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Unconditional, unfair and unreasonable
Emira’s offer for Transcend has received regulatory approval
As noted in Ghost Bites a few days ago, the board of Transcend Residential Property Fund believes that the offer for the company from Emira is unfair and unreasonable. This is based on advice received from the independent expert. On that basis, the board has recommended that shareholders vote against the offer.
This is because the independent expert has suggested a fair value range of R6.00 to R6.60 for the shares. Emira’s offer is R5.38 plus a distribution accrual of R0.0599 per share. This takes the total to R5.4399, almost 10% below the bottom end of the fair value range.
Importantly, an unfair and unreasonable offer (as defined) can still go ahead. The shareholders need to decide for themselves whether to accept it or not. With Competition Commission approval and a Takeover Regulation Panel certificate both now in place, the deal is unconditional.
Unconditional, unfair and unreasonable. Over to you, Transcend shareholders.
Finbond’s losses deepen
The US adventure is proving to be costly to the group
With a share price that has more than halved in value this year (and lost nearly 90% of its value in the past five years), Finbond isn’t exactly a hall of famer.
The latest trading update doesn’t look great either, with a headline loss per share for the six months to August expected to be in the range of 7.6 cents to 8.8 cents. The comparable period was a headline loss of 6 cents per share, so (1) there is still a loss and (2) it is getting worse.
Finbond controls Finbond Mutual Bank in South Africa and owns various payday lending businesses in the Americas. A major challenge has been regulatory changes in Illinois (a critical region for the group) that cap annual interest and fees on payday loans at 36%. That sounds like (and is) a ridiculously high number, yet it isn’t high enough for the business to be profitable.
I’ve done some advisory work for a similar business in Australia in my previous life. One of the issues is that the cost of distribution is incredibly high, with many such lenders competing for advertising space on platforms like Google Ads. The interest rates may be high but the absolute value earned per client isn’t exciting vs. the cost of acquiring a customer. This might be the issue in the US, though I’m just speculating here.
The Savings Account Instalment loan (SAIL) operation in the US is pushing forward regardless, securing $50 million in external funding with potential access to a further $50 million. The loan book at the end of this reporting period was $29.3 million.
The sad thing is that the South African business is running ahead of budget and has exceeded the pre-Covid comparative year. This is yet another case of a South African corporate suffering losses overseas.
This situation is going to take a long time to come right (assuming it ever does), as the interest on SAIL loans is earned over 24 months and accounting rules require an expected credit loss to be recognised in the first month. This means that every new loan actually loses money initially.
Mpact responds to Caxton
They won’t be exchanging Christmas cards this year
After such a long announcement by Caxton the prior day (covered in Ghost Bites here), Mpact kept it short and (relatively) sweet.
Mpact’s view is that Caxton’s announcement includes “further incorrect and misleading statements” which isn’t surprising, as the parties don’t seem to be able to find any common ground.
A more detailed response from Mpact is coming. The company has noted that it intends to release a detailed announcement in the near future. The company also cautions shareholders against placing reliance on comments in the media or the Caxton announcement.
Little Bites
Director dealings:
Herman Bosman (CEO of Rand Merchant Investment Holdings) has bought nearly R5.7 million worth of shares in the company. This is the group that is effectively becoming OUTsurance.
In an unusual transaction, directors and key personnel of Gemfields exercised share options (at a very juicy price) and then sold most of them to Assore International Holdings at a price above the current market price, reflecting the low liquidity in the stock.
Directors of Anglo American bought shares in the company worth just over R250k.
Putprop released results for the year ended June 2022. The group owns 15 properties, mainly in Gauteng. A final dividend of 6 cents per share has been declared, taking the total for the year to 10.25 cents.
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.
With several of these events under our belts, we are thrilled with the corporate access that we are bringing to retail investors in association with our sponsor Kuda, a specialist insurance and forex services provider.
I co-host these events with Mark Tobin, a highly experienced markets analyst who has worked in several global markets, as well as the team from Keyter Rech Investor Solutions who help numerous JSE-listed companies with investor relations services. The South African team from Lumi Global looks after the webinar technology for us.
You can find all the previous events on the YouTube channel at this link.
The latest event saw us welcome property stalwart Growthpoint to the platform. This real estate behemoth has investments in multiple regions and boasts a market cap of over R41 billion. As the world emerges from the pandemic, there is a great deal of uncertainty (and thus opportunity) around the impact on the various types of properties.
It’s therefore not surprising that this was a well attended session with a great Q&A session after the presentation. You can watch the recording here:
Education is big business and there are three major listed education groups on the JSE. Ghost Grads Kayla Soni and Kreeti Panday are here to make it easier for you to learn about Curro, ADvTECH and Stadio.
The education groups are fascinating, even though they haven’t been great long-term investments. They are perfect examples of the importance of valuation multiples, as logic would certainly dictate that these companies should generate strong returns in South Africa.
Let’s start with Curro, the poster child for a growth story that the market got WAY too excited about.
Curro: a rare AltX success story that has had tough times
Curro was formed in 1988 and listed on the JSE (AltX) in 2011, moving to the JSE main board in 2012. Not only is this a rare example of a company that managed to grow beyond the AltX, but in 2017 it gave us another listed company: Stadio.
The PSG Group has a history of incubating and unbundling businesses, with the final step in that dance recently taking place with the unbundling of (almost) all of its assets and the removal of the listed structure.
Let’s not get distracted here, as PSG is a topic all on its own.
Curro deserves to stand on its own feet, operating more than 180 schools across 77 campuses. Even at this scale, Curro was far from immune to the impact of the pandemic. Ancillary income took a significant knock, as extramural activities were shut down.
With that base effect in mind, take note that revenue for the 6 months ended June 2022 rose by 15% to almost R2.1 billion. This has been attributed to learner growth (average numbers up 7% to just over 70,500) as well as fee increases. Recurring HEPS (which excludes R25 million once-off income) rose by 42% to 27.5 cents.
