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The management consulting industry hasn’t escaped controversy, that’s for sure. As the spotlight was placed squarely on State Capture and other high profile corruption cases, some of the biggest names in the business came up. The same can be said for the auditing industry.
Of course, the bad apples in the industry are thankfully a very small minority. Management consultants are typically highly skilled, hardworking individuals who become specialists in areas like strategy, change management and efficiency projects.
Demand for digital transformation has created opportunities for the consulting industry, as project-based work is where these businesses thrive. The principle is that executives hire a team of experts for a limited time, taking advantage of the consulting firm’s extensive experience in these types of projects. Of course, this comes at a hefty cost.
Although this can be a lucrative space, it is highly competitive and barriers to entry are low. Retaining staff becomes difficult and expensive, particularly in a brain drain environment of skilled consultants – those who stay behind become increasingly valuable.
Still, the knowledge economy offers numerous opportunities for companies and individuals alike, with Who Owns Whom noting that increased use of freelancers is opening up opportunities for smaller firms.
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The Great Resignation (GR) – that process whereby an inordinately large number of the workforce voluntarily decided to quit their jobs – is still in full swing, even though the Sars-CoV-2 pandemic that appears to have catalyzed it is now in full retreat. Chris Gilmour decided to delve into this topic.
On closer inspection, the GR has an incredibly large number of moving parts and a proper analysis is not possible without delving into the root causes of it. Suffice to say that it has probably been going on for a while now and the pandemic just brought it into stark relief. If that is the case, we should be prepared for the GR to last a while longer. And, like supply chain disruptions and the war in Ukraine, its effect on the global economy will continue to be inflationary.
The first distinction to make is between people leaving their jobs in greater frequency just to go elsewhere and those people leaving the workforce permanently, not planning to come back at all. The former is more common but the latter is gaining in momentum, especially in the developed world. I first encountered the latter type of GR back in the late 1990s in Cape Town, where I was a general manager of a large life assurance company’s investment arm. The back-office manager, another Scotsman, was a cheery chappie who not only got on with all the staff beautifully but also did his job brilliantly. He went way beyond the call of duty, often spending all night in the office making sure that accounts reconciled. He left nothing to chance. In his late thirties at the time, all he wanted to do was to retire at the age of 50 and go travelling. And to cut a long story short, that is basically what he did.
This type of example has probably been replicated millions of times over in the financial services industry worldwide. People work themselves to the bone and then decide that life’s too short to keep on working into retirement and so make sure they have enough capital to live off and retire early.
But not everyone has the luxury of being able to accumulate enough capital to do this, especially lower down the socio-economic ladder. More often than not, they are forced by economic circumstances to just suck up the abuse they receive in the workplace and continue being wage slaves well beyond normal retirement age.
This is particularly relevant in the hospitality industry, although even here, at least in the developed world, legions of people are quitting, often forcing restaurants and bars to close for good, long after coronavirus restrictions were lifted.
A new outlook?
So what happened during the pandemic to catalyze such a torrent of resignations? It seems like enforced living and working from home inculcated a new outlook on life. A new recognition and evaluation of what is and what is not important in life. To use a hackneyed old term, to get a better work/life balance.
Working from home has resulted in people taking back control of their working lives and away from the bean counters to a large extent. To be sure, Big Brother is still watching in the form of automated work-monitoring systems such as Asana for example, but at least in a home office environment, the individual can choose his or her own chair, desk, office space and much much more. This is especially relevant in the context of peace and quiet for more cerebral types of jobs: those that require a quiet background, where thoughts can be placed in a logical order.
From about the late 1950s or even earlier in the US, open-plan office configurations were all the rage. They were especially popular with head office bean counters, who saw only the cost benefits of squeezing pesky employees into ever-smaller spaces with little or no privacy. This type of approach reached its peak with the concept of the so-called “hot desk”- a system whereby employees no longer have a dedicated desk as such but just use any old desk as and when it becomes available. This was seen to be useful for travelling salespeople aka business development managers who spend most of their time on the road and only needed a desk periodically. But of course, the accountants managed to extend the usefulness of this concept way beyond the sales force.
Many large institutions have many acres of currently unused office space to fill and these leases are costing them plenty of money. They would dearly love to get their people back into the office again. But having tasted “freedom” in a working from home environment, many of them are extremely reluctant to return to the office, even if it’s just in a hybrid fashion.
Little wonder, then, that a large chunk of the work force has become disillusioned over the years. Treated like automatons, they have literally voted with their feet and left in large numbers. Many of them will be forced to return because of economic necessity but many will not. A large number of the people involved in the GR are baby boomers – that cohort of people born between 1945 and 1964, the last of whom are officially retiring this year. That generation never had it so good, compared with Generations X & Y and the Millennials. They have enjoyed decades of almost uninterrupted strong economic growth in the 1950s, 60s, 80s, 90s and now, punctuated only by the global stagnation of the 1970s. And that is reflected, in the developed world at least, in impressive pension fund accumulations in the US, UK and large parts of Europe. And in the UK, for example, there is still a large remnant of defined benefit pension funds, or “final salary” pension funds as the Brits call them. Unlike the more common defined contribution pension funds, where the risk is assumed by the pensioner, a defined benefit pension has its risk in the fund itself, so the pensioners never loses. American baby boomers have had it even better, being able to control their pension fund asset allocations with their 401ks. But when these baby boomers enter retirement, that all stops. For good.
I know of a number of people who formerly worked in high-pressure IT jobs in England and who are now in their late 50s who have relocated to rural Scotland to live. They still have a few years before they can access their considerable private and state pensions and in the meantime are prepared to live relatively carefully off savings. Once their final salary pensions kick in they will be sitting very pretty. And they were doing this before the pandemic even started. They have decided to sacrifice a few more years of lucrative work for a far better quality of life.
