 8.1%. This caused a little bit of panic in the market with the rand reaching a new high of R18.5700 against the US dollar. The effect of the higher-than-expected inflation number will surely be that the Fed will hike by 75 basis points at its next meeting in November and that the Fed will be quite aggressive going forward. The markets are pricing a 100% chance that the Fed will hike interest rates by 50 basis points.

While the dollar has been the main mover of markets in the past few months, we have seen great volatility in the British pound of late. The volatility stemmed from the tax cut reforms by ex-Chancellor Kwasi Kwarteng a couple of weeks ago. The fallout from the announcement was the pound and UK Government bond yield going into a free fall, with the pound hitting an all-time low against the US dollar.

Mr Kwarteng, who was fired on Friday after just 38 days in the job, paid the price for a giveaway that called into question the government’s economic credibility on financial markets. Mr Kwarteng’s replacement, former foreign and health secretary Jeremy Hunt, has since promised to win back the confidence of the financial markets by fully accounting for the government’s tax and spending plans.

Rollercoaster GBP

What does the above mean for the market in terms of direction for the next week?

As we stated earlier this week, we will have little in the way of data that is coming up. We have seen that emerging market currencies have borne the brunt of the US dollar attack last week and are slowly but surely gaining some ground against the US dollar. The US dollar has been overextended – especially after last week’s CPI print – and with the pound gaining some stability it bodes well for risky assets this week.

However, we need to watch out for any announcement from the Fed or recession talk for the markets to move substantially this week.

For more from TreasuryONE and to learn about the extensive service offerings, visit the website.

Ghost Bites (Cashbuild | CMH | Hyprop | Pick n Pay)

The Finance Ghost
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Ghost Bites (Cashbuild | CMH | Hyprop | Pick n Pay)

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 >>>

The DIY and building industry keeps falling

The latest update from Cashbuild isn’t good news at all

Cashbuild has released a voluntary operational update for the first quarter of the 2023 financial year. Revenue is down 4% year-on-year, with existing stores 5% lower. Volumes in existing stores fell by 8% and pricing increases helped mitigate some of that pain. Selling inflation was 4.8%.

Once again, the P&L Hardware business is taking the most pain. That segment is down 11% year-on-year and contributed 8% of sales. The core Cashbuild South Africa segment (81% of sales) fell by 2% overall, with new stores contributing 1% growth and existing stores down 3%.

This was a negative update that drove the share price down by 6%, taking the year-to-date drop to over 24%. The share price is back to September 2020 levels and there seems to be little relief on the horizon for this particular sector of the market.

CMH posts another bumper earnings result

The outlook tells a very different story

CMH is primarily a car dealership business and has had a great time of things in the aftermath of the pandemic. High used car prices means that margins have been great, with the impact of operating leverage leading to bumper profits.

There’s also a car hire business. Although it makes far less revenue than the car dealership segment, you need to look at profit before tax to get the real picture:

I also suggest that you pay close attention to the commentary in the result. Investing is about what will happen next, not what has already happened. The group talks about “weathering a short- to medium-term storm” driven by rising interest rates, worsening loadshedding and economic despondency, pressure from manufacturers to reduce inventory and a fall in confidence levels.

That final point is critical, measured by the number of deals initiated by customers and approved by finance houses before the customer has a “change of heart” and pulls out of the deal.

CMH is up 14% this year. I would be careful here.

Hyprop gets a positive credit outlook

In a REIT, equity investors need to pay attention to the credit rating

In many cases, you can largely ignore a company announcing its credit rating. As an equity investor (and provided the company is in sound financial health), the credit rating is no indication whatsoever of potential equity returns.

I see it a bit differently in REITs, as these are highly leveraged structures where the return to shareholders is heavily influenced by the availability and cost of debt.

I bought Hyprop shares earlier this year at R33 and they are currently trading just below R38, so this is proof that there have been ways to make money this year. My thesis is that retail property funds are due a significant recovery in a post-Covid world and I felt that the share price was undervalued.

GCR Ratings has given Hyprop a solid investment grade credit rating and has also noted a positive outlook, driven by a faster than anticipated recovery in the group, reduced risk on the balance sheet from recent transactions in Europe and the overall strategy around deleveraging the balance sheet.

As a happy shareholder, all of this is music to my ears.

Pick n Pay is on sale

You can QualiSave right now on the share price, which lost 9% on Tuesday

Pick n Pay has released interim results for the 26 weeks ended 28 August and the market appears to be upset. There isn’t much to fault in the results themselves, so this could be a function of a high valuation multiple that is finally unwinding. It may also be linked to visibility on Boxer vs. the rest of the group.

Recognising that the comparable period was impacted by the pandemic, turnover is up 11.5% and gross margin improved from 18.2% to 19.4%. The company suggests that 8.2% turnover growth is a normalised view after adjusting for civil unrest and liquor trading disruptions. If you read carefully in the detailed results, you’ll also find that gross margin on a normalised basis actually fell from 20% to 19.4%. The year-on-year improvement (as reported) is thanks to disruptions in the base.

Trading expenses were 10.6% higher, so operating margin expanded and profit before tax increased by 22.2%.

In Pick n Pay South Africa, like-for-like sales and expense growth were similar at 4.5%. The margin expansion didn’t come from that part of the business.

