In a recent webinar, the founders of bizval (including your favourite ghost) explained why valuations are both an art and a science. We worked through some key principles and enjoyed a vibrant Q&A session at the end.
Ultimately, founders all want the same thing: a successful journey in creating an asset of value. A business only has value if the founder is able to step away one day and sell to someone new, cementing a legacy in the process.
Of course, the big question is this: what is the business really worth?
After an extremely successful inaugural webinar, we are looking forward to bringing you more insights on valuation methodologies and how founders can build more valuable companies. In the meantime, enjoy the recording below and head on over to bizval.co to learn more about the online valuation tool we have built.
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Corporate finance corner (M&A / capital raises)
PSG Group has updated the market on the progress with its group restructure. Interestingly, one of the shareholders who sent appraisal right notices has withdrawn the objection. This leaves one s164 process underway, a complicated legal procedure in which a dissenting shareholder fights to be paid out “fair value” – which of course is believed to be higher than the amount other shareholders would be getting, otherwise the dissenting shareholder wouldn’t bother. The dissenting shareholder only bought the shares after the initial announcement, so this is a classic case of the s164 loophole that has been exploited by a handful of people in the market, much to the annoyance of corporates trying to mop up shares at depressed prices. Interestingly, the remaining dissenting shareholder only has 2,000 PSG shares, a stake worth R174k at current prices. That’s nowhere near enough to make a s164 process commercially viable, as the legal fees are significant. PSG has (unsurprisingly) decided to waive the condition related to s164 demands and will move forward with the restructure accordingly. PSG believes that the last of the conditions will be met by 25th August and a further announcement will be released accordingly.
Momentum Metropolitan has released a voluntary announcement regarding the introduction of the Abu Dhabi Investment Authority as a shareholder in Aditya Birla Health Insurance. The sovereign wealth fund of the Emirate of Abu Dhabi will hold 9.99% in the health insurance company, with Momentum Metropolitan holding 44.1% and the rest held by Aditya Birla Capital Limited. This is a capital infusion of around R1.3 billion that will drive the company’s growth in India. The deal is too small to be categorised under JSE Listings Requirements, so details are limited and shareholders aren’t being asked to vote. You should also take note of the trading statement released by Momentum Metropolitan, which I deal with in the financial updates section.
Shareholders of RMB Holdings have given a resounding “yes” to the proposed sale of the shares and claims in Atterbury Europe to Brightbridge Real Estate for R1.75 billion. With that major hurdle out of the way, the company will focus on the remaining conditions precedent.
Tradehold is in the process of selling its entire stake in Moorgarth Holdings (Luxembourg) to Moorgath’s ultimate group holding company. The value of the deal is £102.5 million. The independent property valuations on all the properties are now available at this link and Valeo Capital (acting as independent expert on the transaction) has noted that its opinion on the terms of the deal remain unchanged after reviewing the valuations.
Sebata Holdings has renewed its cautionary announcement. The company is negotiating the potential disposal of one or more businesses.
Financial updates
Sasol got all the early morning attention with a SENS announcement shortly after 7am that gave the market what it wanted: confirmation of the dividend. As we know, an environment of higher energy and chemicals prices has been bullish for Sasol, with the recent focus on cost and capital discipline helping to turn a favourable environment into a great set of results. For context, the average rand oil price per barrel was 68% higher in this period. Headline earnings per share (HEPS) increased by 20%. If you’re willing to work with management’s definition of core HEPS, then it has more than doubled year-on-year. The most important part is the dividend, which has been announced as R14.70. Net debt was slightly higher (R105.1 billion vs. R102.9 billion) despite repayments of R12 billion, attributable to a weaker rand. Net debt to EBITDA of 0.8x is well below the threshold level of 3.0x. I must highlight that a SOLBE1 share is identical to a Sasol share other than the restricted B-BBEE ownership. SOLBE1 trades at a much lower price than Sasol ordinary shares on the main board. At R180 per SOLBE1, this dividend is an 8.2% yield. The yield for Sasol ordinary shareholders is 4.3%. You can get all the details of the Sasol earnings announcement in this article that the company placed in Ghost Mail this morning.
Merafe Resources got plenty of attention on Twitter after releasing results for the six months to June. The share price tumbled by more than 10%, as some unfortunate souls were reminded of the risks of holding cyclical companies even on a low Price/Earnings multiple. The results themselves were strong, with a 15% increase in revenue, 68% increase in EBITDA and almost 60% jump in HEPS to 37 cents. The share price was trading at around R1.30 in late afternoon trade, so on an annualised basis the multiples look silly. The point is that you can’t just annualise these earnings, as the results can be highly volatile based on underlying commodity price movements. Although the interim dividend was 71% higher at 12 cents per share, the low payout ratio seems to be part of what spooked the market. The likeliest cause of the nasty drop was the CEO commentary throughout the SENS announcement, which warned of a drop in ferrochrome prices and cost pressures from inflation and other pressures. The company expects a tougher second half of the year and is focused on “cash preservation” – really bearish commentary indeed! In fact, I honestly don’t know when last I saw such negative commentary alongside great numbers. The share price is still up around 10% this year.
Momentum Metropolitan released a trading statement for the year ended June 2022. HEPS has skyrocketed – expected to be between 855% and 875% higher with a range of 295 cents to 301 cents. The base period was heavily impacted by Covid, with massive movements related to the mortality experience variance and additional Covid provisions. This situation changed in the latest financial year, with a small net mortality profit for the first time since the start of the pandemic and a positive impact on earnings from the partial release of Covid provisions. Earnings were also positively impacted by investment returns, as insurance companies are exposed to broader market returns. Full results will be released on 14th September.
Bidvest has released a trading statement for the year ended June 2022. HEPS is expected to be between 18% and 22% higher, suggesting a range of 1,414 cents to 1,462 cents. If we focus only on continuing operations (i.e. excluding Bidvest Car Rental), the increase is between 20% and 24%. Detailed results are expected on 5th September. The share price has rewarded shareholders with a 17% gain this year. Trading at around R223 per share, this is a Price/Earnings multiple of approximately 15.5x.
Cashbuild has also released a trading statement for the year ended June 2022 and it tells a far less appealing story than the Bidvest update. HEPS is down by between 30% and 35%, with a range of 1,867.2 cents to 2,010.8 cents. We’ve seen a significant shift in consumer spending in this period as the world reopened. Instead of renovating the bathroom, affluent homeowners are going on holiday instead.
