I’m sorry to disappoint you, but this article isn’t full of advice for your Tinder game. I can’t help you with that. All I can do is help you understand more of what you read about in the markets.
MAC stands for Material Adverse Change, a concept in dealmaking that gives the buyer of an asset a lifeboat in case the asset starts sinking before the deal is implemented.
Why do parties negotiate a MAC clause?
Whenever a new deal is announced, the assumption is always that it will go ahead unless there’s a nasty surprise from a regulator like the Competition Commission. Regulatory approvals are always a risk as they are outside of the control of the parties agreeing to the deal.
A MAC issue is different, as the buyer has the right to walk away from the deal if something goes badly wrong during the implementation phase. It can take many months to implement a deal due to the numerous regulatory approvals that may be required along the way. During that period, anything can happen.
The lawyers will have long and lively debates about the MAC clause while the deal is being negotiated, billing their respective clients along the way (often in 10-minute intervals, so don’t spend too much time chatting to them over a spring roll during the tea break).
It all seems pompous and unnecessary until something goes wrong and the MAC clause is needed. Nobody gets married with a plan to get divorced, yet it makes a lot of sense to put some agreements in place to regulate that unwanted outcome.
The Barloworld – Tongaat Hulett example
An excellent example of a MAC drama was found in our local market during the pandemic.
At the end of February 2020, just before the world went mad, Tongaat Hulett announced that it would sell its starch division to Barloworld for R5.35 billion.
The cash was desperately needed, as Tongaat was in a tough place even before news of an accounting scandal broke. As usual, thousands of employees lost their jobs during the financial disaster and the executives continued to enjoy their money while the wheels of justice turned slowly. The case against them is currently in the courts.
The Tongaat share price went on a rollercoaster ride in 2020, not least of all because the deal with Barloworld wasn’t as cemented as people thought. Although Tongaat shareholders were in support of the deal, it takes two to tango.
In May 2020, Barloworld tried to invoke the MAC clause based on an expectation of the EBITDA (a proxy for operating profit) for the year ended February 2021 being 82.5% or less of the prior year’s result. Barloworld was desperately trying to manage its own risks in a period of immense uncertainty, so doing such a large deal obviously felt scary for Barloworld’s board.
It took a few months to sort out, with independent expert Rothschild & Co eventually confirming that EBITDA had not fallen sufficiently to trigger the MAC. Of course, Barloworld was quick to issue an announcement gushing over the business and how great it is, even though they tried to wriggle out of buying it.
It’s just as well that the deal went ahead, as the business has been a great performer for Barloworld. In the 11 months that Barloworld owned the asset during the 2021 financial year, Ingrain generated an operating profit of R534 million vs. R452 million in the comparative period (before Barloworld owned it). It unleashed R768 million in cash flow as working capital efficiencies were realised.
Looking back, I can understand why Barloworld gave itself the option to walk away by invoking the MAC clause. Hindsight is perfect and there was no certainty at the time that things would work out so well.
This is the point of the MAC clause: optionality for the buyer. It’s a good reminder to deal executives to listen carefully to the lawyers, as the MAC clause in an agreement can end up being the most important section of all.
This was my most-read article in my early days as The Finance Ghost, shared on multiple WhatsApp groups and community platforms. It helped a lot of people with the decision to emigrate (or not) and is replicated here with just a few tweaks and updates where needed. The original publication date was July 26th, 2020.
Is there a more emotive topic for the South African middle class than emigration? With just enough money to contemplate the decision but nowhere near enough for the dream lifestyle of chasing the sun, these inbetweeners face a tough decision. Load shedding doesn’t make it any easier.
The damage to our economy from Covid was severe. It made the 2009 Global Financial Crisis look tame. A significant upswing in commodities in the aftermath of the pandemic has saved the currency and quite possibly our economy as well, although Eskom and numerous other problems constantly remind us that the pain is far from over.