Although HEPS was 59.5% higher, pro-forma HEPS is what matters as this adjusts for the business interruption proceeds that were in this period and not in the base. That metric is 25.3% higher, which makes sense compared to the increase in profit.

To help you understand the group strategy, it’s useful to note that Pick n Pay refers to “high performance but under-penetrated formats” – in this case Boxer and Pick n Pay Clothing. The group believes that there is a significant runway for growth in these formats and I agree with that assessment, with Boxer posting growth of 27.2% and Pick n Pay Clothing up 14.8%.

In the core business, it’s all about separating the Pick n Pay footprint into two differentiated banners: Pick n Pay (for higher income shoppers) and Pick n Pay QualiSave (for lower- to mid-income shoppers). Although I still think it’s a terrible name, all that will ever matter is the financial results. The QualiSave name has been rolled out to 93 stores and a further 41 stores have been refurbished in line with the new plan.

In case you’re wondering, the difference is the amount of choice in store vs. how aggressive the pricing is. Higher income shoppers value choice and quality above all else. Lower income shoppers struggle to put food on the table and need the best possible prices. It’s as simple as that.

Online sales grew 82%. I would caution that this is still off a very low base.

Ultimately, the biggest news for investors who closely follow Pick n Pay is that Boxer is now separately disclosed for the first time. As this table shows, it is the crown jewel of the group in terms of future prospects:

With no other obvious reasons for the sharp decline in the share price, perhaps it was because the market realised that Boxer has been flattering the group story and that Pick n Pay needs more work than people thought?

Little Bites

  • Selected director dealings:
    • A director of Blue Label Telecoms sold shares worth R558k. In general, I’ve seen Blue Label insiders as being net sellers despite (or because of?) the deal with Cell C.
    • A prescribed officer of Standard Bank sold R2 million in shares.
  • Insimbi Industrial Holdings reported results for the six months ended August 2022. Revenue increased by just 1% but net profit jumped by 47%, helped along by an increase in gross margin thanks to higher commodity prices. For a real example of how badly Transnet is hurting the economy, switching from rail to road transport caused direct transport costs to increase by 219%! Cash generated from operations was down by 17%, driven by a significant decrease in trade payables. The best news in the result is that debt has come down considerably.
  • With the Emira – Transcend offer well underway, Emira now owns 68.03% in the company.
  • Ninety One has confirmed its assets under management (AUM) as being £132.3 billion. That’s lower than £134.9 billion at the end of June and £140 billion a year ago.
  • In a nasty display of the yield curve, British American Tobacco has priced $600 million of notes due 2032 (i.e. 10-year borrowings) at 7.75%. Debt is nowhere near as cheap as it used to be.
  • African Rainbow Capital Investments has sent out the circular related to the proposed change to the management fee. If you are invested in that company, I highly recommend you check it out as this has been a major source of underperformance since the group listed.
  • In a weekly reminder of how poor everyone is relative to Naspers and Prosus, those companies have repurchased shares worth $77 million and $190 million respectively. Best of all, that’s only one week’s worth of repurchases!

Ghost Bites (Calgro M3 | Labat | Mpact vs. Caxton | Murray & Roberts)

The Finance Ghost
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Ghost Bites (Calgro M3 | Labat | Mpact vs. Caxton | Murray & Roberts)

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Calgro M3 is lining up a huge pipeline

Investors will keep a close eye on the balance sheet

Residential property developer and memorial park operator Calgro M3 has released results for the six months ended August. It looks like good news, with HEPS up a meaty 33% to 57 cents. This was driven by 5% growth in revenue and an improvement in gross margin from 19.7% to 22%.

Although interest bearing borrowings have decreased by 3%, no dividend has been declared for this period. This seems to be because of general pressures on the balance sheet and the extensive development pipeline. Cash needs to be retained here.

Looking deeper, the residential property development business had 3,868 opportunities under construction as at the end of August. Around half of these are expected to be completed or handed over before February 2023, so revenue is expected to increase in the second half of the financial year. That would be a big finish to the year, as there were only 1,193 opportunities completed in the first half of the year.

The full pipeline in that segment is 24,000 opportunities for R15.9 billion, excluding the Frankenwald development. Calgro plans to exercise the Frankenwald land option at the end of June 2023 and is confident that internally generated cash can fund that option. This would unlock an additional 20,000 residential units across eight distinct income groups.

In the first six months, R47 million of annually planned infrastructure was self-funded. A further R73 million is coming in the second half of the year, which the company plans to fund internally. This is despite the first half of the year registering negative cash from operations due to infrastructure development and other factors.

In the Memorial Parks business, the goal is to grow cash receipts to support all group overheads and interest obligations. In this period though, sales slowed due to various factors including lower burial volumes, affordability constraints and the restructuring of the sales and marketing department. When adjusting for excess Covid-related debts, the memorial parks business is 5.6% lower than the comparable period.

To find out more about Calgro M3 and to ask questions like a proper sell-side analyst, join us on Thursday 20 October at midday on Unlock the Stock. You can also enjoy a presentation by Pan African Resources on the day. Register here for free>>>

Labat needs capital as cash is running low

And sometimes, clarity can be obtained between 10:27am and 11:25am

If there’s one thing that irritates me on the market, it’s when companies treat shareholders like a joke.