Clearly, the end of Covid-19 restrictions was great news for Curro, as the school once more has numerous ways to take parents’ money besides academics. A key driver of revenue growth was ancillary income from sources such as bus income, aftercare fees and boarding school fees, which saw an increase of 21% from the comparable period.
Importantly, gross receivables are lower and the loss provision looks a lot better, so parents are in a better position to pay the fees that are due.
Interestingly, the increase in ancillary income trails the increase in learner growth. There was a 25% increase in average learners from the first half of 2019 (pre-Covid) to the first half of 2022, yet only a 13.7% increase in ancillary income over this period. Unless you think that the school system has changed forever for some reason, this implies that there is runway for more revenue growth in this regard.
The ancillary income also comes at a cost, though. Extramural activities are back, which is partly why operating costs increased by 14.2%. Another driver of cost growth was investment in digital and vocational programmes. Staff costs increased by 11%, with more staff required to support learner numbers and a March salary increase of approximately 5%.
The investment thesis for Curro rests on the operating leverage that is inherent in the business model. Once the schools are built, the marginal cost of adding another student is relatively low, so the primary goal is to increase capacity utilisation of current facilities.
This doesn’t mean that Curro isn’t growing the footprint, mind you. Recent acquisitions include HeronBridge College and a new building for DigiEd Foreshore.
ADvTECH on the up and up
ADvTECH, owner of brands such as Crawford International, Trinityhouse, Abbott’s College and Pinnacle College, was founded in 1978 and today operates over 100 schools across Africa and over 30 tertiary institutions.
This is the first major difference to Curro: ADvTECH has a tertiary business in the same group as the primary and secondary schools.
The group also recently released results for the six months ended June 2022, landing on its feet post-Covid. Group revenue was up 18% and operating profit increased by 19%. At the bottom of the income statement, HEPS increased by 23%.
Gross trade receivables rose by 5% to over R750 million. Credit losses increased by 41.8% to over R110 million despite the provision as a % of receivables dropping, which suggests a significant number of write-offs in this period. Perhaps these were legacy debtors from the pandemic?
The group has focused its capital expenditure on increasing capacity to meet demand. This includes R98.5 million on additions to existing sites, a new school and one new tertiary site. The group expects to reach between R600 and R700 million on capital expenditure by the end of the year.
In schools specifically, revenue rose by 27% and operating profit increased by 70%.
In the group’s tertiary division, including Varsity College, Rosebank College and MSA, revenue grew by 9% and operating profit by 13%. The group has highlighted an advantage in its multi-channel modes of delivery, offering on-campus, blended and online learning options.
In the group’s interim results presentation, ADvTECH emphasised the roles of a weakening public education system and a fall in university subsidies in boosting demand for private education in South Africa. The group noted the difference between matric pass rates in 2021 of 76% for DBE students, 98.4% for IEB students and 98.3% for ADvTECH IEB students.
This positive sentiment towards private schools is reflected in ADvTECH’s enrolments. From February 2021 to February 2022, the group’s school enrolments increased by 9% to 36 802 and full qualification tertiary enrolments rose by 4% to 47 539.
Stadio’s successful streak
If you were wondering where Curro’s tertiary business went, you’re about to find out. If you combine Stadio and Curro, you have a group that is somewhat comparable to ADvTECH in terms of business model.
Stadio Holdings was unbundled by Curro in October 2017, unleashing an investment company that would hold various higher education businesses. The idea behind the unbundling was to give investors an opportunity to choose whether they wanted Curro or Stadio exposure, a classic attempt at a value unlock strategy.
With backing from PSG, Stadio moved quickly to acquire Milpark Education and AFDA. When combined with the other businesses in the group, Stadio offers a spread of accredited qualifications across nine campuses to more than 30,000 students.
To give context to the recent interim results, the year ended December 2021 saw Stadio achieve growth in core earnings, higher student enrolments and the declaration of its maiden dividend to shareholders. This is a significant step for a growth company, as it shows that the acquisitions are cash generative and that management is acting in a mature fashion as the custodians of shareholder capital.
As a final note on that full financial year, HEPS was up by 24% based on revenue growth of 18%, so there is operating leverage in the model. With Stadio tending to execute acquisitions by issuing shares, it’s also important to see HEPS growth as it gives an indication of a successful inorganic growth strategy.
In the latest numbers (the six months ended June 2022), student enrolment is up 11% to 38,348 students. There was an 18% increase in new students, attributable to site extensions and measures to optimize its existing campuses (like the introduction of a new law faculty at one of the campuses that led to an 84% increase in students at that campus alone).
Revenue growth of 13% to R617 million and EBITDA growth of 19% to R192 million reflect the improved performance and success of Stadio, as margins are clearly increasing.
How have shareholders done?
Of course, what really matters to us as investors is the share price performance. Here’s a look at the relative performance over one year:
This is clearly a volatile sector, even though you might assume that education is a slow and steady investment! If there’s one thing you’ve hopefully learnt in Ghost Mail, it’s that the valuation of each company is what really counts.
There is also evidence in this chart of markets doing what markets do: weird things. When the conflict in Ukraine broke out, Curro suffered a much larger drop than the others. Considering South Africa is thankfully very far away from the conflict, this makes little sense. As Anthony Clark correctly reminded us on Twitter after this article was first published, PSG announced the unbundling of Curro at the beginning of March and this drove a significant overhang in the stock.
Before you get too excited and execute a “perfect” hedge by putting your kid’s college fund into Stadio, take a look at the five-year chart:
Curro and Stadio are both the victim of silly starting valuations here, as investors were still giving far too much credit to both growth stories back in 2017 (just as Stadio was unbundled). ADvTECH is the “winner” here, although that’s also given poor returns.
Stadio is on a P/E of 26x, Curro is at 18.5x and ADvTECH is far more modest at 13.5x. To maintain this share price performance, Stadio will need to keep delivering substantial returns.
The largest in the sector is ADvTECH with a market cap of R9.8 billion. Stadio (R3.7 billion) and Curro (R5.4 billion) are still collectively smaller than ADvTECH. This explains why ADvTECH isn’t priced as aggressively for growth as the other two companies (and especially Stadio).