Many UK baby boomers and indeed even younger employees in their 50s have taken early retirement over the years and during the pandemic, finally threw in the towel, never to return. Just last week, the chair of leading UK retailer John Lewis, Dame Sharon White, made a desperate public appeal to early retirees to get back to the shrunken workforce and help to contain soaring inflation. She reckons many of those people could be coaxed back into the workplace if they were offered more flexible working conditions. Conservative Party leadership contender Liz Truss expressed similar sentiments during a televised debate last week.
Neither of these appeals is likely to be particularly successful. People have left the workforce because, quite frankly, they’re gatvol of working. It’s not just about the money, or the office politricks, or the daily commute, or the endless inane chatter of fellow employees, or the lack of privacy in the office – collectively it is precisely about these things and more.
To quote that dreadful little phrase so beloved by Brexiteers during the Leave campaign of 2016, it’s all about “taking back control.”
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Corporate finance corner (M&A / capital raises)
Telkom responded to rain’s media statement about a proposed merger with Telkom, confirming that no offer or proposal has been received from rain. This is why the Takeover Regulation Panel (TRP) was so irritated with rain, as a press release has been thrown into the market that currently has no substance whatsoever. Although a proposal is surely en route to the Telkom board, there are important legal steps in a process like this and rain doesn’t seem to be bothered by minor irritations like the laws of South Africa or our market regulators.
Mondi has agreed to sell its largest facility in Russia (Mondi Syktyvkar) and two affiliated entities to Augment Investments Limited (owned by Russian billionaire Viktor Kharitonin) for around €1.5 billion. The assets being sold exclude a cash balance of EUB 16 billion (around €255 million at current rates). The cash balance will be declared to Mondi as a dividend before the deal is completed. The Ministry of Finance of the Russian Federation will need to consent to the remittance of the dividend. In the year ended December 2021, Syktyvkar achieved profit before tax of €271 million. Performance had improved significantly this year, with interim EBITDA of €225 million vs. full year EBITDA of €334 million in the prior year. Based on last year’s profits, this is a Price/Earnings multiple of around 5.5x. Actually getting this deal across the line is going to be very tricky. Nonetheless, the share price rallied 10.3%. Those who punted at Mondi immediately after the Russian invasion could’ve picked up the shares at around R270 and would now be able to sell them at R335, a tidy return of 24% in five months.
Novus Holdings has finally told us which company they want to acquire. Pearson South Africa is a brand that you might recognise, providing curriculum-based print materials and supplementary learning materials. Pearson also owns Maskew Miller Longman and Henemann, leading publishers of print materials and CAPS curriculum-approved textbooks. Novus is acquiring a 75% stake in Pearson, with the remaining 25% being retained by Pearson’s existing B-BBEE partners. The seller is Pearson Plc, which has made a decision to sell the international courseware and local publishing businesses. Pearson South Africa is one such business. This aligns with the core print activities of Novus, as paper-based textbooks aren’t disappearing from schools anytime soon. The deal value is just under R830 million and the profit for the year ended December 2021 was R260 million, so the price/earnings multiple is only 4.25x (remember that the R830 million is only for 75% of the company). This is a Category 1 Transaction, which means Novus shareholders will be asked to vote on it and a circular will be distributed accordingly. Even though it technically meets the test for a reverse takeover (as the deal is so large relative to the Novus market capitalisation), the JSE has given a dispensation for revised listings particulars to be included in the circular. This is a win for Novus as the regulatory burden can become significant. Irrevocable undertakings to vote in favour of the deal have been obtained from shareholders of more than 50% of the issued share capital of Novus. The company is able to fund this deal from existing cash resources and debt facilities.
Alviva Holdings is currently trading under a cautionary announcement based on a non-binding expression of interest that was received at the end of June for a potential buyout of all the listed shares not already held by the parties. Alviva is still negotiating with the prospective buyers and has renewed its cautionary.
Heriot REIT gave an update on its firm intention to make a general offer to shareholders of Safari Investments. Heriot is engaging with Safari and the TRP on the offer and needs to post its offer circular by 2nd September.
Resilient REIT released results for the six months to June 2022. The fund’s strategy is to invest in retail centres with at least three anchor tenants, with predominantly national retailers taking up the rest of the stores. There are also direct and indirect investments in offshore properties. In happy news for movie buffs, new rental agreements have been agreed with Ster-Kinekor, as the world emerged from the pandemic and Tom Cruise took us back to the movies. A similar arrangement has been proposed to NuMetro. Interestingly, Resilient highlights two important trends: downsizing of department stores and more grocery offerings. This is encouraging for a business like Food Lover’s Market. Headline earnings per share (HEPS) is up 3.76% vs. the preceding six months to December 2021 and the net asset value (NAV) per share is down 2.42% since December 2021, though this is largely due to the distribution of Lighthouse shares. The loan-to-value ratio has increased from 28.8% to 32.1%. Going forward, increasing the number of grocery tenants will make the properties more…well, resilient, though it will be yield-dilutionary. Solar projects are expected to be yield-accretive, offsetting some of this pain for earnings. An interim dividend of 234.05 cents per share has been declared, 7.4% higher than in the preceding six months and 3.5% higher year-on-year. The share price has increased marginally this year.
Distell has released a trading statement for the year ended June 2022. HEPS jumped by between 30.3% and 40.3%, with the Covid impact on the base period clearly contributing to this. There were 47 more trading days in this period vs. the comparable period, which is largely why revenue increased by 20.8% and volumes were up 17.6%. Of course, it’s not just about Covid in the base, as Distell has been performing well. A good example is the international business growing revenues and volumes by high single-digits. The regulatory approval process for the Heineken transaction is ongoing and Distell hopes that the deal will be implemented before the end of 2022.