When a ship is battling a terrible storm, the passengers look to the captain and leadership team for hope. Our leadership team isn’t inspiring confidence in anyone right now, forcing the passengers to at least consider whether the lifeboats might be a better option.
This isn’t an SA-bashing article
It’s too easy to just say “of course you should emigrate” – the decision deserves far more analysis than that.
South Africa has problems, but we are still one of the most important emerging markets in the world. There’s still an S in BRICS. We are still in the G20. By no means are we some obscure country that has no relevance to global trends, even if we are a “junk” economy these days.
There is unquestionably opportunity here. Although the overall economy has been stagnant in recent years, many have still made their fortunes here.
I’m going to take you through a decision process that looks at:
Mitigation of crime as the initial test
Separation of financial and physical emigration
How to make the physical emigration decision
Treating the views of SA expats with some caution
The most important caveat to objective analysis: crime
I want to explain the way I think about the emigration decision and the factors I consider, but I must first touch on the most difficult issue of all: crime.
It’s not about feeling safe, because very few countries are perfectly safe. It’s about feeling like you can successfully mitigate the risks.
I moved from Joburg to Cape Town partially because of how gorgeous Cape Town is, but also because I couldn’t handle the risk of violent crime happening to my family while driving between home and work. Cape Town has crime too, obviously, but the hijacking realities are a fraction of what they are in Joburg.
I felt that hijacking is a risk I cannot mitigate and so I semi-grated, along with thousands of other Joburg families.
Housebreakings, on the other hand, can be mitigated to a great extent by living in a secure complex. The risk is never zero, but it can be managed to an acceptable level in my opinion.
If you feel like you cannot mitigate the risks, or you cannot live a full life in South Africa because of crime, then you can stop reading. You should be on visa application sites instead, giving yourself a shot at happiness elsewhere. I totally get it and respect that decision.
Separating the financial and physical decisions
South Africans are allowed to take R1m offshore every year without jumping through hoops and another R10m per year with permission from the SARB and some other paperwork nightmares from SARS.
I raise this because the vast majority of South Africans will never be at risk of hitting this threshold and not getting their money out. The exception to this would be a Zimbabwe-style liquidity crisis where the Rand literally becomes worthless in a matter of weeks, but I believe we aren’t at that point.
If I believe that we are headed for Zimbabwe status in the next few years, then there are two things I should be doing:
Selling all my fixed assets (especially my house as soon as possible)
Shifting all my Rands into offshore investments as first prize or JSE-listed investments with offshore exposure (e.g. S&P 500 ETFs) as second prize
This is the decision to financially emigrate rather than physically emigrate. It is often (but not always) the precursor to physical emigration.
How do I make the physical decision?
Having already discussed the concepts of crime mitigation and financial emigration, we now need to look at the biggest decision of them all: physical emigration. This is the classic “packing for Perth” approach.
A four-quadrant decision matrix is a favourite tool for strategists. It allows you to assess four scenarios based on two variables. In this case, I believe the most important variables are:
Importance of proximity to family
Income prospects in South Africa
The decision needs to be based on your personal circumstances.
Let’s deal with the family point first. It’s easy: you either do or do not place high importance on being close to your family and close friends. This is especially difficult when you have kids. If you’re young and single and most of your friends have left anyway, then it’s much easier than when you are taking your kids away from their grandparents, for example.
The second point is trickier. Your ability to earn an income is a factor of your skills and your relationships. If you go overseas, your relationships start from scratch, so your skill set has to be fantastic and sought after in whichever country you go to. Please don’t underestimate this issue.
Let’s look at the four scenarios:
Quadrant 1: Upskill / change job
If you want to be close to family and friends but your income prospects aren’t looking good, then you have to do a bit of soul searching and figure out how to upskill yourself in a new direction.
Should you start a business? Do you need to study further? Is it time to do something completely different? It’s not a pleasant situation to be in, but the tough survive.