Do you own shares in one of these companies? Tell us in the comments!
Ghost Mail reader Greg Salter has written this opinion piece on what may have been the unsung hero of the South African economy during the pandemic.
Like with 9/11, the release of Nelson Mandela and the outbreak of the Gulf War, I remember where I was when I heard the news that half of South Africa’s economy had been destroyed by the Covid pandemic.
Convention struggles with catastrophe
It was just over two years ago, on 8 September 2020, when Stats SA released second quarter GDP figures1. Within minutes, my Twitter timeline lit up with news reports that South Africa’s economy had contracted by 51%.
That’s half the economy gone. Decimated.
A closer examination (who even does that?) would reveal that the damage was actually 16% in the quarter and the remainder of the pain was the result of the normal process of annualising the quarterly change to get an annual estimate. Convention does not handle catastrophe very easily.
Nonetheless, 16% was a tremendous blow. With our economy growing around 2% in recent times, it represented 8 years of economic growth wiped out in a single quarter.
The full extent of the impact would be revealed a month later when Finance Minister Mboweni presented his budget update2 in October 2020. South Africa’s debt-to-GDP ratio, a crucial measure of our ongoing financial viability as a nation, was expected to blowout to 95% within 5 years. This is a level which is generally regarded as wholly unmanageable for an emerging market country, and which would almost certainly have forced us to seek assistance from the International Monetary Fund (“IMF”).
Reserve Bank Governor Kganyago was warning that we were heading into an economic abyss and were dangerously close to becoming like Argentina3, where sovereign defaults, hyperinflation and currency devaluation have become the norm.
Still standing
Yet, two years on, we have not been knocked out. Instead, recent headlines are rather encouraging:
Moodys has upgraded our sovereign ratings outlook from negative to stable4;
The IMF has just raised its estimate of South Africa’s economic growth5;
The latest estimate from National Treasury is that debt-to-GDP will stabilise at 75% in 2025, an incredible 20% lower than was originally feared6.
How did this happen? What was the cause? Has our daily news diet of power cuts, potholes, petrol prices, pilfery, pillage, politics and pain blinded us to the possibility of good news?
What of the existence of a rose among the thorns? A miracle in our midst?
This is not a South African phenomenon but it is exacerbated in the South African context. Morgan Housel captures the essence of the issue in his incredible blogpost “Lots of Overnight Tragedies, No Overnight Miracles”7. It’s worth reading.
In summary:
“Good news always takes time, often too much to even notice it happened. But bad news? Bad news is not shy or subtle. It comes instantly, so fast that it overwhelms your attention and you can’t look away.”
Morgan Housel
The media has rightly attributed our change in fortune to a robust trade performance and higher than anticipated corporate tax receipts, both of which primarily trace back to our mineral resource companies in general (and platinum companies in particular). Yet, when we drill into the performance of these platinum companies, a big surprise awaits.
It’s not because of platinum!
Take a look at the revenue split at Amplats, SA’s largest PGM miner:8
Rhodium is the 45th element on the Periodic table. It derives its name from the Greek word “rhodon” meaning rose.
With platinum and palladium, it is one of six Platinum Group Metals. The others are osmium, iridium and somethingelseium!
It is a by-product of the platinum mining process and, like platinum and palladium, is mostly used in catalytic converters for motor vehicles9. These are devices which are incorporated in the exhaust system of the vehicle and change (or catalyse) harmful emissions into their unharmful constituent parts.
The table above reveals that at Amplats, rhodium was attributable for almost three times more revenue than platinum in 2021. Rhodium revenue has grown by 2,100% over 5 years (vs 20% for platinum)! This extraordinary result is corroborated by our export data. Allan Gray presents this excellently10 in the chart below:
Rhodium has risen from nowhere to be South Africa’s largest mineral export in 2021. It is by far the biggest contributor to the surge in export revenue.
The driver of this result has been the rhodium price which has positively exploded in recent years. When last did you see a commodity price grow by 4,000% in a short period of time?
These charts appear in the Quarterly Bulletin from the Reserve Bank11. The performance of the rhodium price is so extraordinary that it necessitated the creation of its own chart (with a vertical axis that is 10 times larger than the ordinary chart used for most other metals).
Amplats to be renamed Amrhodes?
The platinum belt in the North West Province has arguably become the rhodium belt.
Financial media, who focus daily updates on the gold and platinum prices, aren’t telling you the most important story. (Editor’s note: I’ll assume present company excluded.)
Names stick. Habits endure. But the world changes.
Of course, this all leads to the question of what caused the rhodium price to take off. Here, things get both murky and intriguing. Let’s start though with important context.
Rhodium is effective against harmful nitrogen oxide emissions
Nitrogen oxides (NOx) are a collection of harmful gases including nitric oxide (NO), nitrogen dioxide (NO2) and nitrous oxide (N20). They are emitted from the exhausts of combustion engine motor vehicles and contribute to smog, acid rain and global warming12.
Rhodium is a catalyst that is effective at separating the nitrogen and oxygen elements, which then enter the atmosphere harmlessly.
Rhodium has unique properties and is not easily substitutable
Bottom line, if a motor vehicle manufacturer wants to remove nitrogen oxides from its emissions, it needs rhodium. Nothing else is as efficient. Unlike platinum and palladium, rhodium is not easily substitutable.13
Rhodium is found mostly in South Africa
Amplats report that over 80% of primary rhodium supply came from South Africa in 2021. Not quite a monopoly, but not far from it.
The regulation of nitrogen oxide emissions is not new, but likely escalating
China in particular is reported to have tightened emission standards in recent times14.
Where the story becomes speculative is in relation to emission standards in Europe. It’s hard to discern whether there were changes to the emission standards which contributed to the rhodium price change. But something big did happen around the same time.
In September 2015, Volkswagen were caught cheating on their compliance with emission standards15. They had built sophisticated software to dupe regulators into believing their emissions were far lower than they actually were. When correctly measured, their emissions of nitrogen oxides were found to be as much as 40 times higher than they pretended them to be. This led to the adoption, in September 2017, of Real Driving Emissions tests.16
Was rhodium needed by motor vehicle manufacturers to actually reduce their nitrogen oxide emissions because they could no longer cheat? It’s a sensational possibility.
