Huge Group has announced the acquisition of Interfile Group, a solid business with 80% of its revenue earned on an annuity basis. The group offers operational and hosting services, transactional services (bill presentment, SMS, email and payment), call centre services, consulting services and maintenance services. At its core though, Interfile is a software company that implements business process solutions for clients including government departments, municipalities and private sector organisations. The claim to fame is that Interfile built the eFiling system for SARS in 2003. Over the last five years, Interfile has paid dividends of over R65 million. There are synergies with certain Huge Group companies like Glovent Solutions. YW Capital, an equity advisory and investment house, will be coming on board as the new empowerment partner. YW Capital has an investment portfolio that exceeds R450 million. Huge will acquire 30% from Msemu Investment Trust for R30 million and 14% from Aloecap for R14 million. An agreement is being finalised with Gurb for a further 25% and with the founder of the business for 6%. Ultimately YW Capital will hold 25% in the business and the executive management team will hold 5%. This values the group at around R100 million vs. 2022 profit after tax of R27.3 million, so that’s an attractive deal for Huge at a Price/Earnings multiple of less than 4x! It’s certainly a…huge step forward from the Adapt IT debacle.
Altron is in the process of selling Altron Document Solutions to Bi-Africa Investment Holdings. One of the conditions is an approval from the Zimbabwe Competition and Tariff Commission. In a surprise to absolutely nobody, the deal is being delayed because that approval is outstanding. The deadline for fulfilment of conditions has been extended from 31 August 2022 to 28 February 2023.
Although it didn’t come out on SENS, Barclays Plc announced on the LSE that it will be selling its remaining 7.4% shareholding in Absa through an accelerated bookbuild. This means that institutional investors will be approach to take up the stock. The bank is doing well at the moment, so there should be solid demand.
Tradehold shareholders have approved the disposal of its interest in Moorgarth Holdings to Moorgarth Group Holdings for £102.5 million.
Yet another executive of SilverBridge Holdings has accepted the offer from ROX Equity Partners of R2.00 per share. The closing date for the offer is 23 September.
Afristrat’s problems just seem to be going from bad to worse. With the shares suspended from trading on the JSE, the company can’t go ahead with acquiring a distressed loan asset pool of $5 million in exchange for the issuance of shares. The deal is off.
Financial updates
Woolworths released results for the 52 weeks ended 26 June 2022. It’s an unusual one, as the Fashion Beauty Home (FBH) segment has a good story to tell year-on-year and the Food segment reported a decline in profits. The group level result is a combination of South Africa and Australia where lockdowns were terrible for the first half of the year, so group turnover growth of 1.7% isn’t a very helpful metric. The more useful number is 4.9% growth in the second half of the year. The market definitely noticed the balance sheet recovery, with Woolworths moving from net borrowings of R1.1 billion to net cash of R229 million. This was achieved through a strong working capital performance, capex discipline and cash received from all underlying subsidiaries including David Jones. This supported a whopping 247.7% increase in the dividend. Looking deeper, FBG grew full year turnover by 5.4% despite trading space declining by 4.5%, so Woolworths is focused on trading density (sales per square metre). Gross profit margin in this business expanded by 210 basis points to 47.6% and operating margin moved from 8.4% to 11.9%. In Food, sales were up 4.2% and price movement was below inflation, reflecting price investment by Woolworths. Gross profit fell by 50 basis points due to growth in online sales, supply chain costs and price investment. Full year profit fell by 3.9% with an operating margin of 7.3%. In Australia, the focus is on the second half of the year where David Jones grow turnover by 2.6% and Country Road Group grew by 9%. The share price closed 4.8% higher on a day when the market was very jittery, so that’s a solid outcome.
Discovery released a trading statement for the year ended June 2022. The group talks about a “pivot to growth” and that was reflected in headline earnings growth of between 70% and 80%, although core new business annual premium income only increased by 6%. The huge increase in profit was in Discovery Life as the pandemic gently fell away, with the most impressive core business growth in Discovery Health with 20% and VitalityHealth with 27%. Discovery Insure was severely impacted by adverse weather and recorded a loss. Pressure in the Chinese investment market drove a reduction in profitability at Ping An Health Insurance. Discovery Bank put in a “strong performance” although very few details are given. Full year results will be released on 7th September and will be very interesting. The share price has fallen 15% this year.
Murray & Roberts has released results for the year ended June 2022. Revenue increased by 36.5% to R29.9 billion and EBIT was over 30% higher at R705 million. The order book is slightly lower year-on-year but “near orders” (which the company describes as having more than a 95% chance of being secured) skyrocketed from R11.1 billion to R60.4 billion. Although continuing HEPS jumped from 16 cents to 58 cents, net debt is higher (R1.1 billion vs. R0.7 billion) and there is no dividend. The Energy, Resources & Infrastructure platform boasts by far the largest order book in the group. In stark contrast, the Power, Industrial & Water platform remains loss-making. Overall, the company is happy with the group order book and notes that operating margin is expected to improve from FY24.
