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US Speaker of the House of Representatives Nancy Pelosi caused something of a stir in international relations a few weeks ago when she visited Taiwan. Chris Gilmour gives us more context to the international importance of Taiwan.
Pelosi’s trip was the highest-ranking visit by a US Speaker since Newt Gingrich in 1997 and appears to have taken place without President Joe Biden’s express permission. The visit has caused major problems for US/China relations, which were already at a low ebb and in retrospect, it should probably not have happened. But it did, and the US and its allies in the far east will have to live with the economic and geopolitical consequences for quite some time. Already, China has sent a barrage of ballistic missiles over Taiwan, some of which landed in Japan’s territorial waters.
So, what’s the big deal about this little island, formerly known as Formosa? Why are the Chinese so obsessed about bringing it back into the fold?
The right to exist
China has never recognized Taiwan’s right to exist as a separate state, preferring to regard it as a renegade province that someday will be re-incorporated into China.
Taiwan has been ruled by various countries and dynasties over the centuries but its most recent history dates back to Japanese occupation in the late nineteenth century. In 1895, Japan won the First Sino-Japanese War and the incumbent Qing government had to cede Taiwan to Japan. After World War II and Japan’s unconditional surrender to the Americans, control of Taiwan and all territories it had taken from China were relinquished by Japan. The Republic of China (ROC) under the leadership of Chiang Kai-Shek and his Kuomintang began ruling Taiwan with the overt approval of the main western allies, the US and UK. However, a few years later, civil war broke out in China, and Chiang Kai-shek’s troops were defeated by Mao Zedong’s Communist army. Chiang, the remnants of his Kuomintang government and their supporters – about 1.5m people – fled to Taiwan in 1949.
Today, and for many decades, there has been confusion about what Taiwan is. Technically, it has its own constitution, democratically-elected leaders and about 300,000 active troops in its military. In 1971, the United Nations stopped recognizing the ROC as the legitimate Chinese power and instead recognised the People’s Republic of China (PRC), also known colloquially as “Red China” due to it being run by the Chinese Communist Party (CCP). Only around 15 countries formally recognize Taiwan today as a fully independent country.
China offered an olive branch to Taiwan some years ago in the form of a “one country, two systems” proposal, which would have allowed Taiwan significant autonomy but always under the ultimate control of Beijing. It would have been very similar to Hong Kong’s status.
Taiwan rejected this option.
Strategic ambiguity
America’s long-standing policy has been one of “strategic ambiguity” to the extent that it would intervene militarily if China were to invade Taiwan. Officially, it sticks to the “One-China” policy, which recognises only one Chinese government – in Beijing – and has formal ties with Beijing rather than Taipei. In the unlikely event that China and Taiwan were eventually to agree peacefully to re-unite in future, the US would likely endorse such a move. But it has also pledged to supply Taiwan with defensive weapons and stressed that any attack by China would cause “grave concern”
To the casual observer, China is a formidable player on the world stage. After all, it has risen to become the world’s second-largest economy after the US in a matter of a few decades. But that extremely swift ascent has disguised some major vulnerabilities. So although China is the 6th largest oil producer in the world, such is its insatiable appetite for energy that it imports 80% of its oil. On the food front, things are even worse, with the country importing 85% of its food.
Under the old pre-coronavirus conditions, when Pax American and unfettered globalization were still apparent, this wasn’t a problem. Most countries stuck to the rules and technology helped to drive down the prices of consumer goods around the world.
But things have changed in the new post-pandemic era. The levels of bellicose rhetoric surrounding many territorial issues such as Taiwan have risen significantly. Three years ago, who would have thought that the US would leave Afghanistan to the tender mercies of the Taliban once again or that Vladimir Putin would physically invade Ukraine?
But both of these events have occurred, less than a year apart.
Huff and puff
Once again, the casual observer might be forgiven for thinking that China might well up the ante and invade Taiwan. But although it has been huffing and puffing away furiously for the past few weeks since Pelosi’s visit, the chances of a near-term invasion of Taiwan are virtually nil, in my humble opinion.
The first point to note is that Putin and the Chinese leader Xi Jinping met at the opening of the Beijing Winter Olympics back in early February. It is inconceivable that the pair didn’t discuss Russia’s intended invasion of Ukraine, which at that time was only a few weeks away. Both men hold the west in contempt, believing liberal democracies to be fundamentally weak and ineffectual. And America’s hasty withdrawal from Afghanistan did nothing to dispel that notion. They must have thought, quite reasonably given what had happened in Afghanistan, that America and the west would not lift a finger to help Ukraine if a full-scale invasion was mounted.
After all, there was hardly a murmur from the west after Russia annexed Crimea and the Donbass region of Ukraine back in 2014. That being the case, Ukraine would be a blueprint for a Chinese invasion of Taiwan.
However, nobody could have foreseen either the degree of cohesion adopted by the west when it came to applying sanctions against Russia, or the catastrophic failure of the Russian army to overrun Ukraine. To date, over 1,000 western companies have left Russia, the majority of them being unlikely to ever return unless there is significant regime change in the country. While Putin had established a sizable war chest with which to sustain his offensive – some estimates go as high as $600 billion – much of that was frozen in foreign bank accounts near the start of the conflict. Six months into the conflict (which was supposed to have only taken three days!), Russia now finds itself bogged down in a grinding stalemate that has no end in sight.
Xi must have got a massive skrik, as they say in Afrikaans. The last thing any Chinese leader needs is comprehensive sanctioning from the west, either in terms of import or exports. China has been manifestly unable to convert from being a manufacturing, export-led economy to a consumer-oriented economy. It is vitally important that Chinese exports to the west remain free of sanctions and it is equally important that no blockades of oil or food occur.
The Malacca dilemma
This is where China’s relative geographic isolation becomes all too painfully apparent. In terms of oil reaching China, it has to navigate two “choke points” – the Straits of Hormuz in the middle east and the Malacca Strait (a 1.5 mile natural seaway) – that joins the Indian and Pacific Oceans. If China invaded Taiwan, the so-called QSD alliance countries of the US, Australia, India and Japan might well feel obliged to mount a naval blockade against China. Even if an oil tanker manages to get past a naval blockade of the Straits of Hormuz, the Malacca Strait is a really problematic choke point with no really viable alternative, apart from travelling in the notoriously treacherous Southern Ocean beyond Australia and New Zealand.
On the east side of Malacca Strait, notably in the South China Sea, China has been exerting huge influence in recent decades, even going to the extent of constructing artificial islands bristling with weaponry to let all other countries know that this is their bailiwick. China routinely objects to any action by the US military in this area. Other countries, such as the Philippines, Vietnam, Malaysia, Taiwan and Brunei, claim all or part of the South China Sea, through which approximately $5 trillion in goods are shipped every year.
China has also offered to cut a canal through the Isthmus of Kra in Thailand that would not only cut the time between the Indian and Pacific Oceans by much more than going through Malacca but it would then be under China’s control and would no longer be a dangerous choke point. However, this radical proposal has not met with approval from Thailand.
Source: Visual Capitalist
The risks associated with having to contend with a naval blockade of oil and food are probably too great for China to bear. It is thus highly unlikely that China will dare to invade Taiwan while it is still so vulnerable to having its lifelines literally cut off.
However, in typically Chinese long-term thinking ahead fashion, successive Chinese administrations have been exploring the possibilities of securing alternative non-maritime routes for import and export. The Belt & Road Initiative (BRI) is part and parcel of that and whilst it hasn’t been as successful as originally envisaged, it nevertheless has the potential to become a significant component of trade over time.