Where do the benefits go?
The benefits of rhodium’s rally will obviously have accrued most directly to employees of platinum companies and shareholders of these businesses. Millions of South Africans have pension funds or unit trusts with ownership interests in the platinum sector. Most sobering though is the realisation that the R350 monthly Covid relief grant, which supported 10 million unemployed fellow citizens through the pandemic, was fiscally unaffordable absent the commodity price cycle (i.e. mostly rhodium as we’ve seen).
Finance Minister Godongwana did not mince his words on this in his first budget update17 in November 2021, declaring: “Madam Speaker, the additional revenue due to the commodity price rally, created space for government to provide additional support for poverty and employment programmes this year, without negatively impacting the fiscal position.”
The rhodium price has come off somewhat in 2022. And the long-term outlook for rhodium is not positive as electric vehicles do not need catalytic converters. At the same time, emission standards are only heading in one direction in the interim. Even the United States is now passing climate legislation, albeit under the guise of inflation protection.
Could the good times roll on for a while?
Whatever happens next, nothing can take back rhodium’s recent run or the buffering which rhodium provided in South Africa against the savage economic damage of the Covid pandemic. It accounted for around R300bn and counting of unexpected export revenues and a decent chunk of that helpfully flowed into the coffers of the National Treasury.
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Harmony Gold, or Harmony Copper?
Harmony is acquiring an Australian copper project for up to R4.1 billion
If your gold operations have been giving you a hard time, then what do you do? Apparently, you buy copper.
This is a big one. I mean, “gold” is literally in Harmony’s full name. Despite this, the company is looking to diversify its revenue by moving into copper. To settle some jitters you might already have, the deal is being funded with existing cash resources and net debt : EBITDA remains below 1x even after this transaction.
There’s some gold involved here. The target is the Eva copper project in Australia, which adds 1.718 billion pounds of copper and 200,000 ounces of gold to Harmony’s mineral reserves.
Harmony will acquire Eva in full from Copper Mountain Mining corporation. The price is an upfront payment of R3 billion plus a contingent consideration of up to R1.1 billion. It seems as though the price is in US dollars, so there’s a good chance of the rand amounts fluctuating. The contingent payments will be based on the declaration of the copper resources and a share of net revenue.
The construction period for the project is two to three years, which is quick by mining standards. This is an open pit mine with a simple process plant and low overall execution risks. The estimated requirement for development capital is $597 million. The expected life of mine is 15 years.
Life Healthcare emerges from the pandemic
EBITDA is flat or slightly down, as Life isn’t quite like the other healthcare groups
Life Healthcare is the latest hospital group to give us an update on post-Covid trading conditions. In a trading update for the year ended September, the group has indicated a modest improvement in revenue and a decline in EBITDA. That’s not great.
When you see an unusual result like this, you always need to dig deeper to figure out if there’s really a problem or if there’s a good explanation for this. In this case, you’ll discover that the UK business was a major beneficiary of Covid, in stark contrast to most other hospital groups. As the pandemic has eased, this has negatively impacted Life’s earnings from Alliance Medical Group (AMG), which saw revenue growth of between 1% and 4% but a decline in EBITDA of between 10% and 13%. Leaving aside the Covid contracts, AMG’s scan volumes were higher in all three major geographies (the UK, Italy and Ireland).
The Southern African operations have produced the type of result one would expect to see in a post-Covid environment, with revenue growth of between 3% and 6% and normalised EBITDA growth of between 3% and 8%. This implies an EBITDA margin of 17% to 18% vs. 17.1% last year. Interestingly, acquisitions have been mainly in the imaging market (i.e. radiology).
The impact at group level is revenue growth of between 3% and 6%, with normalised EBITDA lower by between 0% and 3%. The numbers were also impacted by the introduction of an employee share scheme this year.
I’m always nervous of “adjusted earnings” as management tends to just paper over the cracks in the business. In this case, they note that EBITDA would be between 6% and 9% higher were it not for the share scheme and the ending of Covid contracts. Sounds good, except that number also conveniently forgets that Covid in the base was negative for the South African business and so the growth rate looks better locally.
There’s no way to truly strip Covid out of this result.
Net debt to normalised EBITDA has increased from 1.82x to 2x over the past year. That’s a number that I would keep an eye on.
The wrong kind of Mpact
The public feud between Mpact and Caxton is just warming up
Here’s the good news: Caxton is writing SENS announcements that sound like an adult was involved in them as opposed to an angry teenager.
Here’s the bad news: it’s also quite clear that a lawyer is involved.
Yes, the fight between Caxton and Mpact is far from over. It gets weirder with every announcement, with plenty of mud being slung in both directions.
I’m going to try hard to get this summary right:
Caxton wanted to file a Rule 28 merger application (a separate filing) which is the case when a joint filing is not possible, for example where there is a hostile takeover.
According to Caxton, the application was refused because Mpact claimed that a major customer would be lost if a merger application was lodged (a highly unusual “poison pill” in this particular deal – though such pills can take many forms).
Mpact’s largest customer is Golden Era, which also happens to have a 10% shareholding in Mpact – this is the customer that Mpact alleged would be lost (and Caxton notes that confidential submissions were made by Mpact and Golden Era in this regard). This is because Golden Era and Caxton are hardcore competitors.
Caxton is arguing that this flight risk (the possibility of losing Golden Era) is price sensitive information, which should be disclosed and which directors of Mpact were aware of when trading in shares. Caxton notes that Mpact “apparently” defends this position by saying that the flight risk isn’t certain, which Caxton argues isn’t in line with the filings at the Competition Commission.
Mpact also alleges that Caxton is seeking to disclose this information in an attempt to get the share price to drop. Caxton strongly denies this (though it doesn’t take a rocket scientist to understand that a heavily depressed Mpact share price makes it an easier takeover target for Caxton).