Trellidor released an updated trading statement for the year ended June 2022. The previous update was released on 6 July and noted that due to the Labour Court judgement and related provision of R32.1 million, HEPS would be down by at least 50% vs. the prior year. There were plenty of other challenges in this period, leading to a 1% drop in turnover and a reduction in trading margin due to raw material and freight inflation. The company notes that steel prices increased by more than 80% in the past two years and that supply chain constraints have persisted. The original trading statement didn’t tell the full story, as HEPS is expected to drop by at least 95% and may even slip into the red. HEPS in the comparable period was 40.80 cents and the Labour Court judgement is a 24.9 cents per share impact, so the rest is attributable to the far more worrying operational issues that aren’t about to disappear. It’s never nice to see a company taking such a tough knock.
Aspen released its results for the year ended June 2022 and the market approved, with the share price nearly 6% higher in late afternoon trade. This is a classic example of grinding out a great profit performance despite tepid revenue growth (just 2%). Normalised EBITDA from continuing operations was up 11% and HEPS from total operations increased by 31%. The dividend is 24% higher at 326 cents per share. Make sure you read the operational update further down in Ghost Bites that deals with the news of a ten-year vaccine deal with Serum Institute of India.
Motus released results for the year ended June 2022 and fell 4.4% on the day, so that’s not ideal. The amount of leverage in this result is something to behold, with revenue only up 5% and HEPS up by 72%. Here’s an interesting one though: free cash flow from operations actually declined by 18.1%. Despite pressures on cash flow from working capital requirements, the dividend is 71% higher at 710 cents per share (of which the interim dividend was 275 cents). Based on the closing price, Motus is trading on a dividend yield of 6%. Net debt to EBITDA is only 0.8x, so the balance sheet remains strong. South African vehicle sales have been better than predicted and Motus increased market share from 20.2% to 22.4%. Motus maintained market share in the UK despite sales in that market falling by 18.2%. Share was also maintained in the Australian market, which fell by 2.1%. For context, the SA operations contributed 66% of group revenue and 81% of group operating profit.
Cashbuild released results for the year ended 26 June 2022. Revenue fell by 12% (despite selling price inflation of 7.2%) and even the gross margin came under pressure, dropping from 26.9% to 26.3%. Thankfully, operating expenses also fell by 13%, so operating profit was down by 16% in a result that could’ve been a lot worse. HEPS is down by 33%. Of the 36 stores that were looted, 28 have reopened, 3 were permanently closed and 5 are in the process of being rebuilt or possibly closed. Trading conditions remain challenging, with revenue down 3% year-on-year in the six weeks subsequent to period end. A final dividend of 677 cents per share has been declared, taking the dividend for the year to 1,264 cents. After closing 8% lower at R226.99 per share, Cashbuild is trading on a trailing dividend yield of 5.6%.
Mustek released a trading statement for the year ended June 2022. The period ended in the worst way possible, after founder David Kan sadly passed away in May. HEPS is expected to be between 15% and 25% lower than in the comparable period, coming in at between 331.36 cents and 375.54 cents. For context, the 2019 result was HEPS of 139.32 cents, so Mustek is still running way ahead of pre-pandemic levels. The share price is up more than 80% over 3 years and is still in the green in 2022, a commendable performance.
Clientele Life has released results for the year ended June 2022 and has put in a solid performance, with the dividend 9% higher at 120 cents per share. This stock trades based on dividend yield, with a share price of just R11.50 (and thus a dividend yield of 10.4%). Everything is managed tightly, so insurance premiums up by 1% for the year aren’t an issue when operating expenses fell by 6%. HEPS increased by 12%, driven mainly by 15% increase in net profit in Clientele Life.
DRA Global has released results for the six months to June 2022. Revenue is down 16.2% and the company has swung into a loss. The net cash balance has fallen from A$118.4 million to A$72.5 million. Although there is no dividend, the company did manage to complete the share buyback programme. The core businesses in the EMEA and AMER regions are performing well, with APAC anticipated to become profitable in the second half of the financial year. Fixed-price contracts in the APAC region have been a major drag on profitability and their terminations are being commercial resolved. On a headline earnings level, the group recorded a small profit in this period, down 83%! The share price is down more than 40% this year.
Anglo American has announced the rough diamond sales value for the seventh sales cycle of 2022. It has come in at $630 million, slightly below $638 million in the sixth cycle. Usual seasonal trends mean that the next few cycles will be affected by the temporary closure of polishing factories for the Diwali holidays.
Randgold & Exploration Co Limited has released financials for the six months to June 2022. The numbers are a little pointless, as all the cash is sitting in investment funds and there has been significant expenditure on litigation. There are currently no operations.
African Bank has a CET1 ratio of 38%, which means that the bank is exceptionally well capitalised. It’s no wonder that this bank is on the acquisition trail, having risen from the ashes. This equity buffer is around three times higher than where banks usually operate.
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Operational updates
In addition to the financial results dealt with above, Aspen announced a collaboration agreement to manufacture and make available four Aspen-branded vaccines for Africa. Before you panic and wonder why anyone cares about Covid vaccines anymore, you’ll be pleased to learn that these are routine vaccines (pneumococcal / rotavirus / polyvalent meningococcal / hexavalent) which means that people still want them. This is a ten-year agreement with Serum Institute of India, the world’s largest vaccine producer. Aspen will manufacture, market and distribute the Aspen-branded vaccines across most of the continent, excluding certain markets where parties already hold rights to these vaccines. With 99% of vaccines in Africa currently imported, Aspen anticipates receiving grant funding from the Bill & Melinda Gates Foundation and the Coalition for Epidemic Preparedness Innovations (CEPI) to support African regional manufacturing capacity.