The biggest single beneficiary of the BRI so far has been the port of Guadar in Pakistan, a long-time ally of China. If the Straits of Hormuz were ever to be blockaded for Chinese shipping, it is not inconceivable that ships carrying oil bound for China could offload onto road tankers at Guadar and make the long journey overland to China via the Karakoram Highway, that was conveniently financed by the Chinese some years ago.
But there is another, highly radical possibility opening up to China as the world’s oceans warm up thanks to climate change. The Northern Sea Route is slated to become ice-free as early as next decade, which will allow China to access vast quantities of liquefied natural gas (LNG) from Yamal in northern Russia. Currently, logistics make it costly and ineffective for China to access large quantities of LNG from Russia but if a new, permanently navigable sea route with no choke points were to open up, that would change the dynamic entirely.
Russia and China are neighbours. It makes sense from so many perspectives for the two countries to trade much more freely with each other. Russia is the world’s biggest supplier of energy, while China is the world’s biggest user of energy. But pipelines don’t just materialise overnight, especially not those in the permafrost of Siberia, where most Russian oil and gas is located. Russia desperately needs to keep pumping its oil, even if it does so at a steep discount to customers such as China and India, because if it stops pumping, the oil will freeze in the pipes and associated infrastructure of Siberia and there are no longer US oil engineers to keep that infrastructure maintained. There isn’t a convenient far eastern Russian port that can handle vast quantities of oil and gas and ship them quickly and efficiently to China, so the opening up of the North Sea Route would be extremely advantageous to both China and Russia.
Source: Wikipedia
So, the visit by Tannie Pelosi to Taiwan has set off all sorts of delicious possibilities for geopolitical analysts to consider.
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Corporate finance corner (M&A / capital raises)
Cognition Holdings wants to dispose of its majority stake (50.01%) in Private Property (Pty) Ltd. The buyers are BetterHome Group, ooba (the home loan company, not the similar-sounding way to get home after you’ve been drinking) and Fledge Capital. The Private Property business is planning to invest in its growth in both upstream and downstream markets and needs capital to do so, which Cognition doesn’t want to be responsible for providing. Cognition will sell the stake for a whopping R150 million in a Category 1 transaction under JSE listings requirements. The shareholder approval requirement is actually 75%, as this deal represents the “greater part of the assets and undertaking of the company” (i.e. the majority of Cognition’s assets) and thus falls within s112 of the Companies Act which requires a special resolution. In the last financial year, Private Property generated profit after tax of R10.2 million. With an implied valuation for the full business of R300 million, the buyers are really opening their wallets for this thing and must see significant potential. To put this into perspective, Cognition’s market cap is only R172 million and they are getting R150 million under this deal! Caxton looks set to receive a very juicy dividend from this (along with the other shareholders in Cognition).
Although African Bank’s equity isn’t listed on the JSE, it can’t be long until we see that name on the JSE once more. In addition to the deal to acquire Grindrod Bank, African Bank has also announced that it is the successful bidder for the majority of Ubank’s assets and liabilities. It will also take on Ubank’s employees on a going concern basis. The cash price for the deal is R80 million. Ubank has a strong presence across mining and rural communities and has been under curatorship since May 2022 (although it has continued operating). African Bank talks about building a “compelling listable proposition” – a clear nod to a future return to the JSE. The sooner the better!
Tongaat Hulett is still trying to figure out the next steps to sort out its balance sheet and recapitalise the company. The company has renewed its cautionary announcement accordingly. Shareholders can’t do anything anyway, as the company is suspended from trading on the JSE.
Impala Platinum has acknowledged that the decision by the Competition Tribunal regarding the offer to Royal Bafokeng Platinum shareholders will not be finalised by 29th August as was previously hoped. The current long stop date for the deal is 26th September and Implats believes that it can still be wrapped up before then, although there are no guarantees. Implats has the right to extend this date and I can’t see why they wouldn’t do so. In the meantime, the stake in Royal Bafokeng has reached 38.39%, as Implats has been acquiring shares from significant holders. It can do this because it hasn’t reached a controlling stake yet, so it doesn’t need the Competition Tribunal’s go-ahead for these smaller acquisitions.
Now that the dust has settled on Ascendis Health’s capital raise, the company has announced that Carl Neethling has an 11.7% stake in the group. Although he is also a director, I included it here as he is first and foremost a strategic investor.
Financial updates
Grindrod has announced its interim results for the six months ended June 2022. This has been an incredible period for the group, with the share price up more than 134% in 2022. In the core businesses, revenue increased by 31% and EBITDA was 37% higher, driving headline earnings growth of 53%. The Port and Terminals side of the business was the runaway success, growing earnings by 164% as volumes at the ports in Mozambique and South Africa increased sharply. Grindrod Bank grew earnings by 63% and the credit loss ratio is running below 2021, with a deal currently underway to sell the banking business to African Bank for R1.5 billion. In the non-core businesses, the strong oil market has improved the situation at Marine Fuels, with Grindrod working with management and its co-shareholder to exit that business. There is only one remaining asset in the private equity portfolio, so that part of the value unlock is nearly complete. The KZN north coast property remains a headache that Grindrod needs to solve. At group level, headline earnings increased by – wait for it – 10,000%! Headline earnings per share was almost as dramatic, with growth of 8,557%. These are obviously nonsensical numbers, reflecting a base period that was highly impacted by operating conditions. HEPS is now 60.6 cents vs. 0.7 cents in the comparable period. An interim dividend of 17.20 cents has been declared.
After a rollercoaster ride of note, including a failed attempt to offload a huge portfolio of commercial property, Rebosis Property Fund is entering business rescue. The group’s financial situation is precarious, with exposure to a rising interest rate cycle and high operating costs for the properties. Over 50% of Rebosis’ revenue is sourced from national and provincial government tenants as well as municipalities, who are notorious late-payers. The company highlights this issue in the announcement, though some in the market believe that this is a distraction from the other strategic missteps that brought the company to this point. As a result of commencing voluntary business rescue proceedings, the board applied to the JSE for a suspension of trading in the company’s two classes of shares on the JSE. This is because the board effectively loses control of the company and cannot take responsibility for compliance with listings requirements, as the business rescue practitioner takes over from here. Unless that practitioner can magically find a buyer with billions available for commercial property, or knows how to collect debts from the government, I’m not sure what they can really do here. Part of management’s turnaround strategy was a “Going Green” strategy. It’s a pity they ended up almost going bankrupt instead.
Northam Platinum has released results for the year ended June 2022. Times have been good overall in mining, evidenced by a 48.3% EBITDA margin. The year wasn’t without its challenges though, with lost production shifts due to operational issues like Covid, regional community unrest and the tragic loss of two lives at Zondereinde. Unit cash costs per equivalent refined platinum ounce increased by 18.9%, with above-inflationary increases in input costs and more employees in service in preparation for an expanded production profile. Expansionary capex jumped from R1.8 billion to R3.1 billion and maintenance capex decreased slightly from R1.5 billion to R1.4 billion. Due to the cost pressures, a 4.4% increase in revenue wasn’t enough to drive growth in profits, with HEPS down by 2.9%. The group remains highly profitable and has been executing extensive share buybacks over the past couple of years, resulting in a 28.9% reduction in issued share capital. Northam describes itself as being at a “critical juncture” in its growth trajectory and has elected not to declare a final dividend despite such a profitable year. The share price is down more than 16% this year.