Aveng released its annual financial statements for the year ended June 2022, allowing investors and interested parties to dig deeply into the numbers. It’s quite tricky to know where to look, as Aveng has had significant non-recurring items. The group generated R576 million in operating profit off R26.2 billion in revenue, a skinny margin of around 2.2%. Normalised earnings per share was 167 cents and HEPS was 252 cents. Thanks to an operating free cash inflow of R612 million, external debt was reduced over the year from R879 million to R481 million.
NEPI Rockcastle released a trading statement for the six months ended June 2022 and then released interim results just a few hours later. This is poor disclosure, as the point of a trading statement is to give shareholders early warning of a difference in earnings of more than 20% vs. the comparable period. Distributable earnings per share increased by 29.4% to 22.83 euro cents. Thanks to a strong balance sheet, every single one of those cents will be declared as a dividend once the company has redomiciled to the Netherlands, which is expected to be completed by 6th September.
Omnia Holdings has had its credit outlook upgraded from Stable to Positive by GCR Ratings. The issuer ratings have been retained at A(ZA) for the long-term rating and A1(ZA) for short-term. GCR sees the business as having strong competitiveness and diversification across geographies and customers. As a reminder, Omnia is a leading regional producer and supplier of nitrogen-based fertilizers in Africa, as well as one of the leading manufacturers of mining explosives in Africa for underground and surface applications.
One for the diaries – Aspen Pharmacare will release results for the year ended June 2022 on 31st August. The live presentation will be held at Investec’s offices, so there are no prizes for guessing who the corporate advisor to Aspen is.
Operational updates
South32 has decided not to go all out with an investment in the Dendrobium Next Domain project at Illawarra Metallurgical Coal in Australia. The expected return on the $700 million required investment isn’t compelling vs. alternatives for the complex. The group will focus on optimising the facility, including a $260 million investment that remains subject to board approval. This gives South32 capacity to direct capital towards other opportunities, like “green metals” in North America (those that are critical to a low carbon future).
BHP has confirmed the exchange rate for its dividend. South African shareholders will be paid R29.7094875 per share on 22nd September.
The company secretaries are at it again. This time, the company secretary of Datatec has sold shares worth over R2.5 million.
Prosus has repurchased shares over the past week or so for around $220 million.
Notable shuffling of (expensive) chairs
The chairs stayed put.
Director dealings
Des de Beer has acquired a further R963k worth of Lighthouse Properties shares. Regular readers will know that he has been investing chunks amounts in Lighthouse shares for a while now.
In the AGM notice that Stor-Age sent to shareholders at the end of July, the company proposed a fee of R3,000 per hour for non-executive directors doing work required by “extraordinary circumstances” – whatever those might be. Shareholders were less than enthralled by this proposal, so Stor-Age opted to amend the proposed resolution and remove the additional amount. Before you feel too sorry for the directors, I must note that the annual fee for a board member is R300,000 and they earn another amount of between R60,000 and R130,000 depending on which committee they serve on. That’s not exactly a pittance for staying awake during PowerPoint presentations while snacking on mini sausage rolls.
Sasol delivered a strong set of financial results against the backdrop of increased volatility resulting from ongoing geopolitical tensions, extended COVID-19 lockdowns and global supply chain disruptions. The company benefitted from higher energy and chemicals prices, as well as strong cost and capital discipline through the delivery of our Sasol 2.0 transformation programme.
Earnings before interest, tax, depreciation and amortisation (EBITDA) increased by more than 100% to R75,5 billion. This is predominantly due to a strong recovery in Brent crude oil and chemical prices, partly offset by hedging losses and lower chemical sales volumes.
The balance sheet has been significantly strengthened with net debt of US$3,8 billion at 30 June 2022, well below the target of US$5 billion. Dividends were reinstated at R14,70 per share in line with the dividend policy.
“Financial year 2022 was characterised by a number of factors impacting our business, including geopolitical tensions, further COVID-19 lockdowns in China, weather-related events and global supply chain disruptions. These conditions dampened global demand and triggered fears of recession in both advanced and developing economies. Amidst this volatility, we demonstrated resilience, delivering a strong set of financial results for the year in a complex and difficult external environment,”
Fleetwood Grobler, President and Chief Executive Officer of Sasol.
He added, “The wellbeing of our people remains our number one priority, as we continue to pursue our ambition of zero harm. I am deeply saddened by the loss of five colleagues while on duty. To eliminate work-related safety incidents, and ensure our employees return home safely, we have rolled out additional safety remediation initiatives in response to these high severity incidents, with increased emphasis on behavioural culture.”
Earnings before interest and tax (EBIT) of R61,4 billion increased by more than 100% compared to the prior year, driven by higher crude oil prices, refining margins and chemical prices. This also resulted in a strong gross margin improvement compared to the prior year. Earnings were impacted by losses of R18,3 billion on the valuation of financial instruments and derivative contracts, higher labour and maintenance cost, as well as increased electricity purchases from Eskom arising from the diversion of gas from utility generation to production, offset by savings from Sasol 2.0 initiatives.
The Energy business further benefitted from a recovery in fuels demand post the COVID-19 impact. However, there was a slight decrease in retail sales in the last quarter due to record high fuel prices. This was offset by lower volumes in Mining, Secunda and Sasolburg downstream value chains following the feedstock and operational challenges which impacted the South African value chain.
The Chemicals business delivered a strong financial performance, benefitting from a stronger average sales basket price (US$/t), which was 39% higher than the prior year. Sales volumes were 12% lower than the prior year largely due to the divestment of the US Base Chemicals assets concluded in December 2020 and lower Secunda and Sasolburg production from Chemicals Africa.
Plans for meeting its greenhouse gas (GHG) target to have a 30% reduced emissions profile by 2030, are progressing well, as a foundation to meeting Sasol’s ambition of Net Zero emissions by 2050.
In South Africa, it is progressing the procurement of over 600MW of solar and wind renewable power with the first projects starting to come online from 2025 onwards.
In Europe, Sasol has entered into several Power Purchase Agreements for its German and Italian operations and have concluded a supply agreement for the provision of Carbon dioxide (CO2)-neutral biomass-based steam to the Brunsbüttel site in northern Germany.