Operational updates
SPAR Group enjoyed a positive response from the market to its voluntary announcement on the strategy in Poland. The recent journey into Eastern Europe has been a disaster and has had a major negative impact on the share price, with Covid making the execution of a turnaround plan very difficult. The disruption to the Polish economy from the conflict in Ukraine hasn’t helped either. After serving notice to 91 retailers in the south of Poland, a whopping 58 retailers elected to leave the group on 1 July. This represents 11.7% of turnover for SPAR Poland and 0.2% of group turnover. There are now 164 stores in Poland and SPAR needs to sort that business out. In a wonderful example of seeing the glass half-full, SPAR is excited to work with the remaining retailers to achieve the level of loyalty required. SPAR has three distribution centres in Poland and is going to close the centre in Warsaw, which will streamline logistics and reduce costs. There’s also a change in reporting lines, with a new CEO appointed for SPAR Southern Africa, which frees up the group CEO to oversee the turnaround strategy for SPAR Poland. The share price was trading at nearly R200 before the market became aware of the troubles in Poland at the end of 2021. It is now at R153, with a lot of work to do to claw back that value.
Labat Africa has announced an agreement with the Council for Scientific and Industrial Research (CSIR) to accelerate the use of cannabis for medical purposes and to industrialise the local cannabis industry. The announcement notes that the CSIR has carried out extensive work in the areas of industrial hemp and medical cannabis.
Salungano Group (previously called Wescoal) has put Arnot OpCo into business rescue. Salungano holds an effective 50% in the company, with the rest held by joint venture partner Arnot InvestCo. Utimately, a subsidiary of Salungano is a creditor of Arnot OpCo and the application for business rescue has been launched on that basis. For now at least, the business operations at Arnot OpCo continue as usual, including the supply of coal to the Arnot power station. Salungano’s investment in Arnot was fully impaired in the latest financial statements.
Unsurprisingly, Lewis shareholders voted almost unanimously for the company to move forward with further share buybacks. This has been a major driver of returns for Lewis shareholders and is one of the best examples on the JSE of how to use buybacks effectively.
Notable shuffling of (expensive) chairs
Thungela has announced the appointment of Yoza Jekwa as an independent non-executive director. Yoza has extensive investment banking and investment experience and also serves on the boards of Brait and Northam Platinum.
Director dealings
A director of a major subsidiary of RFG Foods has disposed shares in the company worth around R130k.
A few Alexander Forbes directors and prescribed officers took advantage of the partial offer by New Veld to improve the status of their investment accounts. For example, the CEO banked nearly R11 million by selling shares into the partial offer.
Unusual things
The fight between Caxton and Mpact has been taken to the next level. There are some serious allegations being made, with Caxton releasing a press release in response to comments made by Mpact CEO Bruce Strong at the interim results presentation. Caxton is trying to acquire control of Mpact and seems to be using various tactics to do it, including voting down certain resolutions at meetings. Caxton claims that its attempts to take control have been met with hostility from Mpact and Golden Era, a competitor of Mpact that holds 10% in the company. Caxton notes that Mpact and Golden Era are the co-accused in cartel case being investigated by the Competition Commission since 2016. Caxton believes that the Mpact board has failed in its disclosure duties and Caxton is now taking legal advice. The press release gets pretty ugly, with the most inflammatory sentence quoted below.
“In soliciting support from Golden Era to oppose a possible Caxton merger, the Mpact board has filed secret representations and affidavits before the Competition Commission and Tribunal, thereby exacerbating concerns held by Caxton that Mpact and Golden Era remain involved in the vestiges of their long-standing cartel.”
Caxton press release, 12 August 2022
Dipula Income Fund’s credit rating has been upgraded by Global Credit Rating Company Limited (GCR) with a stable outlook. GCR notes Dipula’s resilient performance and financial flexibility achieved through restructuring the dual shareholders, along with the easing of financial covenants.
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Corporate finance corner (M&A / capital raises)
Data-only network rain has gotten itself into trouble with the Takeover Regulation Panel (TRP). The company released a press release noting that it wants to propose a merger with Telkom. The Telkom board hasn’t received any offer or proposal, based on a Telkom statement quoted by Bloomberg. This is exactly why the TRP is so annoyed: this type of news can’t just play out in the press. With MTN’s potential offer for Telkom already on the desk of the TRP, any further announcements need to be approved by the TRP. To make it worse, it seems as though the TRP specifically told rain not to issue the announcement, yet they went ahead anyway! I’m not sure what the potential ramifications are, other than rain being ordered to retract the announcement. That seems like barely a slap on the wrist though, as rain has gotten all the press coverage that it would’ve wanted. Will there actually be an approach to the Telkom board? We just don’t know.
Financial updates
The news of the day was undoubtedly the earnings release by MTN for the six months to June 2022. As I recently wrote in Ghost Mail, I took a position in the company based on the strong results released by the subsidiaries. It has worked beautifully, with MTN closing 9% higher after this result. Group service revenue grew by 12.8% and EBITDA was up 13.7%, so there was even EBITDA margin expansion in this result! Group margin is at 45.3%, with many of the African subsidiaries running north of 50%. Holding company net debt has decreased from R30.1 billion to R28.4 billion. Return on equity increased by 460 basis points to 24.2%. HEPS jumped by a beautiful 46.5% to 567 cents. Despite all this, there’s still no interim dividend. Nonetheless, MTN has indicated a minimum dividend per share of 330 cents for FY22. Nigerian liquidity issues aside, I am bullish on this story.