Operational updates
Things really aren’t looking good at Conduit Capital. Although the insurance subsidiaries had put in a good performance in the 12 months to June 2022 and in July as well, the regulatory decision to put one of the subsidiaries under provisional curatorship with a restriction on new business at the end of July threw a huge spanner in the works. Although the company has appealed this situation, the regulators (the Prudential Authority and the Financial Services Conduct Authority) are having none of it. The curator has been unsuccessful in lifting the restriction on new business. The company notes that “much uncertainty exists” and shareholders are advised to exercise caution. Conduit needs to find a new investor to recapitalise the business but had been looking for one for a long time with no success, so it’s not obvious that an investor will now be found.
Afristrat Investment Holdings has released an update on the situation at FirstCred Limited Botswana. An investigation commissioned by FirstCred and finalised in August 2022 has revealed “gross misuse” of the BWP120 million raised from investors by the former management of Getbucks Limited Botswana between 2017 and 2019. They may have gotten the bucks, but nobody else did. Afristrat lost BWP50 million through this process, so you can now see why the company has been interested in this investigation. Two other investors tried to liquidate FirstCred and the Botswana High Court denied the application, granting an order of Judicial Management instead to give the company an opportunity to resolve its debt position under current management. Afristrat notes that this at least provides a chance to recover some of the investment value, though it is rare for anything material to be recovered in these circumstances.
Share buybacks and dividends
British American Tobacco is keeping the SENS wheels turning by continuing to repurchase shares on a daily basis.
Notable shuffling of (expensive) chairs
In more Rebosis news, non-executive director Monica Khumalo has resigned due to “conflicting business opportunities and time constraints” – I can’t blame her, really. I would rather weed my garden than be involved in a business rescue, nevermind give up time with businesses that are potentially growing.
Alexforbes has announced three new director appointments. Marinda Dippenaar will join the board as a representative of African Rainbow Capital (and with many years of prior experience at Alexforbes), Pavin Dhamija joins the board from Prudential Financial and finally Gary Herbert also gets a board seat as a partner and co-founder of LeapFrog Investments.
Mike Aitken, chairman of the investment committee of Emira Property Fund and having served on the board since 2007, has given notice of his retirement. James Templeton has been appointed as the new chairman of that very important committee.
Clicks has announced the appointment of Nomgando Matyumza to the board, with extensive experience across many sectors. Her other existing directorships are Standard Bank, Sasol and Volkswagen SA.
Director dealings
A director of Omnia Holdings has sold shares in the company worth over R122k.
Unusual things
A long and arduous announcement came out on Friday morning about a censure imposed by the JSE on Ben La Grange, a member (CFO, no less) of the disgraced management team of Steinhoff that presided over the destruction of value for investors. The JSE’s announcement goes into great detail about La Grange generating an invoice at Markus Jooste’s instruction that did not have “any legitimate commercial reason” – and we aren’t talking small numbers here. That invoice helped a Steinhoff subsidiary show a profit of R376 million instead of a loss of R329 million. On this basis, La Grange is disqualified from being a director of a listed company for ten years and has been fined R2 million. In arriving at this decision, the JSE highlighted his “constructive and unwavering co-operation” and his “full and frank engagement” with the JSE. Investigations into other individuals who were at Steinhoff during that time are ongoing.
The business rescue practitioners of PSV Holdings are fighting with DNG Energy Limited, a material shareholder in the company. After a lot of expensive letters were exchanged during 2022, the practitioners eventually ran out of patience and took steps to liquidate the company. DNG needed to prove that it had funds available to save the company and had requested enough time to finalise the agreements with bankers. The situation is now rather awkward, as DNG has signed facility agreements with its funders but the motion to apply to court for a liquidation has been filed. DNG now has to fight legally for the right to keep the company alive. It all sounds like a mess. I’m no expert on these matters, but I’m not sure what purpose “business rescue” serves if not to rescue a company from liquidation. If DNG has the money, that should be all that matters.
The TreasuryONE team treats Ghost Mail readers to a webinar every few weeks. It’s been a rollercoaster ride of note in the markets in recent months, driven by key macroeconomic concepts.
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In these webinars, the team digs into the most important drivers of the market, accompanied by many excellent charts. Watch the recording below and make sure you register to attend the next event when we announce it!
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Corporate finance corner (M&A / capital raises)
Universal Partners has one of the most interesting portfolios of any JSE-listed investment holding company. There is news in the offshore portfolio, as the Dentex business in the UK looks set to be sold. Dentex will be merging with Portman, the largest private dental consolidator in the UK. Dentex has over 130 practices that administer pain to their victims on a daily basis. Just kidding, I love going to the dentist… moving on, the deal will create the largest privately focused dental group in the UK and one of the biggest in Europe. Universal Partners will sell its entire shareholding in Dentex for a combination of cash and shares in the merged entity, so shareholders can claw back some of their dental traumas by being invested in the industry. Competition regulators in the UK need to approve the deal and completion is expected in the first half of 2023. Universal Partners notes that the deal doesn’t have a material impact on the current value of Dentex, but that an increase in value is likely as the deal moves to completion. This rather cryptic comment implies that the current valuation on the books is similar to the basis for the office price, with the eventual price reflecting the ongoing growth in the business between now and completion.
MiX Telematics is acquiring Trimble Inc’s Field Service Management business in the US for between $6.7 million and $9.5 million. This business is involved in the sale and support of telemetry and video solutions for fleet services management across different industries, so the strategic fit with MiX Telematics looks pretty obvious. The business has more than 40,000 subscribers. A price of $300 per contract has been agreed where the remaining term is at least 18 months, with between $200 and $300 paid for other contracts. This is why the transaction price can vary so much. Operating profit was $3.2 million, so the earnings multiple looks incredibly low. The assumption is clearly that many contracts won’t be renewed. If they are, this could be a lucrative acquisition. This is a Category 2 Transaction under JSE Listings Requirements and so MiX shareholders won’t be asked for their opinions.
With all conditions to the restructure now met, PSG has announced that the unbundling of assets and delisting will be implemented on 26th September. This iconic holding company will disappear from the market soon!
Advanced Health has confirmed that the strategic review of the group is ongoing and that it has received inbound approaches from several parties interested in PresMed Australia. The company has noted that it is evaluating these approaches and that shareholders will be kept abreast of any developments. At this stage, there is no guarantee or even a likelihood of any transaction being proposed.
As you are no doubt aware by now, Impala Platinum is trying to get its offer to Royal Bafokeng Platinum shareholders across the line. The remaining hurdle is the Competition Tribunal. In the meantime, Impala is allowed to keep buying Royal Bafokeng shares in the market. The latest purchase is for a further 0.16% of shares in issue, taking the total stake to 38.1%.
AYO Technology and AEEI keep playing with our emotions. After planning to acquire the romantically-named Italian Summer business and that deal subsequently falling through, the companies have now removed their cautionary announcements related to a potential disposal of a business. We don’t know which business was on the chopping block and I guess we never will. AEEI remains under cautionary for a different reason though, namely the dispute related to the call option exercised by British Telecommunications South Africa (BTSA).
OneLogix has done the right thing and released a clarification regarding the disposal by NJB Investco and acquisition by Best-Krug Saco of around 34% in the company. As I suspected, the companies have the same ultimate shareholders. There has been no change in indirect beneficial ownership of OneLogix.
Jubilee Metals announced that two warrant holders notified the company that they will be exercising warrants to subscribe for shares at R1.22 each. The total value is R16 million. The current share price is R2.74, demonstrating the value of warrants to those who get them early in a company’s life. A warrant is just a share option issued by the company itself, giving the holder the right to subscribe for shares at a certain price.
