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A closer look at Vukile

Kreeti Panday
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A closer look at Vukile

Vukile Property Fund has an interesting portfolio, with exposure to township and rural properties in South Africa and a retail property strategy in Spain. That’s certainly an unusual combination. With a recent debt roadshow presentation released to the market, the fund caught Ghost Grad Kreeti Panday’s eye.

Vukile is a REIT that describes itself as a “high-quality, low-risk, retail REIT operating in South Africa and Spain.” It has been listed on the JSE since 2004 and the Namibian Stock Exchange since 2007. It holds a controlling stake in Spanish subsidiary Castellana Property Socimi, which is listed on the BME Growth market, a Spanish sub-market on which SMEs are traded.

Vukile was the first property fund to be awarded REIT status by the JSE on 1st April 2013. Whilst some property companies have seemed like April Fool’s jokes, Vukile isn’t one of them.

Vukile owns around 52 retail properties in South Africa and Spain, including Pine Crest in Pinetown, Gugulethu Square in Cape Town and Dobsonville Mall in Soweto.

South African strategy

The group concentrates its efforts in townships and rural markets, seeking out properties that are occupied by tenants such as Pick ‘n Pay, Pepkor and Foschini. These are “blue chip” tenants because they theoretically provide steady income. One has to be careful though, as Edcon would’ve been considered a blue chip at some point in its life.

A third of the company’s rental income comes from essential service providers such as supermarkets, pharmacies and banking. Around 44% of the company’s rental income comes from its top 10 tenants, which include the retailers mentioned above and the likes of Mr Price, Spar and Massmart. It’s worth highlighting that Massmart is really struggling at the moment and particularly in the Game format, which is probably the division that Vukile is most exposed to within Massmart.

The group’s Weighted Average Lease Expiry (an indicator of when the landlord-tenant dynamics will play out in negotiations) is currently at 3.4 years based on GLA (Gross Lettable Area). The group has achieved a tenant retention rate of 93%, which makes sense as township malls of sufficient quality for leading retailers are thin on the ground. In many cases, it’s likely that Vukile owns the only mall servicing a particular catchment area with formal retail operations. As this is an important market, retailers aren’t likely to walk away from these malls.

Spanish strategy

Vukile’s portfolio exposure means that Spain is (slightly) more important than South Africa, with 54% exposure to the land of raging bulls and great sporting talent. Vukile owns 86.9% in Castellana and intends to increase its share for as long as the price remains favourable, given that Vukile is currently purchasing shares at approximately a 48% discount to EPRA NTA (Net Tangible Assets).

Managing risks

Naturally, inflation is both a risk and an opportunity for REITs. They are often seen as inflation hedges, so leases that allow for CPI-linked increases are critical in this space.

The South African operations are exposed to the realities of our country, with six of Vukile’s retail properties damaged in the 2021 July civil unrest. The group’s SASRIA cover prevented it from incurring material losses in this regard.

Interest rate risk is perhaps the biggest risk of all for REITs, as they all run high levels of gearing to help drive return on equity. Although macroeconomic factors drive the interest rate in the market, the fund can control how much debt it takes on and how much of it gets hedged. Vukile has a policy of hedging at least 75% of interest-bearing loans through fixed interest rates or interest rate swaps. The group predicts impending interest rate hikes, citing that the South African interest rate hiking cycle lasts an average of 2-3 years with interest rates rising between 200 and 400 basis points.

Looking deeper, 89% of Castellana’s debt has been hedged and 59% of South African debts have been hedged. The combined hedged is 75.5% of group debt.

Hedging doesn’t happen for free, with financial institutions making sure they earn a spread on any hedges. This is why REITs strive for a balance, hedging enough risk to give comfort to shareholders and leaving some risk on the table to avoid incurring hedging costs to such an extent that it becomes unattractive.

Hitting the green

When it comes to green financing, Vukile is taking advantage of a market that wants to lend money for renewable energy projects. Vukile has procured a 5-year R200 million green loan from Nedbank for the development of 19 solar projects.

83% of the group’s retail properties in Spain are now running entirely on solar energy and the group intends to increase this to 100% of retail properties in Spain.

Looking at other ESG topics, the group has provided 66 bursaries to students in property-related courses and is also rolling out the Vukile Retail Academy, which is targeted at advancing emerging retailers from disadvantaged communities.

Looking ahead

Vukile is still investing in South Africa, with a recently announced transaction to acquire the Pan Africa Shopping Centre that services Alexandra township in Johannesburg. This is a two-phase transaction in which Vukile will buy the existing property for R415 million and a phase 2 development (once completed) for R254 million.

Profit increased sharply in FY22, which is to be expected vs. a Covid-impacted base. The removal of all Covid restrictions should drive traffic to malls, though the outrageous petrol price may force people to stay home anyway.

The share price is up 13.5% this year and more than 24% over the past 12 months. With a market cap of R13.9 billion, this is a substantial REIT that boasts a unique portfolio exposure of Spanish and South African assets. The trailing dividend yield is around 7.5%.

Are you a shareholder in Vukile? Is there a particular reason why you wouldn’t invest? Let us know in the comments!