Bidcorp closed 4.9% higher after releasing a strong trading statement. The company talks about how “positive trading has continued” across “almost every geography” – what more could shareholders want? The Northern Hemisphere summer has dished up a strong performance for this food service group. HEPS for the year ended June 2022 is expected to be between 75% and 80% higher than the comparative year, smashing through the previous all-time high achieved in the pre-Covid 2019 year. The earnings range is between R15.197 and R15.631 per share. The closing price of R324.48 is a Price/Earnings ratio of around 21x, a rather fulsome valuation. The share price is down slightly this year, reflecting a scenario where the growth was already baked into the price.
ADvTECH released a trading statement for the six months ended June 2022. HEPS is expected to be between 20% and 25% higher than the comparable period. This is another example of a share price where the earnings needed to catch up to the multiple, with a 7% drop in the price year-to-date.
Lighthouse Properties has released its results for the six months to June 2022. There’s not much growth to write home about, with the interim dividend only up 0.9% year-on-year. This is despite revenue being around 3x higher than in the comparable period. The loan-to-value ratio jumped from 11.32% to 31.38% and the net asset value per share fell by 11.32% to 36.43 EUR cents. Lighthouse also announced a small related party transaction related to the portfolio of four French properties that were being jointly acquired by Lighthouse and Resilient on a 75%-25% basis. Resilient will be taking a bigger piece of that pie, buying 15% from Lighthouse. This will take the parties to a 60%-40% split. The rationale put forward is that Lighthouse wants to do more deals in France through this investment vehicle, so allowing Resilient to hold 40% means that Lighthouse can grow that portfolio without needing to put in as much capital as if Resilient only held 25%.
Italtile released a sales update and voluntary trading statement for the year ended June 2022. Headwinds have included inflation and a shift in consumer spending away from home improvement to other recreational activities, like drinking beer in pubs while watching the Springboks. Supply chain issues and intensified competition haven’t helped either. Higher interest rates aren’t good news for home renovations, as many South Africans have had to prioritise putting fuel in the car and paying down the bond. Having successfully created an incredibly depressing mood in the first part of the announcement, Italtile then noted only a “marginal decline in turnover” vs. a very high comparable base. Like-for-like store turnover even managed to grow by 1.2% and total store turnover was up by 2.8%. The integrated supply chain manufacturers increased by 1.8%. These growth numbers were mitigated by integrated supply chain importers, with a 2.4% decline in sales. I must say, it is impressive that HEPS grew by between 7.5% and 9.7% against this backdrop.
Old Mutual released a trading statement for the six months ended June 2022. The numbers are complicated, with a number of distortions causing HEPS to be higher by between 52% and 72%. Old Mutual discloses an adjusted HEPS number that shows a movement between -17% and 3%. When a management team tones things down with an adjusted number, you can probably trust that number.
Textainer Group has renewed its revolver facility and extended the term. The facility has been increased from $1.5 billion to $1.9 billion. The spread is 1.475% over the daily Secured Overnight Financing Rate (SOFR), which is the reference rate that has replaced LIBOR.
Capital & Regional Plc has released its interim results for the six months to June 2022. The big story has to be the improvement in the loan-to-value ratio from a totally unsustainable 72% at June 2021 to 40% at June 2022. This has led to the resumption of dividend payments, with an interim dividend of 2.5 pence per share. Occupancy is up to 93.7% and lettings / renewals during the period were achieved at an average premium of 34.1% to the previous rent. Adjusted earnings per share increased by 25%. The stock is quite illiquid, so I wouldn’t read too much into a positive 7.2% move on the day.
Deutsche Konsum REIT has released results for the first nine months of the financial year. Rental income is up 9% and Funds From Operations (FFO) – a key metric in REITS – increased by 3%. Another key measure is aFFO, which is FFO net of capitalised modernisation measures (i.e. investment in the properties themselves). This metric is up 26%. The loan-to-value has decreased to 48.8%, helped along by a valuation increase in the properties of around 7.5%. Over this period, the fund has acquired 24 retail properties for an aggregate value of €98 million with an average initial yield of 8.2%.
Montauk Renewables has released results for the six months ended June 2022. Revenue is up 59%, EBITDA has swung sharply into the green and so has HEPS, coming in at $0.13 per share vs. a loss of $0.13 per share in the comparable period. It’s unusual to see matching positive and negative numbers like that! Despite the obvious improvement in fortunes, no dividend has been declared.
Operational updates
Sibanye-Stillwater has released a new operational plan for the US PGM operations. This business has already paid back the original investment (with the management team not-so-modestly pointing out their “impeccable acquisition timing”), so the focus is on how to optimise the remaining expected return. Recent weather events resulted in a knock to the business, with production suspended for 7 weeks. The bigger issue is the outlook for the palladium market, which has prompted Sibanye-Stillwater to defer capital investment and re-engineer the operations to protect margins and long-term value. You’ll find the detailed presentation at this link.
Share buybacks and dividends
As a reminder of how varied the shareholder register in a company like Glencore is, the Qatar Investment Authority now holds 8% in the company as a result of share buybacks by the company. This is also a useful reminder that when a company undertakes share buybacks, every remaining shareholder’s stake in the company increases as sellers are mopped up.
Industrials REIT has announced the outcome of the scrip dividend alternative. Treasury shares representing 0.71% of shares in issue will be used to settle the scrip dividend.
Professor Tshilidzi Marwala will step down from the board of Nedbank in 2023. There’s a good reason for this – the professor has been appointed by the United Nations as the next Rector of the United Nations University in Tokyo. As “good leavers” go, that’s right up there. It’s wonderful to see South Africans making waves on the global stage.
At Delta Property Fund, Siyabonga Mbanjwa has served as CEO since February 2022. Bongi Masinga has assisted with the transition in an executive role and will now move to being a non-executive director of the company.
Although no directors have joined or left the board as part of this update, Astral Foods’ establishment of an ESG Committee is a sign of the times and how important this has become.