Financial updates
South32 released results for the year ended June 2022, capping off a year of record earnings and cash flow. Revenue from continuing operations was 69% higher and EBITDA margin expanded from 26.4% to 47.1%, so you can already guess that the result at net profit level is extraordinary. HEPS is over 6x higher than the prior year at $0.595 vs. $0.095. The final dividend is $0.14 per share and a special dividend of $0.03 per share has been added for good measure. The total dividend for the year (including special) was $0.257 per share, vastly higher than $0.069 in the prior period. In addition to strong results, this was a period of considerable corporate activity. South32 acquired 45% in the Sierra Gorda copper mine, an additional 16.5% in Mozal Aluminium and a further 18.2% in the MRN bauxite mine. Development work is focused on battery metals. Subsequent to year-end, South32 sold base metals royalties for up to $200 million and acquired 9.9% in the Altar copper project in Argentina. The share price is up around 60% this year.
Gold Fields has released results for the six months to June 2022. The group operates nine operating mines in Australia, Peru, South Africa and West Africa and has one project in Chile. The company is highly respected as an operator and the latest results show why, with HEPS up by nearly 29% to $0.58 per share. Normalised earnings increased by 16%. Net debt to adjusted EBITDA has dropped from 0.49x to 0.33x, so the balance sheet is stronger too. The interim dividend is quoted in rands and 300 cents per share has been declared. The group is being kept busy with the proposed acquisition of Yamana, a major global deal that spooked Gold Fields shareholders. The share price is down 13.5% this year. Gold miners tend to trade at higher multiples than other mining groups, resulting in a lower dividend yield. The interim dividend is a 2% yield.
Sibanye-Stillwater released results for the six months to June 2022 and the market was prepared for bad news after a previous update that showed the full extent of the financial damage from the floods in the US and the local gold strike. Although the share price closed higher on Thursday, all the platinum companies rallied. The good news is that although it was an ugly year, debt remains manageable and there is still an interim dividend. A three-year wage settlement was reached in the gold operations, so that problem shouldn’t come back for a while. It’s worth comparing headline earnings for this six-month period (R11.9 billion) to the immediately preceding six months (R12 billion) rather than just the comparable six months in the prior year (R24.8 billion). The year-on-year picture is terrible but the sequential story isn’t so bad. The worst problem was in gold, with production down 65% vs. the preceding six months at a time when the average gold price was 7.3% higher. Adjusted EBITDA collapsed to a loss of R3.1 billion vs. profit of R2.8 billion in the preceding six months. In the interests of finding a silver lining (not least of all because I’m a shareholder), this was the third highest interim profit performance since the group listed in 2013. An interim dividend of R1.38 is a yield of 3.3% on Thursday’s closing price, which is solid by most company standards but not terribly exciting by mining standards. The share price is down more than 15% this year.
Italtile’s share price remains in the red this year, but it enjoyed a 3.6% rally on Thursday off the back of a solid financial performance for the year ended June 2022. Although system-wide turnover fell by 2% as consumer spending shifted away from home improvement, trading profit was up 6% and HEPS increased by 9%. This is a classic example of grinding out a result under pressure. The dividend increased by 9% to maintain the payout ratio despite a substantial drop in the cash balance of 60%. Although one may be tempted to attribute this to strategic investment in stock and raw materials to mitigate supply and pricing volatility, the cash flow statement suggests otherwise. The biggest year-on-year difference in cash was the payment of dividends! Italtile is ultimately exposed to the mood of South Africans and especially wealthier homeowners, so the “widespread despondency” noted in the announcement is a concern.
Blue Label Telecoms announced that Cell C will release results in mid-September, followed by an investor roadshow over two days. The company acquired a 45% stake in Cell C in 2017 for R5.5 billion which has subsequently been impaired to zero, so that’s been a wonderful investment. Not. The relationship with Cell C is incredibly complicated, with a web of transactions and important dependencies, as Blue Label sells Cell C airtime. In fact, to help keep Cell C afloat, Blue Label has been pre-purchasing airtime. With all said and done, Cell C owes R2.6 billion to Blue Label on a gross basis and R1.75 billion if you offset the amount owed by Blue Label to Cell C. For context, Cell C lost R2.45 billion in the year ended May 2022. Blue Label also released results for the year ended May 2022, reflecting 10% growth in revenue on a consistent accounting basis. The reported number looks very different as a new accounting policy is being applied to sales of value-added services. Core HEPS from continuing operations increased by 18% to 96.56 cents, a measure that excludes non-recurring income in this year and the comparable year. The share price is up more than 41% this year, rewarding those who have taken a punt at a balance sheet that makes Prosus – Naspers look simple.
Adcock Ingram released results for the year ended June 2022. The benefits of operating leverage are clear to see, with revenue up 12% and trading profit up 22%. HEPS increased by 24% and the dividend is 25% higher, so it all checks out. The next year is all about managing margin, with a significantly weaker rand and high fuel prices. Looking into the segmentals reveals that the Consumer segment brought the magic with a 23% increase in revenue and 49% increase in trading profit as the world normalised after Covid. I was surprised to note that the hospital segment only grew revenue by 6% despite the base period being significantly impacted by a lack of elective procedures. The full report notes that there was price deflation of 3.8% in this segment, which would help explain this. Despite that revenue pressure, gross margin was in line with the prior year. The share price is down around 3% this year and is now trading on a Price/Earnings multiple of 9.9x.
Distell Group has released results for the year ended June 2022. Group revenue climbed by 20.8%, driven primarily by volume growth of 17.6% as the world normalised and people returned to pre-Zoom life. As South Africa was particularly strict on alcohol restrictions, international revenue growth of 7.9% is probably a more realistic view on growth. Interestingly, volumes were 9.4% higher internationally which means pricing must’ve decreased. Group EBITDA increased by 20.8% and HEPS was 36.8% higher. Due to the Heineken transaction, there is no dividend.
Balwin Properties released a trading statement for the six months to August 2022. HEPS is expected to increase by between 40% and 50% vs. the comparable period, which means a range of 34.93 cents to 37.43 cents. The share price has lost 23.5% of its value this year and is flat over 3 years, which means you were probably better off investing in a Balwin property itself rather than the shares.
Hulamin released a trading statement for the six months to June 2022. HEPS has jumped by between 137% and 153%, with an expected range of 45 cents to 48 cents. The company also reports “normalised HEPS” which excludes metal price lag and non-trading items. If you are happy to work with that number, the range is only 35.75 cents to 36.75 cents and the increase is a rather daft range of 815% to 835% as the comparable period was loss-making on a normalised basis. The share price chart this year looks like the side of a mountain, with a precipitous drop at the start of June that led to the current position of being down more than 40% year-to-date. That drop was caused by the withdrawal of a cautionary announcement after discussions with a potential offeror fell over despite the completion of a successful due diligence. It isn’t a deal until binding documents have been signed! If the counterparty is Elon Musk, it still might not be a deal at that stage.
Murray & Roberts has released a trading statement for the year ended June 2022. Terms like “record-high order book” and “strong project pipeline” inject happiness straight into the veins of investors. If we include the full group, HEPS has swung from a loss of 14 cents to a profit of 30 – 32 cents. If we only look at continuing operations, HEPS has moved from positive 16 cents to between 59 cents and 61 cents. The share price was down 4.5% by afternoon trade to around R11.30, which strikes me as a lofty earnings multiple. I’m no expert in this space though and I would imagine that the valuation reflects the pipeline rather than the earnings over the past year. Still, the share price is down nearly 20% this year.