Ghost Bites Vol 64 (22)

The Finance Ghost
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Ghost Bites Vol 64 (22)

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

Corporate finance corner (M&A / capital raises)

  • Datatec has released the circular related to the category 1 transaction to sell Analysys Mason to Bridgepoint Development Capital. The shareholder meeting will be held on 2nd September. Datatec holds 71.2% in Analysys Mason (after the dilutionary impact of share incentive schemes in the business) and plans to sell the entire stake. The minority shareholders are also looking to sell their shares, so Bridgepoint is acquiring 100% of the company. Those who don’t want to sell would in any event be subjected to drag-along provisions, which can force minority shareholders to sell in a situation where the controlling shareholders are selling. Without these provisions, minority shareholders can end up blocking a deal. Datatec will receive around £128 million in cash and £7.1 million in deferred loan notes if the deal closes. An earn-out of up to £10 million is applicable to the deal, so Datatec would receive 71.2% of any such payment. You’ll find the circular at this link.
  • The offer from Raubex Group to shareholders of Bauba Resources has achieved another important milestone, with the TRP issuing a compliance certificate in respect of the offer. This allows Raubex to proceed with settlement to those who accepted the offer. Bauba shareholders approved the delisting of the company and Bauba will disappear from our market on 23rd August. Bauba shareholders who don’t accept the offer will hold shares in an unlisted company, which is almost never a good idea.
  • Delta Property Fund has agreed to sell four of its properties to various parties. The most important of these properties is Fort Drury in Bloemfontein for R51.5 million. WB Centre in Kimberley is being sold for R31 million. There are two smaller buildings in Bloemfontein that are being sold, with an aggregate value of R16.3 million. These buildings are a mess I’m afraid. WB Centre is being sold at a discount to book value because Woolworths has vacated the building, taking vacancies to 47.2%. The two smaller Bloemfontein buildings are completely vacant. After this disposal, Delta’s loan-to-value (LTV) ratio will reduce by 50 basis points. The announcement neglects to give the actual LTV ratio, which was 57% as at February 2022. I would also avoid reminding the market of a number like that.
  • Motus Holdings has renewed its cautionary announcement, as the company is still in discussions regarding a possible acquisition of 100% of an aftermarket parts business.
  • Conduit Capital is facing a significant challenge with one of the insurance businesses placed under provisional curatorship. A lot has gone wrong for Sean Riskowitz in recent years. His investment fund Protea Asset Management LLC has sold down shares in Conduit and now holds only 2.7% of the company.
  • Finbond has renewed its cautionary status based on a potential acquisition in Mexico. Considering this country has tastes ranging from avocado to tequila, anything is possible here and caution probably is warranted.
  • African Equity Empowerment Investments (AEEI) issued a cautionary announcement that it is considering a potential disposal of an asset. At the same time, AYO Technology (also linked to Iqbal Surve) released a cautionary that it is considering a potential acquisition. Whilst we can’t be sure that the companies are negotiating with each other, it seems likely that AEEI is looking to sell something to AYO.

Financial updates

  • AngloGold Ashanti has released its interim results for the six months to June 2022. The company has scored some own goals in recent times, so a 3% increase in production is at least heading in the right direction. The cadence is promising, with the second quarter reflecting a 10% increase in production. Total cash costs grew by 6% to $1,068/oz, driven by inflationary pressures and higher royalty payments. Earnings are lower year-on-year, with adjusted EBITDA of $864 million (down 1.4%) and headline earnings of $0.71 per share (down 18.4%). The cash flow picture is a lot prettier, with free cash flow of $471 million vs. an outflow of $25 million in the comparable period. This was made possible by a $549 million receipt from the Kibali gold mine in the DRC. AngloGold completed the acquisition of Corvus Gold for $365 million in January 2022 and the balance sheet is in a strong position despite funding that deal and paying the 2021 final dividend, with adjusted net debt down 13% year-on-year. An interim dividend of R4.93 per share has been declared. The gold companies have modest dividend yields compared to the more cyclical mining houses. On an annualised basis, this interim dividend is a yield of 4%.
  • Impala Platinum released a production update and trading statement for the year ended June 2022. Gross concentrate volumes fell by 3.6%, comprising a 4.3% drop from managed operations and a 2.1% decrease from joint ventures. Concentrate receipts from third parties declined by 1.8%. Gross refined volumes fell by 5.6%. Revenue per ounce has fallen by 4.5% based on dollar pricing for the primary products. To make it worse, unit cost per ounce jumped by 17% because of inflationary pressures and lower overall volumes. HEPS is expected to be between 13% and 21% lower than the comparable period. The share price is down 16.8% this year.
  • Master Drilling has released a trading statement for the six months ended June 2022. HEPS will jump by between 45.5% and 65.5%, which is great news for shareholders. The share price closed 7.7% higher on the day and is now 22% up year-to-date. This is about as close to “selling shovels in a gold rush” as you can get these days.
  • CA Sales Holdings (known as CA&S) is a consumer goods company that recently moved its listing to the JSE in preparation for the proposed collapse of the PSG Group’s listed structure. CA&S is one of the assets that would be unbundled to shareholders. Earnings momentum is exactly what the market wants to see from a new listing, with HEPS for the six months to June 2022 expected to be between 39% and 49% higher. Part of this jump is the impact of Covid on the base period, particularly regarding restrictions on liquor sales.
  • Alviva Holdings released a trading statement for the year ended June 2022. HEPS is expected to be up by a spectacular 85% to 94%. There is a potential buyout on the cards for Alviva, with a non-binding expression of interest received from a consortium of investors and announced on 30 June. The envisaged price is R25 per share but no formal offer has been made yet. Alviva is trading at R23.89 which is very close to an offer price that hasn’t even been confirmed yet. Alviva was trading below R20 per share before the potential buyout was announced.
  • Cognition Holdings has released a trading statement for the year ended June 2022. Things have gone in the wrong direction, with HEPS expected to be between 56% and 66% lower than in the prior year. Although HEPS is positive, the company will report a loss per share because of impairments of goodwill and intangible assets. Remember, HEPS ignores these non-cash losses. Cognition released a cautionary announcement earlier in the week noting the potential disposal of 50.01% in the Private Property business.

Operational updates

  • Nothing new in this category!