The JSE rules are clear. A listed company must publish a trading statement when a “reasonable degree of certainty” exists that results will differ by at least 20%.

At 10:27am, Labat released a trading statement for the nine month period ended 31 May.

Not even an hour later, the detailed results were released. It’s impressive to move from a “reasonable degree of certainty” to “certainty” in less than an hour. Perhaps those cannabis products really do help you focus.

The headline loss per share of 6.6 cents is already worse than 6.5 cents for the 12 month period ended August 2021, as there was significant “other income” last year that hasn’t repeated this year.

The company is looking for capital, which makes sense when you look at the balance sheet. This is a highly speculative play, with a loss of R34.7 million and the largest current asset being a receivable from SARS. I’m quite happy to keep my money away from this one as the risks seem to be as high as the customers.

Mpact responds to Caxton

It’s time for the latest salvo from the green corner of the ring

Of everything I’ve read thus far in the Mpact vs. Caxton fight, this is my favourite line thus far:

“Shareholders should note, however, that as SENS is not a forum for argument, Mpact does not intend to respond to every statement or allegation made in the Caxton Announcement and will confine itself to the matters of relevance to Mpact shareholders.”

Mpact SENS announcement, 17 October 2022

In this announcement, Mpact has reiterated / clarified its position on several matters:

  • The investigation by the Competition Commission started in 2016 and the Commission is not seeking to impose a penalty against Mpact. The company notes that this matter is not linked to the merger dispute with Caxton and calls Caxton’s references to this investigation “opportunistic and unwarranted”
  • The Mpact board cannot assess the merits of an offer from Caxton because there is no offer as of yet, so Mpact equally cannot support a joint or separate merger filing.
  • The Tribunal has referred the matter back to the Commission to determine if Caxton should be allowed to file a merger notification. Notably, the Tribunal commented on the lack of details around a potential offer and noted that firms cannot approach the regulator for a “blank cheque of competition approval” on “terms that are non-existent” – I fully agree with that!
  • In respect of the potential “customer flight” of Golden Era, Mpact confirms that Golden Era confidentially registered its opposition to Caxton’s proposed acquisition on the basis that Golden Era is a major competitor of Caxton and is worried about its supply from Mpact if control changes. Mpact derived less than 10% of total revenue from Golden era in 2021. The Mpact board considers it unlikely that Golden Era will be lost as a client, as supply in the market is tight at the moment and Caxton hasn’t even made an offer. On that basis, the board believes it would be irresponsible to announce the potential risk.

There are various other points in the announcement. If you want to read the entire fight, then refer to the full text on SENS.

Ultimately, there’s an underlying principle here that I fully agree with. Until Caxton actually makes a formal offer for the Mpact board to consider, this is all just noise over SENS and allegations flying in every direction. It would clearly be difficult or impossible for the current board to work with Caxton, so this would be anything but a harmonious relationship in the event of a formal offer being made.

The market will now await the next move, presumably from Caxton.

Disaster at Murray & Roberts

If you aren’t a MUR shareholder, then put a smile on your dial – life could be worse

If you are looking for an investment that you can buy and forget, then please don’t invest in cyclical stocks. Here’s another example from Murray & Roberts of why the only thing you’ll want to forget in that scenario is your share price return:

It’s not often that you see a major company shed a third of its market cap in a single day, yet here we are. Murray & Roberts is officially a loss-making entity thanks to supply chain disruptions and delays in projects which have eroded margins.

Construction is perhaps the toughest industry of all, which is why I’ve never invested in this sector. It’s a serious guessing game. If there are delays to fixed price contracts, then the costs rack up and the revenues don’t.

Here’s the really ugly news: for the six months ending December 2022, the group expects earnings to be at least 100% lower than the previous period which means the company is officially loss-making (again).

To make it worse, there are “especially acute” working capital requirements in the Energy, Resources & Infrastructure platform. That’s a private school way of saying that the place is deep in the smelly stuff.

This is another painful example of why I believe in highly diversified portfolios. You may think you’re investing in great businesses that tick all the fundamental boxes around infrastructure development etc. and you can still be sitting with a 34% drawdown in the time it took you to have your breakfast. When it happens to 3% of your portfolio, it’s painful. When you have 20% in a company and this happens, it’s catastrophic.

Size your positions carefully!

Little Bites

  • A director of AVI has sold all the shares received under a bonus share plan (vs. the usual situation which is to sell enough shares to cover the tax).
  • Southern Palladium has given an update on its Phase 1 drilling programme at the Bengwenyama PGM project. As is always the case in junior mining, the SENS announcement is a crash course in geology. Five drill rigs are drilling and the first samples have been dispatched for assessment. This means that further updates are expected in coming weeks.
  • I find it interesting that Shoprite is publicly inviting stakeholders to engagement sessions ahead of the AGM, particularly regarding the non-binding advisory resolutions relating to remuneration policy. A feature of the local corporate landscape is that many remuneration policies are being voted down by shareholders. These engagement sessions are designed to identify issues ahead of time and avoid the non-binding resolution being a negative outcome.

After DIY stocks have been hammered, are there opportunities?

