Private equity (PE) investments are known for their significant potential for returns, but navigating the path to a successful exit can sometimes be challenging.
Historically, typical South African PE funds are structured as en commandite (limited liability) partnerships with a predetermined term, often 10 years (plus two one-year extensions). At the end of the term, the investments are usually realised, and the investors share the returns. Common ways of exiting private equity funds are either via sales to other companies or secondary buyouts to other PE firms.
However, fund managers may face the challenge of trying to exit at the end of the pre-agreed life of the fund when investments are performing well and an exit would diminish value, or when market conditions are not conducive to an immediate exit. A practical solution may be to set up a continuation fund.
Continuation funds A continuation fund is a vehicle used to extend the life of a PE fund beyond its original term. Existing investors have the option to roll over their interests into a new fund structure, allowing the fund manager to continue managing the portfolio beyond the initial investment.
However, navigating a continuation fund as a way to exit a PE fund requires careful consideration due to the tax implications.
Tax implications The en commandite partnership of a typical PE fund does not enjoy a separate legal or tax persona. In terms of common law, the property of a partnership is co-owned, in an abstract sense, by the partners themselves in undivided (but not necessarily equal) shares, proportionate to their interest in the partnership and on the terms and conditions laid out in the partnership agreement.
The dissolution of a partnership will attract capital gains tax (CGT) for the partners if the division of the assets constitutes a ‘disposal’ or is deemed a disposal for tax purposes.
Disposals A ‘disposal’ is defined in South Africa’s Income Tax Act, 1962 as including ‘any event, act, forbearance or operation of law which results in the creation, variation, transfer or extinction of an asset’. The definition provides particular inclusions with terms such as ‘conversion’, ‘sale’ and ‘exchange’.
When partners initially make their capital contributions to the private equity fund, each acquires an undivided share in the assets. In Chipkin (Natal) (Pty) Ltd v Commissioner for the South African Revenue Service (SARS) (the Chipkin Case), it was confirmed that the undivided share in the asset and its ‘partnership interest’ are mutually exclusive.
Following the Chipkin Case, the disposal of a partnership interest where ownership is transferred to a third party or an existing partner will result in the disposal of an ‘asset’ for CGT purposes.
The proceeds less the base cost of the asset will result in either a capital gain or a capital loss in the hands of the partner. If the partner is a South African company and there is a gain, it will be subject to CGT at an effective rate of 21.6%, while a capital loss may be capable of being off set against capital gains realised by the partner, provided none of the loss limitation rules apply.
Partners ‘re-investing’ in the continuation fund While the dissolution of a partnership would, at face value, constitute a ‘disposal’ for tax purposes, the principle underpinning a disposal is that a person must have disposed of an asset in the sense of having parted with the whole or a portion of it.
In terms of a typical private equity fund, partners’ rights and interests are established upfront by having regard to, inter alia, the profit-sharing waterfall that would be set out in the partnership agreement. Until the disposal of a partner’s interest in the underlying partnership asset, the value of each partner’s interest typically fluctuates. Particular to a general partner of a fund, the value fluctuates disproportionately to the general partner’s initial capital contribution. These changes arise as a result of the partnership interests established upfront.
Mechanically, the termination of a partnership will trigger a replacement of the abstract proportionate co-ownership of the underlying assets with actual ownership of the underlying assets. In this regard, the investor has not parted with anything, nor gained anything. The subsequent contribution of the assets to the continuation fund is then represented by a partnership interest in the new fund.
In the continuation fund, a partner’s interest may differ from that of the old fund, although we assume, for the purposes of this article, that the partner’s interest does not differ in value. For example, an exiting partner may have been a general partner in the old fund but a limited partner in the continuation fund. In respect of the asset itself and the partner’s co-ownership rights in the asset, provided the partner does not monetise the value, the partner will have parted with nothing.
A limited partner in the old fund that contributes its shares to the continuation fund as a general partner will not give up value on the date of admission to the new partnership because the value of the contribution equals the value of the shares distributed from the old fund. The profit-sharing waterfall in the continuation fund needs value accretion or depreciation from that point. Accordingly, a disposal for CGT purposes should not arise upon admission into the continuation fund. The application of this view is supported in SARS Binding Private Ruling 391 (2023 (BPR 391)).
Included within the ‘disposal’ rules is a deemed disposal referred to as a ‘value shifting arrangement’. The value-shifting provisions apply primarily to a movement in a partnership interest in respect of an existing partnership. Accordingly, these shifting provisions should not apply on the dissolution of a partnership as the said partnership is no longer in existence.
This view was also confirmed in BPR 391, where SARS held that the dissolution of a partnership did not result in any change in the rights held by the partner and, therefore, would not constitute a ‘value-shifting arrangement’.
Once the benefits of utilising a continuation fund to cater for specific commercial needs at the end of the term of a fund have been taken into account, one would also need to consider the rights/ entitlements of each specific partner in such fund to determine whether a tax disposal event arises. Unless a particular partner monetises its interest in the dissolved partnership, the contribution of the co-owned interest in the underlying assets to the continuation fund should ordinarily not result in a disposal for CGT purposes.
Jutami Augustyn is a Partner, Michael Rudnicki an Executive in Tax, Diwan Kamoetie an Associate, and Eamonn Naidoo a Candidate Legal Practitioner | Bowmans South Africa.
This article first appeared in Catalyst, DealMakers’ quarterly private equity publication.
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In the 48th edition of Unlock the Stock, Afrimat returned to the platform to talk about the recent performance and strategic focus areas for the group. The Finance Ghost co-hosted this event with Mark Tobin of Coffee Microcaps and the team from Keyter Rech Investor Solutions.
The market response on Thursday morning should be interesting
Attacq released a trading statement and updated its market guidance on Wednesday. If you’re wondering why the share price barely moved, that’s because the announcement only came out after the close of trade. Look out for the market reaction on Thursday morning, which I’m quite sure will be strongly positive.
For the six months to December 2024, Attacq expects to see its distribution per share jump by 46.7% to 44 cents. This is thanks to a lovely jump in distributable income per share.
After such a great start to the year, they also have better expectations than before for full-year earnings. The updated guidance shows growth in full year distributable income per share of 24% to 27%.