Share buybacks and dividends

Notable shuffling of (expensive) chairs

  • The Chairman of Raubex, Freddie Kenney, has decided not to stand for re-election, bringing to an end his affiliation with the company that has spanned nearly 20 years. The reason given is that he has suffered two major personal tragedies and needs personal time. It’s always horrible to read stuff like this and I certainly wish him the best under these circumstances.
  • Alok Joshi has joined the board of Buffalo Coal as a non-executive director and as the representative of new shareholder Belvedere Resources. He is the Finance Director of Belvedere and is based in Dubai.

Director dealings

  • A director of a major subsidiary of PBT Group has sold shares in the company worth R1.32 million.
  • A director of a major subsidiary of Stefanutti Stocks has bought shares in the company worth R78k.
  • An entity linked to the CEO of Invicta Holdings has bought shares in the company worth R68k.
  • The CEO of Purple Group’s wife has sold shares in the company worth nearly R103k.

Unusual things

  • The sad story of Luxe Holdings continues. This is the carcass of what was once Taste Holdings, a successful local pizza business that got stars in its eyes and tried to build Domino’s Pizza in South Africa as well as Starbucks. Domino’s has been liquidated and Starbucks was sold. The company should’ve stuck to rolling dough rather than rolling out restaurants. Luxe holds the jewellery assets that were inside Taste and even that isn’t going well, with many director changes in recent times. The latest mess is that the shares have been suspended from trading by the JSE because the annual report for the year ended February 2022 hasn’t been published. There is an extraordinarily long list of prior period accounting errors that the company has uncovered, ranging from technical IFRS stuff through to basic mistakes. This has resulted in delays to the report. One can perhaps take some comfort from the current management team being willing to identify and sort out these issues.
  • Afristrat Investment Holdings has been suspended from trading by the JSE as the provisional report for the year ended March 2022 has not been published within the prescribed period.
  • We usually see a “no change statement” when a company gives notice of its AGM and distributes its annual financial statements. This means there were no changes since the financial results were announced on SENS. Primeserv Group released a “change statement” which means there were differences between the announced results and the final audited results. They weren’t material though, with a difference of a few million bucks in cost of sales, other income and expenses. I decided to mention it here to show you that a “change statement” does happen on rare occasions!

Buying a second home overseas is not the only way to become a global citizen

Sponsored Content
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Buying a second home overseas is not the only way to become a global citizen

With the assurance of a steady dollar income, you can ignore the potential risks to your safety or retirement security that may arise from domestic political upheavals and you may even uncover significant tax advantages of having a second country of residence, without having to buy a second home overseas.

Even if you have no intention of moving out of South Africa, having a reliable dollar income ensures that your purchasing power is preserved even in the event of an economic catastrophe, such as runaway inflation or political upheaval, most evident recently where the economy of Turkey and Sri Lanka have been decimated by such events. The Turkish lira lost 44% of its value in 2021 alone and continues its decline in 2022.

If the thought of a second residency is appealing, your dollar income makes you a more attractive prospect to governments who want to attract US dollars into their economy.

One of the most compelling reasons for obtaining a second passport, other than the flexibility to live somewhere else, is tax. If you are able to live in a second country for part of the year it will change your tax residency status. If you are a South African tax payer and you spend more than 185 days a year outside of the country, of which 60 days must be continuously spent outside of SA, then the first R1 million that you earn from a foreign source is exempt from tax. If you are a non-tax resident, you will be liable for South African tax on income sourced from South Africa, but you will not be liable for income derived from foreign sources. Local taxes will be payable in your country of domicile but some jurisdictions allow generous tax rebates and often lower or no tax on your foreign earnings. Check with your tax advisor.

Numerous countries offer residency permits, sometimes leading to full citizenship down the line, in return for a dollar or euro investment either in a business, a property, or sometimes just a straight donation. A few countries are even more welcoming. They are offering residency permits, often leading to citizenship after several years, in return for an assurance that a minimum amount of dollars will be deposited into your bank account every month or year.

  • The closest country to South Africa that has an income-based residency programme is Mauritius. A retired non-citizen aged over 50 can apply for a 10-year residency permit by making an initial $1 500 deposit into a Mauritius bank account when their permit is issued, and then transferring at least $1 500 a month or $18 000 a year for the 10 years of the permit. Alternatively, you can invest in any business provided it does not employ you, you do not manage it or derive any salary or benefits from it. After three consecutive years, the holder of a residence permit can apply for a 20-year permanent residence permit.
  • Another country with a similarly tropical climate, Antigua & Barbuda, where English is also widely spoken, has a permanent residency programme for people who can demonstrate an annual income of at least $100 000 (on which a flat tax of $20 000 is payable). Applicants must maintain a permanent residence in the country and spend at least 30 days a year there.
  • Belize in Central America has a coastline on the Caribbean and English is its official language. It offers a Qualified Retired Person Incentive Program, under which visas are granted to people aged 45 or older who can prove an income from a foreign pension, annuity or other acceptable source of at least $2 000 a month (or $24 000 a year), to be transferred into a local Belize financial institution. According to www.smartasset.com, you could live quite respectably on about $1 200 to $1 500 a month in Belize. Under this program, you can also include dependants. You have to remain in the country for a consecutive 30 days a year.
  • Another tropical country with an accessible retirement visa option, where English is a common language, is Malaysia. Its “Malaysia My Second Home” or MM2H programme welcomes people over 50 who can prove a monthly income of 10 000 Malaysian ringgit (about R38 000). This income is tax-exempt. Malaysia provides a 10-year multiple entry visa under this program that is automatically renewed after the end of the first ten years.
So how do you secure a dollar income of at least $2 500 a month?

