Wednesday, July 2, 2025
Subscribe
Home Blog Page 187

Thorts: The rapid rise in competition law developments across Africa

Lerisha Naidu, Angelo Tzarevski, Sphesihle Nxumalo and Zareenah Rasool
-
0
Thorts: The rapid rise in competition law developments across Africa

Baker McKenzie’s newly launched Africa Competition Report provides a detailed analysis and overview of recent developments in competition law enforcement and competition policy in 32 African jurisdictions and regional bodies. The Report considers not only recent developments in competition law enforcement and competition policy in each of the highlighted jurisdictions, but also provides an overview of regulatory and legislative dynamics and challenges in selected markets.

According to the Report, 29 of the 32 surveyed African jurisdictions have national competition laws in place, while only two have no national competition laws, but are members of a regional competition law body. Countries where competition laws exist include Kenya, South Africa, Tunisia, Côte d’Ivoire, Tanzania, Egypt, Nigeria and Rwanda, while Ghana and Uganda do not have national competition law, although they are part of a regional competition body.

The Report outlines how competition authorities in Africa play an important role as champions, advocates and enforcers of competition policy across economies, and view competition policy as a key driver of economic growth. Although over the past two years, African competition regulators have actively engaged in efforts to address pandemic-related challenges, there has also been a general upward trend in competition policy enforcement across the continent. The upward trend in enforcement is highlighted by a number of significant recent developments in competition law regulation around the continent.

NOTABLE DEVELOPMENTS IN AFRICAN COMPETITION LAW

Algeria
In Algeria, a new competition legislation is being considered. A first draft of the legislation is currently being reviewed by the Secretariat General of the Prime Ministry.

Angola
The Competition Regulatory Authority in Angola conducted market inquiries in two sectors, namely telecommunications and petroleum products. Further merger filing fees were introduced by Executive Decree No. 32/21 of 1 February 2021.

Botswana
During the 2020/21 financial year, the Botswana Competition and Consumer Authority carried out market inquiries (mainly focusing on cartelistic conduct) in the following sectors: abattoirs, construction, waste management, government supplies and animal feed. The Competition and Consumer Authority also expressed concerns in relation to pyramid schemes, with the Authority opening an investigation in collaboration with the Botswana Police Service. The price gouging of essential products during the pandemic was also on the agenda, with the Authority receiving numerous excessive pricing complaints in relation to basic food stuffs, healthcare products and hygiene products. The Authority cautioned suppliers and has maintained continuous price monitoring in relation to these products. Vehicle repair garages were also on the Authority’s radar in 2021. It handled 175 cases concerning the use of sub-standard parts or defective spare parts in vehicles brought in for repair and/or service, resistance of garages to effect warranty terms, and unclear pricing practices.

Furthermore, the Authority, in collaboration with the Organisation for Economic Cooperation and Development (OECD), is currently undertaking an impact assessment analysis of the legislative framework in the agricultural grains sector to determine the effectiveness of the legislative framework, focusing on pricing and import restrictions.

Cameroon
Cameroon recently signed a Memorandum of Understanding with the United Kingdom, which sets out the arrangements for applying the effects of the economic partnership agreement from 1 January 2021.

Cape Verde
In Cape Verde, it has been noted that competence on competition matters will be vested in the Ministry of Finance in the short to medium term, as there is currently no effective competition regulatory body.

COMESA
There were various developments with regards to the COMESA in 2021. In February 2021, the COMESA Competition Commission issued a Practice Note in which it amended the interpretation of the term “operate”. Prior to this, a party “operated” in a COMESA Member State if it had turnover or assets in that Member State in excess of USD 5 million. This requirement has now been removed, effective 11 February 2021, and a party will “operate” in a COMESA Member State merely if it is active in it (without a minimum turnover or asset threshold). The impact of this will be to make it easier for a transaction to fall within the scope of the COMESA merger control regime.

The COMESA Commission has also recently issued Draft Guidelines on Fines and Penalties, Draft Guidelines on Settlement Procedures, and Draft Guidelines on Hearing Procedures.

In September 2021, the COMESA Commission issued its first penalty for failure to notify a transaction within the prescribed time periods, which penalty amounted to 0,05% of the parties’ combined turnover in the Common Market in the 2020 financial year. This was imposed in relation to the proposed acquisition by Helios Towers Limited of the shares of Madagascar Towers SA and Malawi Towers Limited.

In December 2021, the COMESA Commission imposed a fine for failure to comply with a commitment contained in a merger clearance decision.

The COMESA Commission also conducted eight investigations into restrictive business practices in 2021.

Egypt
There were numerous recent developments in Egypt, including in November 2020, when the Competition Authority announced that the Egyptian Prime Ministry had approved the Prime Minister’s draft law amending certain provisions of the Egyptian Competition Law 3/2005. In February 2021, the Egyptian parliament’s Economic Affairs Committee started the discussions on the new amendments. The Competition Authority has also recently initiated market inquiries in relation to multiple sectors including healthcare, food, electronic and electrical appliances, as well as the automotive, real estate, media and petroleum sectors.

In April 2021, the Economic Court of Cairo issued a ruling in a criminal case brought against five individual poultry brokers by the Competition Authority in March 2020, for colluding to fix the price of chicken to the detriment of consumers and chicken breeders. The court fined each broker 30 million Egyptian pounds (approx. US$1,6 million) for agreeing to fix the price of a kilogram of chicken.

In July 2021, the Competition Authority initiated a criminal case against two companies who agreed to submit identical offers in one of the practices of the General Authority for Veterinary Services, in violation of Egyptian competition law.

The head of the Competition Authority announced plans for the creation of an Arab Competition Network to enhance cross-border cooperation between antitrust enforcers in the Middle East. The ACN would be the first to provide Arab competition authorities with an official platform to meet and discuss prominent issues and impending changes to antitrust law. The network would be run by the 22 members of the League of Arab States, which includes Egypt, Syria, Lebanon, Iraq, Jordan and Saudi Arabia, among others.