Sasol invested R743,3 million globally in socioeconomic development, which contributed towards funding small to large enterprises, bursaries, education and learnership programmes, health and investment in community service infrastructure. It also invested R1,2 billion in skills development.
Sasol has continued to make major strides on its commitments to sustainable transformation and broad-based black economic empowerment (B-BBEE). The company has recorded exponential growth in spend with black-owned businesses achieving R33,6 billion in 2022 compared to R23,8 billion in 2021.
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Corporate finance corner (M&A / capital raises)
MTN and Telkom have renewed their respective cautionary announcements. Discussions regarding a potential offer by MTN for all the shares in Telkom are still underway. The announcement notes that the potential offer would be to acquire all the issued share capital of Telkom in exchange for shares in MTN or a combination of cash and shares.
Afrimat updated the market on the Glenover phosphate and Gravenhage manganese projects. The Glenover deal was announced in December 2021 with a total deal value of R550 million. The implementation of the initial phases has progressed well and feasibility studies of follow-up phases have yielded “pleasing results” – so that’s clearly good news. The payments for inventory stockpiles (a total of R250 million) have been made to the sellers. The option to acquire the Glenover shares remains at Afrimat’s sole discretion and is valid until November 2022. The news on the Gravenhage project isn’t good I’m afraid, with the water use licence granted by the Department of Water and Sanitation deviating materially from the application that was made. This means that conditions precedent weren’t met and the deal has fallen over as far as Afrimat is concerned. The counterparty disagrees, with a formal dispute now underway that may end up in arbitration. If you’ve ever read a proper sales agreement, you’ll know that there are many clauses that are legal in nature rather than commercial. They exist for scenarios just like these.
Ascendis Health announced the results of its rights offer. The company aimed to raise around R101.5 million and the rights offer was fully underwritten, so there was no chance of that amount not being raised. The debate was simply around where the money would come from. 32.6% of the rights offer shares were subscribed for and all the remaining shares were issued under excess applications, which refers to existing shareholders who put in an application for more shares than they would otherwise be entitled to. The underwriter didn’t need to spend a cent as all the shares were allotted to existing holders, so the underwriting fee was a great deal in the end. A few directors participated in the equity raise with Carl Neethling as the largest by far (over R22.3 million across various associated entities).
Raubex and Bauba Resources announced the results of Raubex’s general offer to shareholders of Bauba. The offer was accepted by holders of 13.29% of shares in issue. The delisting will now take place, so anyone who didn’t accept the offer will be the proud owner of an unlisted share, an asset that is usually as rewarding and valuable as one-ply toiletpaper.
Corporate finance advisors are impacted by the way in which JSE listings requirements are applied to listed companies (the same applies to other exchanges – though they are still in their infancy in South Africa). For that reason, I’m including the JSE’s response paper in this section, which was issued after consulting with the industry about potential changes to the the listings requirements and the strategy going forward. Something that jumped out at me was a proposal to move from two market segments (Main Board and AltX) into three segments, effectively carving out a set of rules for “mid-caps” that create a greater regulatory burden than on the AltX board but not as severe as for the largest companies on the JSE. This is a bit like Pick n Pay’s long overdue recognition of the need for a store format that caters for the middle market. Here’s the relevant excerpt from the JSE response paper:
Financial updates
Motus Holdings has released an updated trading statement approximately a month after the initial trading statement was issued. For the year to June 2022, HEPS increased by between 68% and 73%. The actual range is between 1,980 cents and 2,040 cents per share. On a share price of nearly R118, this puts the group on a trailing Price/Earnings multiple of below 5.9x. Detailed results will be published on 31st August.
Sun International Limited has released a trading statement for the six months to June 2022. When companies talk about a “strong recovery in revenue and EBITDA and a significant reduction in group debt” then you know it’s been a much happier time than before. Both HEPS and adjusted HEPS have swung massively into the green after losses in the comparable period. HEPS is between 83 cents and 101 cents for the interim period. Adjusted HEPS relates to a change in the estimated redemption value of the Tsogo Sun put option. If you’re happy to go with management’s view on that, you’ll focus on the adjusted HEPS range of between 167 cents and 185 cents. The share price traded nearly 3% higher after the announcement at almost R30 per share.
I noticed a SENS announcement for “SuperDrive” and decided to dig further. It turns out to be part of BMW Financial Services, so I couldn’t wait to dig in and see what I could find. There are some great stats to remind you that most people in flashy cars can’t afford them. The weighted average balloon payment is 23.16% and used vehicles are 47.22% of the portfolio, so many people have bought used cars with balloon payments. The weighted average margin is prime + 0.74%, so it’s not cheap to finance these cars. The geographical split is also interesting: Gauteng 57.51%, KZN 16.96% and Western Cape 10.68% of the total portfolio. If you’re wondering whether BMW Financial Services is a listed company, I’m sorry to disappoint you that it isn’t. The company issues debt through the JSE, hence the need for a SENS announcement.
Workforce Holdings has announced results for the six months to June 2022. The staffing, outsourcing, recruitment and training group (amongst other services) grew its revenue by 21% and EBITDA by 19%, so EBITDA margin fell slightly. Those margins are already tiny, with only R68.7 million in EBITDA off R1.9 billion in revenue. HEPS improved by 30% to 14.6 cents. No interim dividend was declared.
One for the diaries – Spear REIT is hosting a pre-close investor presentation at 11am on 31st August. You’ll be able to watch at this link.
Operational updates
Transnet is in the process of upgrading two key ports and plans to structure this as a partnership with the private sector. The idea is to create a special purpose vehicle between Transnet Port Terminals and the winning bidders, with ownership reverting to Transnet after 25 years. In others words, Transnet is looking for an operational partner for the next 25 years and that partner needs to extract enough value in that period to make it worthwhile. The ports in question are DCT2 in Durban and NCT in the Port of Ngqura in the Eastern Cape. The goals are different: DCT2 needs to achieve better commercial performance and throughput, whereas NCT has been loss-making for years and needs additional shipment volumes. After running a process since 2021, there are ten shortlisted partners for DCT2 and four for NCT. Within the DCT list, I recognised names like DP World (the new owner of Imperial), Grindrod Freight and an entity working in conjunction with Remgro. The Remgro bidder also made the shortlist for NCT. Preferred bidders are expected to be appointed by February 2023.
Schroder Real Estate has announced the exchange rate applicable to its dividends. The third interim dividend will be R0.3157950 per share and the special dividend will be R1.707 per share.