Chris Gilmour
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After DIY stocks have been hammered, are there opportunities?

After things cooled down in the DIY retail industry, are there some opportunities to be found locally and abroad? Chris Gilmour gets out his hammer and nails.

The home improvement industry is a large element of discretionary retailing globally and has, generally speaking, been in an uptrend for many years. However, in recent times, this sector has been perceived by investors to be vulnerable to a downturn in consumer spending and share prices have come off accordingly.

But some of them may now be looking good for the longer term.

Home Depot

Back in the late 1990s when I was a retail analyst with the great Merrill Lynch (now part of Bank of America), I regularly attended retail field trips in the US with institutional fund managers and my fellow sell-side analysts at Merrills from many different parts of the world. One of the highlights of those trips was always the visits to Home Depot locations in America. These were vast stores; so vast in fact that electric golf buggies were provided inside in order to get around. There was nothing like Home Depot in South Africa in those days and there still isn’t.

Today, Home Depot is the world’s largest home improvement company. The group employs around half a million peoples and operates out of more than 2000 stores in north America and China.  

As can be seen in the price chart, Home Depot’s price has taken a beating in the past year. But earnings have been growing steadily for many years and last year was no exception. The share is trading on an historic P/E of 17x, which is not expensive for a company of this quality.

UK alternatives

The UK also has a large home improvement/DIY market but only very few of the companies are listed. The biggest is Screwfix, which caters predominantly to “the trade”, with its counter-only service that doesn’t permit the buyer to browse for products. It’s an unpleasant experience for the amateur DIY-er and if you’re not lucky enough to be served by a switched-on person behind the counter, the experience can be agonising. Professional tradespeople seem to enjoy this approach, however. Screwfix is owned by Kingfisher plc, which is listed on the London Stock Exchange.

Then there’s B&Q, which is also owned by Kingfisher. This closely resembles Builders Warehouse in South Africa, which is not surprising, as an ex-director of B&Q was consulted by Massmart to design Builders Warehouse. Kingfisher also owns the European brands Castorama in France & Poland and Brico Depot in France, Spain, Portugal and Romania.

Kingfisher has been a lousy performer over many years. Although it participated in the recent “homebody bounce”, it is pretty much where it was thirty years ago.

Another big home improvement company in Britain is Travis Perkins. This company refers to itself as the largest builders merchant in the UK and has a slightly attenuated range of products in comparison with B&Q for example, though its still includes general building materials, timber, plumbing & heating, kitchens, bathrooms, landscaping materials and tool hire. Until last year, it owned the Wickes DIY chain but unbundled that and listed its separately on the LSE.

Again, a fairly erratic performer, even over the longer term.

Wickes has a chequered history, being founded originally in the US in the 19th century, though it is more commonly associated with a UK domicile. Superficially at least, it looks very similar to B&Q and there are over 200 Wickes store in the UK.

It was previously listed on the London Stock Exchange but delisted amid scandals in the 1990s and was eventually bought out by Travis Perkins. It was demerged and re-listed on the LSE in April last year and the share price has been on a downwards trajectory every since.

Other non-listed home improvement retailers in the UK include The Range and Homebase, the latter being founded by Sainsbury’s in the late 1970s. These are fundamentally different in scope to the likes of B&Q / Screwfix / Travis Perkins and Wickes insofar as they more closely resemble home furnishing retailers with the addition of garden centres. These are not necessarily the type of places that handymen would go to for supplies.

Local hasn’t been lekker this year

This brings us to South Africa. Although there are a great many outlets around the country where the dedicated DIY-er can find satisfaction, only a couple are listed, those being Cashbuild and Italtile. Italtile is a highly specialised home improvement retailer, focusing on tiles and sanitaryware and doesn’t quite compete in the same space as the others.

Builders is part of the struggling Massmart operation and the Build it franchise is part of Spar. There are plenty of other independent hardware retailers all over South Africa, including the Mica and Jack’s Hardware buying groups as well as EST Africa. Collectively, this industry is estimated to be worth around R80 billion a year.

To put this in context, Pick n Pay estimates that the total food & grocery market in SA is worth around a trillion rand. This would mean that the home improvement market is estimated to be worth about 8% of the food and grocery market. The DIY category, as proxied by StatsSA’s “Hardware, Paint & Glass”, has been a dismal performer since a degree of normality returned to these retailers in April and May 2021, following a series of lockdowns in 2020. The accompanying chart demonstrates that this category has experienced negative growth for most of that time. Having said that, the trend may have troughed earlier this year with a very gradual uptrend now apparent.

Of the 318 stores Cashbuild operated at end June 2022, only 9% were located in metropolitan areas, with a relatively even split for the rest between townships, towns and rural areas. The biggest sales declines last year were in Gauteng (-21.2%) and KZN (-22.2%) reflecting the impact of the riots in those two provinces in July 2021. Overall group revenue was down by 12% to R11.1 billion, operating profit fell by 16% to R876 million, headline earnings collapsed by 33% to R436 million and the dividend was slashed by 57% to 1 264c/share. Admittedly, the dividend cover changed from 100% payout to 67%, which also impacted the severity of the fall in the dividend.