OrbVest, the specialists in medical real estate in the US, pay an average yield greater than 7% cash on cash, paid quarterly, on an investment into one of its specialist, medical commercial properties, and a total IRR of 10-12% over the average five-year term of the investment.

The investment is made offshore in the low tax environment of the Seychelles. It also offers a more diversified product, OrbVest Diversified Holdings (ODH), which spreads your risk over a multitude of its medical office buildings with an excess of 100 medical tenants in a portfolio which generates a very robust annual return of 7% and projects an IRR of about 11% over the five-year term. This means that if you accumulate an offshore nest egg in the world’s default currency, the US Dollar, of around $400,000 you would be eligible to live and gain residency in a country like Mauritius, while still enjoying some capital growth while you live off your returns.

Start your journey to becoming a global citizen by moving your discretionary R1,000,000 allowance offshore every year and preserving your wealth in stable medical commercial property in the USA.

IMPORTANT NOTE
OrbVest SA (Pty) Ltd. is an authorised Financial Services Provider. The content and information herein contained and being distributed by OrbVest is for information purposes only and should not be construed, under any circumstances, by implication or otherwise, as advice of any kind or nature, or as an offer to sell or a solicitation to buy or sell or to invest in any securities. Past performance does not guarantee future performance.

Returns are taxable and will be taxed as dividends from a foreign source, ordinary income or capital gains, depending on your tax residency. OrbVest is not a tax and/or legal advisor. Owing to the complex tax reporting requirements associated with private equity and private real estate investments, investors should consult with their financial or tax advisor or attorney before investing.

For members investing via www.orbvest.com, the particulars of the investment are outlined in the property supplement, a private placement memorandum or subscription agreement, which should be read in their entirety by the proposed investor prior to investing and having obtained independent advice.

Ghost Bites Vol 63 (22)

The Finance Ghost
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Ghost Bites Vol 63 (22)

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

Corporate finance corner (M&A / capital raises)

  • We finally have a confirmed offer by Remgro for Mediclinic, with the Stellenbosch-based investment holding company bidding alongside some of Johann Rupert’s European buddies. A subsidiary of large private business Mediterranean Shipping Company will be joining Remgro in this investment on a 50:50 basis. Remgro already holds a 44.56% stake in Mediclinic, so this deal takes the form of a scheme of arrangement to mop up the rest. The offer price is 504 pence in cash although the final price will be 501 pence, as existing Mediclinic shareholders are entitled to the 3 pence per share dividend that was declared in May 2022 (the offer price is reduced by this amount). The deal rationale is that Mediclinic will be better positioned to realise its long-term strategy and objectives if it operates as a private company rather than under public scrutiny. The structure sees Remgro contributing its existing Mediclinic shares to the special purpose vehicle set up for the deal (BidCo) and injecting around £201 million in cash to facilitate its half of the deal. This cash contribution is why the deal qualifies as a category 2 transaction under JSE rules, so no Remgro shareholder approval is required. Remgro will fund the deal from existing cash resources. From a Mediclinic perspective, the offer values the hospital group on an EV/EBITDA multiple of 11.2x and represents a premium of 35% to the price on the day before the initial proposal was made by Remgro. The independent directors of Mediclinic are recommending the offer to shareholders, which is why this is structured as a friendly scheme of arrangement rather than a hostile takeover. This will require 75% approval by Mediclinic shareholders, with the BidCo reserving the right to change the structure to a takeover offer if needed. This may be good news for Remgro’s traded discount to net asset value, as investors looking for exposure to this growth story have no choice now but to access it via Remgro if the deal goes through.
  • Bauba Resources is currently under offer from Raubex and has announced the results of a shareholder meeting to vote on the delisting of the company. The delisting has been approved by shareholders, so it looks like Bauba Resources will be heading for the exit from the JSE.
  • Trustco has announced that it has signed a term sheet in which SJSL Investments has the option to become up to a 70% shareholder in Meya Mining for a total subscription amount up to $50 million. Meya holds a diamond mining licence in Sierra Leone. This would allow Trustco to partially exit its investment in Meya and would enable the operations to be scaled at an accelerated pace. First diamonds are expected in the market by November 2022. This is a category 1 transaction for Trustco and so a circular will be distributed to shareholders as a shareholder vote is required.
  • Most announcements regarding resolutions passed at the AGM are incredibly boring, with the usual story of institutional investors voting against remuneration policies and not much else to report. At the Afrimat AGM, the company withdrew the resolution that would grant a general authority to issue shares. This is due to the recent capital raise by the company which was strongly supported by the market. This is notable because it means that Afrimat does not intend raising additional capital in the next financial year.