Eswatini
In Eswatini, the Competition Commission published a Draft Competition Bill, 2020, which is intended to be presented to the Minister of Commerce, Industry and Trade. The object of the Draft Bill is to increase effectiveness, consistency, predictability and transparency in the enforcement and administration of competition law in Eswatini. It also aims to give effect to regional frameworks, such as COMESA Competition Regulations and international best practices. The Draft Bill has yet to be signed into law. In April 2021, the Competition Commission published guidelines on market definition, which adopt international best practices.

Ethiopia
In Ethiopia, the Trade Competition and Consumer Protection Authority is working on regulations to provide guidance on the application of the Trade Competition and Consumer Protection Proclamation (No 813/2013). Proclamation No. 1263/2021, which is expected to be enacted and come into force in 2022, transfers the powers of the Trade Competition and Consumer Protection Authority to the Ministry of Trade and Regional Integration.

The Gambia
The Ministry of Information in The Gambia is currently reviewing a Merger Commission, which will be effective in maintaining and encouraging competition in markets, to promote and ensure fair and free competition, and to protect the welfare and interests of consumers. The Competition Commission has initiated the following market studies: Hajj Market Study; Rice and Sugar Market Study; Liquefied Petroleum Gas Market Study; Cement Market Study; Tourism Market Study; Banking Market Study; and Vehicle Procurement Market Study.

Ghana
In Ghana, a draft Competition and Fair Trade Practices Bill is before parliament for consideration.

Kenya
The Competition of Authority in Kenya finalised its study into the regulated and unregulated credit markets in the country and issued its report in May 2021. The Authority further developed the Retail Trade Code of Practice 2021, in consultation with stakeholders in the retail sector, to address the abuse of buyer power issues arising from the sector. Also in 2021, the Competition Authority conducted a dawn raid in the steel industry and issued draft joint venture guidelines, to clarify the rules and filing requirements of joint venture arrangements.

Malawi
Notable developments in Malawi include amendments to the Competition and Fair Trading Act, with the regulations having been proposed and submitted to the Ministry of Justice. Furthermore, the Competition and Fair Trading Commission has drafted new guidelines on various topics, including abuse of dominance and collusive conduct, exclusive dealing arrangements and resale price maintenance, market definition, discriminatory and tying conduct, and public interest, amongst others. These guidelines have been circulated to various stakeholders for comment, but have yet to be published. The Competition and Fair Trading Commission recently concluded a market inquiry into the funeral services market, and is currently conducting a market study on digital markets.

Mauritius
The Competition Commission in Mauritius concluded a market study in the pharmaceutical sector on 8 June 2021.

Mozambique
There were numerous developments in competition law in Mozambique in 2021, including that the Competition Regulatory Authority became operational in January 2021. Regulations on Merger Notification Forms were enacted by means of Resolution No. 1/2021 of 22 April 2021. The Regulations prescribe the different forms to be completed for merger notifications, as well as the details of the information and documentation required. Regulations on Filing Fees were enacted by means of Ministerial Diploma No. 77/2021 of 16 August 2021. Filing fees are currently set at 0.11% of the turnover of the parties in the previous year, up to a maximum of MZN 2,250,000 (approx. US$35,000). Amendments to the Competition Regulations were enacted by means of Decree No. 101/2021 of 31 December 2021.

Namibia
A Competition Bill is in progress in Namibia, and the Competition Commission expects to submit the final version of the Competition Bill to the Ministry of Industrialisation and Trade by the end of June 2022.

Nigeria
On 2 August 2021, Nigeria adopted the Merger Review (Amended) Regulations 2021, which set out new fees applicable for merger filings. The Federal Competition and Consumer Protection Commission launched and publicised an investigation into the alleged anticompetitive conduct of five companies in the shipping and freight forwarding industry in October 2021.

South Africa
There were various developments in South Africa in 2021, including in May 2021, when the Competition Commission launched the Online Intermediation Platforms Market Inquiry, focusing on four broad online intermediation platforms and market dynamics that specifically affect business users – eCommerce marketplaces, online classified marketplaces, software app stores and intermediated services (such as accommodation, travel, transport and food delivery). The inquiry is ongoing, with a provisional report scheduled for release on 10 June 2022, and the final report scheduled for release in November 2022.

In April 2021, the Commission released its market inquiry reports on Land Based Public Transport. Furthermore, in April 2021, the Commission published its final report on an impact assessment study it conducted in relation to COVID-19. The report sets out the findings of the Competition Commission regarding the impact of the COVID-19 block exemptions and the enforcement work done by the Competition Commission during the pandemic. The Competition Commission’s fifth Essential Food Pricing Monitoring Report, which is released quarterly, focused on tracking the impact of the COVID-19 pandemic and consequent economic crisis on food markets.

In May 2021, the Commission issued, for comment, draft guidelines on Small Merger Notifications, which contain specific guidance applicable to the assessment of digital mergers.

Notably, 2021 was the year that the Commission prohibited a merger solely on public interest grounds, making it the first transaction to be prohibited on non-competitive grounds. Ultimately, however, the merger was conditionally approved before the Competition Tribunal.

In November 2021, the Commission released its Economic Concentration Report, which highlighted patterns of concentration and participation in the South African economy. The report includes details on the Commission’s power to launch market inquiries into highly concentrated industries, as well as its increased authority to impose structural remedies on businesses in these sectors.

In March 2022, the Commission issued Guidelines on Collaboration between Competitors on Localisation Initiatives, which are aimed at providing guidance to industry and government on how industry players may collaborate in identifying opportunities for localisation and implementing commitments related to localisation initiatives in a manner that does not raise competition concerns.

In March 2022, the Commission launched a market inquiry into the South African fresh produce market, which will examine whether there are any features in the fresh produce value chain which lessen, prevent or distort the competitiveness of the market.

The Commission concluded various settlement agreements with market players (e.g., grocery retailers and laboratories) to reduce the prices of goods and services.

Zimbabwe
In March 2021, the Competition and Tariff Commission in Zimbabwe published draft guidelines on Horizontal Agreements for comment.