Rex Tomlinson has joined the board of Investec Property Fund as an independent non-executive director, bringing with him a whopping three decades of experience at board level.
Director dealings
None!
Unusual things
The listing of New Frontier Properties looks set to disappear. The company is behind on its accounts going as far back as the year ended August 2020. After attempts to recapitalise the company have been unsuccessful, the Stock Exchange of Mauritius (where the primary listing is held) is considering the termination of the listing. There’s a long list of listed companies that somehow end up in this zombie state.
The proposal to Telkom by network operator Rain, that it rather merge with it than MTN, prompted the release of a SENS announcement on Thursday by the Takeover Regulation Panel informing the market that the potential offer to merge was unlawful and that Rain had been instructed to retract the announcement.
Datatec UK subsidiary Logicalis UK&I has acquired Q Associates, a provider of IT consultancy and advisory services around data management, data protection, compliance and information security. The acquisition will extend the reach and skills of the UK subsidiary, increasing value to customers especially in Higher Education and Government Secured Services sectors.
The Central Energy Fund SOC has completed its due diligence following its decision to invest R1 billion for a 10% ownership stake in Renergen’s Virginia Gas Project.
BHP has made a non-binding indicative proposal to acquire Australian miner OZ Minerals in a deal valued at A$8,37 billion. Although the OZ Minerals board has rejected the offer as undervaluing the stock, the A$25 per share offer reflects a 41.4% premium to the 30-day VWAP of A$17.67 per share up to and including the share price on August 5, 2022.
Libstar has concluded an agreement to acquire Cape Foods, a Cape Town manufacturer of a wide range of branded and private label herb, spice and seasoning blends. The product range is marketed both locally and internationally in more than 30 countries. The transaction is in line with Libstar’s strategy to grow its basket of non-commoditised food products in existing categories. Financial details of the transaction were undisclosed.
Sun International is to dispose of a property in Menlyn, Pretoria to Menlyn Maine for an effective R198 million and will acquire from Vast Way, a 14.25% equity interest (and loan account) in Time Square for R125 million.
Globe Trade Centre S.A. has announced a change in strategic expansion to include new sectors identified by the company for investment. These sectors include investment in innovation and technology parks, renewable energy facilities and development of private rented (residential) sector property. As part of this new strategy, the company announced the acquisition of a 25% stake in a joint venture investment in Kildare Innovation Campus, located outside Dublin for c. €115 million.
Delta Property Fund has disposed of four properties, three in Bloemfontein and one in Kimberly, to various parties for an aggregate R16,6 million.
Deutsche Konsum REIT-AG, a real estate company focusing on German retail properties in micro-locations, has acquired the retail park Cottbus-Center and two grocery stores in Saxony-Anhalt.
Unlisted Companies
DataProphet, a local Cape Town-based startup which uses artificial intelligence to provide the manufacturing industry with impactful solutions to optimise production, has closed a US$10 million series A round. The round was led by Knife Capital. The investment will be used to accelerate international expansion.
South African VC firm HAVAÍC has invested US$500,000 in FinAccess, a Kenyan software solutions provider that digitises community banks and farming co-operatives in the East Africa region. FinAccess will use the funds, part of a pre-series A funding round, to expand its two core products, banking software solution Fincore and agricultural software solution Grobox.
Logistics startup Droppa has closed a series A round for an undisclosed amount with logistics company SkyNet Worldwide Express. Droppa is an on-demand courier and fleet hiring e-haling platform. The investment will be used to drive business growth and allow for continuous innovative business solutions.
Sirius Real Estate has issued 1,271,279 new ordinary shares at R19.22 per share in terms of its scrip distribution alternative resulting in a capitalisation of distributable retain profits of R24,43 million.
Industrials REIT has issued 2,134,779 new ordinary shares at R29.80 per share in terms of its scrip distribution alternative resulting in a capitalisation of distributable retain profits of R63,62 million.
The JSE has suspended trading in all securities of Afristrat Investment given that the company’s audited annual financial statements for the year ended March 31, 2022 are only expected to be distributed on or before November 30. Also suspended is the trading of Luxe securities, whose annual financial statement for the year ended February 28, 2022, are still to be published.
Mantengu Mining (formerly Mine Restoration Investments) shares commenced trading again on August 5, 2022, following the lifting of suspension by the JSE. The company was suspended in July 2016 when the Board applied to the JSE for the voluntary suspension of MRI’s shares.
A number of companies announced the repurchase of shares
Argent Industrial has repurchased 1,054,574 shares over the period July 27 to 29, 2022 in terms of the general authority grated by shareholders. The shares, representing 1.77% of the issued ordinary shares capital, were repurchased for an aggregate R13,5 million. The repurchased shares will be de-listed and cancelled.
Industrials REIT has repurchased a further 50,000 ordinary shares at 171 pence per share as it moves to mitigate the dilutive effect of the scrip dividend election.
Naspers and Prosus continued with their open-ended share repurchase programmes. This week the companies announced that during the period 1st to 5th August 2022, a total of 3,885,040 Prosus shares were acquired for an aggregate €245,46 million and 659,095 Naspers shares for R1,58 billion.
British American Tobacco repurchased a further 955,000 shares this week for a total of £31,22 million. Following the purchase of these shares, 204,745,029 shares are held in Treasury. The number of shares permitted to be repurchased is set at 229,400,000.
Three companies issued profit warnings. The companies were: Cognition, CA Sales and Impala Platinum.
Six companies this week issued or withdrew cautionary notices. The companies were: Trustco, Motus, Afristrat Investment, Ayo Technology Solutions, Novus and Nutritional Holdings.