Financial updates

  • Sasol released a trading statement for the year ended June 2022 and the share price barely reacted. This means that the market expected these numbers, with favourable macroeconomic conditions offset to some extent by operational challenges in South Africa that drove lower production. Headline Earnings Per Share (HEPS) is expected to increase by between 8% and 28% (a wide range). The company also discloses adjusted EBITDA and core HEPS, with all kinds of adjustments ranging from hedging movements through to losses on significant capital projects that are still ramping up. Ultimately, I look at HEPS unless there are genuine once-offs in the numbers that aren’t related to the operations and aren’t excluded from HEPS. Focusing on HEPS is especially useful when there are large gains and losses on disposals of businesses, as is the case in Sasol for this period. Sasol’s share price is up more than 26% this year.
  • Standard Bank has released a trading statement for the six months to June 2022 and it reflects the favourable conditions for banking that I’ve written about several times (demand for loans and higher interest rates). HEPS is expected to be 27% to 32% higher than the comparable period. Detailed results will be released on 19th August and I look forward to seeing the drivers of performance, particularly in terms of efficiency ratios (costs relative to income).
  • Gold Fields has released a trading statement for the six months ended June 2022. It’s been a strong financial period for the business, with HEPS expected to be 24% to 33% higher than the comparable period. Production was 9% higher and the gold price has been favourable overall, though inflationary impacts on costs did put a slight damper on the party. All-in costs per ounce increased by 6%. Normalised earnings per share (usually the measure that management wants you to focus on) is only 10% to 18% higher than the comparable period. Results will be released on 25th August.
  • Mondi’s share price dropped 5.8% after releasing results for the six months to June 2022. This is despite margin expansion in all businesses and total EBITDA (including Russia) up 65% year-on-year. The group is in the process of disposing of its Russian operations and has now disclosed them as a discontinued operation. These operations contributed EBITDA of €228 million in this period, around 19.5% of the group total. Group net debt has dropped from €1.9 billion to €1.2 billion, which is 0.8x to underlying EBITDA. The group is busy with €1 billion in expansionary projects, so there is significant investment in growth. Mondi’s interim dividend has increased by 8% year-on-year and is denominated in euros. The company has already announced the applicable exchange rate, so shareholders should note that the rand value is 370.74076 cents per share.
  • Sappi released its third quarter results for the period ended June 2022, managing to time it perfectly alongside sector peer Mondi. Whether you look over three months or nine months as a year-to-date view, the numbers demonstrate an exceptional recovery vs. a very tough period. Over nine months, sales increased 40% and EBITDA increased 167%. The group has swung from a loss of $22 million to a profit of $510 million. Net debt has dropped by 26%. The period wasn’t without its challenges, like operational issues and maintenance in the dissolving pulp operations that mitigated some of the benefit of higher market prices. Inflationary cost pressures and uncertain supply-demand dynamics mean that these businesses are risky, which perhaps explains the 4% sell-off in the share price.
  • MTN Uganda is the latest African subsidiary of the yellow telecoms giant to release results. For the six months to June 2022, mobile subscribers increased by 8.9%, active data subscribers increased by 21.8% and fintech subscribers grew by 14.1%. The data story is coming through strongly here, with data revenue up 36.8% and service revenue only 10% higher. EBITDA only increased by 7.2% so there are some margin pressures in this business, with EBITDA margin decreasing to 50.2%. Still, this is yet another country in which MTN is achieving EBITDA margins in excess of 50%. Capital expenditure increased by 30.7% as the business invests in the network. Profit after tax was up by a whopping 48.1% because depreciation was lower year-on-year.
  • Glencore has released its results for the interim period and they reflect the benefit of the macroeconomic environment for a commodities group like this, with adjusted EBITDA up by $10.3 billion (a 119% increase). Despite a $5 billion drain on cash due to investment in working capital to support these numbers, net debt reduced from $6 billion to $2.3 billion and the company has announced a special dividend ($0.11 per share) alongside a new $3 billion share buyback programme that will be run by Citigroup Global Markets. Of course, the bankers will be tasked with buying back shares as cheaply as possible. The numbers for this period all look a bit silly on a year-on-year basis, like a 111% increase in funds from operations. Although the outlook is incredibly uncertain for commodities, Glencore’s much stronger balance sheet gives it a solid foundation going forward.
  • Although Brimstone Investment Corporation’s share price was trading over 16% higher by late afternoon trade, only 100 shares had traded which means R700 changed hands. When dealing with illiquid companies, you always have to be careful with large percentage moves and tiny values traded. When you read the trading statement released on the day, the share price move looks even stranger. HEPS is down by between 85% and 95%, a really tough result based on downward revaluations of listed investments and a drop in share of profits from associates and joint ventures. Ouch.
  • 4Sight Holdings has released a trading statement for the six months to June 2022. HEPS has shot up by between 126.8% and 145.9%. This is a technology company that manages to pack every single buzzword into its website, ranging from machine learning through to big data.

Operational updates

  • Europa Metals has announced metallurgical results at Toral (the company’s lead, zinc and silver project in Spain) and has given an operational update. In the latest metallurgical testwork, grades achieved for lead and zinc are higher than in previous results. Drilling has been impacted by personnel contracting Covid. You really need to be a mining expert to interpret the detailed results released by the company, which is why I simply avoid investing in junior mining altogether.

Share buybacks and dividends

  • Investec is in the process of repurchasing up to 20% of its issued preference shares, as this has become a less desirable source of capital for banks in recent times. 5% of the issued shares have already been repurchased for an aggregate value of R149 million.

Notable shuffling of (expensive) chairs

  • Hulamin CEO Richard Jacob will retire at the end of September after a 32-year stint at the company, of which the last 12 years were as CEO. It’s quite incredible that there seems to be no succession plan, with an independent non-executive board member appointed as interim CEO while a replacement is found. After 12 years, did he just wake up one morning and decide he was gatvol, taking everyone by surprise?

Director dealings

  • The CEO of Alexander Forbes has elected to sell his shares into the partial offer, which will improve his bank account by around R11.4 million.
  • The CEO of Spear REIT is still buying shares in the company for his kids, this time to the value of R28k.

Unusual things

  • Mantengu Mining has announced the excellent news that its suspension has been lifted following the acquisition of Langpan Mining Co. This is a perfect example of a listed vehicle being resurrected on the market.

Who’s doing what this week in the South African M&A space?

Marylou Greig
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Who’s doing what this week in the South African M&A space?