Lerisha Naidu is a Partner, Angelo Tzarevski an Associate Director and Sphesihle Nxumalo and Zareenah Rasool are Associates in the Competition & Antitrust Practice | Baker McKenzie Johannesburg

This article first appeared in DealMakers, SA’s quarterly M&A publication

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

Mr Price: red cap, green earnings

The Finance Ghost
-
1
Mr Price: red cap, green earnings

Mr Price has released its results for the 52 weeks ended 2 April 2022. I know that this is an odd-sounding reporting period, but with retailers you need to remember that most of them report based on trading weeks rather than calendar years.

There’s another important nuance that you need to be aware of: because of the reporting calendar being based on weeks rather than calendar years, those retailers need to report a 53-week period every few years. Mr Price did this in FY21, which means you need to be careful when comparing FY22 to FY21 because the prior period has an extra week of trading.

To make it possible to do meaningful year-on-year comparison, retailers typically give commentary on a “comparable basis” where they only focus on the first 52 weeks of the comparable year.

I appreciate that these aren’t the most exciting concepts in the world, but you can’t properly understand retail results without knowing about this. Onward to the numbers!

Mr Price is a proper business

On a comparable basis (and now you know what that means), headline earnings per share (HEPS) grew by 25.9%. If you don’t adjust for the extra trading week, the growth rate is 20.1%. This is why it is so important to understand these periods.

One of the things you want to see in a retailer is growing market share, which Mr Price achieved with 140 basis points growth. Another important metric to look out for is operating margin, which has increased to 17.7%.

It’s worth highlighting that online sales grew by 48.2% and contributed 2.9% of total sales. This is much lower than we see in markets like the UK, which creates a strong argument that South Africa’s online shopping channel still has plenty of runway.

Mr Price has been on the acquisition trail, with Power Fashion (1 April 2021) and Yuppiechef (1 August 2021) both included in this result and described as being “earnings accretive” – there’s a difference between being earnings accretive and offering attractive returns on capital though. Investors will be keeping an eye on these acquisitions, as Mr Price did pay top dollar for them. Or top rand, even.

Mr Price is retaining a portion of earnings for future growth, as is common in listed companies. The final dividend is up 25.9% and the pay-out ratio of 63% has been maintained.

A closer look at the numbers

Revenue increased by 25.9% on a comparable basis and 14.1% using comparable stores, which is strong like-for-like growth. Other income grew by 37.5% but this included a once-off SASRIA claim of R296.1 million related to the civil unrest. A business interruption claim is still under assessment and should be finalised in the new financial year.

Here’s the most important metric for me: on a two-year basis and excluding acquisitions, sales grew by 12.5%. Consumers have shifted to value clothing in a time of economic pressure and Mr Price has been waiting with open arms.

Cash sales are 86.1% of the group total but it should be noted that Power Fashion and Yuppiechef are entirely cash based. If you exclude them, cash sales grew 14.3% and credit sales grew 23.6%, with account applications up by 54%. Mr Price notes that the account approval rate of 33.1% remains well within risk tolerance.

Selling price inflation was 5.5% excluding Power Fashion. Including that acquisition totally breaks the internal inflation number as the items are at a much lower average price point. Volumes were up 10% excluding acquisitions.

Moving on to margins, gross profit margin decreased by 150bps to 41%. There were some once-offs in the numbers, with Mr Price noting that on a comparable basis gross margin was in line with the previous period at 42.4%.

Total expenses grew 16.4%, a number well in excess of inflation. That is to be expected when a footprint is growing, as it includes new stores and inflationary costs on the old cost base. The important point is that sales growth is higher than expenses growth, so operating margins have expanded.

This is called “operating leverage” – the joy of revenues growing faster than inflation on fixed store costs.

When it comes to working capital, inventory increased by 6.1% excluding acquisitions and higher goods in transit. This is reasonable in the context of group growth and global pressures.

Capital expenditure was R734 million this year and is expected to be R900 million next year, including 180 – 200 new stores. With return on equity of 28.9% and return on assets of 23.2%, shareholders won’t complain about the group investing capital in growth.

Segments

The Apparel segment achieved record market share and saw operating profit increase by 33.7%, with operating margin up 40bps to 18.9%.

The Homeware segment achieved sales growth of 15.6% which is really impressive vs. a strong base. Operating margin did come under some pressure, down from a record 21.3% to 20.6%, a decrease of 70bps.

The Telecoms segment grew revenue by 34.4% to R1.2 billion. This is still a small contributor (Apparel is R19.5 billion for example) but growth prospects are exciting.

The Financial Services segment grew revenue by 6.2%, including insurance premium income up by 6.4%. The impairment provision adequately covers net bad debts.

Growth prospects

Mr Price is on a rampage. It opened 130 new stores this year, a much higher rate of growth than the 5-year average of 80 new stores a year. Power Fashion has increased its footprint by 20.6% since being acquired, which is quite something considering most people had never even heard of the group before Mr Price bought it.

Surprisingly, openings were lower than Mr Price had hoped, as the group had to direct a lot of its energy towards reopening looted stores.

Beyond bricks and mortar, Mr Price is doing very well in the online space. Online traffic market share is second only to Takealot among pure-play retailers and social media followers grew by double digits. The Mr Price mobile app is the highest ranked South African fashion app on Google Play, with usage up 27.3%.

Of the R4.6 billion available in cash, R3.3 billion is needed for the Studio 88 acquisition once regulatory approvals have been achieved. This will cap off a strong period of acquisitive growth for Mr Price, so the management team will need to focus on integrating the businesses and delivering the strategies.

The important thing is that there isn’t any debt on the balance sheet, so Mr Price isn’t under pressure to service payments to banks.

Am I trading it?

The share price is down around 2.5% this year and is trading at similar levels to May 2021. As great at these numbers look, it all comes down to what was priced into the stock. I must say, I’m tempted to punt at a move from R200 to R220.

There is an important point in the results presentation that gives some balance to all the good news: “May 2022 sales growth below expectations – details to follow at next trading update” – this means that inflation is starting to bite.

Decisions, decisions.

As always, you need to do your own research and arrive at your own conclusion!