In some cases, there is little choice but to emigrate. This is the most emotional emigration of all, as it is based on push factors rather than pull factors and you leave your family behind. It hurts for everyone involved.
Quadrant 2: Do not emigrate
The decision to not emigrate is clear in only one quadrant. If you want to be close to family and your income prospects are strong in South Africa, then physical emigration makes no sense (unless you cannot mitigate the crime issue).
With the right crime and financial risk mitigants in place, you can keep lighting the braai. I am in this quadrant and I really hope to stay in it forever.
Quadrant 3: Emigrate
The decision to get out is also only clear in one quadrant. With weak income prospects and your family already somewhere else, why would you logically stay here?
Quadrant 4: Enter the global job market
This quadrant is typically where professionals with global mobility find themselves. They are specialists in specific fields and can work in many different countries.
If family isn’t an issue, then these people must logically continuously seek the best possible job market for their skills.
Treat the views of expats with some caution
Ask 10 South African expats whether you should emigrate and I guarantee 8 will give you a resounding yes. Of those 8, maybe half are genuinely happy.
South African expats don’t have it easy. Whether they are willing to admit it or not, their hearts still feel something when they think about braais, biltong and Springbok world cup victories.
Many will tell you that “leaving is the best thing they ever did” and “life is so perfect here” – which, in some cases, it is. In many cases though, it isn’t.
With the greatest of respect to expats and recognition of how hard it is, many suffer from confirmation bias and few are willing to admit it. I have enormous respect for those who are capable of giving a balanced answer.
They so desperately NEED emigration to have been the right decision that they only look for positives in the country they’ve moved to and they only focus on the negatives in their place of birth. This falls away when the Springboks win of course, at which time the expat population is the first to break out the green jerseys.
Once you’ve packed up your family and sold everything to move to a foreign land, you will seek confirmation all the time that you did the right thing. This is human nature. These cognitive biases make our lives (and the markets) so interesting.
Final thought: this is a fluid process
I don’t make this assessment once every 5 years. I do it almost continuously in my mind. The facts in front of us are always changing. Our country seems great one day and terrible the next.
Whatever you do, just do everything possible to take emotion out of the decision. Consider your options objectively and calmly and you stand a much better chance of making the right decision.
And if you are reading this as an expat who made the big decision, then please do your best to deliver a balanced view to those left behind. We all know how broken South Africa is, but I have yet to come across a perfect country.
This article is an adaptation of pieces I wrote in the weekly Ghost Mail publication during the peak of IPOs in 2021.It was uploaded a couple of weeks before we launched the new Ghost Mail so the share price CAGRs below are slightly outdated, but it’s the principle that matters.
My long-standing readers and followers on Twitter will be aware that I avoid Initial Public Offerings (IPOs) like the plague. Hype may be great for boxing matches and championship-deciding Formula 1 races, but it is highly dangerous in the world of investing. Nothing gets more hype in the market than a new listing.
An IPO is the process of a company listing on a stock exchange and raising capital. In addition to the company issuing new shares to investors and putting the proceeds in the bank account, the pre-IPO holders will often make a portion of their shares available for sale. This is to create “liquidity” and “shareholder spread” which simply means that there will be enough different shareholders to create a market for the shares and drive trade.
The most important thing to remember about IPOs (especially in the United States) is that the public markets are frequently used to facilitate an exit for previous investors like private equity funds or even the founders.
Now, they aren’t going to sell you the shares at what they perceive to be a bargain, are they?
Trust me, the bankers and venture capital (VC) firms know more than you do about the company. They are only willing to cash out or even dilute their holdings once the best days are over. The super-profits have been made by the time a company comes to market, so paying a valuation as though the company can keep growing like a startup is an almost guaranteed way to blow up your portfolio.