Notable shuffling of (expensive) chairs
Buffalo Coal has announced the resignation of CFO Willie Bezuidenhout and has appointed CEO Emma Oosthuizen to act as interim CFO as well.
Bowler Metcalf has appointed Ms Debbie van Duyn to the board. This is notable because she is also the Chairman of the Plastic Converters Association of SA and plays a role in other industry bodies. Bowler Metcalf is a classic example of a JSE small cap that many people have never heard of. Now you have!
Balwin Properties has appointed Ms Keneilwe Moloko to the board. Her academic background is really interesting, qualifying as both a quantity surveyor and a CA(SA)! Ms Moloko also served on the boards of Attacq, Fairvest and Long4Life.
Director dealings
A director of Kumba Iron Ore has sold shares in the company worth R206k.
A trust related to the chairman of BHP has bought shares worth around R2.95 million.
The CEO of Mondi’s South African business has sold shares in the group holding company worth nearly R1.6 million.
A director of a subsidiary of Nu-World has sold shares in the company worth around R52.5k.
Unusual things
The sad tale of Pembury Lifestyle Group continues, with the company receiving letters of demand from various parties since the passing of the CEO. The company is in so much trouble that it can’t even pay historical debts to its previous auditors. Moore has put in a proposal to be reappointed and Abacus just wants to get paid for old work. Pembury needs to raise money to settle old debts and finalise audits. In positive news, the Northriding property is being let out profitably to commercial tenants, with the proceeds ensuring that monthly obligations to Abacus can be met. This is like watching a cricket team trying to save an innings after losing 8 wickets in the first 10 overs.
Ghost Grad Sinawo Bikitsha couldn’t resist the appeal of dedicating this week’s Ghost Global to the infamous meme stocks – companies that experience sharp moves due to the collective efforts of traders on Reddit.
Meme stock millions
Bed Bath & Beyond suffered a wild week as its shares dropped by over 40%, after one of its largest shareholders (billionaire Ryan Cohen) sold his stake in the company.
For those who aren’t aware, Bed Bath & Beyond is a New Jersey homeware retailer founded in 1971 and currently operating more than 900 stores (after closing more than 200 during the pandemic) across the US as well as outside its borders in Canada, Columbia and Puerto Rico.
The company is listed on the NASDAQ stock exchange and has subsidiaries including Harmon Stores and Buy Buy Baby.
The homeware retailer has been experiencing problems for a while. Ryan Cohen is an entrepreneur and activist investor who co-founded eCommerce pet supplies company Chewy. He is also the chairman of GameStop, another famous meme stock. Spotting an opportunity, he became involved in Bed Bath & Beyond this year.
Earlier this year, Cohen and his affiliates acquired a stake of around 9.8% in the company. A letter to the board was made public in March 2022, in which the activist investors complained about the lack of financial delivery and the extent of executive compensation. This table was included in the letter and it clearly indicates the problem:
The letter even noted that the “strategy looks far better in a PowerPoint deck than it does in practice” – ouch! This didn’t stop Cohen acquiring more shares, reportedly taking the stake to nearly 12%.
Bed Bath & Beyond replaced CEO Mark Tritton in June and named Sue Gove as his interim successor, a restructuring expert. The pressure was clear. Fast forward another couple of months and Cohen shocked the market by filing an intention to sell his stake (this is required when shareholders of US companies hold more than 10%). To the disappointment of some on Reddit, he got the job done quickly by selling his shares and call options.
Cohen’s bank account certainly wasn’t disappointed, with profit of $68 million from selling directly into the meme stock resurgence. There is no reason at all for the correlation of Bed Bath & Beyond, GameStop and AMC Entertainment, other than the meme stock phenomenon:
Before Cohen feels too clever, 20-year-old US university student Jake Freeman made a one-month bet on Bed Bath & Beyond and banked a profit of $110 million. Of course, it’s useful that his family was able to put $25 million on the table to start with. The world we currently live in hey…
These meme stocks are extraordinary and rather problematic from a regulatory perspective, with many putting forward allegations of market manipulation. After all, large groups of people are effectively acting together via social media platforms to move share prices! Cohen is no stranger to these stocks, having invested in GameStop in 2020.
Moving away from the shareholder antics for a moment, Bed Bath & Beyond reported a 25% decline in net sales to $1.5 billion and an adjusted net loss of $225 million in results for the quarter ended 28 May 2022. The company has hit pause on store remodels and new store openings for the rest of the financial year. In line with many other companies, Bed Bath & Beyond reported that its operations were heavily affected by global supply chain disruptions, political conflicts and rising inflation.
Even Tom Cruise couldn’t save Cineworld
With media reports suggesting that box office takings this year are down by around 32% vs. 2019, cinema chains are struggling despite Tom Cruise’s best efforts.
British company Cineworld Group is preparing to file for bankruptcy in the US after operating for more than 25 years. The world’s second largest cinema chain (surpassed by AMC Entertainment) has been struggling to rebuild movie-theatre attendance from the pandemic drops and can no longer keep up with its debt.
Cineworld reported a loss after tax of $565.8 million, net debt (excluding lease liabilities) of $4.8 billion and lease liabilities of $4 billion in the December 2021 results. After an article by the Wall Street Journal highlighted the problems, the share price collapsed by around 85%.
Cineworld also owes $1 billion in damages to Canadian group Cineplex due to a fumbled acquisition back in 2020. Of course, whether there will be any cash available to pay those damages is highly debatable.
I find it necessary to mention that this isn’t the first time Cineworld has prepared to file for bankruptcy. Back in 2020, the company was in negotiations about debt restructuring with their lenders. Cineworld managed to score a favourable deal by having lenders agree to providing a $450 million rescue loan that would help the company in the short-term, saving the company from filing for bankruptcy.
The pandemic and especially its associated lockdowns went on longer than anyone could’ve anticipated. In the end, that loan just kicked the can down the road.
Planet of the APEs
Things are also tough for the leading cinema group AMC Entertainment. It was also hit hard by the pandemic and was arguably saved by the meme stock movement, raising equity capital as its share price rallied for no fundamental reason. The company remained loss-making in Q2 and doesn’t anticipate a great Q3, though the final quarter of the year holds much promise with the release of blockbuster films.