Exchange Listed Companies

Remgro, SAS Shipping Agencies Services (MSC Mediterranean Shipping Company SA), the Mediclinic International board and newly formed Manta Bidco (to be jointly held by Remgro and SAS) have reached an agreement on a recommended cash offer to acquire the remaining 55.44% stake of Mediclinic. Remgro currently holds a 44.56% equity stake in Mediclinic. The acquisition values the entire issued and to be issued ordinary share capital of Mediclinic at approximately £3.7 billion and an implied enterprise value of approximately £6.1 billion. Shareholders will receive 504 pence in cash for each share held, representing a premium of approximately 50% to the volume-weighted average price per Mediclinic shares on May 25, 2022, the day prior to the initial announcement. In addition, shareholders will be entitled to receive the final dividend of 3 pence per share approved at the AGM on July 28, 2022.

Old Mutual is to acquire a minority stake in funding solutions specialist Preference Capital. Old Mutual has the option over time to increase its shareholding to a majority stake. Financial details were undisclosed.

African Rainbow Capital subsidiary TymeBank South Africa intends to acquire Retail Capital, a fintech funder of local SMEs, forming the foundation of its expanded business banking offering. Retail Capital has provided funding in the region of R5,5 billion to some 43,000 business owners in SA. Financial details of the transaction were undisclosed.

Vukile Property Fund, a specialist retail REIT, has acquired the Pan Africa Shopping Centre in Alexandra, Johannesburg for R414,6 million. The seller, the Pan Africa Development Company is held by consortium members Atterbury Property (50.89%), Talis Holdings (47.34%) and Summit Ridge Trading 5 (1.78%). Vukile will also appoint the seller to develop the centre’s second phase expansion which it will then acquire for R254,3 million on opening in April 2024.

DRA Global has sold its APAC maintenance, shutdown and structural mechanical piping construction business subsidiary G&S to technical industrial services provider KAEFER Integrated Services for A$8 million.

Shareholders in Cognition have been advised that the company is in discussions regarding the possible sale of its 50.01% stake in Private Property South Africa.

Unlisted Companies

Air Liquide’s specialised entity VitalAire, a provider of respiratory care services and products for use by chronic patients at home, has acquired the diabetes division of Ethitech, a distributor of medical technology and diabetes medical devices in South Africa. The acquisition will enable VitalAire to meet the growing need of patients with diabetes, leveraging on innovative connected technologies and offering personalised patient follow-up.

The Public Investment Corporation (PIC) is to invest US$100 million into the Africa Finance Corporation, a Nigeria-headquartered multilateral financier of infrastructure on the continent. As a shareholder in AFC, the PIC hopes to benefit from co-investment opportunities.

Mobile ‘play-to-earn’ app Skrmiish, has raised US$2,5 million in a seed round. The Cape-based startup that enables gamers to earn cash in every match played, will use the funding to boost its growth globally.

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

Who’s doing what in the African M&A space?

Marylou Greig
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Who’s doing what in the African M&A space?

DealMakers AFRICA

ASX-listed Lindian Resources has announced the acquisition of a 100% interest in Rift Valley Resource Developments, a Malawian company that owns the Kangankunde Rare Earths Project. Under the terms of the transaction, Lindian will acquire all the shares in Rift Valley from its existing shareholders for US$30 million. The company also announced its intention to raise capital via the placement of shares. It has received a binding commitment to subscribe for 15,000,000 fully paid ordinary shares at $0.20 per share, raising US$3 million. In connection with the Placement, the company will also issue 7,500,000 options to the investor exercisable at $0.25 per share and expiring three years from the date of issue.

KCB Group, an East African financial services organisation headquartered in Kenya, is to acquire an 85% stake in DRC-based and listed Trust Merchant Bank (TMB). Shareholders will receive a cash consideration for the shares based on the net asset value of TMB at completion of the proposed transaction and using a price to book multiple of 1.49. TMB has US$1,5 billion in assets. After two years, KCB will acquire the remaining 15% from existing shareholders.

US-based fintech Umba, has taken a 66% stake in Kenyan Daraja, a deposit-taking microfinance bank. Financial details for the transaction were undisclosed.

Vodafone plc is to dispose of its 70% stake in the Ghana operations to Africa-focused Telecel, as it seeks to concentrate on key markets. Financial details were undisclosed.

ADNOC Distribution, the retail and distribution arm of the Abu Dhabi National Oil Company, has signed an agreement to acquire a 50% stake in TotalEnergies Marketing Egypt, a fuel retail, aviation and lubricants business, for a consideration of approximately US$200 million.

Furniture and home goods marketplace Homzmart, has closed a US$23 million pre-series B round. Participating in the round were STV, Impact46, Outlier Venture Capital, Rise Capital and Nuwa Capital. The Egypt-based e-commerce platform will use the new funding to expand services, especially logistics, and strengthen supply chains.

Kenyan Insurtech Lami has raised US$3,7 million in a seed extension round led by Harlem Capital. Investors participating in the round included VC firm Newtown Partners, Peter Bruce-Clark, a partner at Social Impact Capital, Caribou Honig and Jay Weintraub of InsureTech Connect (a networking platform for insurtech innovators) and senior members from Exotix Advisory.

Qurious Labs, the Egyptian Web3-focused venture studio, has raised an undisclosed sum from Openner, a venture capital firm in Egypt. The funding will be used to support entrepreneurs in the Mena Region building Web3 companies using blockchain, digital currencies, NFTs to explore the Metaverse.

Zener SA, an integrated energy provider in Togo, has secured a financing package from the IFC which will be earmark for the use of reducing polluting fuels for cooking in the country. The loan of €8,1 million by the IFC will be matched by a loan from other partners. The company will, among other things, expand its LPG storage terminals in Togo.