An IPO that only facilitates trade rather than the raising of fresh capital is known as a “direct listing” – examples include Coinbase, Roblox, Palantir, Slack and Spotify. Here’s a quick look at the compound annual growth rate (CAGR) at time of writing this article and the listing date of each of these companies:
Spotify -1.3% (3rd April 2018)
Slack +7.8% (20th June 2019)
Palantir +19.1% (29th September 2020)
Coinbase -55.1% (14th April 2021)
Roblox -36.4% (10th March 2021)
This is a small sample size of course, but there’s a clear trend here and it won’t look any different with more examples: new listings generally suck for investors and the listings in 2021 were the most dangerous.
Buying IPOs at a time when the market is clearly expensive is a very painful mistake that you need to avoid.
IPOs ARE FAIR-WEATHER FRIENDS
If you draw a long-term chart of the number of IPOs each year in the United States, you’ll notice that they tend to peak at the end of a bull market. This isn’t by accident and isn’t a coincidence.
If you are bringing a company to market and hoping to attract investors, wouldn’t you want to do it when the market is hot and investors are itching for the next opportunity? Trying to sell something new to battered investors is much tougher than just taking advantage of hype around a specific sector or concept.
This is why you tend to see a flurry of IPOs in specific sectors at different times. For example, electric vehicles have been all the rage. The tech sector in general was flying throughout the pandemic. In 2022, things have cooled off considerably. The downstream impact on venture capital is becoming visible now, with a definite risk-off approach coming through from tech investors.
IPOs LOVE ASSET PRICE BUBBLES
When you hear stories of pimply kids from Harvard raising gazillions of dollars with little more than a one-page term sheet and a promotional video to explain the idea, you need to be afraid. In that environment, people might even start buying JPEGs of monkeys for enormous amounts of money. Oh, wait…
For me, NFTs must be the single best example of what happened to the market during the pandemic. The NFT market is collapsing and it’s going to get worse. Crypto is looking very shaky right now.
Unprecedented levels of economic stimulus (money printer go brrrrrr…) by the Fed created a spectacular asset price bubble. In those scenarios, there is plenty of money to be made provided you recognise the risks and realise that you are in a game of musical chairs. When the music stops, you need to have already cashed out.
In such a market, there are several IPOs every week.
For context, Statista tells me that there were a total of 685 IPOs in the US from 2016 to 2019. There were 431 just in 2020 and a whopping 951 in 2021, far more than in any prior year.
Another sign of trouble was the number of Special Purpose Acquisition Companies (SPACs) that listed. These are “blank cheque” companies that raise money based on a loose plan to go off and do deals. We have a similar mechanism on the JSE, though we haven’t seen a SPAC listing in a long time. Capital Appreciation Limited was the first SPAC on the JSE and has worked out very well, with a market cap at time of writing of nearly R2.4 billion and an exciting strategy in various FinTech verticals.
LOOKING BACK: COINBASE
In the process of migrating my work to the new Ghost Mail platform, I worked through many of my earlier blog posts in my life as a ghost.
In April 2021, I wrote about crypto exchange Coinbase. I specifically wrote about how I felt the company was a gigantic bubble, with IPO pricing that would hurt investors while maximising returns for those leaving the building.
Since then, Coinbase’s share price has more than halved.
Many investors made the argument at the time that Coinbase is the shovel in the gold rush. This is a great analogy that reminds us of the power of being a platform business. When selling the shovels, you don’t care if the buyer finds gold or not. That is the buyer’s risk, while your profits from the shovel sit safely in your bank account.
Of course, if nobody ever finds gold, then your shovel business is in serious trouble. That’s a longer-term problem.
Coinbase takes a percentage of the value of crypto traded on the exchange. In other words, the profits fluctuate with the pricing of crypto tokens. This isn’t the shovel in a gold rush; this is a share of the gold itself. As I wrote at the time, the analogy was being applied incorrectly.
A careful read of the prospectus (the detailed document that accompanies any listing) would’ve revealed that the company’s goal is to operate at break-even (!) for the time being. They were looking for investors who believed in the mission and would hold through cycles.