In an attempt to keep tapping into the meme stock movement, AMC announced a stock split that creates “AMC Preferred Equity” or APE units, a direct nod to the Reddit users who refer to themselves fondly as apes. This is a result of prior attempts to raise more capital through the issuance of ordinary shares, a move that shareholders eventually blocked after growing tired of dilution.
The preference shares are issued free of chargeas a dividend and give the company an instrument for raising capital in the future. Here’s the trick though: an APE unit is convertible in future to an ordinary share, so this is just like a stock split.
Ultimately, this solution is all about the optics rather than the fundamentals. But after all, isn’t that exactly what meme stock trading is about?
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Chris Gilmour takes a closer look at StatsSA retail sales figures and the numbers put forward by listed grocery retails that indicate the size of the market.
It’s important to monitor the retail sales figures from Statistics SA (StatsSA).
Firstly, the trends in the overall and component parts of the time series give valuable clues as to the direction of spending in the economy. It’s certainly not perfect and the various categories that StatsSA employs in compiling these stats don’t necessarily align with what the JSE-listed retailers are seeing, but it’s a reasonable proxy.
Secondly, it can help in having a stab at estimating which companies are gaining and which companies are losing market share in the various categories of spending. It is possible to buy market share and other information from market research organisations such as AC Nielsen with their Retailer Liaison Committee stats, but these are expensive and not really for the general public.
The informal sector cannot be ignored
The other big factor that must also be borne in mind when using these stats is the fact that not all data is captured in the formal retailing market. As a rough guess, it has been estimated over the years that the informal retail sector probably accounts for around 40% of total retail grocery sales in SA, but nobody really knows how accurate that figure is. Informal traders, such as spaza shops, service the great majority of South Africa’s population and although they are not always the cheapest option, they are certainly the most convenient from a township perspective. In the rest of Africa, that figure is substantially higher, as formal retailing is still in its infancy on the rest of the continent.
Additionally, not all formal retailing is carried out by JSE-listed retailers. There are many cash and carry / wholesalers in South Africa, especially in the rural areas, many of which offer exceptionally keen pricing for their customers.
So, market share among the large JSE-listed companies has to be seen in the context of being only a proportion of total retail sales. Over time, under “normal” economic conditions, one would expect to see the formal JSE-listed retail component growing. However, in a languid economy characterised by low growth and high interest rates, we should expect the informal sector to do relatively better.
Lack of clarity in the numbers
Up until about 15 years ago, when grocery market shares were more openly discussed in the industry, it was generally acknowledged that Shoprite enjoyed a market share of around 35% of the formal market, with Pick n Pay on about 28%, Spar on 23% and Woolies Food in mid to high single digits. But then it was discovered that Shoprite’s market share figure didn’t include VAT, whilst Pick n Pay and Spar’s did, resulting in a massive distortion of the figures. At that point, Pick n Pay stopped supplying market share information and the figures have been treated with a deal of circumspection ever since.
However, in the past couple of years, Pick n Pay has provided a remarkably good segmentation of its sales, as shown in the graphic below:
Source: Pick n Pay AFS 2022
For 2021, Pick n Pay estimated the size of the formal grocery market to be R628 billion, of which it had a 16% share. That was split into 23% of the more affluent market, 27% of the middle market and only 11% of the less affluent market. Using the same methodology would result in Shoprite having a 26% market share.
Woolies Foods estimates its grocery universe to be between R350 million and R400 million, of which it has a 10% share. If the Pick n Pay universe was used instead, Woolies’ market share would be closer to 6%.
In the latest Stats SA retail sales figures to June 2022, total retail sales in SA for 2021 were estimated at R1.166 trillion. Of course, this includes all categories of retailing, not just grocery, but if the Pick n Pay estimate of total grocery sales is correct, then grocery accounted for 628/1 166*100 = 54%, which sounds about right.
Retail growth trends by category
In the June StatsSA figures, overall retail sales declined by 2.5%, which was something of a shock, as most analysts were looking for a positive print. The main culprit was the continuing reduction in Hardware, Paint & Glass category, which continued its dismal decline. But the other big surprise was a decline in sales at General Dealers, which went backwards by 5.7%. This is highly unusual, as General Dealers is predominantly food, which is non-discretionary. This decline may be explained by the sharp rise in clothing, footwear, textile & leather (CFTL) sales, which rose by 5.3% in June, following a sharp reduction of 4.3% in May. The rise in CFTL sales is perhaps explained by the continuing drift back from home to office work and the need to replenish wardrobes. It is just possible that consumers decided to forego some food shopping in June in preference to CFTL shopping. We may get a clearer picture of this phenomenon as the year progresses and the drift back to the office has fully run its course.
The so-called “homebody economy” phenomenon, whereby huge numbers of people worked from home during the coronavirus pandemic and spent a lot of money making their homes comfortable and efficient, appears to be well and truly over. A good proxy for that economy is the Hardware, Paint & Glass category of retail sales, which recorded a -8.6% contraction in June. This category has recorded six successive negative prints since January 2022.
Recent trading updates
Woolies, Truworths and Shoprite have all published trading updates in recent days, as they all have June year ends. Woolies Foods and their Clothing divisions both appear to have lost market share, while Shoprite appears to have gained significant market share. After a pretty dreadful first half, Truworths has bounced back and although it seems to have lost market share overall, its second half performance appears to be much better than the first half. Truworths will no doubt claim that they have gained share of the credit apparel market market, a market that most other participants are actively leaving in favour of cash retailing.
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Corporate finance corner (M&A / capital raises)
Prosus has announced the acquisition of the remaining 33.3% stake in iFood from Just Eat for €1.5 billion in cash. There’s a potential further payment of up to €300 million if the food delivery sector “re-rates” its multiples in the next 12 months. The announcement doesn’t indicate how this is calculated, but it basically protects the seller if the market recovers. The loss attributable to Just Eat was a meaty €62 million in the six months to June 2022. Grossed up for the shareholding, this implies that the group lost around €185 million in that period. You certainly need to place a lot of value on hopes and dreams to be investing in this stuff.
The latest company to annoy the Takeover Regulation Panel (TRP) is Emira Property Fund, although it appears to be a minor transgression. In mid-July, Emira announced a firm intention to make a general offer to the shareholders of Transcend Residential Property Fund. Marketing materials were subsequently released that included views that were not included in the firm intention announcement. The TRP directed Emira to remove these materials from social media. Takeover law is enshrined in the Companies Act and the TRP is one of our strongest regulators in South Africa. When a company is under offer, the regulations become critical.