Karooooo (the owner of Cartrack) is clearly excited about the milestone of 1,600,000 subscribers, releasing an announcement that this number has been reached. The results for the second quarter are in line with “management’s expectations” and results will be out on 12th October.
Delta Property Fund released a voluntary pre-close update for the six months ended 31 August 2022. The group has been focused on disposing of non-core assets, which are largely vacant. 26 assets have been earmarked for disposal with an aggregate value of R767 million. During the period, disposals worth R259.2 million were executed. The proceeds are used to reduce debt. The vacancy rate of 33.9% is enormous and will only improve to 32.1% based on the disposals already agreed (property transfers are underway). It gets worse the more you look, as month-to-month leases are 12.3% of the total. The disposal of the non-core holding in Grit Real Estate Income Group is also a priority. This disaster of a fund has lost 94% of its value over 5 years.
Rebosis Property Fund has announced that Phahlani Mkhombo and Jacques Du Toit have been appointed as the joint business rescue practitioners of the company. In reality, they are now in charge of the group.
Share buybacks and dividends
In the past few months (other than during closed period), Super Group repurchased shares worth R741.5 million. This represents 6.7% of issued share capital.
Glencore is also back at it, with a repurchase of around £17.65 million.
Notable shuffling of (expensive) chairs
Ms Dimakatso Quocha has joined the board of African Media Entertainment, bringing with her extensive experience in the ICT and broadcasting sector.
DRA Global has appointed Michael Sucher as CFO, having been the Acting CFO since May. He has been with DRA since 2021 and held previous roles at BHP and South32.
Director dealings
A prescribed officer of Harmony Gold sold R8.1 million in shares all the way back in MARCH and the company has only announced it now due to an “administrative oversight” – this attention to detail (i.e. lack thereof) might explain the recent financial performance.
A director of a subsidiary of Stefanutti Stocks has acquired shares in the company worth more than R91k.
A director of Equites Property Fund has pledged further shares as security for a loan from Investec. Many people don’t realise that directors in listed companies are often sitting with leveraged positions, especially in the property sector.
A director of a subsidiary of RFG Holdings has disposed of shares worth over R381k.
A director of a subsidiary of Renergen has sold shares worth nearly R175k.
A director of Redefine Properties has bought shares in the company worth around R1.29 million.
A prescribed officer of Adcorp has sold shares worth around R1.7k. I hope he doesn’t spend it all at once.
Mediclinic has published the circular related to the offer by Remgro and MSC Mediterranean Shipping Company, acting through Manta Bidco Limited. The independent Mediclinic directors consider the terms to be fair and reasonable, having taken advice from both Morgan Stanley and UBS (thereby racking up a bill that would make some medical specialists blush). You’ll find the scheme document at this link and all related documents at this link.
Mahube Infrastructure is in the process of restructuring and recapitalising its business. Shareholders are also being asked to approve the revised investment policy. The JSE has granted a dispensation for the rule to dispatch a circular within 60 days of the announcement. A circular will be issued to shareholders before 5 September 2022.
Financial updates
Conduit Capital’s journey to zero (or pretty close) continues, with the Prudential Authority lodging an application to the High Court to place Constantia Insurance Company Limited into liquidation, with a court date in September. This subsidiary represents 94.4% of the revenue of the consolidated group. With 200,000 shares bid and over 2.5 million shares offered, those stuck in the structure are trying to get out.
Harmony Gold fell by 11% after releasing results for the year to June 2022 that reflected the full extent of the pain. Although revenue increased by 2%, production profit fell by 20%. Operating cash flow decreased by 55%. Guidance for next year doesn’t look like much to get excited about, with production in a similar range to this year and all-in sustaining cost “below R900,000/kg” vs. R835,891/kg this year. The final dividend of 21 cents per share is a small consolation prize for a share price that has fallen more than 28% this year.
Master Drilling released interim results for the six months to June 2022. On a USD basis, revenue was up 34% and profit increased by 47.9%, so that’s a fantastic set of numbers. Headline earnings per share (HEPS) is measured in ZAR and was up 55.5%. The accounting earnings growth hasn’t fully translated into cash earnings growth, with net cash from operating activities only up by 19%. The committed order book is $242.7 million. To put that into perspective, revenue for this period was $96.5 million. Master Drilling doesn’t typically declare interim dividends and this period is no different. The share price is up more than 50% in the past 12 months as activity has picked up significantly in the mining sector. This is about as close to “shovels in the gold rush” as you can get.