Sure. We all want that, along with a Ferrari for our next birthday present. Who wouldn’t want investors that don’t care about making a profit?
At the time of the IPO, Coinbase was priced at a forward Price/Sales multiple of around 9x. The Nasdaq (itself a listed company) was trading on a revenue multiple of 4.7x and makes a profit. The JSE was trading at a revenue multiple of around 4x.
So here was Coinbase, priced at double the revenue multiple of the traditional equity exchanges and aiming to simply operate at break-even. That wasn’t a story I was going to invest in.
I’m really glad I didn’t, as this chart will demonstrate:
IPOs are best avoided. Be careful out there, Ghosties.
Mediclinichas provided a trading update for the year ended March 2022. With full results scheduled for release on 25 May, this gives the market a taste of what happened in that period.
As I’ve written many times before on this platform, the hospital groups were not beneficiaries of the pandemic. The cancellation of elective procedures caused havoc with operating margins. The latest results demonstrate that a recovery from that tough period is well underway.
Revenue grew by 8% and group EBITDA margin came in at around 16%, a 180bps improvement from the 14.2% result in the prior year. Revenue is now ahead of the FY20 period (GBP3.2 billion vs. GBP3 billion) but EBITDA margin hasn’t fully recovered yet, running 150bps below the FY20 margin of 17.5%.
Investors will appreciate the improvements in the balance sheet. After a tough period in FY21 with low cash conversion of profit into cash generated from operations (just 77%), a 125% conversion rate in FY22 reflects a period in which working capital swung positively.
Thanks to strong cash conversion, the group net debt / EBITDA ratio has improved from 5.1x to 4.0x. Importantly, this is better than the 4.3x reported in FY20.
Mediclinic’s share price is trading only slightly below pre-pandemic levels and is up around 7% this year.
Grindrod has released a trading update that includes information on the floods in KZN. I’m not surprised to see this, as the market was talking about every business with possible exposure and Grindrod certainly featured on that list.
Like all great company updates, it starts with the good news.
In the first quarter of 2022, Ports and Terminals achieved strong volume growth. Ports volumes were up 11% and Terminals drybulk volumes were up 48% vs. the prior period.
Grindrod also highlights the Coastal Shipping and Clearing and Forwarding business in the Logistics segment, which delivered earnings growth of 39% over the prior period. This business benefits from a recovery in sea-borne trade to pre-pandemic levels.
Grindrod Bank’s earnings were up 9% on the prior period despite continuing with a cautious approach, indicated by the large liquidity surplus.
We now get to the bad news.
The container depots, terminals and warehouse facilities in Central Durban were impacted, with five sites presently suspended and likely to remain that way for several weeks. It’s not every day that you’ll see a sentence like “activity to recover customer containers and restore facilities has commenced” – this was a serious natural disaster.
Unrelated to the flood damage, the Matola Terminal has suffered force majeure after a ship collision damaged the infrastructure. Ship-loading operations are expected to commence this month.
The announcement follows the standard approach of a you-know-what sandwich, starting and ending with positive news and putting all the ugly bits in the middle. The good stuff starts again with an update related to the disposal of the fuel carrier fleet in Botswana at carrying value. This means that Grindrod has fully exited the fuel and automotive road transportation business, in line with the group strategy of focusing on core assets.
Finally, the remaining two tranches of preference share debt of R150 million in the Private Equity and Property business has been settled.
Force majeure is a legal construct that is common in agreements. It allows for one of the parties to be released from liability in a scenario where the ability to perform under the contract is made impossible based on unforeseeable circumstances.
As you can imagine, this becomes open to interpretation and all kinds of fighting. The only winners in these scenarios are the lawyers.
On Thursday, both Thungela and Exxaro announced that Transnet had notified them on 8th April that the state-owned company was now operating under force majeure.