EBIT margin was 7.9% last year but management reckons this is not sustainable. The new year started off relatively weak and conditions in this highly competitive industry are forecast to remain very tough.

This is a great company with an outstanding pedigree and is exceptionally well-managed. But it is going to struggle this year and next. On a PE ratio of 10.6x, it’s not especially cheap either.

For equity research on South African retail and other stocks, go to www.gilmour-research.co.za.

Ghost Bites (Caxton vs. Mpact | Mondi | Prosus | Quantum | Tongaat

The Finance Ghost
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Ghost Bites (Caxton vs. Mpact | Mondi | Prosus | Quantum | Tongaat

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Caxton vs. Mpact: the latest

Spoiler alert: they still hate each other

Well, here we go again.

Caxton kicked off this announcement by pointing out that Mpact promised a detailed response to Caxton’s announcement “in the near future” and that nothing further has been released for a full week. I can’t fault that view. Mpact did leave things hanging with the last announcement. Never one to miss an opportunity, Caxton has complained to the JSE that Mpact’s announcement is an abuse of the listings requirements.

Mpact has now withdrawn the enforcement proceedings against Caxton and its Chairman. In the related non-confidential affidavit, Caxton claims that Mpact is admitting to the issue of customer flight by Golden Era, a large customer and material shareholder in Mpact. Caxton also reminds us that the Tribunal has confirmed that customer flight is an irrelevant consideration for whether Caxton is allowed to file a Rule 28 merger filing application.

This alleged customer flight is the crux of the entire issue. Caxton notes different statements made by Mpact in this regard, which can be interpreted on a spectrum ranging from Golden Era immediately moving its business away from Mpact through to the commencement of a process to move away over time. According to Caxton (and I must agree with this particular view), such a loss of a key customer would be considered a “poison pill” for a potential takeover by Caxton. The reason for this situation is that Golden Era and Caxton are strong rivals in the market, so Golden Era wouldn’t want to do business with a Caxton-controlled entity.

Separately, Mpact believes that Caxton and its chairman have committed criminal offences under the Competition Act, which can lead to a penalty of 10% of turnover and/or a R10,000 fine and/or imprisonment up to six months. We can all agree that those are very different punishments. Caxton and its chairman deny any such breach of the law.

The saga continues as we await Mpact’s promised announcement…

Mondi announces a strong quarter

With a share price down 27% this year, Mondi is still trying to recover from the Russian exposure

If we exclude the Russian operations, Mondi’s underlying EBITDA for the third quarter was €450 million, up 55% vs. the same quarter last year. The result was driven by higher selling prices and volume growth across most of the underlying businesses.

There’s a remarkable insight in the announcement related to Mondi’s energy needs. Although European gas prices have been a feature of the markets this year, Mondi generates most of its energy internally. Of the internal energy production, 80% is from biomass sources! Overall, only 10% of the fuel is sourced from natural gas. This is an incredible example of sustainability and good business sense in action.

The group is busy with a €1 billion expansionary capital investment programme and the projects are expected to deliver mid-teen returns. This includes a €400 million kraft paper machine in the Czech Republic facility and the acquisition and upgrade of the Duino mill in Italy for €240 million.

All eyes are on the disposal of the Russian business, with an agreement already in place to dispose of the operations for €1.5 billion. There are huge outstanding regulatory approvals for this deal, so investors are collectively holding their breath in the hope that it goes through.

Aside from Russia, investors can take a lot of heart from Mondi’s ability to grow volumes and push through pricing increases in difficult times.

Oligarch Ivan Tavrin acquires Avito from Prosus

Prosus will be paid around R44 billion with an expected close this month

For those who thought that Avito is a “donut” (i.e. a worthless, big fat zero in value), there’s a surprise on SENS. In March, Prosus announced a separation of the Russian classifieds business (Avito Group) from the rest of the business. This was obviously a move towards leaving the country in the wake of the invasion of Ukraine.

As Mondi and now Prosus have demonstrated, there are Russians waiting to acquire businesses from multinational organisations who are leaving the country. The news of a RUB151 billion (R44 billion) offer for Avito from Kismet Capital Group (controlled by oligarch Ivan Tavrin) will be welcomed by Prosus shareholders, as Prosus owns 99% of Avito.

These are extreme circumstances, so it becomes difficult to debate what the “fair value” really is. Avito made a profit of $160.3 million in the year ended March 2022. The purchase price works out to around $2.4 billion, so that’s a Price/Earnings multiple of 15x. That’s not the “desperate” price many would’ve feared!

Quantum’s financial performance is no yolk

Shareholders won’t be laughing when they see these numbers

If you love high margin businesses with low risks, the only involvement you should have with eggs and poultry is buying the products at your local grocery store. Poultry producers need to deal with everything from volatile raw material input costs through to the risk of avian influenza.

For the year ended September, Quantum’s headline earnings per share (HEPS) will be at least 63% lower than the comparable period. This implies a maximum HEPS number of 19.3 cents vs. 52.2 cents last year.

It’s been a perfect storm for the company. The margins in poultry are thin on a good day, so a substantial increase in raw material costs quickly eats into the profitability. With other issues like fuel and electricity costs along with loadshedding, there’s really not much margin left. To make it worse, a weak consumer environment put pressure on egg selling prices and reduced demand for layer livestock. The final nails in the coffin were outbreaks of avian influenza and weather conditions in the Western Cape, along with labour unrest at the Kaalfontein layer farm in Gauteng.