Ghost Bites Vol 24 (22)

The Finance Ghost
-
3
Ghost Bites Vol 24 (22)

Your daily market overview delivered in bite-sized bullets:

  • Spar Group released interim earnings for the six months to March 2022. This is the one I’ve been waiting for, as I took a rather speculative position in the company in the hopes of a strong result. In some places, I got it right. There were some negative surprises though. At group level, turnover was up 5.2%, operating profit increased by 7.1% and diluted headline earnings per share (HEPS) was uninspiring with 3.7% growth. I’ve written a feature article on this result, including details on why I took the long position and how it performed in relation to that. Spoiler alert: the trade didn’t work out.
  • Sanlam has released an operational update for the four months to April 2022 that includes some rather scary numbers. The floods have caused great pain in the insurance business, causing a drop in headline earnings for this short period of 31%! I cover this in more detail in this feature article.
  • Etion Limited intends to sell 100% of the shares in Etion Create to Reunert, a listed electronics business. This is such a large deal for Etion that it triggers the need for a special resolution (75% approval), as it is the “greater part of the assets or undertaking of the company” – simply, this is triggered under s112 of the Companies Act when over 50% of the group’s assets are being sold. Etion Create specialises in customised electronic subsystems, so the fit with Reunert is clear. Etion is following a value unlock strategy with great success, as it has historically traded at a significant discount to the underlying intrinsic value. The purchase price is around R197 million and isn’t allowed to exceed R210 million after all adjustments. The net assets of Etion Create as at 30 September 2021 were R159.4 million. Etion intends to distribute the net proceeds to shareholders. There are many steps to be completed in this deal and Etion shareholders can expect to receive a circular on approximately 1 August 2022 with full details.
  • Afrocentric holds a 71.3% stake in AfroCentric Health. That subsidiary has entered into an agreement to acquire the remaining 49% in AfroCentric Distribution Services for R75 million. This is a small related party transaction under the JSE listings requirements. This is part of AfroCentric’s strategy to build distribution capability to market the new generation products of AfroCentric and its other partners. In the six months to December 2021, this business generated profit before tax of R11.6 million. As this is a small related party deal, shareholders don’t need to vote on it but an independent expert does need to sign off that the deal is fair and reasonable. Mazars Corporate Finance has been appointed to provide an opinion.
  • The JSE probably had to take a lot of dust off the podium and screens for a new listing event, but today Southern Palladium celebrated its dual listing on the Australian Stock Exchange (ASX) and the JSE. With a successful initial public offering (IPO) that raised $19 million, the company will focus on developing its Bengwenyama PGM project in the Bushveld Complex. Southern Palladium holds a 70% stake in the project.
  • If you are a shareholder in MAS Real Estate, you should note that the company has released the circular for its proposed acquisition of six commercial retail centres in Romania. The counterparty happens to be the fund’s joint venture partner in the country, so this is a related party deal which means there are special JSE rules. The circular also deals with an extension to the joint venture. You can find the circular at this link.
  • I don’t pay a lot of attention to shareholding changes related to local funds, as they trim and increase their positions regularly and are often restricted to the South African market. Global investment giant BlackRock has no such restrictions, so it is notable that the fund has increased its stake in The Foschini Group to 5.375%.
  • If you are interested in Orion Minerals, then you can listen to a presentation at an investor conference in Australia at this link.

Spar: a trade that didn’t work

The Finance Ghost
-
2
Spar: a trade that didn’t work

Spar’s slogan these days is “Under the Tree” – I had to Google it to check. Gone are the days of “Good for You”, which may be apt considering recent share price performance.

Spar has traded in a channel for years. Check out this chart and take note of how the stock has swung up and down in a clearly visible range:

This means that Spar has been a poor choice in a buy and hold strategy. Before you get carried away in thinking Shoprite and Pick n Pay were any different, here’s a 5-year relative performance chart of all three of them:

Clearly, this isn’t a sector where you can buy and forget. For fans of swing trading and pairs trading (long one and short the other), the grocery retail sector does offer plenty of fun. I think part of the reason is that this sector is hyper-competitive, so success at one retailer is often at the expense of another.

I took a punt on Spar ahead of the latest earnings. The stock sold off sharply at the end of 2021 based on issues in integrating the acquired business in Poland and the guidance given to the market that the dividend would be significantly lower for the next couple of years. This is to give the balance sheet breathing room for a large SAP implementation project.

To be fair to Spar, substantial investment in IT infrastructure is part of what drove Shoprite’s recent run of form. The process is painful but it should be worth it.

I bought after the big sell-off and my long thesis was based on the following expectations for this result:

  • Poland to be doing better, not least of all with so many Ukrainians to feed (sad but true)
  • The food service businesses in Ireland and England to perform well as restaurants have recovered
  • Local grocery retail to lose further ground to Shoprite and Pick n Pay but nothing major
  • TOPS to put in a huge recovery performance as people were allowed to buy alcohol and have braais
  • Build it to experience slightly negative turnover growth in line with the broader pressures in DIY and building materials vs. a really strong base year
  • I didn’t have a firm view on Switzerland but didn’t expect it to cause fireworks in either direction (sigh)

So, what happened?

I’ll start with Poland, where turnover was +6.5% in local currency (a good result). Retailer loyalty (the percentage of goods that franchisees acquire from Spar group as the wholesaler) only increased marginally to 31%, which isn’t great. The issue seems to be in the south of the country. Expenses were -3.3% which is really good as corporate stores were closed and the footprint rationalised. There’s still a loss of R187.5 million but it’s a lot better than it used to be. So, expectations partially met.

Moving on to Ireland and Southwest England, turnover +8.3% in local currency so that ties in with what I hoped to see. Here’s the bad news: operating expenses jumped by +16.9%, driven by labour shortages and distribution costs. This caused a nasty impact on margins that I didn’t see coming.

I’ll deal with Switzerland before bringing it home. Turnover was -1.6% in local currency and operating expenses increased by 10% in local currency, so this business’ margins also got hammered as operating profit fell by 13.7%. Ouch.

The improvements in Poland were effectively offset by the pressures in the other businesses. This is a major disappointment.