Cashbuild’s gross margin is a disappointment (JSE: CSB)
This isn’t what I was hoping to see
Regular readers will know that I took advantage of a tactical entry point in Cashbuild late last year. Although it worked beautifully, I’m starting to wonder about my plans to keep it. The share price has been one-way traffic this year and not towards the top right of the page.
Some momentum in revenue has been the good news up until now. Alas, we’ve now seen the margins for the interim period and they aren’t strong. With gross profit margin down 40 basis points on revenue growth of just 5%, HEPS could only manage 1% growth thanks to inflationary pressure on costs. That’s better than it being down, but not by much.
At least working capital has become more efficient, with 88 days of stock instead of 90 days. This boosted cash and cash equivalents by 20%, showing you once again how small changes in retail can have a large impact.
Although revenue in the first 7 weeks of the year increased by 6%, I now have to wonder about the underlying margins being achieved in 2025. Revenue growth doesn’t mean much for investors if the dividend is flat.
The share price closed 3% lower on the news, taking the drop this year to 19.4%. The fact that I’m still way up in this position tells you how daft the market was last year when it created that surprising entry point in August.
Curro needs more kids, but earnings are up at least (JSE: COH)
How much more can be squeezed out of parents?
Curro has a pricing vs. volumes problem. It’s clear as can be. Weighted average learner numbers were up just 1% for 2024, yet tuition fee revenue was 7%. I don’t need to sit in one of the maths classes to know that the difference has to be fee increases.
Now, if the schools are sitting with extra capacity (and they certainly are), then why such high fee increases? Surely it’s better to have a few years of below-inflation increases to try and improve capacity utilisation?
In the absence of that strategy, I can only assume that many of the schools are in areas where there simply aren’t enough kids anyway. The birth rate is a known issue and so is emigration. If that’s the situation, then fee increases are unfortunately the only option available to Curro.
We will have to see how this plays out in years to come. For now, the group managed recurring HEPS growth of 13% for the year ended December 2024. They are still investing in new campuses, despite the difficulties in filling the ones they already have.
Schools built before 2009 are only running at 74.7% capacity. Acquired schools are running at an average of 72.7%. Although there are clearly regional nuances, is the reality that South Africa simply has too many private schools?
Emira’s subsidiary is selling a large residential portfolio (JSE: EMI)
The announcement is frustratingly missing one key metric
Right at the beginning of 2024, Emira Property Fund concluded the acquisition of Transcend Property Fund. The idea of buying the entire fund was to get the portfolio at a discount, with the ability to dispose of assets piecemeal to unlock value.
So, for Emira shareholders, it’s encouraging to see news of a substantial disposal by Transcend, which is a wholly-owned subsidiary of Emira after that deal. The total price is R530 million, so this is a substantial deal covering literally hundreds of sectional title residential units.
At this point, you must be itching to know how the price compares to the value on the Emira balance sheet. That makes two of us. Alas, Emira decided that this wasn’t worth including in the announcement. The only thing we know is that the price was “fair market value” – according to the directors of Emira, that is. Very helpful.
The net operating income for the six months to September 2024 was R25.3 million. If we annualise this, the yield is 9.6%. That does sound like a reasonable yield, so in reality they properly did get this disposal done at a premium to what they originally paid for the portfolio.
But why not explicitly say that?
Growthpoint’s earnings are inching higher (JSE: GRT)
At least the direction of travel is up, if not by much
Growthpoint released a trading update for the six months to December 2024. It’s a voluntary update, mainly because Growthpoint’s growth rate is in a different postal code to the level that would trigger a trading statement.
For the interim period, distributable income per share is expected to grow by between 3% and 4%. Talk about a game of inches! This is actually better than they expected, so full-year guidance has been increased to growth of between 1% and 3%. The market appreciated this news, sending the share price 3.5% higher.
Old Mutual’s operating profit seemed to disappoint the market (JSE: OMU)
At least returns on shareholder funds gave HEPS a boost
We’ve been seeing some pretty impressive numbers coming out of the insurance industry lately. The market didn’t appreciate what it saw at Old Mutual though, sending it more than 5% lower based on the release of a trading statement.
“Results from operations” is the primary measure of operating performance and unfortunately it wasn’t great, with a range of -6% to 14%. The mid-point of that range is in the low-to-mid-single digits. That’s not exciting.
The per share numbers are better thanks to share repurchases. Combined with the benefit of investment returns on shareholder funds, HEPS is up by between 13% and 33%. They also give a range of adjusted HEPS of 7% to 27%.
Returns on shareholder funds aren’t strong every year as they depend on the whims of the market. This is why investors tend to put more weight on the operating earnings.
The share price is now slightly down over 12 months, which is quite extraordinary when viewed in the context of Sanlam up 14%.
Double-digit growth in the Quilter dividend (JSE: QLT)
And the market celebrated
Quilter is a great example of the power of building distribution in financial services. Their efforts in the UK market have been excellent, with total assets under management and administration up 12% and boosted by core net inflows of 5% of the opening value. They also had great momentum in net inflows during the year, with the fourth quarter being the strongest.
So, for the year ended December 2024, they managed to grow revenue by 7% and keep operating expenses under control, with an increase of just 3%. This is why adjusted diluted earnings per share rose by 13%. On an unadjusted basis, HEPS actually swung sharply negative. Given the underlying growth here and the 13% increase in the dividend as well, I’m inclined to go with their adjusted view here.
Across both the Quilter and IFA channels, gross flows were strongly up on the prior year. Although there are obviously many nuances within the business, the direction of travel is clearly up.
Spur still gives you wings (JSE: SUR)
But be careful of the impact of Doppio Zero
If you have small children, you fully understand the importance of the Spur business model. For many parents, it’s a place of safety and sanctity while their offspring go and rip up the play area instead of the house. I’m convinced that the best restaurant model of all is the one that includes a play area. Customers are infinitely more forgiving of the food if there’s a safe place for the kids.
This is certainly reflected in Spur’s numbers for the six months to December, where franchised restaurant turnovers are up 10% and revenue increased 13.8%. Group HEPS increased by 11.8% and the interim dividend per share followed a similar path, up 11.6%.