There are various other fights underway, not least of all Caxton’s opposition to remuneration being paid to non-executive board members of Mpact. In response, Mpact appointed the non-execs to the board of the operating company and is paying them there.
There are other little daggers in the announcement, like Caxton claiming that Golden Era buys nearly half of the carton board output of Mpact’s Springs mill, as well as tens of thousands of tons of corrugated board. There’s also a claim that “independent sources confirm that Golden Era is already seeking alternative imported carton board sources of supply” – something that won’t do the Mpact share price any favours (whether true or not).
It is worth noting that Mpact has previously admitted to cartel conduct with Golden Era and has received conditional corporate leniency from the Commission. Golden Era has denied its participation. If any cartel activity is continuing, Mpact could face a fine of up to 10% of its turnover.
As you can see, there’s a lot going on here. Caxton holds 34% in Mpact and whilst any short-term negative effect on Mpact’s share price would hit the value of that stake, it would also make the remaining 66% a lot cheaper. There are very serious accusations flying around from both parties and Competition Law is no joke whatsoever.
The most significant step would be a Rule 28 application and Caxton is hoping for a positive outcome based on the Tribunal’s reconsideration thereof. This would test the theory of whether Golden Era will find other suppliers.
Get the popcorn!
Thungela can mitigate the Transnet strike
This tells you how useless Transnet is at the best of times
Just when you thought Transnet couldn’t possibly do more harm to our local mining industry, there’s now a strike by the United National Transport Union. The good news is that because Transnet is so useless, Thungela has already implemented various risk mitigation strategies for the inconsistent rail service.
Although railing to the Richards Bay Coal Terminal is now interrupted, Thungela has high stockpile levels in its operations. The business can manage seven days of interruptions without a significant impact on production, which tells you everything about the usual level of service from Transnet. If the strike lasts for two weeks, Thungela will need to curtail production and this will hurt export volumes.
The trick here is that the coal terminal can keep loading vessels, so Thungela can survive off its stockpile that is already at the port.
In a final example of how “easy” it is to do business in South Africa, Thungela is working with Transnet to deploy additional security measures on the coal corridor. This includes helicopter surveillance, amongst other measures.
Maybe Tom Cruise should’ve stuck around longer in South Africa to shoot the next Mission Impossible movie.
Zeder released a trading statement that seems concerning unless you read carefully. As an investment holding company, the measure is net asset value (NAV) per share. This is expected to be between 41.7% and 42.8% lower than the prior year. There are two good reasons for this: Zeder unbundled the stake in Kaap Agri in April and paid a large special dividend in May. The group has become a lot smaller as a result of the value unlock strategy. To assess the total return to shareholders, one would need to include the value of the Kaap Agri stake and the special dividend. In a silly missed opportunity, the announcement doesn’t give that calculation.
If you are a shareholder in Novus, you will want to be aware that the company has released the circular for the proposed acquisition of Pearson South Africa. This publishing house has a focus on textbooks and achieved revenue of R960 million and operating profit of R368 million in the year ended December. I had no idea that margins like this are achieved by publishers! You’ll find the full circular at this link.
Sirius Real Estate has achieved the early refinancing of the company’s next major debt expiry (a €170 million facility) approximately a year ahead of schedule. The refinanced facility is the same value and is priced at 4.26% over a seven year term. At group level, the impact is that the weighted average debt expiry moves from 3.8 years to 5.0 years and the weighted average cost of debt moves from 1.4% to 1.9%.
Pan African Resources has closed the transaction to acquire the Mintails SA assets for R50 million. The assets were bought out of liquidation and have the potential to increase Pan African’s gold production by 25%. To fund the project, a debt package of $80 million has already been negotiated with RMB. Further capital will be needed and the company is considering various options.
Vunani has released results for the six months ended August. Although revenue and premiums were up by 17%, profit after tax was flat (and thus margins contracted). Headline earnings per share (HEPS) decreased from 21.7 cents to 20.3 cents. Despite this, the interim dividend has been increased from 6.5 cents per share to 9 cents per share. This is a highly illiquid stock that is currently trading (occasionally) at R2.97 per share.
Harmony Gold Mining has acquired Eva Copper Project and the surrounding exploration tenements in Australia from TSX-listed Copper Mountain Mining. The deal, which sees Harmony paying an upfront cash consideration of US$170 million (c.R3 billion) plus a contingent payment of up to a maximum of US$60 million (c.R1,1 billion), will lower the company’s risk profile. The acquisition will add 1.7818 billion pounds of copper and 260,000 ounces of gold to Harmony’s Mineral Reserves and will extend its diversification into copper – a future-facing metal critical to the energy transition.
Motus has released further details on the proposed acquisition by its UK-based subsidiary of family-owned business Motor Parts Direct for a purchase consideration of £182 million (R3,64 billion). The acquisition is aligned to Motus’ international growth strategy to reduce dependency on vehicle sales and strengthen its integrated business model by focusing on the aftermarket parts business.
Anglo American is to form a renewable energy partnership in South Africa with EDF Renewables, a subsidiary of the French utility group. The new jointly owned company, Envusa Energy, will develop a regional renewable energy ecosystem designed to meet Anglo’s operational power requirements in South Africa and support the country’s broader just energy transition.
Vunani Capital (Vunani) is to acquire a 50% stake in Verso Group, a financial services company specialising in wealth management and Section 13B retirement fund administration. Verso, predominantly Western Cape based, also has offices in Pretoria, Johannesburg, Gqeberha and East London. The acquisition is in line with Vunani’s strategy to expand its financial services activities, particularly in niche markets both in South Africa and across the continent.
Aveng has, via subsidiary Aveng Africa, disposed of Trident Steel to a consortium for R700 million. Trident Steel Africa, a vehicle established for the purpose of the acquisition is owned by consortium members Ambassador Enterprises, a US-based private equity firm, Joseph Investments, Arbor Capital Investments and Trident Steel management. Aveng will provide R210 million in the way of funding to a separate company in order to subscribe for 30% of the equity in the purchaser, thereby retaining a 30% stake in the business, which will be specifically reserved for B-BBEE participation for a period of one year post closing. The business was seen as falling outside the ambits of infrastructure development, resources and contract mining which, going forward will underpin Aveng’s long-term strategy.