DealMakers AFRICA is the Continent’s M&A publication
www.dealmakersafrica.com

Weekly corporate finance activity by SA exchange-listed companies

Marylou Greig
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Weekly corporate finance activity by SA exchange-listed companies

The disposal by enX of the businesses Impact Fork Trucks and EIE Group, have realised net cash proceeds of c.R1,33 billion. While the majority of proceeds have been applied to recapitalisation of subsidiaries, repayment of debt etc. the Board has declared a special distribution of R1.50 per enX share to be paid on August 22, 2022, representing a R273,5 million payout.

The halving of Conduit Capital’s share price this week comes as the company’s subsidiary Constantia Insurance was placed under provisional curatorship by the High Court. Conduit has been in discussions with potential investors to recapitalise the business. Once this is finalised, Conduit expects the restriction to be lifted.

The JSE has advised that Afristrat Investment and Primeserv have failed to submit their annual reports within the four-month period stipulated in the JSE’s Listing Requirements. Should the reports not be submitted before August 31, 2022, their listings may be suspended.

A number of companies announced the repurchase of shares

Glencore has announced another share buy-back programme in which it may repurchase its shares in the market up to an aggregate value of US$3 billion. The shares purchased will be held in treasury.

Adcorp has repurchased 708,345 shares in terms of the general authority granted by shareholders over the period July 15 to 18, 2022 for an aggregate R3,98 million.

Investec Ltd has repurchased 1,537,823 preference shares representing 5% of the company’s issued preference share capital. The preference shares were repurchased at an average price of R96.35 for an aggregate value of R148,2 million during the period May 25 to August 3, 2022.

Industrials REIT has repurchased 100,000 ordinary shares at 168 pence per share as it moves to mitigate the dilutive effect of the scrip dividend election.

Textainer repurchased 1,417,819 shares at an average price of $31.81 per share during the second quarter. On July 22, the board authorised a further increase of $100 million to the share repurchase programme.

Naspers and Prosus continued with their open-ended share repurchase programmes. This week the companies announced that during the period 25th to 29th July 2022, a total of 3,303,295 Prosus shares were acquired for an aggregate €218,27 million and 659,095 Naspers shares for R1,64 billion.

British American Tobacco repurchased a further 880,000 shares this week for a total of £28,94 million. Following the purchase of these shares, 203,790,029 shares are held in Treasury. The number of shares permitted to be repurchased is set at 229,400,000.

In March 2015, the Waterberg Coal Company and its subsidiary Firestone Energy were granted voluntary suspensions in the trading of their shares on the ASX and the JSE, pending the outcome of funding negotiations. In December 2017 Firestone entered liquidation proceedings and while the process is still ongoing, the JSE has announced its intention to remove the company’s listing from the Main Board on August 12, 2022.

One company issued a profit warning. The company was Brimstone Investment.

Three companies this week issued or withdrew cautionary notices. The companies were: Astoria Investments, Conduit Capital and Cognition.

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

Ghost Bites Vol 62 (22)

The Finance Ghost
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Ghost Bites Vol 62 (22)

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

Corporate finance corner (M&A / capital raises)

  • ARC Investments has announced that TymeBank will acquire Retail Capital, a lender to SMEs, for an undisclosed amount. It is apparently a “FinTech” business although companies like to use that term just because they have a website with a chatbot. The obvious benefit of combining these businesses is that TymeBank obtains expertise in SME lending and Retail Capital obtains far cheaper funding in the form of TymeBank deposits. TymeBank currently has over 5 million individual customers and 100,000 business banking customers.
  • Cognition Holdings has issued a cautionary announcement regarding the potential disposal of its 50.01% interest in Private Property. This is particularly interesting because the founder of Private Property (Justin Clarke) joined me on Episode 2 of Ghost Stories to talk about his journey with that business. You can listen to it here.
  • A few months ago in April, Caxton and CTP Publishers and Printers announced the acquisition of certain business from Amcor South Africa. This includes the bag-in-a-box business in Cape Town for the wine industry, which I assume means good ol’ papsak and a resultant headache (hopefully not of the financial kind). The Amcor Port Elizabeth business is also part of the deal, with various products supplied to the automotive tyre industry. The Competition Commission approved the merger without conditions and the effective date was 1 August. Operational integration is underway and Caxton notes that the deal is value accretive. The share price jumped sharply in April when the deal was announced but has slid lower to be just 4% higher year-to-date.
  • PSG Group released a highly technical announcement dealing with matters related to the proposed restructuring. One of the mechanisms in the deal relates to “disqualified persons” and their impact on the scheme consideration. The current shareholding by disqualified persons is 12.9% and this isn’t expected to change. If it does, the scheme consideration of R23 may be adjusted in accordance with the terms in the circular. In other important news, conditions related to Competition Commission approval and a binding ruling from SARS have been met.
  • If you’ve been following the news on Rex Trueform, you’ll know that the company is moving strongly into the property business. The company announced in April 2022 that it would subscribe for a 51% interest in Belper Investments, a property letting enterprise. All conditions precedent have been fulfilled and the effective date is 3 August.
  • In case you want to put a reminder in your diary, the Ascendis circular for the rights offer will be available on the company website this Friday.

Financial updates

  • Absa has tightened its earnings guidance with another trading statement related to earnings for the six months to June 2022. On a normalised basis, headline earnings per share (HEPS) is expected to increase by between 25% and 30%. This is a range of 1,275 cents to 1,326 cents. The share price is up 9.3% this year, having enjoyed a stronger environment for banking with solid demand for loans and higher prevailing interest rates.
  • MTN Rwanda has announced its results for the six months to June 2022. Unlike the other African subsidiaries, mobile data subscribers only grew by a modest 1.7%. Active data subscribers jumped by 23.9%, reminding us of the real opportunity in Africa. Mobile Money subscribers grew by 9.1%. Looking at the financials, service revenue increased by 21.5% and EBITDA grew by 17.8%, so there was some margin compression. EBITDA margin came in at 49.3% vs. 50.4% in the comparable period. Also in line with other subsidiaries on the continent, capital expenditure was up by a significant 56% based on investment in the network. Profit after tax fell by 31.5% though, attributed to the amortisation of the operating licence that was renewed in 2021. MTN Rwanda enjoys 65.6% market share and is another example of MTN’s growth story across Africa.
  • South Ocean Holdings is an illiquid company on the JSE that doesn’t get much attention, with a market cap of just over R200 million. The company has two operating subsidiaries with operations that manufacture low voltage electrical cables and hold property for investment purposes. The results for the six months to June 2022 reflect a decrease in revenue of 11% and a drop in HEPS of 10%.