It’s important to note that roughly 6% of restaurant sales came from Doppio Zero, which was acquired with an effective date of 1 December 2023. This means that it was hardly in the comparable period, so the double-digit group sales growth is largely thanks to acquired revenue. If you look at group revenue instead of restaurant turnovers, you’ll find growth of 7.6% excluding Doppio. Decent for sure, but not as exciting as the numbers would initially suggest.
The cash story is great, with cash generated from operations up by 79%. This gives the group plenty of firepower and of course it makes capital allocation discipline very important.
STADIO’s growth story continues (JSE: SDO)
Tertiary education is an exciting industry in South Africa
STADIO has a reputation for being one of the better growth companies on the JSE. The share price has been doing plenty of growing lately, up 47% over 12 months!
There’s a good reason for this, with HEPS up by between 23.3% and 33.1% for the year ended December 2024. If you prefer to use core HEPS, you’ll find an almost identical growth percentage.
When local investors love a company, it can easily trade at a P/E in the 20s. STADIO is in that club, with the midpoint of the latest earnings guidance suggesting a P/E of 22.6x. If growth remains strong, then local market trends suggest that the P/E can stay there. In a consistent multiple situation, shareholder returns will then be similar to underlying earnings growth. Of course, if the multiple unwinds in a case where growth is disappointing, those returns can wash away very quickly.
For now at least, STADIO is getting full marks from the market.
Trellidor’s earnings are so much better (JSE: TRL)
But there’s still no dividend
Trellidor’s recovery story is proving to be as challenging as trying to break through one of their famous products! If you backed them 12 months ago, you would certainly be smiling now with a 77% increase in the value of your investment. If you’ve been there for three years, you would still be down a third. This company has had quite an adventure.
Revenue for the six months to December 2024 was up just 4.1%, so the recovery isn’t being driven by top-line fireworks. HEPS was much stronger, up 38.3% to 26.6 cents. An improvement in operating profit margin from 12.3% to 14.7% did wonders here.
The group remains in a situation where its core Trellidor business is underperforming in South Africa and doing well in the UK. I think market saturation is the real issue here, along with the ongoing shift towards living in complexes. People are trading security bars and gates for guards in a complex. This is forcing Trellidor to become more efficient in the business, which perhaps isn’t the worst thing.
Cash generated from operations is important to keep an eye on. It was actually slightly down for the year, despite the improvement in profits and a useful decrease in finance costs as well. A quick look at the balance sheet reveals the culprit: a substantial jump in trade and other receivables.
Although they don’t say it, I suspect that working capital pressures were one of the reasons why there’s no interim dividend.
Woolworths continues to slide (JSE: WHL)
The fashion businesses really are a drag
Woolworths closed 6.3% lower after releasing interim results. This takes the year-to-date drop to nearly 14%. Ouch.
Let’s start with the highlight: Woolworths Food. Turnover was up 11.4% overall and 7.3% on a comparable store basis. The Absolute Pets acquisition is skewing this performance, with sales up 9% excluding that deal. Still, with that kind of revenue growth and an increase in gross margin of 30 basis points, South African shoppers still love getting their Woolies Food fix. Expenses jumped by 15.2% though, so Woolworths shareholders have only seen an increase of 7.8% in adjusted operating profit. One thing that they can’t afford right now is pressure on margins in the only part of the business that is really working.
This brings us to Fashion, Beauty and Home. It just wouldn’t be a Woolworths result without some kind of excuse about inventory availability, with new processes and systems at the distribution centre to blame this time. They also put the blame on late supplier deliveries. Considering the number of people I’ve seen online complaining about Woolworths clothing quality (along with my own experience of it), I suggest they use one of the many mirrors in the store and look at themselves for this performance instead of hunting around for others to blame. Turnover was up just 2.5%, gross profit fell by 170 basis points and adjusted operating profit declined 17.7%. Frankly, it’s time for proper accountability here.
Over at Country Road Group, the challenges of retail in Australia (and New Zealand) continue. Sales fell 6.2%, gross margins took a 320 basis points knock and adjusted operating profit tanked by 71.7%.
Clearly, everything other than Food (and pockets of good stuff elsewhere, like Beauty) sucks right now. The group result therefore makes for painful reading, with the interim dividend down 27.7%. I genuinely don’t understand how the narrative in the apparel business can still be so focused on blaming external factors, or why large shareholders are letting the group get away with that.
Director dealings:
Director dealings:
A director of NEPI Rockcastle (JSE: NRP) bought shares worth around R300k. In a completely unrelated situation, the company also realised that an associate of a different director opted to receive a scrip dividend instead of a cash dividend. This wasn’t known at the time.
Vukile (JSE: VKE) is still serious about the acquisition of Bonaire Shopping Centre in Spain. This is the property that was damaged by flooding in October 2024. The property has been repaired and has reopened, with trading having commenced in mid-February. Vukile’s subsidiary Castellana still has exclusivity over the property and the parties are busy negotiating. Hence, Vukile has renewed the cautionary announcement.
Invicta (JSE: IVT) has been busy with quite the repurchase programme in the past few months, buying 5.08% of its shares in issue in on-market trades. They still have a general authority in place for another 14.92%, although they don’t indicate in the announcement whether they will get there.
For those following Metrofile (JSE: MFL) in detail, or Sabvest (JSE: SBP) for that matter, you’ll be interested to know that Afropulse Group and Sabvest Investments extended the put-call period over the 21 million Metrofile shares by 12 months to November 2026. Afropulse holds the call option and Sabvest holds the put.
Those who were too stubborn to listen to actual experts when SAB Zenzele Kabili (JSE: SZK) listed are still licking their wounds. The share price is down at R36, at one point trading as high as R180 when it somehow became a local example of a meme stock. The AB InBev (JSE: ANH) share price hasn’t done well, hence the B-BBEE structure has reported a terrible drop in net asset value per share of between 55% and 59% for 2024. The expected FY24 range is R26.91 to R29.67, so it’s still trading at a premium!
Tariffs may have a diminished impact on China, as the country has strategically restructured its supply chains to lessen its reliance on the US, says Campbell Parry, global resources analyst at Investec Wealth and Investment International. Speaking on the latest episode of No Ordinary Wednesday, Parry discusses prospects for the Chinese economy and the country’s investment case.