Within South Africa, TOPS shot the lights out with turnover +41.6%. TOPS revenue of R5.5 billion in this period is much higher than R4 billion in the six months to March 2019 before the world became a less enjoyable place.

Build it did well I think to achieve turnover growth of +1.4%. Inflation was +5.8% so volume growth was approximately -4.4% (assuming no major change to the footprint).

Core grocery turnover was +4.6%. Price inflation for the SA business as a whole was 5%, so it is likely that volumes dropped slightly in grocery. As a wholesaler, Spar runs at much tighter margins than Shoprite and Pick n Pay, so the impact of fuel cost increases etc. have to be passed on to franchisees. It’s worth noting that whilst employee costs only increased by 3%, fuel jumped by 40% and the period ended March only includes a few weeks of the petrol price jumps we have suffered with. Watch out for this in the next period.

Spar’s private label turnover was only +4.1%, with riots severely impacting major suppliers and thus Spar’s range of house brands. This is an important source of gross margin uplift and I would hope to see this tracking ahead of revenue growth in future.

My idea hasn’t worked out

By the time you roll this up to group level, turnover was +5.2% and operating profit was +7.1%. An unfavourable tax contributed to profit after tax +4.1% and headline earnings per share (HEPS) +3.5%.

It’s also very important to note that HEPS of 642.6 cents is much higher than the interim dividend of 175 cents per share. Spar is retaining cash for the R1.8 billion SAP implementation. The interim dividend is 37.5% lower than the prior year.

If we simply double the interim dividend for the purposes of working out a forward yield, we have a yield of around 2.4% at the current share price. The risk for investors is the share price dropping to around R125, which is where support is found at a share price level going back to 2015!

The worry for me is that there’s also a fundamental argument that the share price could get to R125. Investors in a rising yield environment may not have the patience required to sit on the stock at this dividend yield and the share price may drift lower as a result.

I bought Spar with a swing trading outlook and swings don’t always go in the direction you want them to. If they did, everyone would be a stock market millionaire!

The share price jumped in the opening auction and then traded down rather quickly, eventually closing 0.8% lower for the day.

Having considered the reasons why I bought the stock and what the outlook is from here, including critical macroeconomic considerations like inflation, I’m now looking to exit my position.

Sanlam has taken a big knock

The Finance Ghost
-
0
Sanlam has taken a big knock

Around a week ago, Santam released an operational update for the four months to April 2022, which I wrote a feature article on. Sanlam has now done the same, giving us insights into the mothership.

Sanlam is a genuinely impressive business. If you have a look at the dividend history of the company, this is a very good example of a business that you can buy and forget about. The share price isn’t going to shoot the lights out, but it should give decent returns over an extended period with a significant dividend yield. Having said that, the last few months have been really challenging for the group.

Sanlam is taking a big step in Africa with the Allianz deal. I wrote about the deal in detail in early May, which you can find here. As a quick synopsis, Sanlam wants to combine its African operations with those of Allianz, creating a vast footprint on the continent. Sanlam would hold 60% of the joint venture, which means it would effectively be taking control of Allianz’s assets. This is a significant deal.

The group has positioned itself firmly as an emerging markets business, with only a focused international asset management business remaining in the UK.

Strategically, the story is great. The latest earnings are an unfortunate reminder of the risks faces by insurance groups.

As a sign of the times, Sanlam has significantly increased its buffer of discretionary capital. This means that more money is being kept in reserve, a direct result of ongoing market pressures and uncertainties. Discretionary capital increased from R2.9 billion on 31 December 2021 to R6.5 billion on 30 April 2022, including GBP153 million in proceeds from the UK asset sales.

The downside of the increased buffer is that it negatively impacts returns to shareholders. The nature of a buffer is that it would be invested conservatively, which doesn’t provide equity-level returns to Sanlam investors.

The net result from financial services has decreased by 7%. Digging deeper into this, we find that the Life Insurance business performed well, up 14% thanks to lower Covid-related mortality claims. The Investment Management business enjoyed higher average assets under management than a year ago, as inflows throughout 2021 were strong.

Earnings in the General Insurance business fell by a whopping 62%, a direct result of the catastrophe claims and lower returns on insurance funds. As insurance reserves are invested in the market, buying a business like Sanlam means you are taking exposure to the rest of the equity market as well.

In terms of new business volumes, Life Insurance was a solid contributor with volumes up 8%. General Insurance volumes were up 4%. Investment flows were down by 8% though, with Sanlam pointing out the high 2021 base. The net margin on new business declined from 2.82% in 2021 to 2.34%, mainly due to product mix changes.

Group net cash inflows of R26.7 billion were down by 5% because of the lower investment flows.

The effect on net earnings of a weak result from financial services was magnified by group project expenses. It’s never pretty when overheads are growing quickly and the underlying business has had a tough time. The impact on headline earnings is substantial, with a decrease of 31%!

With a drop in the share price of around 1.5% by late afternoon trading, it seems to have been mostly priced in. This year, the share price is slightly up.

Attacq pre-close update

The Finance Ghost
-
3
Attacq pre-close update

Property fund Attacq has released a pre-close update presentation. This is a way to bring the market up to speed with how the fund has performed in recent months, with the current financial period closing at the end of June. Hence, a “pre-close” update.

I always appreciate and applaud any efforts by companies to go above and beyond minimum disclosure requirements to investors. I must also note that I am a shareholder in Attacq.

Gross interest-bearing debt has decreased since December 2021, reducing from R8.6 billion to R8.1 billion. The gearing percentage (net debt as a percentage of assets, with some adjustments) has stayed at 38%.

Attacq has applied the marketing brush to the names it uses for different types of properties. You’ll shortly see what I mean.

Collaboration hubs (what everyone else would just call office properties) saw vacancies improve slightly since December, with occupancy at 82.9% vs. 82.7%. I was quite surprised to note that the Waterfall City offices have a lower occupancy rate than offices in the rest of South Africa (81.8% vs. 85.7% respectively).

“Retail-experience hub” (shopping centre) occupancies also increased slightly from 96.2% to 96.4%. The logistics and hotel properties are fully let.