STADIO Holdings (and yes, they insist on capital letters) released solid results for the six months to June 2022. When you’ve grown HEPS by 18%, you’re allowed to take the upper case route. That result has been driven by 11% growth in student numbers, which led to 13% revenue growth. It’s worth noting that STADIO negotiated the early settlement of the CA Connect acquisition (a runaway success) through issuing Milpark shares, thereby diluting its interest in Milpark from 87.2% to 68.5%. STADIO only pays annual dividends rather than interim dividends, so there’s no dividend for this period. Despite the world returning to normal, contact learning student numbers fell by 4% and distance learning increased by 14%, with distance learning now contributing 85% of the student base. Back in 2017, it was only 80%. STADIO has no debt and a cash balance of R167 million, so the group really is in a strong position. This is a classic case of a great story that has already been priced in, as the share price is down over 5% this year. In today’s edition of Bad Conclusions, we also note that STADIO’s students are learning less and eating more:
Old Mutual released results for the six months to June 2022 and the market hated them, sending the share price down over 6.5% by afternoon trade. That’s a little embarrassing when the first line of the announcement talks about a “strong set of results” – well, the market says otherwise. The words “more than offset” are also frequently used, mainly because the bad news tended to outweigh the good news. Net client cash flows fell by 27% and funds under management dropped by 7%. Value of new business fell by 4%. The highlight was probably Life APE sales, up 15%. Thanks to the pandemic mostly disappearing from our lives, results from operations increased by 87%. Adjusted headline earnings would’ve been up 19% if income from Nedbank was excluded from the prior period, as Old Mutual unbundled the stake in November 2021. That doesn’t seem terrible on an overall basis, but the market looked through the net result to the underlying performance and clearly had different expectations. The interim dividend of 25 cents per share (44% of adjusted headline earnings) is below the dividend policy (ordinary dividend cover of 1.5x to 2x of adjusted headline earnings over a financial year) and many in the market had hoped for more. The share price is down nearly 17% this year.
Kaap Agri has released a voluntary trading update for the ten months ended July 2021. The agriculture industry has been impacted by higher fertilizer and fuel costs due to the conflict in Ukraine, as well as logistical issues related to the floods. The Agri trade business achieved real growth of 16.6% vs. the prior period and the Retail trade business grew turnover by 1.6% excluding the acquisition of PEG Retail Holdings. Margins in both businesses have improved relative to the prior period. Kaap Agri notes “severe fuel volume decreases” in the broader industry based on high fuel prices, as consumers have been forced to reduce travel. The impact on Kaap Agri’s fuel business has been a reduction in volumes of only 2.8% (excluding PEG), which is good under the circumstances. As the PEG acquisition became effective on 1 July, only one month of its performance is included in the numbers for the 10 months ended July 2022. Those operations have exceeded expectations. Kaap Agri reports recurring HEPS as the most meaningful measure of profitability, with that measure expected to be between 15.3% and 21.3% higher in the year ended September 2022.
Super Group released results for the year ended June 2022. Revenue increased by 17% and EBITDA was up by a substantial 69.8%. In a rather unusual shape to the income statement, the impact on HEPS was lower than on EBITDA, with that metric up by 33.4%. Cash generated from operations was up by 38%, which is always an important line to consider. The dividend is 34% higher at 63 cents per share. The share price has lost more than 16% this year.
Transpaco has released results for the year ended June 2022. HEPS is 41% higher at 475.5 cents and the total dividend per share is 215 cents. This result was made possible by revenue growth of 12.5% and operating profit growth of 35.1%, with operating margin expanding from 79% to 9.6%. The Plastic division contributed 58% of group operating profit and grew operating profit by 31%, with the Paper and Board division contributing 31% of group operating profit and growing its profit by a meaty 44%. The rest of the operating profit came from properties and group services, in case you were doubting your maths. The share price is up 48.5% this year.
Brimstone Investment Corporation released results for the six months to June 2022. I only ever look at the intrinsic net asset value (INAV) per share, as this is an investment holding company and the consolidated results reflect the roll-up of underlying companies, which makes it difficult to draw meaningful conclusions. One such conclusion is that Brimstone continues to disappoint investors, with INAV per share down by 18.4% year-on-year. No interim dividend has been declared, so there is nothing to ease the burn for investors. The share price is flat this year and the bid-offer spread is even wider than the frowns on the faces of investors.
Lewis Group has been upgraded by Global Credit Ratings (GCR) from A(za) to A+(za) for its long-term rating. The short-term rating has been affirmed at A1(za) and the outlook is stable. GCR noted Lewis’ resilient performance through the pandemic and its strong operating margin that the rating agency expects to continue trending upwards. Despite many reasons to feel good about the business, the share price is flat year-to-date.
Equites Property Fund has also announced an update from GCR, affirming its existing ratings and revising its outlook to positive.
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Operational updates
Southern Palladium presented at the 2022 Africa Down Under event and has made the presentation available online. It has useful information on the PGM value chain in South Africa and the drilling plans for the company. You can find it here.
MC Mining Limited has announced updates for its Makhado project, Vele Colliery and Greater Soutpansberg Projects. The company is facing a decision around whether to move the Vele coal processing plant and modify it at Makhado, or construct a bespoke coal processing plant at Makhado. At this stage, the most attractive project NPV (net present value) is to move the Vele plant to Makhado. The construction of a bespoke plant gives almost the same return and retains the optionality around the Vele asset. The company has initiated discussions with BOOT (build, own, operate, transfer) funders. Other exploration assets in Limpopo (like the Greater Soutpansberg Projects) are longer-term opportunities.