When demand for point-of-lay hens drops, the company needs to hold them for longer than planned and this drives a higher cost of production and reduced margins. The poultry industry is one of the strongest examples of operating leverage in action, as very high fixed costs and low contribution margin (profit per hen, per egg etc.) mean that profitability is hugely impacted by changes in volumes.

Of course, this means that when things are going well, they go very well.

In response to the pressure on profitability, Quantum is closing businesses that just aren’t attractive. The decision has been taken to close the Tongaat layer rearing farm and the East London packing station.

There is minimal liquidity in this stock, which is the only explanation for why the share price didn’t move on Friday despite this announcement.

Tongaat needs R1.5 billion for milling

Stakeholders will shortly receive a restructuring plan from the board

Tongaat Hulett is currently suspended from trading on the JSE. Despite reducing its debt from R11.7 billion to R6.3 billion through various asset sales and other management actions, the company’s balance sheet remains unsustainable.

The wheels really fell off when the planned equity capital raise from Magister Investments failed.

The sugar milling operations are performing better than the previous season but the company needs R1.5 billion to cover the peak working capital requirement. In July, South African lenders put forward a R600 million base facility. It has a scheduled repayment date of 25 October, which is less than two weeks away.

In an attempt to keep the company alive, the board has developed and approved a restructuring plan. “Various stakeholders” need to accept the proposal, with the announcement not giving further details on who the stakeholders are or what the proposal is. All we know is that the plan seeks to address both the debt and liquidity constraints.

This is perhaps a perfect example of the old joke: when you owe the bank R6 million, it’s your problem. When you owe the banks R6.3 billion, it’s their problem.

Anything could happen here!

Little Bites

  • Director dealings:
    • A director of Bidvest sold R10 million worth of shares on the open market.
    • A director of NEPI Rockcastle acquired shares in the company worth nearly R2.3 million.
    • Des de Beer has acquired another R5.5 million worth of shares in Lighthouse Properties (and I still can’t find a working website for the company).
  • In a production report for the nine months to September 2022, Merafe confirmed that attributable production from the Glencore Merafe Chrome Venture in the third quarter was 84kt, resulting in a 3.7% increase in production year-to-date vs. the prior period.
  • Cognition Holdings is in the process of disposing of 50.01% of Private Property for R150 million. In the circular released to shareholders on Friday, the independent expert concluded that the price is fair as it is higher than the suggested fair value range of R107.5 million to R136.3 million for 50.01% of the group. To help you understand how sensitive a valuation is to discount rates and terminal growth rates (the assumed growth into perpetuity), here’s the sensitivity table from the circular:

TreasuryONE webinar: Inflation, recession and the US dollar

The Finance Ghost
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TreasuryONE webinar: Inflation, recession and the US dollar

The latest TreasuryONE webinar couldn’t come at a better time, with so much going on in the market and the dollar continuing to dominate the global economy.

In this webinar, Wichard Cilliers and Andre Botha unpack the global economic landscape. As always, there’s a great Q&A session at the end of the webinar.

Watch the recording below and look out for the registration link for the next event when we announce it!

Ghost Bites (Afrimat | Aveng | Grindrod | Karooooo | RCL Foods)

The Finance Ghost
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Ghost Bites (Afrimat | Aveng | Grindrod | Karooooo | RCL Foods)

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 >>>

Afrimat sees a drop in profitability

Although diversified, Afrimat hasn’t escaped the commodity pressures

Afrimat released a trading statement for the six months ended August 2022. Headline earnings per share (HEPS) is expected to be between 236.1 cents and 265.6 cents, a decrease of between 10% and 20% vs. the comparable period.

An increase in volumes helped soften some of the pain from iron price decreases and higher production costs. The force majeure declaration from Transnet won’t help here, with an impact on logistics for the iron ore mines.

The balance sheet remains very strong (the company is debt free) and Afrimat’s strategy of building a diversified group is ongoing.

The share price is down 21% this year.

Aveng looks increasingly interesting

Australian subsidiary McConnell Dowell is winning a lot more work

After agreeing to sell Trident Steel for a price that was much higher than many expected, Aveng has released more good news in the form of a 39% increase in McConnell Dowell’s work in hand to A$3.5 billion.

52% of the work is in Design and Construct, 34% is in Alliance and 14% is in Construct only, in case you were curious.

As any investor in the construction industry will tell you, there’s a big difference between new work and profitable new work. To help mitigate the risks of inflation, the contracts have escalation clauses and other terms to manage risk. Of course, we will only know for sure whether it works once profits on these contracts are reported in periods to come.

Grindrod jumps 6.5% after a trading update

There was a “strong performance” in the nine months to September (whatever that means)

Although we don’t know what percentage earnings grew by, the market took kindly to the wording used by Grindrod in this trading update. I suspect that the real driver of the jump was the detail given on the core underlying business units.

For example, Maputo Port volumes were 23% higher thanks to the additional slab and berthing capacity. The Grindrod drybulk terminals achieved a 47% increase in volumes, with profit participation on coal cargo. At Matola, the damaged berth infrastructure has been repaired and there are feasibility studies underway to expand the terminal from 7.3 million tonnes per annum to 12 million tonnes.