Operational updates

  • None today!

Share buybacks and dividends

  • Industrials REIT has repurchased shares to offset the dilutionary impact of the scrip dividend. It’s not obvious to me why a company would use a scrip dividend alternative and then repurchase shares and experience a cash outflow anyway. Please do enlighten me if you have the answer.

Notable shuffling of (expensive) chairs

  • There have been some independent non-executive director changes at Metair Investments but nothing that looks different to the usual game of boardroom musical chairs at listed companies.
  • Eastern Platinum has appointed a new Chief Operating Officer (COO). Hannelie Hanson is an internal appointment, having been with the company since 2012. The group is highly focused on the restart of the Zandfontein underground operations, so creating this role makes sense.

Director dealings

  • A non-executive director of Afrimat has bought shares in the company worth R258.5k.
  • A non-executive director of British American Tobacco has bought shares in the company worth around £98k (around R2 million)

Unusual things

  • I usually ignore situations where institutional investors move through a 5% threshold in a listed company, as it can happen for multiple reasons. I just find it odd that JPMorgan Securities went from 6.9% to 10.98% in Clicks and then back to 8.12% in the space of a month.

Report: The Motor Industry in South Africa

The Finance Ghost
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Report: The Motor Industry in South Africa

In a collaboration that is hot off the press, Ghost Mail readers can access Who Owns Whom research reports, industry overviews and organograms at a significantly discounted rate. These reports provide invaluable deep dives into the local and African markets and are used by many local institutions.

The motor vehicle industry in South Africa is a chunky part of the economy. Among higher income groups, we are a nation of drivers rather than public transport users. Cars are part of South African culture, making us an important market for many global manufacturers.

Unsurprisingly, South Africa has the largest vehicle market (measured by sales and exports) in Africa. Sales did well over the pandemic, though workshop revenue has struggled to return to pre-pandemic levels. This makes sense, as maintenance costs are driven by mileage and most of us have been driving far less in a hybrid working environment.

With global semiconductor shortages, the vehicle market experienced a jump in used car prices based on supply-demand dynamics. In many cases, people were selling cars for more than they paid for them!

The local manufacturing industry has faced more than just semiconductor challenges. Issues like social unrest and the electricity crisis have impacted production. Although we have a vibrant local manufacturing base, there are also question marks over the ability to shift that production to electric vehicles in response to global demand.

We also shouldn’t forget that South Africa is a strategic supplier of catalytic converters to the world, as we are the most important Platinum Group Metals (PGM) producer in the world.

Overall, the researchers at Who Owns Whom believe that the long-term outlook for the vehicle manufacturing sector is positive and that the short-term outlook is uncertain. The potential loss of export share based on a material global shift to electric vehicles is a concern.

If you would like to obtain the full report on this sector or any of the other full reports, industry overviews or organograms on the Who Owns Whom research platform, use the discount code GHOST40 and enjoy a 40% discount on the research.

Non-farm payrolls in focus again

TreasuryONE
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Non-farm payrolls in focus again

US economic data releases are always important. This week, the non-farm payroll number could give us a sign of a slowing economy. The team from TreasuryONE helps us understand the macroeconomic mood out there.

Last week we saw a shift in the Fed’s recent rhetoric – even though the Fed hiked rates by 75 basis points, the Fed stated that while they are approaching the neutral rate, hikes will now be done on a data-dependent scale. In the immediate aftermath of the slight change in the Fed’s rhetoric the US dollar weakened, which gave a much-needed shot in the arm to EM currencies, and the rand strengthened all the way back to the R16.40 level.

Another data set that came out last week was the Advance 2nd Quarter GDP, which showed the US economy had a negative growth quarter – the second quarter in a row where negative growth was seen. This immediately gave rise to the recession question which will be on the watch with every subsequent data release going forward. With the economy slowing down, it will definitely start feeding into the Fed thinking and hikes could be less going forward should the impact remain significant.

One area where the growth slowdown in the US, Europe, and China has had an effect is the commodity sector. We have seen a rise in the gold price instead of the US dollar after the fear of recession in the US and also the oil price slowly trickling down with less demand expected for the commodity. Brent Crude is below the $100 level and we could see the price struggling to reach the previous highs as demand falls away.

Brent Crude

Now that the US economy is in focus again, all eyes will be on any US economic data set in order to understand the state of the US economy. We will see other data apart from inflation drive the market and with this week’s non-farm payroll number we could see the first signs of the slowing economy in the employment sector. We can expect any adverse number on Friday will impact the US dollar and therefore the rand.

The rand will be a passenger this week with any move in the US dollar translating into some rand movement. We do expect the rand moves to be constrained a little due to the elevated commodity prices, and we do believe the rand is quite happy between the R16.50/80 range as it has failed quite a few times in breaking below R16.40. However, any move above R16.80 should be seen as a definite selling opportunity.

USD:ZAR

TreasuryONE provides daily updates in the Ghost Mail morning mailer (subscribe here). Visit TreasuryONE’s website for more information on market risk management, treasury services and more.

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