Hosted by seasoned broadcaster, Jeremy Maggs, the No Ordinary Wednesday podcast unpacks the latest economic, business and political news in South Africa, with an all-star cast of investment and wealth managers, economists and financial planners from Investec. Listen in every second Wednesday for an in-depth look at what’s moving markets, shaping the economy, and changing the game for your wallet and your business.
At Brimstone, intrinsic NAV is what counts (JSE: BRT)
And it hasn’t gone in the right direction
Brimstone Investment Corporation released results for the year ended December 2024. They start with a note that HEPS was up 51%. To be very clear, HEPS is the single most useless metric you can look at in an investment holding company. Ignore it.
If HEPS mattered here, then why is the dividend flat when HEPS is up 51%? Also, why has the intrinsic net asset value (INAV) per share – the metric that the market uses to assess the share price – decreased by 8.5%?
The problem is that HEPS is highly affected by the accounting policies applied to the underlying stakes. When the percentage held in investee companies ranges from portfolio investments (not even a significant minority stake) through to consolidated investments in which Brimstone has control, HEPS can bounce all over the place as the accounting treatments are so different.
In case you need final proof, the share price is flat over 1 year. That wouldn’t be the case if HEPS mattered.
It’s high time that Brimstone stopped focusing on HEPS and started putting INAV at the centre of its reporting.
Packaging remains the growth area at Caxton & CTP (JSE: CAT)
But not enough to offset the decline in publishing and printing revenue
Caxton & CTP released numbers for the six months to December 2024. Revenue fell by 1.6%, as the company faces the problem of having a legacy side of the business (publishing and printing) and a growth area (packaging). The latter isn’t growing quickly enough (+3.0%) to offset the pressure in the former (-8.1%).
Thankfully, profit is what really counts. With operating profit moving 14.7% higher and HEPS up by 12.3%, the pursuit of efficiencies paid off for them. It sounds like this has included a particular focus on staffing costs and restructures, with staff costs up just 1.4%.
Community newspapers are under the most pressure it seems, with local advertising revenues down 4%. I think that people are now getting their community news through WhatsApp groups and direct comms from local schools etc. I distinctly recall the weekly paper arriving at my house as a kid, which I then read through with my mom in the afternoon. I’m not sure that this happens in households anymore with either parent!
Even at The Citizen newspaper, growth in the legal advertisements was the major source of improvement. It’s extremely tough to convince advertisers that they can get decent return on investment in the newspaper space. It’s sad in some ways, but that’s how disruption works.
CA Sales Holdings flags strong growth in HEPS (JSE: CAA)
The strategy continues to deliver
CA Sales Holdings just seems to get it right time after time. For the year ended December 2024, they expect HEPS to jump by between 23% and 28%. That’s a very juicy increase, achieved through the combination of organic growth and bolt-on acquisitions that the company is so well known for.
The danger of using Earnings Per Share (EPS) instead of HEPS comes through clearly here, as the comparable period included a R123.6 million bargain purchase gain on the T&C Group acquisition in Namibia. EPS is therefore pretty flat for the year because of the large number in the base.
HEPS is the right number to use when assessing true financial performance. On that metric, the company is doing very well.
Exceptional results at Discovery (JSE: DSY)
They’ve earned those smoothies
Discovery had a really great time of things in the six months to December. No matter where you look, the metrics are great.
Normalised headline earnings increased 34% and the same is true for the dividend, so we can tick the box for the cash quality of earnings. Normalised return on equity increased from 12.6% to 15.0%, so that’s a win for capital allocation. The life insurance sector metric looks even better, with annualised return on embedded value up from 12.1% to 19.0%!
Basic embedded value per share is one of the methods used by the market in valuing the company. It increased by 16% to R179.47. With return on embedded value well above the cost of equity, it means that the market is happy to pay a juicy premium to embedded value per share. Discovery’s share price is at roughly R209 per share. The market is therefore pricing Discovery at an effective return on embedded value of 16.3% (19.0% * R179.47 = R34.0993 and then take this and divide it by the share price of R209).
Although things are obviously a lot more volatile when you dig into business unit performance, it’s worth noting that both the Discovery SA Composite and Vitality Composite grew normalised profit by operations by 27%. They are seeing good things happen across the group.
Another notable performance is Discovery Bank, where revenue increased 42% and they are now at monthly operational breakeven.
The share price is up 56% in the past year. The group has had a few exciting times that turned out to be disappointments in the past decade. Is it finally different this time?
A record interim dividend at Harmony (JSE: HAR)
And they still have their eyes on copper
Life is good in the gold industry. In fact, it’s fantastic. Harmony grew revenue in the six months to December by 19% and saw net profit jump by 33%. That also happens to be the growth in earnings, with HEPS up 33%. The dividend story is even better, up 54.4% to a record of 227 cents per share!
This all happened despite a 4% decrease in gold production, which the company says was planned. They certainly didn’t plan for the gold price to do quite as well as it did, so that part was pure luck.
Earnings were boosted by all-in sustaining cost (AISC) coming in below guidance, although it was 15% higher as the group faced cost pressures. Combined with the lower production, this shows how different things might have been if not for the average gold price received being 23% higher.
If you CTRL-F in their detailed earnings, you’ll find three references to the word “copper” – and I suspect that might be higher by the time we get to full-year numbers. They describe themselves as being “on the cusp of introducing near-term copper” – watch this space!
Solid growth at HomeChoice (JSE: HIL)
You can engage with management directly next week on Unlock the Stock
HomeChoice International has released a trading statement for the year ended December 2024. It looks very strong, with HEPS up by between 20% and 30%.
This puts the range of expected earnings at 371.2 cents to 402.1 cents. With the share price at R28, the mid-point of that range is a P/E of around 7.2x.
There aren’t many companies on the local market at single digit P/E multiples with that kind of growth rate. You have the perfect opportunity to learn more about the company on Unlock the Stock next week. Attendance is free for the management presentation and facilitated Q&A at 12pm on 13th March. You just need to
The long-stop date for the MultiChoice – Canal+ deal has been extended (JSE: MCG)
With MultiChoice under so much pressure, that’s not good news
Right now, there is one thing and one thing only that is propping up the MultiChoice share price: the offer by Canal+. Based on the underlying earnings at MultiChoice, I genuinely don’t know where the bottom would be for the share price in the absence of that offer.