On the logistics side, the coastal shipping and container depot businesses enjoyed strong charter rates on leased and subleased vessels. The locomotive deployment rate improved from 32% to 63%. Graphite operations in Northern Mozambique seem to have done well at the port of Pemba. Finally, the clearing and forwarding business was supported by favourable freight rates.

The disposal of Grindrod Bank is effective on 1 November.

Overall, it’s clear that the underlying operations are still doing very well in this economic environment. Grindrod’s share price is up a whopping 89% this year!

Karooooo releases solid second quarter numbers

Profitability seems to (mostly) be on the right track again

Long-standing followers will know that I was a big fan of Cartrack just before the transaction to take the listing offshore and rename the company in such a way that vowels exceed consonants by some margin.

Speaking of margin, there hasn’t been as much of it at Karooooo as I would like. Covid put a real spanner in the works in Southeast Asia where the company tried to expand. After incurring significant expansion costs, it’s taken a while for revenue growth to come through.

The company has now released its results for the second quarter ended August 2022. There are just over 1.6 million Cartrack subscribers, up 14% year-on-year. Net additions in the quarter of 57,251 compare favourably to the 42,139 subscribers added in the comparable quarter last year.

The company notes that there is “traction” in Southeast Asia. We need to see more than just traction to justify the share price.

Looking at the financials, revenue was up 30% and subscription revenue was 17% higher. The group has changed over the past year, as there are now other business lines that aren’t recurring in nature. The largest non-recurring business is Carzuka, which I see as a blemish on the group strategy.

Cartrack EBITDA margin has recovered to 51%, up from 46% in the second quarter last year. That’s a LOT more like it. Sadly, Carzuka has lost R6.2 million in this quarter off revenue of R65 million. With a gross profit margin of just 10%, it remains beyond me why Karooooo is wasting time on that business. Karooooo Logistics (the renamed Picup business) is at least washing its own face, with a modest profit of R514,000 off revenue of R41.4 million.

Earnings per share increased by 28% and cash generated from operating activities jumped by a substantial 42%, which is good news for investors.

There was a net cash balance of R1 billion at the end of August. With free cash flow generation looking stronger, I hope to see distributions to shareholders. I fear that there will be investment in the likes of Carzuka instead.

RCL Foods wants to unwind its B-BBEE deal

This is a classic example of a structure that is “underwater”

Here’s the recipe for the average B-BBEE deal in the market:

  • A target is set for Black Ownership and Black Women Ownership (and other sub-sections of the code like broad-based etc.)
  • A shareholder register analysis is conducted to figure out how empowered the company already is
  • The % ownership for the deal is established on this basis e.g. the B-BBEE partner may only need to take a 10% stake in the company to achieve maximum points or the desirable number of points
  • The company decides to do the deal at listed level (using listed shares) or at subsidiary level (only the South African operations)
  • A funding structure is designed, either using bank funding or a notional loan / preference share from the company
  • Everyone hopes and prays that the share price grows enough and pays sufficient dividends to service the debt, thereby leaving behind some equity at the end of the structure
  • Bankers celebrate, lawyers buy new cars and the ESG section of the report has new content

Sadly, the economics rarely work out as well as planned. There are numerous reasons for this. The most obvious one is that if a dividend yield on a listed share is only 3% and the deal is funded using debt or preference shares at a cost of funding of say 7%, then clearly the structure actually goes backwards in value unless the shares grow in value by at least inflation.

If the deal is done at the wrong time or if the company doesn’t perform as hoped, the structure is “underwater” because the value of the debt or preference shares exceeds the value of the shares.

So, with that out the way, it should now make more sense to you that RCL Foods needs to unwind its B-BBEE deal (which was for employees and strategic partners) because the share price has fallen sharply since the deal was implemented in 2013.

Assuming shareholders give the green light, RCL will repurchase the shares held in the structure for a total price of nearly R230 million. When the shares were issued, the value was over R345 million. This deal isn’t just underwater – it’s at the bottom of the ocean! the proceeds will be used to repay as much of the preference shares as possible, with the outstanding balance being waived by RCL.

The big question is: what is the cost to RCL?

Well, RCL effectively loaned money to third parties to subscribe for shares in the company when the price was much higher (R17.32 per share). The share price has fallen to a 30-day VWAP of R11.49 and RCL is now buying back those shares.

The trick is that the original issuance was a subscription for new shares rather than a purchase on the market, so cash left RCL and came straight back. After the buyback, cash once again leaves and comes back. All else being equal, there’s the same number of shares in issue today as there were before the original deal was done. It’s also possible that such deals are implemented without any cash actually flowing i.e. via accounting entries and legal set-off.

Unless I’m missing something, the only cost to RCL is the tax leakage and the money spent on advisors and other costs. This is because the deal was funded by a vendor loan rather than a bank loan. There’s also the reputational risk of a failed deal and the disgruntled employees who aren’t receiving anything under the structure. I’ll be interested to read the full circular when that gets released.

If you have a different view on the economics of this deal from the perspective of RCL, let me know!