+OneX (Reunert) has acquired South African Azure solutions provider EUCafrica as part of its strategy to build end-to-end digital transformation solutions for enterprise clients.
Consortium parties, Old Mutual Life and African Infrastructure Fund 4 (managed by Old Mutual’s African Infrastructure Investment Managers), Bauta Logistics and Mokobela Shakati are to acquire Oceana’s Commercial Cold Storage Group – trading as CCS Logistics. The purchase consideration payable for the Southern African cold storage provider is R760 million. The transaction will enable Oceana to allocate capital to opportunities aligned to its strategic objectives in the global fish protein sector.
Grand Parade Investments (GPI) has acquired and on sold two properties in relation to the settlement of a dispute with Gumboot Investments. The properties, based in Cape Town and Gauteng were acquired from Gumboot Investments for a transaction consideration of R66,5 million. These were on sold to Karez Trading for R44 million, generating a loss of R22,5 million for GPI – the cost attributed to the indemnity provided by GPI on behalf of its subsidiary Mac Brothers which was placed under voluntary liquidation in April 2022.
Europa Metals has announced the signing of a letter of intent for an option and joint venture arrangement with Denarius Metals, in terms of which, Denarius will have the right to acquire up to an 80% ownership interest in Europa Metals’ wholly owned Toral Zn-Pb-Ag Project in Leon Province in Northern Spain. The farm-in transaction involves the granting of a two-stage option (to acquire 51% and 29%) in return for funding of certain planned expenditure for an aggregate consideration of up to US$6 million.
Pan African Resources has announced the closing of the deal in which it acquired the Mogale Gold and Mintails SA Soweto Cluster assets out of provisional liquidation. The R50 million deal was first announced in November 2020.
Two companies reported the termination of deals announced
The US$4,7 billion deal announced in August 2021 between Prosus and Indian digital payment provider BillDesk failed to fulfil certain conditions precedent by the long stop date of 30th September 2022.
Conduit Capital’s intention to acquire 51,769,633 Trustco shares for N$93,7 million, first announce in August 2021, did not fulfil the conditions precedent resulting in the lapse of the share sale agreement.
Unlisted Companies
Cape Town-based venture capital firm HAVAÍC has concluded its third investment in Kenyan fintech company Tanda. The investment will enable Tanda to invest in key strategic partners, accelerate product development and scale in Kenya and East Africa over the next 15 months.
Cars.co.za, the local online car marketplace, has entered into agreement with Sun Exchange to buy into an off-grid solar power project providing off-grid solar power plus battery storage for Karoo Fresh, a commercial farm in SA’s Karoo district.
Talk360, an international voice calling app which is building a single payment platform to be launched in 2023 combining all local African currencies and payment methods, has raised a further US$3 million in seed round funding adding to the US$7 million raised in May 2022. Investors in the round include Allan Gray E2 Ventures, Kalon Venture Partners, E4E Africa, Endeavor and existing lead investor HAVAÍC.
Development Partners International (DPI) has, through its ADP II fund, exited from Egyptian retail group B.TECH. The 33.4% interest was sold for an undisclosed sum to the Saudi Egyptian Investment Company (SEIC), a wholly owned subsidiary of the Saudi Public Investment Fund. B.TECH represents the largest integrated omnichannel retailing and consumer finance platform in Egypt, selling consumer electronics and household appliances.
Access Holdings plc, via its Lagos-based subsidiary Access Bank, is to acquire a 51% stake in Finibanco Angola from Portuguese Montepio Holdings. The deal is in line with the bank’s strategy to be Africa’s payment gateway to the world.
Ascent Rift Valley Fund has exited its investment in Medpharm Holdings Africa, a provider of medical diagnostic laboratory services in Ethiopia. The stake was sold for an undisclosed sum to Cerba Lancet Africa, a network of clinical pathology and medical diagnosis sites in Africa.
Helios Investment Partners, a UK-based private equity fund, has sold back its 60% stake in Telkom Kenya to the Kenyan Government for Ksh6,09 billion.
Britannia Industries, a leading Indian food company, has acquired a 51% stake in Nairobi-based Kenafric Biscuits. In addition, Britannia Industries has acquired all the shares in Kenayan Catalyst Britania Brands.
Venture capital firm HAVAÍC has concluded its third investment in Kenyan fintech company Tanda. The investment will enable Tanda to invest in key strategic partners, accelerate product development and scale in Kenya and East Africa in the short term.
Easy Matatu, a Ugandan minibus ridesharing services platform, has received an undisclosed investment from the Renew Capital Angels. Funding will be used to expand Easy Matatu’s end-to-end technological platform, which will double its monthly trip capacity, and to expand the fleet of cars.
Cowtribe, a last-mile veterinary delivery company in Ghana coordinating deliveries of veterinary vaccines and other animal health products to rural and underserved communities, has received an investment and non-financial support from the Boehringer Ingelheim Social Engagement initiative.
Nigerian proptech startup Spleet, has raised US$2,6 million in a seed round led by MaC Venture Capital. Other investors included Noemis Ventures, Plug and Play Ventures, Metaprop VC among others. Funds will be used to expand its property management product offering and expand across Africa
CardoO an Egypt-based IoT devices manufacturer has raised US$660,000 in a seed funding round led by The Alexandria Angels with participation from Sofico Investments, the European Bank for Reconstruction and Development and angel investors. Funds will be used to improve products, enable local manufacturers to produce consumer electronics for IoT under the brand name CardoO.
This week was all about the repurchase of shares on the open market
Argent Industrial has repurchased 37,000 ordinary shares representing 0.07% of the issued share capital. The shares were repurchased at R13.00 per share for an aggregate value of R481 million.
Glencore this week repurchased 8,759,982 shares for a total consideration of £42,80 million. The share purchases form part of the second part of the Company’s existing buy-back programme which is expected to be completed over the period from August 4, 2022, to February 14, 2023.