Trading densities in certain malls have grown significantly year-on-year. Trading density is a measure of tenant turnover divided by gross lettable area. Mall of Africa trading density grew 18.1%, Garden Route Mall grew by 13.3% and Eikestad Mall is 12.2% higher. Other malls have only managed low single digits.

From a dividend perspective, Attacq wants to retain its REIT status and needs to declare a dividend by the end of October to do so.

Beyond the rental income and related dividends, Attacq has numerous developments underway. Recently completed developments include the Cotton On head office and distribution centre as well as a Courtyard Hotel in Waterfall. A corporate campus, data centre, distribution centre and residential tower are all under development.

Attacq plans to hang on to its 6.46% stake in MAS Real Estate, giving strategic exposure to European property. Retail assets in the rest of Africa are considered non-core and will be disposed of.

The share price is down around 17% this year and is volatile between R6 and R8 a share, with a clearly visible trading range that creates great opportunities for swing traders. It’s just a pity that the stock is quite illiquid with a wide spread.

Ghost Bites Vol 23 (22)

The Finance Ghost
-
0
Ghost Bites Vol 23 (22)

Your daily market overview delivered in bite-sized bullets:

  • Sygnia has released interim results and they look to be a rock solid set of numbers. I was particularly impressed by net inflows in the retail business over the six months to March, a tough period in the market. I wrote in detail about the results at this link.
  • Attacq has released a pre-close update in which the property fund has disclosed movements in debt, growth in trading densities, a slight improvement in vacancies and an update on properties under construction. I’ve written on the numbers in more detail at this link.
  • Sirius Real Estate is a industrials-focused fund that achieved excellent share price gains during the pandemic. Things have cooled off substantially in 2022, something I warned about during 2021. THis is a great example of a momentum trading strategy and the importance of getting out of the way once the momentum turns against you. The underlying results are still good, with the fund announcing that its dividend for the year ended March 2022 is going to be 15.5% to 16.5% higher than the prior year. Importantly, this is mainly driven by an increase in funds from operations, so there is high “cash quality of earnings” – this is what investors want to see vs. fair value gains which are a paper return rather than an improvement to the bank account. Sirius is down around 28% this year.
  • Omnia Holdings has released a trading statement for the year ended March 2022. Headline earnings per share (HEPS) is expected to be between 70% and 90% higher, coming in at between 639 cents and 714 cents. There’s noise in the numbers from hyperinflation in Zimbabwe and the disposal of Umongo Petroleum and Oro Agri over the past two financial reporting periods. Omnia has a strong balance sheet and has said that a “decision regarding dividends” will be communicated with results. Is another special dividend on the way?
  • Sabvest Capital has been a great story for investors over the past year, proving that there is value to be found among JSE-listed investment holding companies. The company is also proof that even with a truly terrible website, excellent returns can be achieved. The share price is up almost 40% in the past year and the latest update is that the CFO has bought over R1 million worth of shares.
  • Oando Plc has signed a Memorandum of Understanding with the Lagos Metropolitan Area Transport Authority for a rollout of electric mass transit buses, the necessary supporting infrastructure and related service centres. Lagos has 25 million residents and the city is clearly concerned about the impact on air quality of a growing population that needs to move around the city. Oanda is an energy company that is trying to transition away from fossil fuels. The stock has very little liquidity on the JSE.
  • Nutritional Holdings is back at it with colourful and unusual SENS announcements. A former shareholder and director has taken steps to apply for a provisional liquidation of both the holding company and a subsidiary to recover a shareholder loan. The matter for the subsidiary has been postponed to July 2022 and the holding company judgment is pending. The new board is investigating the matter and notes that there may have been Companies Act breaches related to the loan. The soap opera continues and I’m glad that I am watching from a distance, as I never have and never will own shares in this company.
  • Safari Investments RSA has responded to Heriot REIT’s firm intention announcement relating to a general offer to be made to Safari shareholders. At this stage, the independent board is not expressing a view on the offer of R5.60 per share. The immediate next step is for Heriot REIT to issue a circular with details of the offer. Safari then needs to issue a response circular, which will include the opinion of an independent expert on whether the offer is fair and reasonable.
  • There’s been another loss-of-life incident at Harmony Gold’s Kusasalethu mine, near Carletonville. In the strongly-worded announcement, the company notes that there have been too many incidents at this mine and that safety messages to staff have been re-emphasised. Harmony will conduct a comprehensive investigation into the incident.
  • Nictus Limited is one of the smallest companies on the JSE, with a market cap of under R37 million. This obscure listed company is a retailer of furniture and electrical appliances. In a trading statement, Nictus updated the market that for the year ended March 2022, HEPS is between 39% and 59% lower than the prior period.
  • A director in WBHO has bought a small number of shares, with a transaction value of almost R55,000.

Sygnia: passive-aggressive growth

The Finance Ghost
-
0
Sygnia: passive-aggressive growth

It’s always fun tracking the progress of a disruptor. In the asset management industry, Sygnia fits that description. The share price has nearly doubled over the past 3 years and is up almost 20% in the past month after drifting lower for the first few months of 2022. Can the growth continue?

Before digging into Sygnia’s latest results, let’s give the numbers some context. By the end of March, Coronation had assets under management (AUM) of R625 billion. Sygnia has assets under management and administration of R295.3 billion.

Now, there’s an important nuance there. AUM attracts the best fee, with assets under administration attracting a lower fee as there isn’t discretion over the asset allocation decision. Sygnia has built its business around passive investments, with the differentiator being clever marketing around products that track interesting underlying indices.

Sygnia is the second-largest provider of ETFs in South Africa and the largest provider of international ETFs on the JSE. I mean really, who hasn’t heard of the Sygnia 4th Industrial Revolution fund?

Another relevant nugget of information is that Sygnia operates the sixth-largest commercial umbrella fund in South Africa, with around R12.5 billion under management.

In the six months to March, Sygnia generated revenue of R397.4 million. Over the same period, Coronation generated R1,934 million in revenue, 4.87x higher than Sygnia off an asset base that is only 2.12x larger. This is the impact of the AUM vs. assets under administration strategy.