Sadly, due to ongoing regulatory processes, the long stop date of 8 April 2025 for the deal isn’t going to work. Even worse, they aren’t expecting to miss this date by a small margin. With the extension of the long stop date all the way out to 8 October, they are sending a message to the market that things are going to take a long time at the regulators.
They describe this as “ample time” for the fulfilment of conditions. I should certainly hope so!
MultiChoice’s share price fell 4.5% in response to the news, as the market applied the time value of money to the expected proceeds.
Double-digit growth in HEPS is good going at Nedbank (JSE: NED)
A bank this size is beholden to the broader country’s trajectory
Nedbank has released results for the year ended December 2024. It was of course a very strange year, with the first half filled with load shedding and election jitters, while the second half was filled with promises. I’m not sure that South Africa saw much execution of the GNU hopes, especially if you read results from sectors like construction.
It wasn’t an easy year in which to run a bank, so I think that Nedbank’s growth in headline earnings of 8% was presentable. Due to share buybacks, HEPS was up 11% and the full-year dividend per share grew 10%. The other key metric for investors is return on equity, up from 15.1% to 15.8%.
In a country with low growth, the important thing for banks is to keep their costs under control. Nedbank has various initiatives underway to try and achieve this. Despite this, the cost-to-income ratio has crept higher from 53.9% to 55.9%. This is due to revenue increasing by just 4% vs. 8% growth in expenses.
So then how did earnings end up higher? The answer lies in the credit loss ratio, which improved significantly vs. the prior year. Naturally, investors would prefer to see strong growth in revenue, as a solid improvement in the credit loss ratio isn’t something that will be experienced every year.
The net asset value increased 4% to R240.39. The share price closed 2% higher at R291.
Nedbank values the Ghost Mail audience and has given more details on their financial performance in your favourite publication at this link.
Higher debt and far more shares in issue ate up Sea Harvest’s profits (JSE: SHG)
They are calling this their most challenging year since listing in 2017
Sea Harvest Group released results for the year ended December 2024. Although revenue increased by 16% and gross margin improved by around 200 basis points to 26%, that’s the beginning and end of the highlights reel.
Firstly, that revenue number isn’t nearly as exciting as it looks. The increase is thanks to the acquisition of Sea Harvest Pelagic and Aqunion. Adjusting for acquisitions, group revenue was flat. Volumes fell and price increases were enough to offset the impact.
Group operating expenses jumped 20%, with the acquisition and general inflation having an impact here. The improvement in gross profit margin means that gross profit was up 25%, so thankfully they still managed some operating margin expansion here. By the time you go through some fair value and other adjustments to reach EBIT, growth on that line is just 8% and margins went backwards.
Now we get to the bad news. Net finance costs increased by 24% thanks to higher levels of debt after the acquisition. This is obviously a much higher jump than the growth in EBIT, so headline earnings fell by 37%.
It gets worse I’m afraid. Due to the large number of additional shares in issue, HEPS tanked by 45%. If you adjust for a once-off gain on purchased loans is the prior year, the drop was 17%. The dividend has tracked HEPS lower, down 45%.
Here’s another metric that is well worth noting: South African catch rates are at historical lows and down a whopping 30% vs. 2020 levels in the second half of the year. Pricing increases helped, but couldn’t protect margins in that part of the business.
Is there a silver lining here? Cash from operations probably fits the bill, with a positive swing of note in working capital. Despite higher interest charges, cash from operating activities was much higher at R774 million vs. R450 million in the comparable period. With net debt up by R334 million, they could do with another period of strong cash generation.
The oceans are unpredictable things. This makes it difficult to provide an accurate outlook on the business. One thing is for sure: catch rates desperately need to move higher.
Shoprite keeps eating everyone’s lunch (JSE: SHP)
And don’t make the mistake of ignoring their up-and-coming banners
At this stage, it doesn’t surprise the market when Shoprite releases incredible figures. It’s practically the expectation, which is a dangerous recipe for a share price. After all, investors make the most money from a positive surprise in the market. When something is priced for perfection, the risk is that there’s a disappointment.
Much like the broader retail sector on the JSE, the Shoprite share price is taking a breather right now. Down 9.3% year-to-date, the return over 12 months is just 3%. This is despite a set of numbers that just saw group revenue up 9.4% for the 26 weeks to 29 December 2024 and diluted HEPS up 9.9%. The interim dividend increased 6.7%.
For Shoprite to keep growing off this base is not straightforward, which is why investors are now experiencing single-digit returns. Although the grocery business at Shoprite clearly has room to keep winning market share from its competitors, Shoprite isn’t sitting back and hoping that this will be enough to keep driving growth. They have worked hard on introducing new store formats, like Petshop Science which has grown from nothing to 129 stores. Sales for the interim period were up 56.9% in that business. This strategy is in contrast to the approach taken by the likes of Woolworths, where they went the route of acquiring Absolute Pets instead.
If we dig a bit deeper, we find Supermarkets RSA with growth of 10.4%. Like-for-like sales increased 6.1% and customer visits increased by 4.1%. Some of Shoprite’s competitors can only dream of growth in volumes like this.
In the higher margin side of the business, Checkers and Checkers Hyper grew sales 13.6% and those famous Sixty60 scooters saw sales growth of 47.1%. Petshop Science, Uniq and obviously Checkers Outdoor are reported as part of these numbers. The group is building an incredible dataset of its customers thanks to the Xtra Savings card. As they add more specialist stores, the data will keep getting better.
Shoprite and Usave increased sales by 7.1%, so there’s a considerable gap between this business and the premium offering. The positioning of Checkers has proven to be a masterstroke.
Supermarkets non-RSA was a drag on growth, up 4.1% in rand terms and contributing 8.6% to group sales. Other operating segments also didn’t grow as quickly as the supermarkets business, up 6.2% and featuring a notable performance by OK Franchise of 8.8%.
In terms of trading margin, a 20 basis points increase in Supermarkets RSA was enough to offset the pressure in Supermarkets non-RSA, so group trading margin increased by 20 basis points to 5.7%. The daft approach in modern accounting rules is for lease costs to be excluded from trading profit, as the charges on leases are instead found in finance charges. This is why finance costs were up 28.3%, with the cost of the group’s expansion coming through on that line.
I have yet to meet a single person who likes the way leases are now treated for accounting purposes. Not one.