Financial updates
Standard Bank announced results for the six months ended June 2022. It has been a wonderful time for the banks, with record headline earnings of R15.3 billion, up 33% on the prior period. Return on equity (ROE) improved from 12.9% to 15.3% (the target by 2025 is to reach 17% – 20%). Net asset value grew by 15% and there’s a tasty interim dividend of 515 cents per share, representing a payout ratio of 55%. Margin growth is very important and the banks measure this as either “positive jaws” or “negative jaws” – with the positive variant describing a scenario where income growth exceeds expense growth. In such a scenario, margin expands. Positive jaws in this period was 450 basis points, reflecting the difference between income growth and expense growth. Looking ahead, income growth for the rest of the year is expected to be strong (double digits in net interest income and single digits in non-interest revenue), with ongoing positive jaws and a credit loss ratio in the lower half of the through-the-cycle range of 70 to 100 basis points. The share price is up around 14.5% this year.
Aveng has released a trading statement for the year ended June 2022. Headline earnings per share (HEPS) is expected to fall by between 74% and 78%, with the company pointing out significant non-recurring gains of R868 million in the prior period. Headline earnings (vs. earnings) usually adjusts for such issues, but not all non-recurring items can be adjusted in HEPS. The company provides a view on normalised earnings per share in an attempt to show the true underlying performance of the business. Normalised basic earnings per share is expected to be between 76% and 92% higher than the comparable period. In cases like these, I tend to just focus on the actual HEPS range given and I ignore the percentage movements. HEPS was between 226 and 261 cents, so the Price/Earnings multiple is somewhere around 7x.
People with a taste for profits will be happy to learn that Spur’s HEPS for the year ended June 2022 increased by 31% to 144.22 cents. There is no debt on the balance sheet and the cash position is up by R29.8 million to R290.7 million. With 631 restaurants across 15 countries, Spur managed to grow solidly throughout the year with a fairly similar growth rate in the first half (H1) and second half (H2). A dividend of 78 cents per share has been declared and the share price closed at R21.50. Looking ahead, the group has flagged macroeconomic issues and rising inflation as concerns. I would perhaps argue that a more stressful country may push more parents to use Spur as Friday night childcare while sipping a cold ale! RocoMamas is where my concern lies, where sales were up 25.3% (vs. say 30.1% in Spur itself, or 31.4% in Panarottis). All these numbers look amazing of course, but remember the base period had Covid lockdowns. My recent experience at RocoMamas was disappointing and a poll I ran on Twitter suggests that I’m certainly not the only one feeling this way:
Afrimat will host a pre-close briefing session related to the interim results for the six months ending 31 August 2022. It will take place on 26 August and those who are keen to attend the virtual event should contact Keyter Rech Investor Solutions for details.
Operational updates
Purple Group (the controlling shareholder in EasyEquities with a 70% stake) has announced that EasyEquities has partnered with an e-wallet provider in the Asia Pacific region to launch investing services within that application. The user base is described as “tens of millions of users” which sounds like a very large market indeed. The launch is planned for September and the counterparty has asked to remain unnamed until the launch. Like a ghost, really.
Share buybacks and dividends
Much like those who smoke every day, British American Tobacco is still busy with share buybacks every day.
Karooooo has confirmed that the interim dividend is R10.053 per share and that it will be paid on 12th September.
Notable shuffling of (expensive) chairs
There was no shuffling on Friday.
Director dealings
A director of Thungela has acquired shares in the company worth nearly R100k.
A Dis-Chem director has sold shares in the company worth R24.6 million. That buys a few nice things.
Des de Beer continues to buy shares in Lighthouse Properties, this time with a R1.1 million purchase.
The interim CFO of AngloGold Ashanti exercised share options and promptly sold the whole lot, putting R382.5k in his pocket.
An executive director of Trematon has bought shares in the company worth R53k.
An entity related to the CEO of Industrials REIT sold shares worth just over £5.2 million. The proceeds will be used as partial repayment of a £6.5 million debt owed by the CEO’s related entity to a subsidiary of the REIT. The loans were made between 2015 and 2017 as part of a company share purchase plan. The balance of the loan will be repaid in the next seven working days. After this sale, the CEO will still hold around 4.55% of the issued share capital.
Unusual things
The Takeover Regulation Panel (TRP) is being kept very busy lately. Aside from the usual regulatory issues related to offers in the market, the TRP also deals with complaints and allegations of misconduct or breaches of takeover law. Complaints have been related to transactions involving a share repurchase in African Phoenix Investments, a general offer from Peresec Prime Brokers and Zarclear Holdings, a share repurchase by Zarclear, the mandatory offer in EnX Group and the scheme of arrangement involving African Phoenix and Zarclear. The complaints boil down to one thing: parties acting in concert and failing to disclose this. There are other elements to the complaint, like the independent expert not considering the potential liability of African Phoenix in respect of the Extract Group mandatory offer. The first decision for the Executive Director of the Panel is whether the complaints are “frivolous or vexatious” – in this case, the decision has been made that there is reasonable suspicion of an infringement and that this deserves a proper investigation. It’s important to note that no adverse findings have been made at this stage. All that has happened is the decision to take a closer look.
Raven Property Fund was set up to hold properties in Russia, which seemed like a good idea until war broke out. After needing to sell its stake in those properties, the listed vehicle will be disappearing from the JSE. It’s hardly a loss, as the share price chart looks like the company traded once in the past 3 years!
As we head into the back part of the year, we are seeing that data is getting more scrambled across the globe, which could only mean that volatility is going to be the rule rather than the exception. The team from TreasuryONE explains.
Last week, we saw US CPI coming in better than expected, with the number printing at 8.5%. Other data out of the US in the last couple of weeks also tended to beat expectations to the positive side.
While the number is still high, many analysts believe that the US has reached peak inflation and that the hawkish narrative by the Fed could be slowed down and that we are in line for a 50 basis point hike rather than the 75 basis point hikes that analysts in the market have punted. The immediate reaction to the number was for the US dollar to weaken, which was good news for EM currencies like the rand.
This all points to the narrative that there could be a soft landing in the US economy.
However, the story in the bond market is a little bit different. For a six-week period now, yield curves are inverted. Yield curve inversions, which are rare, are viewed as a good recession predictor because they suggest that investors believe – with the interest rate on long-term bonds being lower than the rate on short-term bonds – that economic growth is slowing.