Octodec had a strong day on the market, closing nearly 14% higher based on a trading statement for the year ended August 2022. Distributable income per share is expected to be between 17% and 37% higher, coming in at between 158 cents and 185 cents. The distribution is expected to be between 117 cents and 140 cents for the full year, of which 50 cents has already been paid out. Even after the rally, the closing price of R9.39 is a trailing dividend yield of around 13.7% at the midpoint of guidance.
OneLogix has released results for the year ended May 2022. As we know from previous announcements, the company had a very tough year. Other than the obvious stuff like civil unrest, OneLogix also suffered damage from a hailstorm during September 2021 that nailed large shipments of passenger cars being processed by the company. The group carried the risk of minor repairs and the end result wasn’t minor when so many cars were damaged – the cost net of insurance was R25 million. For context, trading profit for this period was R178.8 million. Although revenue increased by 24% and EBITDA by 12%, things went badly wrong further down the income statement. Headline earnings per share (HEPS) fell by 69%. Even “Core HEPS” took a 60% knock. No dividend has been declared. Although the board has been considering a take-private of the company with a R3.30 per share offer, recent performance put those plans on ice. It’s unclear whether an offer will be forthcoming. The share price is trading at just above R2.90.
Operational updates
Kibo Energy has initiated a process for Requests for Proposals (RFPs) to investigate feasibility of replacing coal with renewable biofuel. The company hopes to fuel existing utility scale power projects with biomass on a sustainable basis, which means a full assessment across economic, environmental and social metrics. The biomass would need to fuel a 300 MW power plant over a 20- to 25-year power purchase agreement period. Work completed by the company thus far has been encouraging, so this is to take it to the next level with the appointment of an international expert. Sit down for this one: Kibo’s share price has increased 4x over the past month from R0.05 to R0.20 per share!
Equites Property Fund released a pre-close investor presentation that includes numerous important insights. For example, UK logistics had a wider base of tenants in this period, with online retailers dropping from 35% of take-up in 2021 to 18% in the first half of 2022. In South Africa, warehouse footprints are being expanded by national retailers and third-party logistics companies, with market rental growth of between 10% and 20% at the top-end of the market. I had to include the below table from the presentation, which shows the impact on property valuations of market rental growth vs. yields used to value the properties. The base yield is 4.25%, so this means that 17.5% rental growth is needed to offset +75 basis points in yield. Over the next 24 months, Equites expects a marginal decrease in property valuations. Although the asset class is thought of as an inflation hedge, this is only on an income basis. The impact on valuations can be flat or negative, as inflation is often accompanied by higher rates.
Share buybacks and dividends
I’m running out of creative ways to tell you that British American Tobacco is still repurchasing shares on a daily basis.
FirstRand’s shareholders overwhelmingly approved the transaction to repurchase the bank’s preference shares. We’ve seen extensive repurchases of bank preference shares in the market as this has become a less desirable source of capital under new banking capital regulations.
Notable shuffling of (expensive) chairs
Buffalo Coal has appointed Tushar Agrawal as the chairperson of the board. He is the ultimate beneficial owner of Belvedere Resources, the largest shareholder in Buffalo Coal.
Director dealings
Barloworld had some pretty bad errors in recent announcements for director dealings. The worst is a mistake related to a director who was announced as having acquired over R4 million in shares – in reality, he sold that value of shares! The recent purchases by a trust related to the CEO were also incorrectly disclosed as being for 26,180 shares vs. the correct number of 22,580 shares. They at least got the direction right on that one.
The CEO of Sirius Real Estate has bought some shares in the company to add to his self-invested pension. This was a small purchase (£15k) which takes his total stake in the group to 0.83% of shares in issue.
A director of Kaap Agri has purchased shares worth just over R51k.
A director of a major subsidiary of Nu-World has sold shares in the holding company worth over R65k.
A non-executive director of Bytes Technology Group has bought shares in the company worth nearly R200k.
Unusual things
New Frontier Properties has been booted off the Stock Exchange of Mauritius (SEM) for failing to publish outstanding financial statements for the year ended August 2020. It’s quite spectacular to note that this company won a PwC award for corporate reporting in 2017. Talk about hero to zero.
Mr Price’s shareholders are less than enamoured with the company’s remuneration policies, with 48% of shareholders voting against the remuneration implementation report in a non-binding advisory vote. There will now be a process of engagement with shareholders. Although I must point out that many companies are experiencing this issue (like MultiChoice with a 31.7% vote against the report), a 48% “no” vote is rather high and especially after Mr Price engaged with major shareholders before the meeting. To put both of those into perspective, over 60% of Naspers shareholders were unhappy with the remuneration policy and 89% voted against putting unissued shares under the control of directors. Ouch.
Richemont is to dispose of a 50.7% stake in its loss-making online luxury and fashion retailer YOOX NET-A-PORTER (YNAP). Italian FARFETCH will acquire a 47.5% stake and Symphony Gold, Mohamed Alabbar’s investment vehicle a 3.2% stake, resulting in YNAP becoming a neutral distribution platform in a move to facilitate a shift towards a hybrid retail-marketplace model. Richemont announced it was impairing €2,7 billion (R45,6 billion) in its YNAP Investment. The deal will see Richemont holding an approximate 12% stake in FARFETCH and will, depending on profit targets met, receive an additional US$250 million worth of shares at the end of five years. In addition, FARFETCH may increase its ownership in YNAP shares to 100% through a put and call option mechanism.
Prosus has announced the acquisition of the remaining 33.3% stake in iFood, a platform business which includes grocery, quick commerce and fintech, from minority shareholder Just Eat. The cash consideration payable is €1,5bn (R25,5 billion), plus a contingent consideration of up to a maximum of €300 million in cash depending on a re-rating of the food delivery sector.
MiX Telematics, via its North American subsidiary, has acquired the Field Service Management (FSM) business from Trimble for a total minimum consideration of $6,7 million. The North American operations of FSM include the sale and support of telemetry and video solutions that enable back-office monitoring and visualisation for fleet services management in several industries.
SEM-listed Universal Partners, which has a secondary listing on the JSE’s AltX, has disposed of its entire shareholding in Dentex Healthcare, a consolidation platform focused on private dentistry in the UK. The acquiring party, Portman Dental Care, is the largest private dental consolidator in the UK, with a growing presence in Europe.
The general offer by Raubex to acquire the remaining 38.32% stake in Bauba Resources for a cash consideration of R0.42 per share, closed on August 19, 2022. The offer was accepted in respect of 99,64 million shares constituting 13.29% of the total issued share capital of the company. Raubex now holds 74.97% of the company which delisted from the exchange on August 23, 2022. Shareholders not accepting the offer now own shares in the unlisted company.
The R650 million deal struck between Afrimat and sellers Aquila Steel (Aquila Resources) and Rakana Consolidated Mines for the acquisition of the Gravenhage manganese mining right and associated assets in May 2021 will no longer take effect. Reasons given by Afrimat were that all conditions precedent were not fulfilled by end date August 20, 2022. In particular, the granting of the Water Use License Application was not fulfilled.
Unlisted Companies
Sango Capital, a local investment management firm, has made a minority investment in Sundry Markets, a Nigerian grocery retailer operating through the ‘market square’ brand. The investment was made alongside Africa-focused investment company Tana Africa Capital.
Mergence Investment Managers, through its infrastructure and development fund, has taken a controlling stake in the affordable rental housing group Live Easy.