The second half has a tough base to grow against. The comparable period saw 10.1% growth in H2 and although sales in the first few weeks are ahead of last year, I doubt they will manage much more than mid-single digit growth vs. that base. Then again, Shoprite certainly keeps delivering!
WBHO shows that construction can make money (JSE: WBO)
How does a 30% increase in the interim dividend sound?
The construction industry has claimed many investor scalps. It’s not uncommon to see a complete collapse, often due to one or two really bad contracts. Thankfully, WBHO looks like the class captain in the sector, with all the important metrics heading in the right direction.
Revenue for the six months to December 2024 was up 10% and operating profit from continuing operations was good for 15%. HEPS from total operations jumped by 19.5% and the dividend was the best news of all, up 30% to 300 cents per share!
Future earnings are of course driven by the order book. This increased 7% in the period, which does look a bit light relative to earnings growth.
Here’s a fun fact for you: in Gauteng, data centre projects contributed 21% of revenue, commercial offices were 52% and residential work was 16%. Sadly, Gauteng as a whole suffered a contraction of 11% in building revenue, while coastal regions were up 19%. It says something about the trend of where people are living and working that office and mixed-use developments contributed 42% of revenue derived from the Western Cape. In the Eastern Cape, the only activity seen by WBHO has been industrial and warehouse developments.
On the roads and earthworks side, revenue in South Africa was up by 25%. Mining and energy sector projects contributed 43% of local revenue, while road projects were 41%. Water infrastructure was just 6%, which is a larger worry in our country!
In case you’re wondering whether public sector problems are unique to South Africa, hopes of an upswing in public spending by the new Labour Government in the UK have not materialised and WBHO’s UK business has been negatively affected. In practically every country, politicians are heavy on promises and light on delivery.
Overall, a solid set of numbers that support the 42% increase in the share price over the past 12 months.
Nibbles:
Director dealings:
The executive of the main subsidiary at Lewis (JSE: LEW) who has been selling shares recently is at it again. The latest disposal is of shares to the value of R2.45 million.
Mustaq Brey, non-executive director of Oceana Group (JSE: OCE) and of course the driving force behind Brimstone (JSE: BRT), bought shares in Oceana worth R1.2 million.
A couple of Kumba Iron Ore (JSE: KIO) directors and the company secretary sold shares worth around R16 million. Although they relate to old share awards, the announcement isn’t explicit on whether this is only the taxable portion.
One of the executives of Vodacom’s (JSE: VOD) South African subsidiary sold shares worth R1.3k.
Acting through Titan Fincap Solutions, Christo Wiese bought R12.2k worth of Brait Exchangeable Bonds (JSE: BIHLEB). This is pocket change on that side of the fence – literally. To give you an idea of how much ammo is flying around in the Titan stable, Wiese also restructured his stake in Collins Property Group (JSE: CPP). The ultimate beneficial ownership hasn’t changed, but we are talking about a shuffling of chairs to the tune of R864 million!
Labat Africa’s (JSE: LAB) new IT-focused strategy has been given a boost by the acquisition of a 51% stake in Ahnamu for R25 million, payable mostly (R20 million) through the issue of Labat shares at 10 cents a share. That’s a premium to the current prevailing share price. R5 million is payable in cash. This is a hardware distribution group, so that’s a pretty tough way to make money with paper thin margins. I have to believe that there’s a typo in the announcement, with profit after tax for the acquired business meant to be R7.8 million rather than R78.8 million. The net asset value is R64 million. If it is indeed R78.8 million, then Labat did the deal of a lifetime.
Supermarket Income REIT (JSE: SRI) has achieved very little liquidity on the local market. They also have an old-school management structure in the form of an external management company that is now being “internalised” at great quote. This used to be an issue on the JSE, with property executives enriching themselves in the process. At this UK-based REIT, the management company will be paid out £19.7 million, funded by proceeds from the recent sale of a Tesco store. With cost savings of £4 million, they are effectively achieving a yield of 19%, which is better than any of the other capital allocation opportunities they have available. Still, such structures should never have been allowed to exist.
Telemasters (JSE: TLM) is back under cautionary, with the two largest shareholders having received an expression of interest from a B-BBEE company to acquire their shares. There are a bunch of conditions attached, including the raising of funding it seems, so this is by no means a done deal. The proposal is for due diligence and negotiation of documents to be concluded by the end of March. That sounds extremely ambitious. The relevance to other shareholders is that if a deal does get done here, it would trigger a mandatory offer to all shareholders at the same price.
It’s the end of an era (or is that an error?) at Transaction Capital (JSE: TCP), with the name set to change to Nutun Limited (JSE: NTU) from 26 March.
There’s another name change on the local market – a subtle one, but perhaps therein lies a clue. Dipula Income Fund (JSE: DIB) is changing its name to Dipula Properties Limited with effect from 17 March.
The operating environment in 2024 remained challenging, with economic activity relatively weak as evident in SA GDP growth expectations of only 0,5% for the year when compared with 0,7% in 2023. The first 6 months were particularly difficult given geopolitical uncertainty, high interest rates and general uncertainty ahead of SA’s national election. A peaceful and fair election outcome and the swift formation of a government of national unity brought cautious optimism in financial markets resulting in lower bond yields, stronger equity markets and a stronger rand, while credit default swap spreads also improved. As the environment improved gradually into the fourth quarter of the year, inflation declined further towards the low end of the SARB target range (its lowest level since the Covid-19 pandemic), the MPC cut interest rates by a cumulative 50 bps and business confidence improved. Household credit growth, however, continued to slow to 3,0% by the end of the year, and corporate credit growth increased by 5,4%, remaining relatively volatile and not yet reflective of a material improvement in fixed-investment activity.
Performance:
In this context, Nedbank Group delivered an improved financial performance as headline earnings increased by 8% to R16,9bn and the group’s ROE strengthened to 15,8%, from 15,1% in the prior period, reflecting steady progress towards our ROE targets. HE growth was underpinned by good NIR growth, a lower impairment charge and targeted expense management, offsetting muted NII growth given slower loan growth and margin pressure. DHEPS increased by 11%, benefiting from the share buy-back we executed in 2023. Balance sheet metrics all remained very strong, enabling the declaration of a final dividend of 1 104 cents per share, up by 8% at a payout ratio of 57%.