With bonds seeing troubled times ahead, it only adds to the volatility pot and data being scrambled.
The rand, which touched the R17.00 level not too long ago, traded all the way down to R16.14 in the wake of the data release. Still, the rand, for one, ran too far too quickly, and the second part of the rand bounce back has been weak data out of China, with Chinese data disappointing the market and the Chinese Central Bank cutting interest rates unexpectedly. The Chinese economy is still battling a real estate slump and strong COVID controls which will weigh down any significant growth.
This brought about the market running back to the US dollar, with the US dollar trading below the 1.02 level against the euro, after comfortably trading above that mark after the CPI number. There seems to be a definite divergence between the US and Chinese economies, and that data divergence could set the tone for volatility going forward.
The rand enjoyed the “good” CPI data out of the US but sank back to the R16.40 level after the Chinese data misses. We expected the rand to trade around that level until the release of the FOMC minutes on Wednesday.
The key message from those minutes was that the Fed will continue to hike rates for as long as inflation remains above the 2% target. The pace and size of the hike could slow depending on fresh data in the coming months.
The rand lost ground and remained weak on Thursday, trading around the R16.80 mark. We saw a full reversal since the US CPI numbers, when the rand enjoyed a sell-off in the dollar.
If you enjoy these updates, you’ll love the upcoming webinar with TreasuryONE. Join us at 9am on Thursday, 25th August for a look at inflation and the threat of recession. Attendance is free! You just have to register at this link.
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Corporate finance corner (M&A / capital raises)
Although it was obvious from yesterday’s announcement with the results of the meeting, Fortress has confirmed in a separate announcement that the attempt to collapse the dual-share structure has failed. Although over 60% of the FFA and FFB shareholders voted in support of the deal, it needed 75% approval as a special resolution. Fortress needed to meet the minimum distribution requirement of a REIT by 31 October 2022 and cannot do so due to the Memorandum of Incorporation and the rules for distributions. The company is now meeting with the JSE to figure out the way forward, as a REIT has never lost that status before on the JSE.
Tsogo Sun Hotels has achieved resounding shareholder approval for the proposed transaction to commercially separate from Tsogo Sun Gaming and sell a hotel. The name has now formally been changed from Tsogo Sun Hotels to Southern Sun Limited, with new JSE share code SSU. The confusion of having two listed companies called “Tsogo” is finally behind us.
Financial updates
Adcock Ingram has released a further trading statement for the year ended June 2022. In mid-July, the company guided earnings growth of “at least 20%” – the minimum disclosure under JSE Listings Requirements rules to trigger a trading statement. Things are a little better than that, with HEPS expected to be between 23.5% and 24.0% higher, coming in at between 500 cents and 502 cents. The share price is just over R51, so the Price/Earnings multiple is slightly over 10x.
Exxaro has released financial results for the six months to June 2022, reflecting revenue growth of 48% and a 77% jump in net operating profit. Cash from operations was a huge R9.4 billion (vs. nearly R4 billion in the comparable period) and dividends from equity-accounted investments brought in another R3 billion. HEPS is only up by 26% though, as equity-accounted income from Sishen Iron Ore fell by 51% and this is reported below the operating profit line. The interim dividend is 23% lower than last year, coming in at R15.93 per share. The group derives 97% of its revenue from coal, which is why the earnings look so good for this period. Of course, it just wouldn’t be a coal industry announcement without a Transnet bashing section, so here it is in all its glory:
“Locomotive unavailability remains a huge challenge, which combined with cable theft, vandalism and sabotage of rail infrastructure, is impacting our logistics chain.”
Exxaro interim earnings release, 18 August 2022
Curro has released results for the six months ended June 2022. Average learner numbers increased by 7% (now over 70,000) and revenue was up 15% (13.3% from tuition fees as a combination of inflationary increases and learner growth, along with 21.4% growth in ancillary revenue). Margins have expanded based on this revenue growth, with EBITDA up by 20%. It gets better the further down you look, with recurring HEPS up by 31%. There’s no interim dividend though, with management electing to wait for a final dividend. The credit loss provision was higher in this period than the comparable period, with R175 million in debtors from actively enrolled accounts and a substantial R74 million from inactive accounts. The real hangover of the pandemic is found in that debtors balance, with many families losing their income for reasons beyond their control. I will never forget the stupidity of extended lockdowns.
Grindrod’s incredible share price run continues, closing over 8% higher after releasing a great update. This year, the share price has considerably more than doubled! This has been a combination of delivering a focused strategy and benefitting from Transnet’s incompetence, with the Maputo port becoming rather popular for South African exporters. Maputo Port volumes grew 30% in the six months to June 2021, driving earnings growth of over 100% in Grindrod’s Port and Terminals business. Over $110 million has been invested in the port to upgrade the infrastructure for greater chrome and ferro-chrome capacity, rail offloading facilities, road upgrades and berth rehabilitation. Even in Richards Bay, volumes were up 28%. This isn’t just a Maputo story. In the logistics side of the business, the shipping and container depot businesses performed well despite KZN’s best efforts to wash the containers into the sea. Interim insurance proceeds of R100 million were received to replace damaged equipment and infrastructure. Grindrod Bank is performing solidly, which is important as that business is being sold to African Bank for R1.5 billion. The other businesses planned to be sold are Marine Fuels, the private equity portfolio and the property exposure on the KZN north coast, which has been an albatross for Grindrod shareholders. With all said and done, core headline earnings (Port and Terminals, Logistics, Bank and Group) came in at between R514 million and R544 million in this period, up between 49% and 58%. Grindrod is absolutely cooking!
Grindrod Shipping released results for the second quarter of the year, giving us a six-month view to June 2022. The group has announced its highest quarterly dividend ever of $0.84 per share. Supply is being constrained by minimal ordering of new vessels because of concerns over environmental regulations and the prices of new builds, so existing operators are charging high rates. In fact, the daily rate for handysize and supramax/ultramax vessels was significantly higher in this quarter than in the first quarter. At this stage, bookings for the third quarter are at fairly similar rates to the average over six months, which means they are down on second quarter rates. The dry bulk market has also experienced limited impact from higher inflation levels and interest rates. HEPS of $2.78 for the quarter is 186% higher year-on-year. The share price closed 15.8% up on this news, taking the year-to-date performance to around 30%! There has been much volatility along the way.