Share buybacks and dividends
Last week, Prosus repurchased shares with a total value of nearly $208 million.
Lighthouse Properties is offering shareholders a scrip dividend of 1.625 EUR cents per share or a cash distribution of 1.462 EUR cents per share (a 10% discount to the scrip option). A scrip dividend means that shareholders receive shares in the company instead of cash. Lighthouse is incentivising shareholders to take the scrip option, as this helps the fund retail cash.
Reinet shareholders have approved a dividend of €0.28 per share and the exchange rate for the conversion to rand will be announced on 6th September.
AngloGold Ashanti has appointed Ms Gillian Doran has the CFO with effect from 1 January 2023. Ms Doran is currently the CFO of Aluminium within the Rio Tinto Group, based in Montreal.
Mpact has appointed a new independent non-executive director, which is particularly important given the battle that the company is having with Caxton & CTP, an activist shareholder in the company. Alethea Conrad has been appointed to the board and brings 16 years of experience at Oceana Group.
The company secretary of Calgro M3 is stepping down and being replaced by Juba Statutory Services. This is the only official company role that can be filled by a legal entity (obviously with a suitably qualified person behind it) rather than a warm body.
Director dealings
The directors of Sibanye-Stillwater are buying the dip, with Neal Froneman himself picking up over $682k in shares. Admittedly, that is relatively small change for him, dwarfed even by the Chief Regional Officer: Americas buying $731k in shares. A non-executive director bought nearly R2m worth of shares on the local exchange.
The group CFO of Famous Brands doesn’t mess around when it comes to investment positions in the company. He has bought contracts for difference (a leveraged position) with exposure of nearly R1.05 million.
An associate of a director of NEPI Rockcastle has bought shares in the company worth over R3.7 million.
A director of a subsidiary of Stefanutti Stocks has bought shares worth nearly R184k.
A director of ISA Holdings increased his exposure to the company through a transaction further up in his personal investment holdings. In other words, there was no changing of hands of the shares in the listed company. The look-through exposure increased.
Unusual things
Tsogo Sun Hotels will trade under its new name, Southern Sun Limited, from 7th September.
Ghost Grad Kayla Soni is new to the team and has hit the ground running with this week’s Ghost Global, covering a great variety of companies.
Bed Bath & Beyond Bounces Back
Bed Bath & Beyond (BBBY) has been a Ghost Global favourite recently, earning numerous headlines throughout August. Why not continue the trend?
The share price is up more than 130% this month, enjoying strong continued support from so-called “meme stock” enthusiasts who seem to buy shares regardless of fundamentals.
Speaking of the fundamentals, the company has plans to grow its customer base and win market share, while driving growth and profitability in addition to a stronger balance sheet. It all sounds great on paper. A “strategic update” is due from the company this week, which will give investors more to think about.
It’s also worth highlighting the “short squeeze” phenomenon – a surge in the share price that forces bearish investors with short positions (a bet on the price dropping) to repurchase shares at higher prices to limit their losses, thus driving demand and further inflating the price of these assets. The potential for a short squeeze can be measured through the “short interest” or percentage of shares in a short position, with reports that BBBY had short interest of over 50%!
Following a period of intense decline, BBBY is finalising fresh financing through a $400 million loan from Sixth Street Partners to counteract the “balance sheet swirl” as they are calling it. This caused a flurry of activity in the company’s bonds, with volumes in the 2044 bond making it one of the highest traded yield bonds on the market at the end of last week
Affirm Holdings: revenue rises and the stock slides
The “buy-now-pay-later” FinTech company slumped by 13.5% in premarket trading last Friday (and eventually closed nearly 20% lower) after the company announced a bigger-than-expected quarterly loss of 65 cents per share (vs. market expectations of a 58 cents per share loss). Revenue ran ahead of estimates though, coming in at $364.1 million vs. expected $355 million.
The biggest issue lies in the 2023 revenue predictions. Affirm expects $1.6 billion – $1.7 billion as online shopping heads towards pre-Covid levels, whereas the market expected $1.9 billion as a continuation of rapid growth during the pandemic.
The Covid darlings are struggling with growth as the world has normalised, driving Wall Street jitters that Affirm’s business model (providing short-term loans) will not succeed in a weak economy that is characterised by rising interest rates and surging inflation. There are many players competing for credit among shoppers, with pressure likely to be felt on demand for non-discretionary goods that shoppers would typically use credit for.
Investors have raised concerns around stagnant growth and the likely rise of delinquencies among borrowers as the economy weakens. Affirm’s credit loss provisions spiked to $72.7 million from $25.5 million in the comparable quarter last year!
Some analysts are looking through the noise and remaining confident, with Morgan Stanley giving it a Buy rating with a health warning that it could take a few more quarters for investor confidence to return. Those with a bearish view are pointing to a complacent company that is untested in an economic downturn.
Amazon: NOT in the game despite acquisition rumours
Will they? Won’t they? Rumours ran wild that Amazon would be making an offer for video game developer Electronic Arts (EA), driving a strong rally last week including a 15% pre-market gain. Things have settled down since then, so those who rushed into the spike are already nursing their losses.