This isn’t a criticism of Sygnia at all. It’s just very important as an investor to understand the business model.

At first blush, it looks like revenue grew faster than assets, which suggests a positive change in mix. A more detailed read shows that average assets under management and administration increased by 15.3% and revenue linked to assets increased by 10.6%, so that reveals quite the opposite. A promising story on the revenue line is that treasury, securities lending and brokerage income increased by 24.5%. The blended outcome is 13.4% growth in revenue.

An increase in value of assets under management and administration of R4.5 billion helped offset most of the R5.6 billion net outflow in this period, compared to net inflows of R3.8 billion in the prior comparative period. It’s important to highlight that R241.2 billion of assets are institutional and this business experienced a R9.2 billion net outflow, of which R7.2 billion relates to a mutually agreed termination of a low margin client.

Looking through this noise, R3.6 billion in net inflows in the retail business shows how the South African retail investor community is maturing. They are buying market weakness rather than running away from it.

The revenue growth in this period was strong enough to drive headline earnings per share (HEPS) growth of 23.8% as benefits of scale were achieved. HEPS came in at 92.6 cents.

The interim dividend is 80 cents per share, up from 55 cents a year ago.

Sygnia’s share price of around R18.50 suggests an annualised Price/Earnings multiple of around 10x. Sygnia isn’t trading at a bargain price, so punters may want to watch it carefully for any pullback to the traded channel of around R15.50 to R17.00. Those happy to take a longer-term view on Sygnia would need to believe in continued disruption of the establishment by this group, with a track record to back that up.

 

Ghost Bites Vol 22 (22)

The Finance Ghost
-
0
Ghost Bites Vol 22 (22)
  • There’s a rare event on the JSE – the issuance of a pre-listing statement! This is the document that a company releases before coming to market. CA Sales Holdings is being unbundled from PSG and is moving its listing from the Cape Town Stock Exchange to the JSE, so this is a new(ish) listing. Nevertheless, there’s something new for investors on the JSE. Read more about the company in this article.
  • Renergen has signed a retainer letter with the US International Development Finance Corporation (DFC) to evaluate making a loan of up to $500 million to finance the development of Phase 2 of the helium and natural gas operations at the Virginia Gas Project. The same lender provided $40 million in funding for Phase 1, so the parties already know each other very well. Renergen has also received many letters of intent to co-lend alongside the DFC, with a cumulative value of over $700 million just in senior debt. This exceeds the remaining debt requirement. Provided the DFC completes a satisfactory due diligence, it seems as though Renergen has quite easily achieved the target of 65% debt funding for Phase 2.
  • Alexander Forbes has a new strategy and a reworked brand (AlexForbes), breathing some life into a business that is synonymous with the institutional financial infrastructure in South Africa (both a good and a bad thing). It seems to be working, with results for the year ended March 2022 reflecting operating income up by 7% and headline earnings per share (HEPS) from continuing operations up by 19%. The annual dividend is 45% higher as operating conditions have improved. Although the share price closed 4.88% higher on Monday, it is still down 4.44% this year.
  • Fortress REIT has released a trading and pre-close operational update. In the logistics portfolio, vacancies reduced to 1.8% at the end of May from 2.6% at the end of December. The fund does highlight “notable construction cost inflation” over the past six months, which impacts net initial yields on new developments. In the retail portfolio, tenant turnover increased by 8.4% on a like-for-like basis in the year ended April 2022 (this excludes the buildings impacted by the July civil unrest). Vacancies in the retail portfolio have remained at 3.7%. The office portfolio is getting worse, with vacancies increasing from 29.1% to 29.4% over the past five months. Luckily, the office portfolio is 4.5% of total assets and is considered non-core, with a portion under due diligence for rezoning as a residential conversion. Since June 2021, Fortress has disposed of R531 million in properties across the different types of assets and has achieved a profit vs. book value of R25.8 million. A further R334 million worth of properties are held for sale and have not yet transferred. Fortress has R3 billion in cash and a loan-to-value of 39.8%, which is on the high side. Boosted by an expectation that NEPI Rockcastle (in which Fortress holds a 23% stake) will increase distributable earnings by 24% in FY22, Fortress expects distributable earnings in FY23 to be 12.4% up year-on-year. As a final important point to note, Fortress is busy with a process to potentially collapse the dual share structure into one class of ordinary shares.
  • MultiChoice has released a trading statement for the year ended March 2022. This business is trading sideways, with benefits from a recovery in advertising revenue being offset by higher content costs, in this case due to a return to a full sporting calendar. HEPS is expected to drop by between 20% and 25% for the year and core HEPS will be between 5% and 8% higher, with unrealised foreign exchange movements as a major contributor to the difference. Leaving aside these adjustments, my view is that MultiChoice is a business in terminal decline.
  • Hulamin shareholders may be in for a shock if they check their portfolios today. The share price lost a colossal 27.6% on Monday as the company announced the withdrawal of its cautionary announcement. The company was deep in negotiations with a potential offeror who had indicated a satisfactory deal price to the directors, representing a substantial premium to the Hulamin share price at the time. A due diligence had even been completed to the offeror’s satisfaction. As anyone who has worked in corporate finance will tell you, deals can and do fall over at the eleventh hour on a regular basis. Due to being “unable to agree satisfactory terms with all stakeholders” and the offeror becoming “concerned about recent global economic uncertainty”, the deal is dead. The offeror has walked away, leaving a substantial amount of pain among Hulamin punters. Here’s the really scary thing: the share price is still much higher that it was for most of 2021 before the prospect of a deal turbocharged the price.
  • Southern Palladium raised $19 million in its initial public offering, of which around $13.3 million is earmarked for technical drilling and other costs and the rest is for corporate costs and working capital. With trading on the Australian Stock Exchange scheduled to commence on 8th June, the company released a number of important pre-listing disclosures, including the detailed clawback provisions related to the shares issued to pay for the acquisition of the asset supporting the listing. The JSE has approved the secondary listing of the company, which means another new listing is thankfully on the horizon.
  • MC Mining has entered into a R60 million standby loan facility with Dendocept, an oddly-named company that holds a 1.5% stake in MC Mining. A first, I found it strange that such a small shareholder would extend a loan facility. I then kept reading and discovered that this is a 12-month convertible facility that is repayable in cash or convertible to shares at a 15% discount to the prevailing 30-day volume weighted average price at date of conversion. The interest rate is prime (currently 8.25%) plus 300 basis points. Proceeds from the facility will be used to make progress at the Makhado hard coking coal project, enhance specific areas of the bankable feasibility study, undertake drilling programmes and support group working capital requirements. It appears as though MC Mining can draw all or part of the facility and it will be available for 12 months.
  • In a leading example of lightning striking twice, Gary Shayne has resigned from the board of directors of Ascendis. He wasn’t there for terribly long and even managed to lose money on a leveraged trade during that period. I think it’s time for him to forget about this company once and for all, having been hurt by it more than once.
  • Kaap Agri’s deal to acquire PEG Retail Holdings, core to the fuel strategy of the diversified agriculture group, has achieved a resounding endorsement from shareholders with 99.99% approval at the general meeting.
  • Universal Partners is currently under a mandatory offer by Glenrock of R18.63 per share. With the price sitting at R20.43, it looks like a silly situation at first blush. The important point here is that the stock is illiquid, so the bid-offer spread of R18.25 – R20.98 tells the real story. Those looking to exit a position, especially a large position, would be better off taking the offer than trying to sell in the open market. The offer closes at 12pm on 17th June 2022.
  • Investment holding company Astoria has renewed its cautionary announcement related to the potential acquisition of a 25.1% interest in International Mining and Dredging Holdings for a ticket price of $5.5 million. Agreements are still being finalised for the potential transaction.
  • Grand Parade International has met the final condition precedent for the unbundling of the investment in Spur Corporation. This means that Grand Parade shareholders will see Spur appearing in their brokerage accounts on Monday 20th June, like a surprise burger arriving at the door.
  • An executive director at Santova exercised options to acquire shares for a total price of R651,000 and immediately sold those shares for R2,415,000 – a tidy profit as part of executive compensation.
  • The CEO of Brikor has sold shares in the company. The numbers are small but so is the level of liquidity in the company, so this is important enough to mention.
  • Directors of Gold Fields (including CEO Chris Griffith) have bought shares in the company after the nasty drop last week. This makes me happy, as it cements my alignment with them and ensures we lose money together at the moment.
  • In another example of insider buying in the gold industry, a director of AngloGold Ashanti has bought around $50,000 worth of shares in the company.
  • Discovery co-founder Barry Swartzberg has pledged R796.9 million in shares as security for preference share funding of R187 million. I am incredibly curious about what he may be doing with that capital! The only reason this gets announced on the market is that Swartzberg is a director of Discovery and this is considered a notifiable security arrangement. To be clear, no shares have been bought or sold here – only pledged as collateral.
  • The lead independent director of Sun International, Graham Dempster (a name anyone from Nedbank will recognise), has bought around R2.55 million worth of shares in the company.
  • It’s worth a mention that Spear REIT CEO Quintin Rossi has been buying shares in the company for his children. There have been a number of these announcements recently. Although the numbers are relatively small, this is a substantial endorsement of the company’s prospects (unless his kids have really been annoying him lately and this is his way of getting back at them). To help with pocket money, the Spear shares will pay a cash dividend on 20th June.
  • Associates of a director of MiX Telematics have bought shares in the company worth around $90,000.
  • There was significant insider buying at Sabvest Capital, with an executive director buying over R2.5 million worth of shares.
  • The special distribution of 200 cents per share by enX Group will be paid on 20th June, a substantial return of cash to shareholders considering the share price closed at R8.99 on Monday. The mandatory offer by MCC Contracts and African Phoenix has also been finalised, with only 0.06% of enX shareholders accepting the offer. This isn’t surprising, considering the offer price was R5.60 and the share price has been trading above R8 for months.
  • In the Oasis Crescent Property Fund, unitholders of 34.9% of units qualifying for the distribution elected to receive it in cash. The rest opted to reinvest their distributions in the fund.