Aside from Caxton and CTP Publishers and Printers fighting with Mpact on SENS, the business is actually doing really well. For the year ended June 2022, HEPS is expected to be 94.5% – 110.8% higher, coming in at between 146.7 cents and 158.9 cents. Results are expected on 12th September. The share price has put in a respectable performance this year, up around 12%.
Blue Label Telecoms has released a trading statement for the year ended May 2022. HEPS is 34% – 38% higher than in the prior year. The expected range is between 115.62 cents and 119.06 cents. With a share price of R7 just after the announcement came out, that’s a trailing Price/Earnings multiple of around 6x. There is still much debate in the market over the ongoing attempts to keep Cell C alive.
Workforce Holdings released a trading statement for the six months to June 2022. The outsourcing, recruitment, training and other services offered by the company led to HEPS of between 14.04 cents and 15.16 cents, an increase of between 25% and 35% vs. the comparable period.
Randgold & Exploration Company has released a trading statement for the six months ended June 2022. A headline loss of 14.90 cents per share is a considerable deterioration from the loss of 7.37 cents in the comparable period. The share price closed over 19% lower, though this is mainly a reflection of the extent of the bid-offer spread.
Buffalo Coal Corp released interim results for the six months ended June 2022. Revenue was up 7% and the loss from operations decreased by 92%. It was still a loss though, in this case R3.5 million off a revenue base of R187 million. No dividends have been declared.
Operational updates
Thungela and Transnet have concluded an amendment to the long-term agreement in which Transnet gives below-par service to Thungela (and others) and gets lambasted for it over SENS on a regular basis. In early April, Transnet issued a Force Majeure notice to the Coal Export Parties (CEPs) based on issues outside of its control, like people stealing infrastructure (among other things). Transnet wanted to use these circumstances as a trigger to terminate the agreement, with the CEPs said no to. Instead, the parties went into a period of negotiation. The parties have now reached agreement on minimum rail capacity as well as rail tariffs, including performance penalties. Thungela does not believe that this agreement will have a material impact on the recently published operational outlook.
Share buybacks and dividends
Tsogo Sun Gaming has declared a final dividend of 19 cents per share for the year ended March 2022. Don’t spend it all at once!
EnX Group is paying a R1.50 special dividend, which is chunky when the share price is R7.20. The last day to trade is 30th August and payment will be made on 5th September.
Aside from a few changes to board committees here and there, no exciting chairs were shuffled.
Director dealings
An associate of Des de Beer continues to buy shares in Lighthouse Properties, this time to the value of R1.8 million.
Unusual things
The Nutritional Holdings soap opera continues. The company has now identified the parties in the liquidation proceedings. Anthony Richard Pinfold is the former director who initiated the applications (there are two – one for Nutritional Holdings and one for Nutritional Foods) and if I understand the announcement correctly, Ontario Private Equity is the shareholder contesting the application. For Nutritional Holdings, a liquidator has been appointed and an application has been made to set aside the final liquidation order. For Nutritional Foods, the matter has been postponed to February 2023.
Novus subsidiary Novus Print has concluded an agreement to acquire Pearson plc’s 75% stake in Pearson South Africa for a base consideration of R829,4 million. The remaining 25% stake is held by BEE partners Sphere RB Investments and Pearson Marang Education Trust whose stake will remain in place following the conclusion of the acquisition. Within the Pearson SA stable are the print materials and CAPS-approved textbook publishers Heinemann and Maskew Miller Longman. The acquisition is a category 1 transaction.
Lonmin UK, a wholly owned subsidiary of Sibanye Stillwater has disposed of its majority stake in Lonmin Canada (Loncan) to Ontario-headquartered Magna Mining, valuing Loncan’s assets, which include the Denison project and Crean Hill mine, at C$16 million.
Mondi plc is to sell its Russian pulp, packaging paper and uncoated fine paper mill Mondi Syktyvkar to Augment Investment for a consideration of RUB95 billion (c.€1,5 billion). The category 1 transaction will require shareholder approval. In a separate transaction, Mondi has agreed to acquire the Duino mill near Trieste in Italy from the Burgo Group for a total consideration of €40 million. The containerboard machine in operation at the mill will strengthen the groups backward integration in corrugated packaging.
Fortress REIT shareholders have rejected the proposed scheme by the Board to repurchase all the Fortress A shares held, in consideration for the issue of 3.01281 Fortress B shares for every Fortress A share held. This, despite the fact, that prior to proposing the scheme the company engaged extensively with shareholders of both A and B shares on the need to collapse the dual share structure, warning that failure to do so would lead to the loss of REIT status which requires certain distributions of income.
The acquisition by SGT Solutions (40% owned by Ayo Technology Solutions and 60% held by African Equity Empowerment Investments) of Italian Summer, a company in the power management and backup solutions industry, has been terminated. The reason given for the immediate termination is the unfulfillment of conditions precedent.
Unlisted Companies
Seriti Resources has reached financial close on its acquisition of a majority stake in wind-powered renewable energy company Windlab Africa. The acquisition, through its subsidiary Seriti Green, consists of 100% of Windlab South Africa and 75% of Windlab East Africa. Windlab Africa is valued at c. US$55 million (R892 million). As part of the transaction involving debt and equity, RMB and Standard Bank have each taken a 14.5% stake in Windlab Africa for transaction considerations of US$5,8 million (R95,1 million).
Pretoria-based veterinary pharmaceutical company Afrivet Southern Africa has been acquired by US animal health distributor Bimeda. Afrivet also operates in Zambia and Mozambique while Bimedia has a long-established presence in Africa. Financial details were undisclosed.
City Logistics and private equity firm Clearwater Capital have acquired the Fastway Couriers South Africa franchise, with City Logistics taking the majority 70% stake. Financial details of the transaction were not disclosed.
Sango Capital, a local investment management firm, has acquired a controlling stake in Tunis Stock Exchange-listed Sotipapier, a manufacturer of Kraft paper, test line and flute paper based in Tunisia. The stake was acquired from private equity firm SPE Capital for an undisclosed sum.
Homefarm, a Johannesburg-based agritech startup, has raised c.R1,7 million in a seed funding round. The funds will be used to scale its operations, improve its service offering and roll out its marketing and distribution channels. The startup has as a fully automated indoor farms model which allows people to grow their own food.
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