Transnet was already underperforming in these contracts, with just 58.3Mt of coal delivered to the Richards Bay Coal Terminal in 2021 vs. annual capacity of 77Mt. In other words, Transnet has been letting every taxpayer down at a time when coal prices were flying and local producers were trying to take advantage of an upswing in the cycle.
The factors that Transnet is using to justify the force majeure are legal proceedings relating to the irregular locomotive acquisition and maintenance contracts, as well as “rife vandalism” on the coal line. Thungela chose not to give its view on whether these are truly beyond Transnet’s control, while Exxaro was blunter in its view that it disagrees with Transnet’s assessment.
Because Transnet was so broken already, Thungela notes that it doesn’t believe that this development will have a material impact on the 2022 operational outlook. Exxaro’s view was that the impact cannot be determined until negotiations are finalised.
Transnet hopes to conclude new five-year agreements with the coal exporters by 30 June 2022. This is sadly a perfect example of South Africa scoring yet another own goal.
Mr Price has been on the acquisition trail with a vengeance. The latest deal is for Studio 88 Group, a substantial retail group that operates several fashion chain stores.
Mr Price will buy a 70% stake in the company from RMB Ventures and the current management of Studio 88, so this is a classic private equity exit. RMB Ventures will sell out completely and the management team will sell half of their interests. Importantly, the seven senior management team members who are shareholders will retain their positions and will remain as shareholders, ensuring alignment with Mr Price.
This is a significant deal for Mr Price with a transaction value of R3.3 billion, or around 6% of the company’s market capitalisation. Mr Price has been cash-flush and has made it clear to the market that deals are the way forward, so the acquisition is funded entirely through existing cash resources.
This creates a lower-risk deal (as the banks won’t come knocking if it starts going wrong), which is a good thing as every acquisition is always a risky move and Mr Price has been doing more deals recently than some private equity funds!
With revenue in the last financial year of R5.6 billion, Studio 88 Group is the largest independent retailer of branded leisure, lifestyle and sporting apparel and footwear in South Africa. Retail outlets include Studio 88, SideStep, Skipper Bar, John Craig and other chains. There are over 700 stores targeting aspirational customers, so this is different to the usual Mr Price value proposition.
This acquisition has helped me realise that I’m truly on the wrong side of 30, as I don’t know most of these brands. I can confirm that aspirational fashion takes a backseat when a chunk of monthly income is going into buying nappies for Toddler Ghost.
Where Studio 88 does have overlap with Mr Price’s model is in the focus on cash sales. Studio 88 is exclusively cash-based (vs. selling on credit), so the money is being made on gross profit margin rather than interest on a debtors book.
Studio 88 will become the group’s second largest trading division. With this footprint included, Mr Price Group would have over 2,400 stores and employ over 25,000 people.
The enterprise value is R4.7 billion and EBITDA for the year ended September 2021 was R630 million, so the EV/EBITDA multiple is 7.5x which is reasonable in my view. On a last twelve months basis to February 2022, EBITDA was R765 million, so there is strong underlying growth (and the multiple is actually just over 6x). I’m pleased to see that these numbers are on a sensible pre-IFRS 16 basis, which means EBITDA is net of rent payments. This may sound ridiculous to you (it certainly does to me), but current accounting rules push lease payments below the operating profit line and into the interest paid line.
If you read my weekly Ghost Mail publication earlier this week, you would know my feelings around current accounting rules.
Mr Price’s stated vision is to become the most valuable retailer in Africa. This isn’t possible without moving outside of the core value proposition, so Mr Price sees this acquisition as a way to plug a gap in the group. Aspirational (i.e. brand-conscious) customers aren’t currently being serviced by Mr Price. Studio 88 has achieved a compound annual growth rate (CAGR) of over 20% in both revenue and operating profit for the last 10 years, so the management team clearly knows what it is doing.
This is a Category 2 deal for Mr Price, so shareholders will not be asked to vote on it. Regulatory approvals (like the Competition Commission) will need to be obtained by no later than 31 October 2022.