Little Bites

  • PSG Konsult released interim results for the six months ended August 2022. Total assets under management increased by 7% and gross written premium was 8% higher. Recurring HEPS only increased by 2% excluding intangible asset amortisation, with the insurance business impacted by the floods in KZN and the asset management side affected by lower securities prices (on which fees are based). PSG Wealth carried the can here, with recurring headline earnings up 13%. The dividend per share is 10% higher. Return of equity of 19.8% is well above the cost of capital.
  • Schroder European REIT has had its property portfolio revalued as at 30 September. The direct portfolio was independently valued at €218.7 million, an increase of just 0.1% in the quarter. The entire portfolio has leases that are subject to indexation, so rising inflation is contributing to rental growth that should mitigate declines in value.
  • Almost all the Ascendis shareholders unsurprisingly prefer to have more money rather than less, with just 0.63% of shareholders voting in favour of the deal to sell Ascendis Pharma to the Pharma-Q / Imperial Pharma consortium. 99.56% voted in favour of selling to Austell Pharma, which really isn’t surprising considering the offer by Austell was much higher.
  • If you’ve been waiting patiently for Heriot REIT to distribute the circular for the Safari Investments offer, your wait is now over. Heriot is making a cash offer of R5.60 per share and the circular is finally available.
  • Sappi recently announced a tender offer process for its 3.125% Senior Notes due 2026. Simply, that means that Sappi is reducing its debt by offering to buy back its notes. Sappi will repurchase €209.6 million notes on a purchase yield of 5.544%, which means a purchase price that is 92.410% of face value. If you buy fixed income instruments and interest rates then go up, you end up losing capital. After the repurchase, €240.4 million worth of notes are outstanding.
  • James Smith (interim CEO of DRA Global) has now been appointed as the permanent CEO.

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

Sanlam has made an offer to take control of black-owned JSE-listed investment holding company AfroCentric Investment (ACT). The offer is conditional on Sanlam acquiring a minimum of 36.6% and a maximum of 43.9% shareholding in ACT from minorities at an offer price of R6.00 per share – a premium of 49.01% to the 30-day VWAP. Currently Sanlam, through its subsidiary Sanlam Life, holds a 28.7% stake in ACT Healthcare Assets (AHA) which it acquired in 2014 giving it an effective 27% stake in Medscheme. As part of the transaction, Sanlam will transfer its shareholding in AHA to AfroCentric in exchange for a 28.7% stake in AfroCentric. The deal will see Sanlam expand its client proposition to provide a more holistic product offering.

Grindrod Shipping has made a further announcement regarding the potential agreement with Taylor Maritime Investments (TMI). Grindrod Investments which holds c.10.12% stake in Grindrod Shipping will tender its shares to TMI in line with the voluntary cash offer to shareholders of US$26 (this includes a US$5 dividend distribution) per Grindrod Shipping share. The voluntary offer however is conditional on TMI receiving more than 50% of the voting rights from existing shareholders by the expiration time of the offer. Should this minimum stake not be achieved, the deal will not take place.

Ascendis Healthcare shareholders have approved the Ascendis Pharma disposal to Austell Pharmaceuticals in a R432 million deal. The deal was conditional on shareholders not approving the sale of Pharma to Pharma-Q and Imperial Logistics, a R375 million deal first announced in February 2022. In a statement the company said it expected the Austell deal to close by end-October.

RCL Foods is to unwind its BEE transaction announced in 2013 by way of a repurchase of shares. Subsequent to its implementation the company’s share price has significantly declined in value, resulting in the existing BEE transaction being materially underwater at the end of its term in May 2022. The aggregate repurchase consideration is R229,63 million which will be funded from the company’s cash resources. Since the shares to be repurchased amount to over 5% of the company’s issued share capital, the repurchase is treated as an affected transaction requiring the appointment of an independent expert.

Spear REIT is to acquire the industrial property known as The Island in Milnerton for R185 million from Inospace 2. The deal is in line with the company’s strategy to increase exposure in the logistics, urban logistics and bulk warehousing in the Cape Town Metropol.

Heriot has released its offer circular to Safari Investments RSA shareholders detailing its firm intention to make a general offer of R5.60 per Safari share. The offer will remain open until 25th of November. An independent expert will now be appointed by the Safari board to opine on whether the offer is fair and reasonable.

In a small related party deal, Famous Brands has acquired the properties 478 James Crescent and 37 Richards Drive, both in Midrand.

Unlisted Companies

Cape Town-based EXEO Capital, an alternative investment partner in sub-Saharan Africa, has acquired The Vital Health Food Group through Nurture Brands, the convenience foods platform in EXEO Capital’s Agri-Vie Fund II. Vital is a local manufacturer and distributor of vitamins, minerals and supplements. Financial details were undisclosed.

Sakhumnotho Group, a local equity investor, has acquired a 25% stake in the Boschkrans Boerdery Business, a producer and exporter of citrus and tables grapes. The investment will further Boschkrans strategic vision to be a global role player in the production and marketing of fresh produce.

Mineworkers Investment Company (MIC) has added to its impact investing portfolio in a deal which will see it take a 24.85% stake in TooMuchWifi for an undisclosed sum. Funds will be used to grow the business and so expand access to affordable data by customers and their communities.

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

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