The Cape Town Stock Exchange (CTSE) has raised R85 million in a funding round led by venture capital investment company founded by Capitec Bank and Empowerment Capital investment Partners, Imvelo Ventures. Also participating in the round were existing investors, Lebashe Investment, Pallidus Alternative Investments, Shaolin Investments and Gary Strobel. Proceeds of the capital raise will be used to fund ongoing growth and expansion.
South32 has declared a special dividend of $0.03 per share, returning $139 million to shareholders.
Ascendis Health has successfully raised R101,53 million in a fully underwritten, non-renounceable rights offer through an offer of 143 million new Ascendis shares at an issue price of 71 cents per share. The funds raised will be used, in part, to repay the Austell Facility with the remainder of the proceeds being used to fund the restorative and net working capital requirements of the Medical and Consumer businesses in the near-term.
Raven Property Group has received JSE approval to terminate its secondary listing, which will be removed on August 29, 2022.
The Stock Exchange of Mauritius has withdrawn the listing of New Frontier Properties shares after the market close on August 25, 2022, this as the company failed to comply with the provisions of the listing rules relating to the publication of its financial statements.
A number of companies announced the repurchase of shares
Prosus continued with its open-ended share repurchase programme. This week the company announced that during the period 15th to 19th August 2022, a total of 3,391,090 Prosus shares were acquired for an aggregate €217,4 million.
British American Tobacco repurchased a further 905,000 shares this week for a total of £31,2 million. Following the purchase of these shares, the company holds 206,464 of its shares in Treasury.
Three companies issued profit warnings. The companies were: Aveng, Cashbuild and Harmony Gold.
Six companies this week issued or withdrew cautionary notices. The companies were: MTN, Pembury Lifestyle, Telkom SA SOC, Sebata, African Equity Empowerment Investments and Ayo Technology.
South Africa’s B-BBEE Commission – the “enforcer” of BEE compliance – has, in recent months, found itself on the wrong side of the law. Separate rulings made by the High Court indicate that the Commission’s zealous and single-minded approach to fronting could well be at odds with its legislative mandate to function impartially, without fear, favour or prejudice.
The B-BBEE Commission (the Commission) was established to encourage and monitor the B-BBEE compliance of Corporate South Africa in order to drive strategic economic outcomes. It was designed to be restricted to exercising investigative powers only, approaching the courts for interdicts in the cases of identified fronting. The defining spirit of the Commission is the B-BBEE Act which, in turn, must be read together with the Promotion of Equality and Prevention of Unfair Discrimination Act (Equality Act).
The practice of fronting has been identified as a significant impediment to the spirit and development of B-BBEE, and alleged wrongdoers have been hotly pursued by the Commission under the leadership of Commissioner Zodwa Ntuli. More than 80% of complaints received by the Commission relate to this practice.
Over the last eight months, three cases of alleged fronting were brought before the High Court. In all three cases, the findings were almost entirely unfavourable towards the Commission.
In October last year, a case involving the Commission’s publication of a final report on alleged fronting by CRRC E Loco Supply (CRRC) was brought before the High Court in Pretoria. The company – a joint venture between Chinese-owned company CSR: Zhuzhou Electrical Locomotives and empowered entity, Matsete Basadi Consortium – had been investigated by the Commission following two separate complaints lodged by former directors of CRRC.
When the Commission’s final findings’ report duly indicated instances of fronting by CRRC, the company took the matter to the High Court in a bid to stop the report’s publication. While the court did not find grounds for the majority of the complaints made by CRRC, it did rule that the Commission could not publish its final findings’ report, pending the outcome of investigations by other regulatory bodies.
Following the CRRC matter, two further cases on alleged fronting identified by the Commission were heard before the High Court in January and July of this year. In both instances, the Commission’s reports were found to be substantially lacking in factual evidence.
The January court ruling was in favour of Cargo Carriers, a leading provider of supply chain and logistics solutions. It concluded a matter that had begun in 2015, when complaints were made to the Commission by owner-drivers contracted under the Cargo Carriers’ B-BBEE owner-driver initiative (ODI). The complainants alleged insufficient empowerment through the ODI, regarding access to funds, assets and management training. Following an investigation, the Commission concluded in April 2019 that Cargo Carriers had engaged in fronting and was thus in breach of the B-BBEE Act. In its rulings, the High Court found that “not a single jurisdictional fact for fronting was established by the Commission.” The Court had also noted that despite further documentation provided by Cargo Carriers in response to the Commission’s preliminary findings in June 2018, the final findings in April 2019 were “a copy and paste of the preliminary findings.”
In June this year, a fronting case made by the Commission against Sasol Oil was declared invalid and set aside by the High Court. While the Commission had notified Sasol Oil in 2017 that it was commencing investigations following complaints made against it, the case had its roots in an empowerment transaction entered into in 2006. At the time, Sasol Limited and Sasol Oil entered into an agreement with empowered company, Tshwarisano LFB Investment Proprietary Limited (Tshwarisano), in which the latter acquired a 25% shareholding in Sasol Oil.
At the conclusion of the empowerment transaction in 2015, a complaint was made to Sasol Limited by one of Tshwarisano’s minority shareholders about what it deemed had been an unfair preference share agreement between itself and its funding partner at the time of its share acquisition. Sasol Limited was able to facilitate a settlement agreement between the minority shareholder, Awevest Investment Limited (Awevest), and its funding partner.
When the Commission approached Sasol Oil in 2017, it was to outline a complaint against Sasol Oil, stating that it had been responsible for the unfair terms set out in the original agreement between Awevest and its funding partner, and had thus knowingly engaged in and perpetuated a fronting practice by claiming black ownership points flowing from Awevest’s participation in Tshwarisano.
Upon notification by the Commission of its final findings of fronting and recommended remedial actions in 2019, Sasol Oil approached the High Court. The Commission’s report was invalidated by the High Court, which ruled that “the Commission’s decision was based on incorrect facts and not on admissible evidence. The Commission took irrelevant considerations into account and relevant considerations were not taken into account by the Commission.” Furthermore, the Court ruled that the Commission’s findings were “made arbitrarily or capriciously within the meaning of section 6(2)(e) of PAJA and were irrational within the meaning of the section 6(2)(f)(ii) of PAJA” and “unreasonable within the meaning of section (6)(2)(h) of PAJA”.
The actions of the Commission in all of the abovementioned cases raise concerns. In the case of CRRC, the Court’s rulings indicate, in part, that the Commission was not following due regulatory process; in other words, the Commission had not awaited the outcome of investigations by other regulatory bodies before intending to publish its final findings’ report. Those further investigations could well have had an impact on the Commission’s findings and subsequent recommendations. In the cases of Cargo Carriers and Sasol Oil, the Commission seemed intent on finding instances of fronting at all costs, neither considering additional documentation supplied to it by both companies following its initial findings, nor balking in the face of poor evidence.
It is doubtful that the Commission’s setbacks will dim government’s quest to rout out fronting. Earlier this year, Minister of Trade, Industry and Competition, Ebrahim Patel reiterated that resistance to B-BBEE impedes other related policies that the government has introduced, or plans to introduce, in order to broaden economic participation and combat inequality. He said, “Legal challenges against B-BBEE policies have sought to stall through litigation and aggressive posturing, the necessary journey of transforming the economy. It is a dangerous strategy that will fail. It will ultimately undermine the social stability that democracy rests upon.”