There isn’t much of a narrative at AfroCentric – and not much in the way of profits, either (JSE: ACT)
This is a rather strange approachto delivering bad numbers
AfroCentric released results for the six months to December. They are objectively awful. Sure, the comparative period is the 12 months to June 2024 due to a change in year-end, so one would expect profits to be “down” roughly 50% as we are comparing 6 months to 12 months.
Alas, although revenue was 51.8% lower (and hence in line with a reasonable expectation), AfroCentric actually made a loss in the six months to December. At HEPS level, they managed a paltry 3.80 cents in earnings – down 90.6% vs. the comparative period.
Sadly, the company puts zero effort into explaining why. If there was a laziness award for financial reporting, this would be gold star stuff. Sure, the endless pages of financials are there, but where is the management narrative? Where is the outlook?
I can only assume that for whatever reason, AfroCentric doesn’t want you to buy their shares. There’s no other explanation for why such a small company puts such little work into explaining this trajectory.
As a rand hedge, Aspen was negatively impacted by recent rand strength (JSE: APN)
The market loved the constant currency numbers, though
The six months to December at Aspen is a great example of how severe the impact of currency movements can be. Revenue was up 9% at constant exchange rates, yet it was only 4% higher when reported in rand. This trend carries on all the way down the income statement until you get to normalised HEPS, up 17% at constant rates and only 5% as reported.
One of the negative impacts on HEPS was a 20% jump in normalised net financing costs, driven by higher rates and debt levels. Although net leverage remains comfortably within the targeted range, the bankers are getting a bigger slice of the pie than before.
From a margin perspective, the Manufacturing segment showed the largest change. The gross profit margin jumped from 5.3% to 15.9% as the underlying mix and business model evolved. Despite revenue being flat at constant rates, normalised EBITDA more than doubled!
Overall, there’s bullish sentiment heading into the second half of the year. They also expect a strong period of cash flow, as well as lower effective interest rates, so that should do wonders for profit conversion. The market really liked what it saw, with Aspen closing nearly 12% higher on the day!
A mixed result at Bidvest (JSE: BVT)
And plenty of new debt for acquisitions
The six months to December 2024 won’t go down as one of their best at Bidvest. Revenue increased by 6%, but trading profit was flat as margin contracted by 66 basis points. Group HEPS was up just 3%. Even worse, HEPS from continuing operations actually fell by 1%. The interim dividend was up just 1%, despite cash generated from operations increasing by 18%.
You might think that the Automotive segment was where the problems were found, given the level of disruption in that space. Instead, due to management actions taken, that segment actually grew profit by 14.1%! Some of this is due to acquisitions like Dekra, so don’t assume that this is entirely thanks to the dealerships business.
The problem children were the Commercial Products division (down 26.9% due to a massive slump in renewable energy product sales), Adcock Ingram (trading profit down 17% as consumer spending came under pressure and pharmaceutical wholesalers reduced their stock levels) and the Freight division, with an 11.9% drop in trading profit impacted by issues like maize exports.
The winner? Bidvest Services South Africa, up 16% with great results across the underlying offerings. As people have returned to work and everyone is getting out and about again, so the demand for property services has increased.
At the same time as these pressures, net debt jumped substantially due mainly to corporate actions. This drove a 17.2% increase in interest charges. Bolt-on acquisitions are part of the game at Bidvest, so there will be periods like this in which they ramp up the debt. There will also be disposals, with the sale of Bidvest Bank and FinGlobal still subject to regulatory approvals.
Decent growth at Clientèle – and a lesson in why HEPS is so important vs. EPS (JSE: CLI)
The insurance industry is putting out strong results at the moment
Clientèle has released a trading statement dealing with the six months to December 2024. The range for HEPS is frustratingly wide, with expected growth of between 2% and 17%. The mid-point suggests around 10% growth, which is a decent outcome.
But why the trading statement? After all, the trigger to release one is an expected change of at least 20%. The answer lies in Earnings Per Share (EPS), expected to be up by between 222% and 245%. A bargain purchase gain of R469 million on the 1Life acquisition is the major driver here.
Therein lies a very important point: although the price paid for the 1Life acquisition reflects management’s approach to deals and certainly shouldn’t be ignored, the jump in EPS is clearly not an indication of sustainable earnings growth. For that, we must look to HEPS.
What happened to Italtile’s dire warnings about the manufacturing segment? (JSE: ITE)
And what will life-after-two-pot look like?
Last year, Italtile was telling anyone willing to listen that the manufacturing side of the business was in trouble. Overcapacity in South Africa was a real issue, putting pressure on performance for manufacturers dealing with a fixed cost base.
Now, with the release of interim results, that narrative has all but disappeared – in the SENS announcement, at least. There’s simply a note that this is a deflationary environment for ceramic tiles, forcing the manufacturing business to look for cost efficiencies. That’s a much less severe narrative than we saw before. If you read the full set of results though, you’ll see some of the difficult language coming back when they talk about the manufacturing business.
With system-wide turnover down 1% for the period, it’s hard to imagine that the overcapacity issues in the market have really become that much less of a problem, so I tend to believe the detailed narrative of concern vs. the short-form SENS announcement that almost brushes over the issue. Capacity utilisation was 76% in Q2 and we know that number was better than Q1 (even though they don’t give the percentage). Italtile acknowledges the benefit of the two-pot system in their business in Q2, so I don’t think they are extrapolating the Q2 period.
Despite the dip in system-wide turnover, they managed to grow trading profit by 3% and HEPS by 4%. Although they are heavy on narrative and pretty light on Q1 vs. Q2 numbers, it’s clear that they were thrown a lifeline by the market at the end of 2024. In the end, the Manufacturing segment only saw its profit before tax decrease by 5% based on revenue decreasing by 2%. In Retail, sales were up 3.6% and profit before tax followed suit.
Alas, the deterioration in sentiment in 2025 has taken the shine off performance at the stores, though we must wait for full-year results to know for sure. For now, we know that the first two months of the calendar year saw flat revenue in the retail business and weaker revenue in manufacturing.
Italtile is down 19% year-to-date. My choice in this sector, Cashbuild, is down 13%. Over 12 months, Cashbuild is up 29% and Italtile is up just 7%.