If this deal is real, the technology giant would become the one of the leading video game companies in the world and this would likely be Amazon’s largest acquisition to date (at least $35 billion and far in excess of the acquisition of Whole Foods for $13.7 billion back in 2017).
The story is believable, with Microsoft in the process of acquiring Activision Blizzard (currently going through regulatory approvals). Electronic Arts is known for sports titles in particular, which is both a strength and a weakness as the business is dependent on being granted licences from sports clubs and associations. Average annual active users of 580 million is 16% higher than the prior financial year, so EA is still growing.
If not Amazon, would Apple or Disney make a move here? Microsoft won’t be able to, as competition authorities would certainly block a further acquisition after Activision Blizzard.
Amazon has been quick to shut down these rumours and EA followed the same route. Make no mistake though: EA is a logical acquisition target for the world’s tech and media giants. EA CEO Andrew Wilson hinted that EA would be “open” to doing business differently – read into that what you will.
Luxury fashion platform’s performance is not so farfetched
I’m sure all the shopaholics and fashionistas know about Farfetch, but for those of you that rotate through the same three outfits in your wardrobe, Farfetch is an online luxury fashion retail platform that sells goods from 700+ boutiques and brands worldwide.
Despite facing considerable exchange rate headwinds, FarFetch’s revenue beat estimates. Gross merchandise value (GMV) grew sharply in the pandemic and is still inching upwards, despite Russian operations being suspended (a critical market for luxury goods) and ongoing Covid-related lockdowns in China.
The New Guards Autumn-Winter 2022 collection proved to be a shopper favorite, with the Brand Platform contributing just over 10% of GMV.
The share price is up 25% in the past month, thanks mainly to the news of Farfetch acquiring 47.5% of Richemont’s YOOX Net-A-Porter (YNAP) online fashion group. With Richemont identifying Farfetch as its online platform of choice for luxury goods as the companies work closer together, this company is firmly on the map for South African investors.
It’s safe to say that Farfetch is a popular choice for investors, shareholders and shopaholics alike, which is why The Finance Ghost and Mohammed Nalla chose to focus on the company in this week’s episode of Magic Markets Premium. For insights into Farfetch (including its very worrying balance sheet) and over 40 global stocks, with a new report and podcast released every week, visit the Magic Markets website to subscribe. At R990/year, it’s the best investment you can make – an investment in yourself!
Hosted by Diana Granoux, The Family Finance Show focuses on real-world tips and advice to help people do a better job of managing their finances. After I appeared as a guest in the first season to talk about dividends, Diana invited me back for a raw discussion about life as an entrepreneur.
Whether you are contemplating a side hustle, already executing that strategy or so far down the road that you’ve quite your corporate job, there is something in here for you. I may be a ghost, but the stories and insights are authentic and based on my actual experience in “escaping” corporate.
The world of entrepreneurship isn’t for everyone, as you’ll discover by listening to this show:
Detailed cautionary announcement regarding a potential offer by Walmart to acquire all the outstanding shares in Massmart that it does not already own, excluding treasury shares.
Note from The Finance Ghost:
It’s finally happened. Walmart has decided to take Massmart private, enabling the group to execute a turnaround strategy away from the public eye and without the agony of releasing such tough results every six months.
The mechanics of the potential deal are still being finalised and this is not a firm intention announcement. The potential offer price is R62 per share, representing a premium of 53% to the closing share price and a 68.7% premium to the 30-day VWAP.
After injecting R4 billion into Massmart to keep the business afloat during Covid and the riots, it has become clear that this turnaround is far from over.
Refer to the detailed announcement below for the official statement from Walmart and Massmart:
I’ve been writing for a long time about Walmart’s incredible patience with the attempted turnaround of Massmart. If you read about the latest interim results in the financial updates section of Ghost Bites today, you’ll see why I call it an “attempted” turnaround. Sure enough, the Americans are tired of trying to save this business in the public environment, particularly after they had to inject R4 billion in financial support to help the group survive Covid lockdowns and the riots. It is much easier to make really tough choices when a company is private, particularly with the financial disaster that is Game. Walmart bought 51% of Massmart in 2011 for R148 per share when the USD:ZAR was around the R7 mark. The potential offer of R62 per share at a time when the rand is struggling to stay below R17 means that the 49% could be acquired for around $3.60 vs. the original deal at $21 per share. Talk about averaging down! It is very important to note that this is only a potential offer at this stage, not a firm intention announcement that commits Walmart to making an offer.
Grindrod Shipping is the other big name that looks set to disappear from the JSE, after Taylor Maritime Investment Limited (listed in London) made a non-binding indicative proposal to acquire all the shares in Grindrod Shipping not already held by the group. The potential offer price is $26 (over R436) per share, comprising a $21 cash purchase price and a $5 special dividend. The rand amounts will vary with the USD/ZAR exchange rate. The board of Grindrod Shipping has entered into exclusive discussions with Taylor Maritime but has not agreed definitive terms at this stage. The share price of Grindrod Shipping closed nearly 20% higher on the day at R397.