This week was all about startups and funding rounds
Kamp Group, a Ugandan pelleted animal feed processing, marketing and distribution company trading as Kamp Feed has received US$2,6 million in blended equity and debt funding. The funding, raised through a co-investment arrangement between Yield Uganda Investment Fund and Gorm Pedersen 2 Holding ApS, a Danish investor, will provide Kamp Feed with long-term patient capital to execute the company’s growth and expansion strategy.
Convertedin, an Egyptian marketing startup providing an operating system for e-commerce brands, has raised US$3 million in a seed round led by Merak Capital with participation from 500 Global and MSAS. The funds will be used to scale operations in Egypt and Saudi Arabia and to launch operations in Brazil.
Beacon Power Services (BPS), a Nigerian energy tech startup, has closed a US$2,7 million seed round. The round was led by Seedstars Africa Ventures with participation from Persistent Energy. BPS provides data and grid management solutions to help Africa’s power sector distribute electricity more efficiently. The funding will be used to improve current products and expand into markets beyond Nigeria and Ghana.
FinAccess, a Kenyan software solutions provider that digitises community banks and farming co-operatives in the East Africa region, has received a US$500,000 investment from South African VC firm HAVAÍC. FinAccess will use the funds, part of a pre-series A funding round, to expand its two core products, banking software solution Fincore and agricultural software solution Grobox.
Social commerce platform, Egypt-based Sharwa, has closed a US$2 million pre-seed funding round. The platform allows customers to purchase daily household essentials at more affordable prices. The round was co-led by Nuwa Capital and Hambro Perks Oryx Fund, among others.
Tripesa, a Ugandan tourism startup, has raised an undisclosed sum in a pre-seed round supported by Future Capital, Consonance Investment Managers and LTNT Investments.
Crew HR &Payroll, the Kenyan platform offering digital human resource solutions to SMEs, has raised an undisclosed sum and has rebranded to FaidiHR. The investment, from SprintX, a US venture capital firm focused on early-stage startups, will be used to grow the business.
COVID-19 and the various levels of lockdown had an unprecedented impact on dealmaking, both in South Africa and beyond its borders. When the national lockdown commenced in South Africa on 26 March 2020, many transactions were in the midst of being finally negotiated or signed. Some were successfully closed; others subsequently collapsed. What set apart those transactions that made it across the finish line from those that failed?
We examine some of the lessons learnt from dealmaking during COVID-19.
As a starting point, COVID-19 had a significant practical impact on business operations which, in turn, impacted profitability, long-term sustainability and, ultimately, dealmaking. Some of the most significant challenges faced by businesses were the following:
• Lockdowns: Many countries requested or enforced social isolation, curfews or lockdowns to a varying degree to mitigate and suppress the spread of the virus. It had a disastrous impact on many sectors of the economy.
• Compliance: The cost and practical challenges associated with ensuring compliance with COVID-19 protocols and regulations to protect employees and customers were crippling for many businesses.
• Valuation: COVID-19 caused a reduction in the share value of many companies.
These unforeseen circumstances had an immediate impact on dealmakers, who now needed to navigate dealmaking during a global pandemic – ranging from binding offers being terminated and purchase prices being renegotiated, to supervening impossibility arguments being invoked, force majeure events being declared, and profitability warranties and indemnities being reconsidered.
Many lessons can be learnt from successful deals during this period:
• Pre-contract/offer stage: Give careful consideration to what is agreed to in the initial stages of the transaction (for example, whether an offer is binding or non-binding, or whether only parts of it are binding).
• Amendments to transaction agreements: COVID-19 had a significant (often negative) impact on transactions which were already in the implementation phase; in particular, as regards interim period undertakings, material adverse change provisions, and representations and warranties which could no longer be honoured. Many deals, although signed, were ultimately successful as they were renegotiated, following an approach which was fair and balanced to both parties, rather than cancelled in their entirety.
• Force majeure: COVID-19 and the national lockdown highlighted the importance of force majeure clauses in agreements. The advantage of a force majeure clause is certainty in relation to rules regarding notices, timelines and events constituting a force majeure, rather than relying on the general provisions in the common law.
• Disclosure against representations and warranties: Many agreements included the ability for sellers to make disclosures against representations and warranties right up to closing, which provided sellers with a degree of greater control in otherwise largely economically uncertain times. Some agreements went even further to include a “COVID-19” action list, allowing sellers to record actions that would be taken to mitigate against the operational and business risks of the pandemic.
• “Ordinary course of business” warranties / undertakings: A seller of shares or a business would typically undertake to the purchaser that in the interim period between signature and closing, the business of the company would be run in the normal or ordinary course. During the pandemic, exceptional, yet reasonable (in the circumstances), measures were forced to be taken by many sellers. The question is whether such measures, brought about by circumstances beyond the seller’s control, trigger a breach of contract – does one assess “ordinary course” in a purely objective light, or do subjective factors have a role to play? The answer was not always clear and should rather be dealt with carefully in the drafting. Going forward, ordinary-course-of-business provisions will, no doubt, receive greater scrutiny.
• W&I insurance: The economic uncertainty faced by many sellers, who were required to provide extensive representations and warranties, fuelled a significant rise in the popularity of warranty and indemnity (WI) insurance.
• Electronic signatures: COVID-19 and the lockdown spurred creativity when buyers and sellers were forced to sign agreements, against the challenges of meeting in person. We have since witnessed a rise in the use of advanced electronic signatures, facilitated by applications such as “DocuSign”. Although a welcome development, it is important that we also recognise the limitations of electronically generated agreements; specifically, the signature thereof, and the limitations imposed by legislation such as the Electronic Communications and Transactions Act and the Alienation of Land Act.
• Closing mechanics: The advantages of “remote” working and virtual meeting applications came to the aid of many deal teams during COVID-19 and lockdown. Many deal teams opted for virtual closing meetings, which allowed them to continue, notwithstanding the difficulties associated with meeting physically.