Fronting was criminalised in the BEE Amendment Act in 2013. Individuals deemed to have had actual knowledge of a fronting practice can face criminal sanctions that might include a fine and/or up to ten years’ imprisonment. Convicted individuals could be barred from doing business with organs of state for a period of ten years from the date of conviction. Companies could be given an administrative penalty of up to 10% of annual turnover, with awarded contracts with organs of state cancelled.
The Commission’s actions, found to be wanting according to South African law, could well undermine the confidence of companies to develop empowerment transactions without fear of prejudice at a later stage. Companies are, nonetheless and in good faith, obliged to seek out empowerment partners to contribute to South Africa’s transformation. In an environment where an organ of state appears, for all intents and purposes, to have gone somewhat rogue, yet remains firmly backed by the state, companies are advised to reach out to empowerment transaction experts so as to create robust, transparent and compliant transaction vehicles that will withstand any scrutiny.
Evon Jeewan is a Corporate Finance Principal | Bravura.
This article first appeared in DealMakers, SA’s quarterly M&A publication
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Corporate finance corner (M&A / capital raises)
Richemont has announced a major step forward in its direct-to-consumer online strategy. I find this fascinating, with many of the world’s largest consumer brands going this way so that they can lock in the full margin as the manufacturer and the retailer. I always wondered whether there are enough people willing to spend the price of a family hatchback on a timepiece or necklace without even seeing the product, but YOOX NET-A-PORTER (YNAP) claims to have 4 million customers! Admittedly, most of those customers will be buying costly shoes and handbags rather than exceptional timepieces, so the jury is still out for me from a Richemont perspective. Richemont’s vision has been to make YNAP a neutral platform with no controlling shareholder, thereby helping the entire luxury goods industry to digitalise. US-listed FARFETCH (another company that loves capital letters) will be acquiring 47.5% in YNAP and an entity linked to Mohamed Alabbar will be acquiring 3.2%, so there will be no outright controlling shareholder. Alabbar is the founder of the property company that built the Burj Khalifa – quite a claim to fame! The announcement is somewhat contradictory, noting a put and call option structure that would lead to FARFETCH acquiring the remaining shares in YNAP. This would break the whole “no controlling shareholder” argument but I think Richemont’s point is that no luxury goods manufacturer would then control the platform. FARFETCH already operates an online marketplace for luxury goods and part of this deal will see Richemont’s Maisons (the private school word for “manufacturers of very expensive things”) joining the FARFETCH marketplace. Richemont will hold a stake of around 12% – 13% in FARFETCH after this transaction and will receive a further $250 million worth of shares after five years. There is no debt in YNAP and Richemont has committed a credit facility of $450 million for up to 10 years. Alabbar’s investment will take the form of a share-swap, as Alabbar will sell its joint venture in the Gulf region with YNAP to that company in exchange for a 3.2% stake. Richemont is taking a nasty knock to its income statement here, with a write-down of €2.7 billion. FARFETCH’s share price has tanked by over 77% this year (though it was over 10% higher pre-market thanks to this announcement). Online retailing of luxury goods clearly isn’t easy.
In a transaction like Impala Platinum’s offer to Royal Bafokeng Platinum shareholders, there is considerable involvement from regulators and even government. The latest development is that Impala Platinum has concluded a Framework Agreement with the Minister of Trade, Industry and Competition. It deals with concepts like employment, support for small businesses and localisation. This is an important strategic step in the deal as the Competition Commission has already recommended an approval to the Competition Tribunal whose decision is pending. Northam Platinum is the sole party objecting to the Tribunal. As a reminder, the cash portion of the offer price is R90 and Impala Platinum has decided not to reduce the price by the amount of the dividend recently declared by Royal Bafokeng Platinum. The full offer is R90 plus 0.3 Impala Platinum shares for each Royal Bafokeng Platinum share.
Etion Limited has distributed the circular for the proposed disposal of Etion Create to Reunert. You’ll find it at this link. The original firm intention announcement was missing some critical elements required by Takeover Law, specifically confirmation of Reunert’s available cash or a bank guarantee for the offer. This is such basic stuff for proper commercial lawyers, so I really don’t know why we are seeing all these Takeover Law issues lately. As a reminder, the Takeover Regulation Panel (TRP) is the regulator here and they do a great job. Reunert has now provided a bank guarantee and the other elements that were missing from the original announcement have also been addressed.
Encha Properties, the B-BBEE investor in Vukile Property Fund, has had to sell a portion of its shares to settle a loan with Investec. The remaining stake is around 6% in Vukile and Encha plans to remain a long-term shareholder.
Blue Label Telecoms is busy with the recapitalisation of Cell C, a process that has taken longer than initially anticipated. These things always take longer than people think. Binding agreements should be concluded soon and the transaction is expected to close by mid-September.
Onelogix has been on the “will they / won’t they” list for a potential buyout for months now. The board’s enthusiasm to take the company private was tempered by macroeconomic conditions and company-specific issues, like a storm that caused significant damage. The company announced that NJB Investco (Pty) Ltd has sold all its shares in the company and that Best-Krug Saco (Pty) Ltd now holds 34% of shares in issue. The announcement doesn’t give further information on the parties sitting behind these entities.
Financial updates
KAP Industrial released its results for the year ended June 2022. If we look at continuing operations, revenue increased by 17% and operating profit before capital items jumped by 40%, with operating margin expanding to 10.5%. The story gets even better further down the income statement, with headline earnings per share (HEPS) increasing by 73% to 74.4 cents. The share price is trading at around R4.40 so the Price/Earnings multiple is 5.9x based on those numbers. The numbers are slightly different with discontinued operations included, though the impact on HEPS is minimal (75.1 cents vs. 74.4 cents from continuing operations only). A dividend of 29 cents per share has been declared, nearly double the comparable dividend. The cash story isn’t quite as exciting as the earnings growth, with only a 17% increase in cash generated from operations due to working capital requirements. The segmental results vary considerably. PG Bison grew revenue by 16% and operating profit by 35%, with gross margins protected despite raw material cost escalations. Restonic was hammered by the riots in July 2021 and raw material cost increases at short notice, with revenue down 7% and operating profit down a nasty 73%. Automotive business Feltex also had a horrible year thanks to the riots and floods that had a significant impact on new vehicle assembly volumes. Feltex experienced a drop of 11% in revenue and 77% in operating profit. Polymer business Safripol (by far the most profitable division in KAP) had a wonderful year, with revenue up 35% and operating profit skyrocketing 227%. Although transport business Unitrans grew revenue 11%, operating profit dropped by 11%. The troubles came in the Unitrans Africa business, where profit collapsed by 77% despite revenue increasing by 7%. Finally, recently-acquired DriveRisk was included in this result for seven months and contributed R22 million operating profit at a margin of 9%, with KAP noting that performance was below expectations due to semiconductor chip shortages.
Bid Corporation operates in the lucrative food service industry in 35 countries. It is a truly global company and you can invest in it right here on the JSE. The results for the year ended June 2022 reflect a return to restaurants by consumers. As Zoom’s share price will confirm, it turns out that people didn’t want to remain locked in their houses as the pandemic abated. Group revenue growth was 28.2% as reported and over 33% on a constant currency basis, driven by 49% growth in Europe (the biggest market) and 55.1% in the UK as the second-largest market. Cash generated from operations before working capital changes was 41.4% higher. They are very clever in making that distinction, as the cash net of working capital changes was only 3.9% higher. The overall movement in cash was negative this year, with significant investment in the business. This is largely to be expected in a period of recovery, as you need the balance sheet to support the operations. Other than Australasia, which put in a disappointing result for the first six months of the year thanks to Covid and draconian government regulations, the group is looking strong across the board. A final dividend of 400 cents per share has been declared. Although there’s been plenty of volatility along the way, the share price is essentially flat year-to-date. The recovery has been priced in for a while now.