Zeder has announced the disposal of Zeder Africa, which holds a 55.62% stake in Agrivision Africa. This business produces and mills agricultural grain in Zambia and has been problematic for Zeder, as agriculture is hard enough before you take into account African economies that are notoriously volatile. The acquirer is ForAfric Forestry, a company registered in Zambia but with South African shareholders based on the names of the beneficial owners. The price is R160 million, a decent premium over the R146 million value at which the investment was recognised in the financials at the end of February 2022. This is a Category 2 transaction, so Zeder shareholders will not be asked to vote on it.
Master Drilling acquired just over a 25% interest in A&R Group back in 2021 and the deal included a call option to take that stake above 51% within a period of two years. A&R Group focuses on technology to improve the safety and operational performance of miners globally, so this is a diversification play for Master Drilling. A call option gives Master Drilling the right (but not the obligation) to increase its stake. The strike price on the option (the amount payable for the shares) is calculated using a formula that references recent financial performance. The estimated amount is R129.4 million. A&R’s profit after tax for the year ended February 2021 (now an outdated number) is R26.5 million, but there are distortions from payments on shareholder loan accounts etc. This is a Category 2 Transaction, so shareholders won’t be asked to vote.
Huge Group has renewed its cautionary announcement. The company is considering a series of discussions that would be a Category 2 Transaction in aggregate. There are no further details at this stage. Based on what I saw when Googling the website, I wouldn’t be surprised if a name change is coming soon and their SEO person jumped the gun:
Financial updates
Aside from the huge news of the Walmart offer, Massmart also released interim results for the 26 weeks ended 26 June 2022. Revenue was almost identical to the comparable interim period but gross profit margin contracted by 100 basis points. Combined with inflationary pressure on costs, the impact on trading profit was highly negative – it tumbled by 27.2%. The headline loss per share worsened by 45.7%. Even from continuing operations, the group registered a headline loss of R903.5 million. The group headline loss was R942.5 million, so the discontinued operations can’t be blamed for this. To put the financial nightmare into perspective, trading profit was R323.5 million and insurance proceeds for business interruption were R270 million. At the time of the terrible looting of the Game warehouse, I tried to make light of the situation by joking that it was possibly the only way to move that stock. A lot of truth is said in jest. Walmart man Mitchell Slape is moving on from the CEO role at the end of 2022, with current COO Jonathan Molapo moving into the top job. Personally, I wonder whether Walmart will ever learn that the “American Way” doesn’t necessarily work in other regions. It’s good to see a South African taking the reins again, though it is going to be a really tough job as Massmart likely moves into a private environment.
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Steinhoff has released a trading update for the nine months ended June 2022. Steinhoff still has debt of €10 billion, which must be why the team is far too busy to write a decent short-form announcement, instead sending you to the website to go hunting for the report. Credit markets aren’t great at the moment and interest rates are rising, so restructuring the debt is critically important and far from easy. Moving from group level into the operations, we see minimal growth on a constant currency basis, other than in Pepco Group. With Europe facing economic headwinds of note, operating a discount retailer is probably the right strategy in the region. It still won’t be easy.
MAS plc has released results for the year ended June 2022. This group is focused on property in Central and Eastern Europe and achieved adjusted distributable earnings per share of 6.83 euro cents, up 15.2% year-on-year. At the end of June, shareholders approved important transactions related to the relationship with developer Prime Kapital. One was for the acquisition of six Romanian commercial centres and the other was to extend the duration of the joint venture and the funding commitment. Tangible net asset value of €1.40 per share is 12.9% higher vs. June 2021, reflecting a combination of improved performance and higher asset valuations. A dividend of 3.82 euro cents per share has been declared. It’s fascinating to note that open-air malls saw a footfall recovery vs. pre-pandemic levels whereas enclosed malls are still lower. Has there been a permanent shift in shopper preferences?
ADvTECH has released results for the six months ended June 2022. Revenue increased by 18% and operating profit was up 19%, so there was limited operating leverage in this result. When you see a larger percentage change in operating profit vs. revenue, you know that operating leverage is at play (the impact of fixed costs in the structure). Headline earnings per share was up 23% and the interim dividend of 23 cents per share is 21% higher than in the comparable period. It’s worth noting that operating cash flow before capex was only 8% higher due to a similar working capital result in this period vs. the prior period. The schools division achieved 9% growth in enrolments year-on-year and tertiary (full qualifications) was only 4% higher.
Sea Harvest Group released results for the six months ended June 2022. Although revenue jumped by 29%, a contraction in gross margin from 32% to 25% means that gross profit was flat year-on-year, wiping out the benefit of higher revenue. With inflationary pressure on expenses, EBIT (earnings before interest and taxes) was down 10% and so was headline earnings per share. Fishing is an incredibly tough industry, with unique challenges like fishing quota volumes. You also have to remember pressures like fuel costs, as the fishing vessels aren’t cheap to run. I also found it interesting that although the Aquaculture (abalone) segment grew revenue by 55%, the business is still loss-making (R18 million).
Hulamin released results for the six months ended June 2022. Although sales volumes were fractionally higher, revenue was up 45%. Operating profit increased by 144%, with the massive increase relative to revenue growth as a result of operating leverage and the structurally low margins in this business. Headline earnings per share increased by 147% to 47 cents. No dividend was declared for this period or the comparable period.