Mr Price closed 6.9% higher, so that’s as close to a “shareholder vote” as the deal will get.
Capitec is a wonderful example of a company where the valuation has moved into a different solar system from the rest of the market. The company has been one of the single greatest success stories of modern times on the JSE and continues to grow. It needs to, as the valuation is beyond demanding.
There’s been a lot of noise in the market around Capitec and there are still those who simply don’t believe the numbers. In the absence of concrete proof to the contrary (whether from Viceroy or elsewhere), I will rely on the audited numbers released by the company.
Those numbers tell quite a story.
Before getting into the details, I’ll prepare you by noting that headline earnings per share (HEPS) increased by 84% in the year ended February 2022 to R73 per share. I know what you’re thinking – “this was a recovery year vs. Covid” – and you are right, when it comes to most companies. For the year ended February 2020, HEPS was R54.28 per share. Earnings are 34.5% higher over a two-year period that included the largest economic shock of our lifetimes.
The dividend story is even stronger, up 128% to R36.40 per share. To top it off, there’s a special dividend of R15 per share. Ignoring the special dividend, Capitec is only on a dividend yield of 1.6%. This is a result of the enormous valuation placed on the company by the market.
If we look deeper, we find a year that boasted 14% growth in active clients to 18.1 million and 17% growth in clients using digital channels to 10.1 million. Such high growth numbers mean that Capitec continues to win market share.
The financials tell an interesting story around the strategy.
Total interest income (the bread and butter) only increased by 6%. Net loan fee income, which is related to this, also increased 6%. This is nothing to get excited about, obviously. The magic is happening on other income lines like net insurance income (up 60%) and net transaction income (up 21%). Don’t ignore funeral plan income, up 39%.
These ancillary services are aggregated into what banks refer to as “non-interest revenue” – a key driver of return on equity as this income is not directly related to assets or liabilities on the balance sheet.
A huge 55% decrease in credit impairments (a R4.3 billion favourable swing) gave the result a strong boost. After impairments, net income increased by 55%.
Expenses grew substantially in this period, up 33%. The narrative in the result suggests that the main driver is employee costs (up 57%). This has caused the cost-to-income ratio to jump to 47% from 42%, of which 300bps is directly attributable to employee cost growth. Although that’s still a much better cost-to-income ratio than competitors, investors will keep an eye on this.
Thanks to such positive JAWS (the net income growth rate minus the expenses growth rate), profit after tax shot up by 91% and headline earnings increased by 84%.
Return on equity (ROE) has improved from 17% to 26% and the net asset value per share (a key concept in banks) increased by 20% to R308.88.
Here’s the kicker: Capitec closed 1.5% lower yesterday at just under R2,270 per share. That’s a price/book multiple of 7.35x (price divided by net asset value per share). The effective ROE (which combines ROE as reported and the value the market is placing on the equity) is thus just 3.5%.
I know from my work on Magic Markets Premium that some of the best companies in the world (like Microsoft) trade at these levels of effective ROE.
The valuation just doesn’t seem to matter with Capitec, as the share price is up nearly 64% over the past twelve months and is 11.5% higher this year.
The market is pricing in a great deal of growth and to Capitec’s credit, they keep on delivering it. After dominating in consumer banking, even the business banking efforts are looking really good (accounts up 31% and a contribution of R174.5 million to group earnings). Capitec has acquired Mercantile Bank to give its business banking strategy a boost.
Notably, Capitec is lagging the share price performances of other major banks this year. The valuation has taken a small breather. But with a result like this, the growth story is still in good shape.
TWK Investments isn’t a company that you’ll spot in a list of SENS announcements. The company has its primary listing on the Cape Town Stock Exchange and a secondary listing on A2X for trading purposes, so scanning the JSE won’t help you find it.