DRDGOLD has released results for the year ended June 2022. It’s been a tough period for the company, as the tailings model is all about volume throughput and squeezing out small margins. This makes DRDGOLD highly sensitive to the gold price, as small changes in price can have significant percentage impacts on the operating margin. An unsavoury situation is one in which the gold price is underperforming and inflationary cost pressures are coming through the system, which is exactly what has been happening. Revenue is down 3% and HEPS has fallen by 22%. Although the year-on-year comparison isn’t a great story, the company is profitable and has declared a dividend of 40 cents per share, identical to the comparable period despite the drop in earnings. The share price is down just over 20% this year.
Harmony Gold has released a trading statement for the year ended June 2022. The CEO commentary focuses on discipline in capital expenditure and reduction of overall risk, which sets the tone for the news that Harmony will be restructuring the Tshepong Operations. Tshepong North’s sub-75 project has been suspended and the life of mine has been reduced from 19 years to 7 years. This creates a smaller but immediately profitable operation. The capital that was earmarked for Tshepong North will instead be used for the Zaaiplaats project and the Kareerand tailings expansion in the Vaal River region, both of which offer higher returns. Here’s something that will shock you at first blush: Harmony has recorded a loss in this financial year. Impairment losses have taken the group into the red, with an expected loss per share of between 160 cents and 189 cents. HEPS excludes the impact of impairments and other non-recurring items, so it is still a positive range (461 cents to 549 cents). R3.6 billion of the R4.4 billion total impairment relates to Tshepong Operations. Ouch.
If you need to renew your ID card or passport at Home Affairs soon and you have several hours to kill, Redefine Properties just released the mother of all presentations. The capital markets day slide deck has 145 pages to keep you busy. Investors will care the most about the distributable income guidance, which was thankfully summarised in the SENS announcement. Distributable income for the year ended August 2022 is anticipated to be 52.6 cents per share, which is within previous guidance. For FY23, an increase of between 3% and 7.2% is expected. Between 80% and 90% of distributable income should be paid out as a dividend. Of course, these numbers depend on many factors like trading conditions in South Africa, the contribution from Eastern European subsidiary EPP and the inflation and macroeconomic outlook.
Exemplar REITail (that really is the name) has updated the market on its performance for the 5 months to July 2022 and has issued a trading statement. Vacancies are down from 3.26% at 1st March 2022 to 2.8% at the beginning of August. Like-for-like rental is up by 6.3%. Despite inflationary pressures, property operating costs as a percentage of revenue decreased vs. the prior financial year, although administrative costs increased. With such a significant impact from Covid and the riots in the base period, the company has guided that the distribution per share for the six months ending August will be between 36.7% and 50% higher. Speaking of the riots, the last remaining property being repaired in the portfolio is Edendale Mall. Phase 1 of the rebuild will be complete by the end of this month, representing 42.5% of rental for the centre. The next 40% or so will open in December 2022, with the rest in April 2023.
Globe Trade Centre (an obscure Eastern European property fund with a name that always sounds like a typo) has released results for the six months to June 2022. Rental income was up 5% and Funds From Operations or FFO – the key measure for property funds particularly with an offshore focus – was up 7%. The loan-to-value (LTV) ratio is 42%. The fund is heavily skewed towards office properties, with 39 of the 45 completed commercial buildings being office properties and the other 6 being retail properties.
Deneb Investments has finalised its Covid business interruption claim and will receive around R74 million (excluding VAT) from its insurers.
If you are a shareholder in Octodec, take note that the company will hold a pre-close webinar at 10am on Thursday 25th August. The presentation should be available on the company website after the webinar.
Operational updates
Spear REIT has announced the R74 million redevelopment of Blackheath Park for Bravo Brands, a group that includes brands you would recognise like King Koil, Sealy and Edblo. The company is using Cape Town as the growth node for its export business. Bravo was the tenant in a property in Parow owned by Spear and approached the property fund to find new, larger premises. This triggered the redevelopment of Blackheath Park, with Bravo Brands taking 16,000sqm initially on a 10-year lease. The plan is to increase this to 42,000sqm over the next five to seven years. The initial redevelopment yield will be 9.85% on completion. Bravo will take occupation on 1 February 2023. This is a feel-good story for local manufacturing as well as for Spear’s ability to respond to tenant demand in the Western Cape.
Share buybacks and dividends
Like a smoker who can’t kick the habit, British American Tobacco continues to repurchase shares on a daily basis.
Notable shuffling of (expensive) chairs
The appointment of heavy-hitting directors to the board of Telkom only just squeaked through at the AGM, with 53% approval for the likes of Brian Kennedy and Mteto Nyati to join the board. Although not specifically linked to director appointments, there were important special resolutions that didn’t pass, like share repurchase authorities or providing financial assistance. There is clearly unhappiness in the Telkom shareholder register and that’s not great news for a potential offer from MTN, though it really depends on what has driven this vote.
Not quite a shuffling of chairs, but rather an extension to the period that this chair will spend in one place – Oceana has received a dispensation from the JSE to extend interim CFO Ralph Buddle’s term until 31 January 2023. After complete upheaval in its executive structures, the company is looking for a permanent CFO.
Kibo Energy issued a notice of AGM and announced that the chairman (and one of the founding directors), Christian Schaffalitzky, will be retired from the board at the AGM as part of broader retirement planning. A new chairman is expected to be appointed by the end of 2022. It’s generally a good sign when founders feel confident enough to walk away from their babies.
Fairvest’s company secretary has resigned to “pursue other interests” – the company will announce a replacement in due course.
Luxe Holdings is saying goodbye to yet another director, with an independent director leaving the board. Two new directors have joined the board and a company secretary has also been appointed. Eventually, the revolving door at this company will calm down.
The chairperson of Buffalo Coal has resigned from his position on the board. A replacement hasn’t been announced yet.
Director dealings
At first blush, it looks like Kenneth Collins and associated entities sold shares in Tradehold worth nearly R6.5 million. If you read carefully, the buyer is also an entity associated with Collins, so this was really just a restructure of personal affairs.
An associate of a director of Pick n Pay has sold shares worth nearly R460k.
Sygnia CEO David Hufton exercised share options and sold almost half of the stake. This is standard practice in the market, with directors usually selling a portion of the shares to cover the taxes payable.
An associate of a director of Clicks has sold shares in the group worth R10.7 million.
More directors of SilverBridge Holdings have accepted the offer from ROX Equity Partners of R2.00 per share.
Unusual things
Because I read every single SENS announcement these days, I’ve now learnt that even South Africa goes into a closed period for investors! National Treasury will not have any investor meetings from 26 September to 26 October, the month before the Medium-Term Budget Policy Statement (MTBPS).
In a recent webinar, the founders of bizval (including your favourite ghost) explained why valuations are both an art and a science. We worked through some key principles and enjoyed a vibrant Q&A session at the end.
Ultimately, founders all want the same thing: a successful journey in creating an asset of value. A business only has value if the founder is able to step away one day and sell to someone new, cementing a legacy in the process.
Of course, the big question is this: what is the business really worth?
After an extremely successful inaugural webinar, we are looking forward to bringing you more insights on valuation methodologies and how founders can build more valuable companies. In the meantime, enjoy the recording below and head on over to bizval.co to learn more about the online valuation tool we have built.
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