A new(ish) listing on the JSE

The Finance Ghost
-
0
A new(ish) listing on the JSE

In an event that is as rare as rainfall in the driest parts of the world, a company has issued a pre-listing statement for a JSE listing. New listings are pretty hard to come by on the local market. This one isn’t quite “new” but is better than nothing.

CA Sales Holdings is currently listed on the Cape Town Stock Exchange and is being unbundled by PSG as part of that famous investment holding company collapsing its structure on the JSE. This asset isn’t unknown to the market, but this is the first time that investors on the JSE can invest in it directly.

The Cape Town Stock Exchange will be losing this listing as a result of this deal, which is unfortunate in my view. It would be good to see that exchange develop.

No fresh capital will be raised as part of the listing moving to the JSE and the anticipated market cap is nearly R2.2 billion, so this is a solid mid-cap business.

CA Sales is a fast moving consumer goods (FMCG) operation that has its core asset in Botswana, which it acquired in 2012. The group operates the largest distributorship business in Botswana. Today, the group has offices and facilities in Botswana, South Africa, Namibia, Zambia, Zimbabwe, Lesotho and Swaziland.

As is typical of a group that has been built through acquisitions, there are a number of non-controlling shareholders in underlying subsidiaries. This creates complexity but also means that there are management teams in the subsidiaries that usually have skin in the game.

With a dividend policy of paying 20% of headline earnings as a dividend, this company offers a yield to investors as well as growth prospects from exposure to African consumers. The “emerging middle class” theme is relevant here.

If you are looking for more information, you can download the pre-listing statement at this link.

The much higher levels of liquidity and visibility on the JSE mean that this company will be on the radar of far more investors going forward. It brings something different to the market, which is always most welcome.

1...186187188...208Page 187 of 208

Focuses on making market news and investment concepts accessible, understandable and fun!

Ghost Mail is free to read

SUBSCRIBE TODAY

Partner with Ghost Mail

CONTACT US

© Ghost Mail

Verified by MonsterInsights