• Partial impossibility: COVID-19 and lockdown reminded us that there may be transactions in which certain obligations can still be performed. If these obligations are divisible from the rest of the agreement, then those will remain whilst the rest of the agreement is discharged. For example, where a landlord leases out premises on which both essential and non-essential business services are carried out by a tenant in separate sections of the premises, during a lockdown, the landlord is able to still provide possession and occupation of the essential section and (at the risk of oversimplification of the myriad contract law issues here) the tenant can and should still pay its pro rata rental in respect thereof. Absent express clauses, however, it is not always obvious whether the agreement is indeed divisible.
• The importance of an experienced client deal team: Having a strong, experienced client deal team, in addition to the legal team, will assist in navigating unforeseen legal and practical deal-making challenges.
Always be prepared for any eventuality; creativity and adaptability in times of economic uncertainty may ultimately be the key to success.
Justine Krige is a Director in Corporate & Commercial | Cliffe Dekker Hofmeyr
This article first appeared in DealMakers, SA’s quarterly M&A publication
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Corporate finance corner (M&A / capital raises)
This is big news: shareholders have approved the PSG restructuring transaction that will see the holding company unbundle most of its assets and disappear from the JSE. 95% of votes at the meeting were cast in favour of the transaction. Unsurprisingly, two shareholders have delivered notices of objection under s164 of the Companies Act, known as Appraisal Rights. This is a technical section of the Companies Act that allows shareholders to follow a clearly-defined (and expensive) legal process to obtain what they believe is fair value for the shares. There are certain players in the market who are taking advantage of this legal mechanism by acquiring shares after the announcement of a transaction and then exercising the s164 rights, attempting to lock in a profit along the way. Whilst I personally think that s164 should only apply to shareholders in the register on the date of the announcement, the law is the law and this “loophole” currently exists. The PSG announcement makes some noise about how this process could scupper the entire restructuring, which I’m certain is nonsense. There’s no chance of the entire PSG restructure falling over because of two s164 demands. I suspect that the board will push on with the deal and will see those shareholders in court.
Renergen has announced the successful completion of the Central Energy Fund due diligence related to a R1 billion investment for a 10% ownership stake in the Virginia Gas Project. This is important for the Phase Two operations at Virginia, with Phase One about to be commissioned. There have been some delays in flicking the big switch for Phase One, with CEO Stefano Marani commenting that the delays are immaterial in the context of the next 20 years and that they would rather do things carefully vs. rushing it and introducing risk. I can’t argue with that logic!
Novus Holdings has renewed its cautionary announcement regarding a “potential acquisition” – the market hasn’t been made aware of what the acquisition is. Shareholders are advised to exercise caution until more details can be announced, which would only happen if final terms can be successfully negotiated.
Deutsche Konsum is a specialist REIT focused on German neighbourhood retail properties. Sadly, there is literally no liquidity on the JSE, so you can’t easily buy or sell shares in the company even if you wanted to. Still, I report on the updates for those who may already have shares or who are interested in the German property market. The latest news is the acquisition of three properties on acquisition yields of between 7.8% and 8.2%. In this financial year, Deutsche Konsum has acquired 24 mainly food-anchored retail properties on an average initial yield of 8.2%. The vacancy rate is around 6%. The fund will own 184 properties once all deals close.
An obscure American investment company now holds 8.45% in Conduit Capital. Whilst I can’t be sure, I suspect that this is part of Sean Riskowitz unbundling his stakes to the investors in his fund. You may recall an odd scenario where the Massachusetts Institute of Technology suddenly became a shareholder in Calgro M3. That was also a result of a Riskowitz unbundling.
Financial updates
Nedbank released its interim results for the six months to June 2022. They look excellent, with a 26% increase in HEPS and an 81% increase in the interim dividend per share, which means the payout ratio has increased and management is clearly feeling confident. Impressively, the credit loss ratio has stayed consistent at 85 basis points and Nedbank has clearly managed its expenses carefully, driving an improvement in the cost-to-income ratio. The net asset value per share is R209.64 and the share price is trading slightly higher at around R215. For more details, please refer to this article from Nedbank that includes the full result.
Sabvest Capital has released results for the six months ended June 2022. There are good reasons why this investment holding company is so widely respected in the market. With the Seabrooke family sitting behind this vehicle, it now holds twelve unlisted and three listed investments. The focus on unlisted investments plays a major role in minimising the discount to net asset value (NAV) that plagues so many investment holding companies. If you can’t get the assets anywhere else, you’re likely to be willing to pay more for that exposure. The NAV per share has increased by 26.1% year-on-year, an excellent performance. The dividend per share is 50% higher at 30 cents per share. In case you need further convincing of the track record, the 15-year compound annual growth rate (CAGR) in NAV per share is a rather spectacular 16.9%, without reinvesting dividends. The NAV per share is R103.88 and the share price is R72.01 – a discount of just over 30%. The share price has increased more than 50% in the past year.
MiX Telematics has reported results for the first quarter of the 2023 financial year. Subscription revenue was slightly down year-on-year because of currency impacts, with 6.3% growth on a constant currency basis. Total revenue was up 7.3% on that basis. Gross profit margin fell from 65.5% to 62.0%, leading to lower gross profit overall. Due to increased sales and marketing costs, operating income margin took a significant knock from 12.4% to 6.9%. Although profitability has clearly gone in the wrong direction, the group still has $24.6 million in cash and so the balance sheet is able to support the strategy. The share price is down nearly 34% this year, so the market isn’t enjoying the numbers coming out of this group.