In case you’re curious, TWK stands for Transvaal Wattle Growers. Tracing its roots to 1940, the company now operates a timber division (ranging from forests to a chipping mill), a grain division (storage, marketing and processing), a trade division (retail branches selling agricultural products as well as New Holland agencies), a renewable energy division (roof solar solutions), a motors division (dealerships and fuel stations in Piet Retief, Ermelo and Standerton) and a financial services division (financing and insurance solutions to the agricultural industries).
This is clearly an interesting group and one that you may not be familiar with.
The company has released its interim results for the six months to February 2022 and there are some chunky numbers to attract your attention. For example, revenue is up 30.6% to R4.88 billion and the net asset value (NAV) per share has increased by 18.43% to R50.24.
The share is trading at R37.50, a discount of just over 25% to the NAV.
The percentages become a little silly as you move further down the income statement (in a good way). EBITDA is up 111.8% and profit after tax is up 175.5%. Cash is always important and investors will be pleased to note that cash from operating activities (before working capital changes) increased 100.4%.
This is a record interim result that includes strong contributions from the timber and trade divisions in particular. Like in any business, there are also challenges being faced. Guidance from management is strong, with an expectation of outperformance in the second half of the financial year vs. the comparable period.
To help you find out more about this fascinating company, Unlock the Stock will feature the TWK management team at 12pm this Thursday 14th April. The other company on the day will be Mpact, a solid JSE mid-cap business that has proven its resilience during a tough few years in South Africa.
This is a wonderful (and free) opportunity to engage with the management team and ask your questions. Don’t miss out on it!
Life Healthcare has released a voluntary trading update for the six months to March 2022. This covers the first half of the 2022 financial year.
The business isn’t a rocket when it comes to revenue growth, so investors are looking for improvement in EBITDA margins to help drive profitability.
The South African operations have delivered accordingly. With revenue growth of between 3% and 5% in this period, the increase in EBITDA margin from 16.6% to around 17% is important.
The strength of the rand doesn’t do any favours to the results of Alliance Medical Group (AMG) once converted to Life’s reporting currency. AMG’s primary areas of operation are the UK, Italy and Ireland. Revenue growth was just 1% to 3% in this period. Normalised EBITDA margin has gone the wrong way in that business, down from 24.8% to around 21%. Life attributes this to the ending of COVID-19 contracts with the UK’s National Health Service.
At group level, revenue is up between 3% and 5% and normalised EBITDA margin is 17% vs. 18.6% in the comparable period. This has been dragged down by the AMG result.
It may sound counterintuitive, but hospital groups didn’t do well during the pandemic. Elective surgeries were cancelled and margins suffered as operating leverage worked against these groups. Net debt to EBITDA (a measure of balance sheet strength) has been a focus, so Life reports on this in the update. A net debt to EBITDA of 2.78x as at 31 March 2021 was high, improving to 1.82x by September 2021 and now at around 2x.
Momentum is encouraging, with average occupancies in this period of 58% vs. 57% in the comparable period. More importantly, average occupancies over the last 8 – 10 weeks have been 66% and theatre minutes have increased by 10% year-on-year.
Shareholders should note that the Scanmed S.A. business in Poland was in the comparable period but not in this one, as it was sold to Abris Capital on 26 March 2021. The business contributed 6 cents per share to net earnings in the first half of 2021.
The primary international growth initiative is Life Molecular Imaging (LMI), which has grown revenue by 30% in this period despite delays in drug approvals by regulators in key markets.
Locally, growth initiatives are in the renal dialysis and oncology businesses. Life has completed its first deal in the imaging market, acquiring the imaging assets of the East Coast Radiology practice. The process to build two cyclotrons in South Africa has commenced. Although these may sound like villains in a Transformers movie, they are actually particle accelerators used for imaging procedures.
Detailed results for this period will be released on 26th May. There wasn’t much of a market reaction to this update, so we will see what happens as we head closer to results. The share price is down around 5% this year.
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