South32 has this week repurchased a further 2,744,745 shares at an aggregate cost of A$10,14 million.
Prosus continued with its open-ended share repurchase programme. This week the company announced the repurchase of 3,625,070 Prosus shares for an aggregate €196,88 million.
British American Tobacco repurchased a further 692,108 shares this week for a total of £22,53 million. Following the purchase of these shares, the company holds 212,015,769 of its shares in Treasury.
Investec ltd is to embark on a purchase programme as part of its capital optimisation strategy. Investec will conduct an on-market purchase of Investec plc ordinary shares to a maximum aggregate market value equivalent of R1,2 billion. The purchase programme commenced on 3rd October 2022 and will end on or before 17th November 2022.
Five companies issued or withdrew cautionary notices. The companies were: PSV Holdings, Nutritional Holdings, Telkom, Sebata Holdings and Aveng.
An important consideration when implementing a repurchase of shares
The repurchase by a company of its own shares is allowed in terms of section 48(8) of the Companies Act 71 of 2008 (the “Act”) provided, inter alia, that the solvency and liquidity test is met. One of the other core restrictions, in terms of s48(8)(b), is that a decision by a company’s board to acquire its own shares is subject to the requirements of s114 and s115 of the Act where the transaction – in terms of which the shares are reacquired by the company, considered individually or as an integrated series of transactions – involves the acquisition by the company of more than 5% of its shares.
S115(8) expressly provides that any person who informed the company of their intention to vote against the special resolution approving a fundamental transaction – and, in fact, attends the relevant meeting and votes against such special resolution – is entitled to seek relief in terms of s164 of the Act.
S164 of the Act provides for dissenting shareholders’ appraisal rights. An appraisal right is best described as the right of a dissenting shareholder, who does not approve of a fundamental transaction, to have its shares bought out by the company in cash, at a price reflecting the fair value of the shares.
In the recent case of Capital Appreciation Ltd v First National Nominees (Pty) Ltd and Others1, the Supreme Court of Appeal (the “SCA”) was called upon to consider whether the reference to the requirements of s114 and s115 of the Act in s48(8)(b) means that the appraisal rights in s164 of the Act were triggered when a company proposed to repurchase more than 5% of its shares.
The facts can be summarised as follows: Capital Appreciation issued a circular to its shareholders in which it notified them of its intention to repurchase shares from specific shareholders, and that due to the number of such shares, the transaction was subject to s48, s114 and s164 of the Act. The special resolution for this transaction was passed by a large majority of shareholders.
The minority shareholders in Capital Appreciation approached the High Court, in terms of s164 of the Act, for an order that an appraiser be appointed to assist the court in determining a fair value of their shares in Capital Appreciation. The minority shareholders exercised their appraisal rights in terms of s164 due to the fact that Capital Appreciation proposed to repurchase specific shares from specific shareholders in terms of s48 – which repurchase met the requirements of s48(8)(b). Capital Appreciation changed tack and argued in court that s164 did not apply, with the result that First National Nominees (the minority shareholder) had no right to an appraisal of the fair value of its shares by the court.
Before the High Court, (which judgment became the subject of the appeal) Capital Appreciation argued that the repurchase of shares in terms of s48 does not qualify as a scheme of arrangement, as understood in the authorities related to the previous Companies Act and, accordingly, although s48(8)(b) incorporates the requirements of s114 and s115 into a transaction whereby more than 5% of a company’s shares will be repurchased, this is only a reference to the procedural requirements and not the appraisal rights in s164. Moreover, as s48(8)(b) does not reference s164, the legislature would have made reference thereto in s48 if its intention was that s164 would be triggered in the circumstances referred to in s48(8)(b). The High Court disagreed and held that the inclusion of the requirements of s114 and s115 in s48(8)(b) incorporated all the requirements of these sections into a repurchase in terms of s48(8)(b), including the appraisal rights in s164, irrespective of whether the transaction qualifies as a scheme of arrangement or not.
The SCA, in dismissing the appeal by Capital Appreciation and confirming the decision of the High Court, held that the reference to s114 and s115 in s48(8)(b) establishes a direct link between s48(8)(b) and s164. The SCA held that First National Nominees was, therefore, entitled to be paid the fair value of its shares by Capital Appreciation.
In so ruling, the SCA confirmed that a company wishing to repurchase more than 5% of its shares in terms of s48 of the Act must, in addition to complying with the procedural requirements of s114 and s115, comply with the requirements of s164, should a minority shareholder wish to exercise their appraisal rights. The possibility of a minority shareholder exercising their appraisal rights is, therefore, an important consideration when a company decides to implement a repurchase of shares in terms of s48 of the Act.
1Capital Appreciation Ltd v First National Nominees (Pty) Ltd and Others [2022] ZASCA 85 (8 June 2022).
Johan Coertze is an Associate and Giscard Kotelo a Candidate Attorney. Article overseen by Counsel Michael Van Vuren | Fasken.
This article first appeared in DealMakers, SA’s quarterly M&A publication
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Alphamin beats its production guidance
But a lower tin price means profits are way off the preceding quarter
Alphamin reminds us in every announcement that the company produces 4% of the world’s mined tin at its operations in the DRC.
Production in this quarter was 3,139 tonnes, a solid beat of the production guidance of 3,000 tonnes. The problem is that the average price per tonne has dropped from $35,345 to $22,011, a nasty 38% decrease in the space of just three months. This drop in the commodity price explains why the share price has lost 32% of its value this year.
The impact on EBITDA is substantial, down 55% from the preceding quarter to $30 million in this quarter.
The company believes that demand for tin is expected to increase over the next five years, with supply expected to remain constrained. Along with the Mpama South project (scheduled for commissioning in December 2023), this is the underpin for the investment thesis in this company.
The share price is back to where it was in May 2021. If you missed the uptick over the pandemic, there’s a chance here for another bite at the cherry if you like the fundamental story of the business and the tin market.