Sun International Limited has released results for the six months ended June 2022. Here’s the really big news: the company has declared its first dividend payment since 2016! Income was up 37% year-on-year, with adjusted headline earnings swinging wildly from a loss of R7 million to earnings of R438 million. As the group was forced to find cost savings to survive during the pandemic, the adjusted EBITDA margin improved from 26.8% to 29.1%. Debt has been reduced from R6.4 billion to R5.9 billion, which helps justify the return to paying dividends. Headline earnings per share was 93 cents and the interim dividend is 88 cents per share.
Operational updates
Southern Palladium has announced the commencement of the Phase 1a drilling programme at the Bengwenyama project. 31 boreholes will be drilled in this phase, with a further 32 boreholes planned for Phase 1b. The goal is to increase confidence in the orebody and convert a portion of the Inferred Resource and Exploration Target into Indicated Mineral Resources. I repeat these terms verbatim because I know they are important in the world of junior mining, a sector that I leave to the geologists to invest in (although I always enjoy reading the updates).
Orion Minerals released a critical update, making it a big day for junior mining. The South African Department of Mineral Resources and Energy has granted a mining right for the Flat Mines Area of the Okiep Copper Project in the Northern Cape. The right lasts for 15 years and can be renewed on application for a maximum of a further 30 years. The next steps are final engineering studies, Mineral Resource upgrade, drilling and bulk sampling for metallurgical optimisation. An updated feasibility study is targeted for completion in early 2023.
Share buybacks and dividends
Glencore has confirmed the exchange rate applicable to the $0.24 dividend per share, of which $0.11 is an additional distribution alongside the H2 distribution. South African shareholders will be paid R4.03351 per share on 22nd September.
Similarly, Textainer has confirmed that the dividend of 25 US cents per share will be converted to a rand equivalent of R4.1725 per share.
Notable shuffling of (expensive) chairs
After 32 years of service, including nearly five as CEO, Pepkor CEO Leon Lourens has advised the board of an intention to take early retirement. Pieter Erasmus will move back into the top job that he held from 2001 to 2017, going full circle in his relationship with the group.
Woolworths has announced the appointment of Robert Collins as an independent non-executive director. Collins served as managing director of Waitrose until 2020, so he brings plenty of retail experience to the table.
Salungano Group has announced the appointment of Kabela Maroga (currently a non-executive director of the company) as CFO. Ms Maroga has experience in banking and in the mining industry, with a very unusual combination of a CA(SA) professional designation and a post-graduate diploma in mining engineering.
Adcock Ingram has appointed Ms Busisiwe Mabuza as independent non-executive director. Ms Mabuza is the chair of the IDC and the lead independent director of Tsogo Sun Gaming, in addition to being an independent non-executive director of Ninety One Limited. Professor Matt Haus will retire from the board in May 2023.
Director dealings
A director of a subsidiary of Nu-World has sold shares in the company worth nearly R20k.
An entity related to Christo Wiese has purchased debt instruments in Brait worth £3.8 million.
The company secretary of Afrimat has bought shares in the company worth R52k.
The total value of local M&A deals captured for H1 2022 (excluding South Africa) was US$12,28 billion, almost double that recorded over the same period in 2021. This number only includes those transactions where at least one of the parties is headquartered in Africa, or where the target is African based. Where the parties are foreign, or the target has subsidiaries in an African country, the transaction is classified by DealMakersAFRICA as foreign, and these deals totalled US$50 billion in H1 (US$9,6 billion in H1 2021).
West Africa was the most active region with 118 deals valued at US$2,48 billion, 77% of which involved private equity; followed by Southern Africa (US$1,57 billion) and East Africa (US$1,06 billion). By country, Egypt led the pack with 90 deals (US$565 million), followed by Nigeria with 82 deals valued at US$1,97 billion and Kenya with 67 deals valued at US$790 million.
The trend that emerged during the pandemic continues with private equity the main driver of investment on the continent, representing 65% of all local deals. Much of this investment found its way into start-ups and, in particular, those in the fintech space – increasing access to banking and energy to the underserved population, providing strong traction in terms of revenue. The two largest private equity deals for H1 2022 (where deal values were disclosed) were the US$260 million investment into Sun King (previously Greenlight Plant) – a distributor, installer and financier of solar home energy products for people currently living without reliable energy access, and the investment in Nigerian Flutterwave’s series D capital raise of US$250 million.
According to The Big Deal, an Africa-focused database, Africa bucked the trend in declining venture capital investment as the only region in Q2 2022 to record three-digit growth, raising US$1,3 billion against US$600 million in Q2 2021; this against a 29% decline year-on-year globally. Yet despite this growth, the numbers represent c.1% of global venture funding. Analysis by DealMakersAFRICA supports this trend, as seen in the growth of deal activity by private equity in the table below.
Data sourced from DealMakers AFRICA
Included in this issue for the first time is the feature, Women of Africa’s M&A and Financial Markets Industry, the first of its kind to be published by DealMakersAFRICA. It carries unique and inspiring stories, and it is hoped that these journeys will offer inspiration to young women, giving them courage where needed and the realisation that they are not alone.
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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.
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