Libstar Holdings released a trading statement for the six months ended June 2022. Revenue increased 9.6%, boosted by volume growth of 6.9%. Gross profit margins were maintained in line with the comparable period, which is impressive in the context of raw material and energy cost inflation. Normalised HEPS is up by between 11.5% and 16.7%. Because of the craziness of the comparable period, reported HEPS from all operations is expected to be 95.7% to 106.3% higher. Libstar still classifies the Household and Personal Care divisions as held for sale, despite a previous deal falling through. These divisions have reported a reduced operating loss in this period. The company has also announced the acquisition of Cape Foods, a manufacturer of branded and private label herbs and spices. This seems like a very sensible step for Libstar as part of its strategy to invest in non-commoditised food businesses. The deal is small, so no further details have been disclosed.
Quilter Plc has released results for the six months ended June 2022. Although Assets under Management and Administration fell by 12% since December 2021, the group still managed to grow adjusted profit before tax by 9%. The drop in assets is attributable to adverse market movements, with underlying flows still positive in most of the platforms and at a group level overall. Due to a non-recurring tax credit in the comparable period, adjusted diluted earnings per share fell by 5%. South African investors are more accustomed to HEPS as a measure of profitability, with that metric increasing sharply from 4.5 pence in the comparable period to 11.7 pence in this one. I felt that this quote from the CEO was worthy of inclusion:
“Global equity markets have experienced one of the worst periods of negative performance in recent years and traditional 60:40 multi-asset portfolios have had their largest negative year-to-date return on record.”
Quilter CEO Paul Feeney
Technology group 4Sight Holdings has released results for the six months ended June 2022. Revenue is up 13.1% and HEPS jumped by a whopping 136.2%. Weirdly, the company talks about a “decrease in cash balances during difficult trading conditions by 9.1%” – not something you expect to see with a profit result like that. The debt:equity ratio also increased, another odd outcome when profits are up. I dug deeper into the result and found that the debtors balance is a whopping R132 million (before credit loss allowances) vs. interim revenue of R329 million. Operating profit of R12.1 million has only translated into cash from operations of R1.67 million, so cash quality of earnings is low to say the least. When in doubt, follow the cash.
Montauk Renewables has filed its Form 10-Q with the SEC. If you’ve ever wondered what a quarterly report on the US market looks like, you’ll find it at this link. The company has swung into the green, with basic earnings per share of $0.14 in this quarter vs. a loss of $0.03 in the comparable quarter.
Operational updates
Royal Bafokeng Platinum has a deal with a subsidiary of Anglo American Platinum that was implemented in July 2018, itself a renewal of a longstanding relationship between the parties. Under this agreement, the Anglo Plats subsidiary purchases all the PGM concentrate produced by the Royal Bafokeng subsidiary. The termination date for a portion of the concentrate is August 2024, provided notice is given by August 2022. As Royal Bafokeng is currently under mandatory offer by Impala Platinum, the parties have agreed to extend the deadline for the termination notice to February 2023. If notice is given by then, the termination of either 17% or 50% of the concentrate will be effective in August 2024. Yes, the agreement is specific on those two percentages.
Jubilee Metals Group has given an update on its operations and projects for the six months to June 2022. The major achievement during the period was the conclusion of the R1.2 billion investment programme in South Africa and Zambia. This programme has expanded production across PGMs, chrome, copper and cobalt. The early results from the new Inyoni operations have outperformed expectations, achieving a 34% decrease in PGM unit cost. There’s also good news in the copper business, with Zambian copper production up 14%. Thanks to these major operational improvements, profit per PGM ounce and copper tonne are up 12% and 9% respectively vs. the preceding six months, despite a drop in commodity prices. Net revenue in South Africa was up 21% and operational earnings grew by 23%. In Zambia, revenue increased by 16% and earnings increased by 30%. Despite these numbers, Jubilee’s share price is down more than 16% this year. Admittedly, it’s up more than 430% in the past 3 years!
Globe Trade Centre has traded on the JSE literally a handful of times in the past few years. There is zero liquidity. The company has announced strategic expansion of its investment portfolio beyond traditional real estate in its current markets. This includes innovation and technology parks (business parks with tech and pharma tenants), renewable energy facilities and investment in private rented sector property.
Share buybacks and dividends
Argent Industrial was given authority at its 2021 AGM to repurchase up to 20% of issued shares. Since then, the company has only managed to mop up 1.77% of issued shares at an average price of R12.80 per share. This isn’t the most liquid stock around, which makes it tricky to execute large buyback programmes. The current share price is R13.90.
Industrials REIT is repurchasing shares to mitigate the dilutive effect of the scrip dividend. The latest repurchase is 50,000 shares at 171 pence per share (a total of around £85.5k)
Sirius Real Estate has confirmed the outcome of the scrip dividend alternative. Of a total dividend of €27.656 million, only €1.456 million is being settled through the issue of new shares. The rest is a cash dividend. This doesn’t exactly give a feeling of confidence from existing shareholders in the attractiveness of the current share price, as the vast majority chose to receive cash rather than more shares.
British American Tobacco is still hammering away at its share buyback programme on a daily basis.
Notable shuffling of (expensive) chairs
None!
Director dealings
Several directors of Vodacom subsidiaries have sold shares to settle the tax on employee share option schemes. I usually ignore these announcements but felt I should mention it here to explain why. As the value received is taxable, executives often sell enough shares to free up cash to pay the tax. This is a cash flow issue rather than a view on Vodacom’s prospects.
Unusual things
The soap opera at Nutritional Holdings continues, with a former shareholder and director having taken steps to liquidate the company. Here’s the shocker: the provisional liquidation has been granted! Certain shareholders are now lodging an intervening application. One of the arguments being made is that the notice was served at a vacant office that had been burnt and vacated, despite still being the registered address of the company. Yikes! A far better defence is that there may have been breaches of the JSE Listings Requirements and/or Companies Act when previous directors seem to have granted themselves security over their loan. If that is true, then the security won’t stack up in court. Either way, it remains a complete mess.
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