One step closer for Ascendis
The Austell offer has achieved Competition Commission approval
As regular readers know, Ascendis shareholders need to decide whether they like money or not. It’s really as simple as that, as there are two competing offers on the table and one is materially larger than the other.
As a reminder, the offer from the Pharma-Q / Imperial Logistics consortium is a base price of R375 million. Austell Pharmaceuticals has offered R432 million for the same assets. You don’t need to get the calculator out to choose a winner there.
Until the latest announcement, the material difference between the offers was that Pharma-Q / Imperial already had Competition Commission approval in place and Austell didn’t. Ascendis has announced that Austell has also received approval without conditions, so the difference between the offers is only the price.
Obviously, the board has given shareholders a clear recommendation to vote in favour of the Austell deal.
Equites is proof that the grass isn’t always greener
In the six months to August, the UK portfolio lost value and the SA portfolio moved higher
The annoying thing about markets is that they don’t always fit the popular narrative. For example, the SA-bashers tend to conveniently forget that other countries also have problems (though they do tend to have electricity at least).
There are issues in the UK at the moment and the property market there is under pressure. Goodness knows we have our problems in South Africa too, but markets are all about the reality vs. what was already priced in.
Despite load shedding and everything else, logistics property fund Equites is reporting record demand for warehouse development in South Africa. With a substantial amount of land in its portfolio, Equites is well positioned to take advantage of this.
Over this period, like-for-like valuations in South Africa are up 2% and the UK portfolio is 2.9% lower (in sterling). Now, before you point to the weakness in the rand, I must point out that in August 2021 the pound was actually slightly stronger than it is now against the rand. Both currencies have been slaughtered against the dollar.
The loan-to-value (LTV) ratio of 33.3% means that Equites has lower gearing than many other property funds. This conservative positioning isn’t a bad thing in this environment.
The net asset value (NAV) per share is 6.5% higher year-on-year and is up 0.8% since February. The interim gross dividend of 81.58013 cents per share is 4% higher than the interim dividend last year.
Mac Brothers continues to hurt Grand Parade Investments
The latest hit relates to a lease that was guaranteed by GPI
Grand Parade Investments (GPI) had an adventure in the food sector that won’t go down as one of South Africa’s finest success stories. After selling Burger King South Africa to close the curtain on that initiative, the voluntary liquidation of catering business Mac Brothers is going to leave a bitter taste for shareholders.
Back in 2016, Mac Brothers entered into a sale and leaseback transaction with Gumboot Investments. In these transactions, a company looks to raise capital by selling properties and immediately leasing them from the purchaser, thereby securing ongoing occupancy of the property. For the buyer, the appeal is that there is already a tenant in place for the property who clearly wants to be there. For the seller, capital is unlocked and there is no need to move to a new building (at least for the term of the lease).
Sadly, it can go wrong when the tenant goes bankrupt. In this case, GPI gave Gumboot a guarantee for the rental, so the liquidation of Mac Brothers triggers a claim from Gumboot under that guarantee.
To avoid a long and expensive fight in court, GPI has agreed to acquire the building from Gumboot at a premium price that reflects the higher-than-market rental that Mac Brothers was paying. GPI will pay R66.5 million for the properties and will immediately sell them for R44 million to unrelated third parties. This locks in a R22.5 million loss for GPI, which is much lower than the exposure under the guarantee that was estimated to be R46 million at the end of June.
Another major blow to Game
There were no buyers for the Game stores in East and West Africa
Anyone who has followed Massmart’s journey in recent years is well aware that Game is a major problem. The business model is struggling to achieve resonance with customers, having been disrupted by eCommerce and its own strategic mistakes.
With Walmart poised to take Massmart private assuming shareholders accept the offer, there will be some major changes required to make Massmart financially viable. Game is the obvious area of focus.
In yet another blow to the business, Massmart couldn’t find a buyer for the Game stores in East and West Africa. Considering that Game is the format that was supposed to win in Africa for Massmart, this is a disaster.
Massmart has started the process to close the Game stores in those regions. This raises yet more questions about the future of Game in South Africa.
Little Bites
Director dealings:
Des de Beer is back at it, buying shares in Lighthouse Properties for nearly R2.4 million. I just wish they would get their website fixed.
Anglo American has released the latest rough diamond sales figures for De Beers. The eighth sales cycle comes at a traditionally quieter time in the year for the industry, so the group is happy with sales of $500 million that it says were in line with expectations. The comparable cycle last year delivered $492 million in sales. The seventh cycle this year was larger at $638 million, so the impact of seasonality is clear.
Newpark REIT is a funny little property fund that owns just four properties. There are some iconic properties in the portfolio though, not least of all the JSE building in Sandton and the nearby mixed-use property 24 Central, where yours truly spent many Friday evenings as a young banker attempting to attract ghosts of the opposite sex. Nostalgia aside, the net asset value per share is down 4% year-on-year and the interim dividend per share is 15.4% higher at 25 cents. The loan-to-value (LTV) ratio is slightly lower at 33.1%.
Although Europa Metals jumped by over 47%, it’s worth noting that liquidity in the stock is incredibly thin. It doesn’t take much money in absolute terms to really move the price. The company announced a deal with Denarius Metals, a company that sounds like a Harry Potter character, which would see Denarius take up to an 80% interest in the Toral Project in Spain. Denarius has the option to do so rather than the obligation. The first tranche would be for a 51% interest, with the associated cash used to finalise a pre-feasibility study and pay for exploratory drilling. There are plenty of details in the announcement that give you insight into the financial structures used in junior mining, so read it if you are interested in this space.
Jasco Electronics released results for the year ended June 2022. It’s been a horrible year, with challenges ranging from civil unrest through to gross misconduct by the leadership team in one of the divisions (a business that Jasco has decided to exit). A rights issue in February raised R42.7 million net of costs. If you’re wondering why the capital raise was necessary, operating profit in this period of R3.2 million vs. net finance costs of R16.5 million should answer the question. The headline loss per share of 6.4 cents caps off another tough year for Jasco. The net closing cash balance at the end of June was R29.4 million.
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