The JSE’s return on equity has moved above 20% (JSE: JSE)
But keep an eye on the payout ratio
This is always a fun thing to learn for new investors: the JSE is listed on the JSE! The company that actually owns and operates the exchange is listed on its own product. Hence, the share code JSE: JSE.
For the year ended December 2024, HEPS improved by 9.6% and the dividend increased by 5.6%. Let’s face it: these aren’t amazing growth numbers when you consider the backdrop of the GNU and all the improved sentiment on the local market. It’s worth highlighting that 37.8% of operating income is non-trading in nature i.e. not linked to volumes on the local market. When you build a more resilient model, you don’t get to participate fully in the upswings. Of course, you also don’t suffer as much in the downswings!
The market treats the JSE as a dependable cash cow that generates great returns on shareholder equity. With return on equity moving up from 19.4% to 20.2%, they’ve certainly managed the latter. The decrease in the payout ratio does call the former into question, particularly when viewed in the context of a 1.5% decrease in net cash from operations.
The JSE has to hold huge cash and bond balances, so a favourable interest rate environment makes a difference to them. Net finance income was up 21% year-on-year.
The share price is up 44% over 12 months and is even in the green year-to-date, unlike so many of the companies listed on the exchange.
Separately, the company announced that Dr Suresh Kana will retire as lead independent director (and chairman of a few committees) after nine years on the board. Ben Kruger is taking over as the new lead independent director.
Earnings up and dividends still on hold at MAS (JSE: MSP)
But there’s a deal on the table that could bring them back sooner
When MAS took the decision late in 2023 to stop its dividends and focus on getting ready for difficult debt maturities in the subsequent years, the market had a complete panic. The share price nosedived, as South African property sector investors love dividends.
Today, the price is back where it was before the plunge. If you bought that dip right at the bottom, you’re up around 50% since then!
Patience is still the order of the day though, as there’s no dividend despite a 13.1% increase in distributable earnings in the six months to December 2024. The tangible net asset value per share increased by 7.2%, so that also headed in the right direction. Overall, they’ve enjoyed strong performance in the underlying portfolio as well as the DJV joint venture.
The major bond maturity that they are focusing on is in 2026. They’ve done a huge amount of work in securing debt finance to help with this. Even then, unless the proposed transaction with respect to the investment in the joint venture is implemented, dividends are on hold until at least the 2027 financial year and further asset disposals are likely to be required.
It’s interesting that there are such difficulties despite the loan-to-value being 25.6%. There’s an interesting lesson here, in that leverage ratios don’t tell you everything. You also have to consider availability of debt at the time of maturity, which is where the problems are in this case, as this means cash needs to be available for the redemption.
Along with the complexities of the joint venture relationship, this is why both Moody’s and Fitch have downgraded MAS’ credit ratings. The problem is that this can become a death spiral, as the downgrades make it even harder to raise debt. They also tend to increase the cost of debt.
So, the announced transaction related to the joint venture is clearly critical. It will see the joint venture repurchase the 60% held by PKM Development, leaving MAS will full control of the joint venture. The repurchase would be priced at a premium, which is unsurprising given how much trouble MAS is in, leading to a dilution of MAS’ tangible net asset value by an estimated 7.4%. There are a bunch of assumptions in that dilution calculation, so the final number could be quite different to that.
It’s not a completely painless solution for the balance sheet, as there’s a cash payment involved here that MAS is able to partially fund via an issue of unsecured debt at 10% per annum. A minimum cash payment of €30 million is required and hence the portion funded through this debt is likely to be just under €60 million.
But here’s the really good news: if the deal goes ahead in the next few months, MAS dividends could result as soon as September 2025.
It’s all to play for here!
Metrofile’s geographical complexities are hurting them (JSE: MFL)
It’s time to focus on home
Metrofile has gone from one disappointment to the next. The numbers for the six months to December reflect a 4% drop in revenue excluding Tidy Files (which they opted to exit in the prior year) and an 11% decrease in operating profit. EBITDA fell 8%. It only gets worse further down the income statement, with HEPS down 38% and the dividend per share dropping by 43%!
Yay for net debt coming down by 3%. At least there’s a faint silver lining here.
The reality is that the geographical exposure is a problem that needs to be solved now. Revenue in the South African business from continuing operations increased by 3% and operating profit jumped by 19%. Turnaround initiatives there seem to be working. Sadly, Rest of Africa saw revenue fall 10% and operating profit collapse by 67%. Middle East experienced revenue down by 7% and a deterioration back into an operating loss of R2 million.
The focus for the rest of the year is on free cash flow generation and further degearing of the balance sheet. They’ve also flagged that there will be a geographical review of the business, so perhaps we will see some major changes.
MTN Ghana shows what is possible in Africa (JSE: MTN)
Here’s how things are supposed to work
After the somewhat traumatising numbers released by MTN Nigeria, the results at MTN Ghana are quite the palate cleanser. For the year ended December 2024, they had healthy top-line growth (revenue up 34.5% and subscriber numbers all in the green) and they converted that into solid profits, with EBITDA up 31.3%. Although there’s a slightly contraction in EBITDA margin, that’s a strong growth rate. It’s worth noting that normalised EBITDA margin (after adjusting for a management fee reversal in 2023) would’ve been slightly up.
Profit after tax increased by 26.3%, so it was an excellent period overall despite the best efforts of the Ghana government to get their hands on more of the profits through tax assessments. The tax charge for the period was 59.7% higher year-on-year.
Capex only increased by 7.6%, which means that capex intensity fell. That’s good news for free cash flow.
The shift in usage is something to behold, with data revenue up 53.8% and voice revenue down 0.9%! The fintech side has a good story to tell, with MoMo revenue up 54.4%.
With medium-term guidance for service revenue growth in the high twenties range (in percentage terms), alongside the company’s ability to maintain and even grow margins, the business in Ghana shows why MTN goes through so much pain to be in Africa.
Mustek’s earnings have plummeted (JSE: MST)
And yet the share price is up 37% over 12 months
Corporate law enthusiasts (and active investors) would’ve sunk their teeth into the TRP ruling that Mustek released last week. You’ll find it here. It shows how intricate takeover law becomes, particularly when assessing concert parties and how this impacts a takeover offer.
Against this backdrop and all the uncertainty it creates going forwards in terms of ownership of the company, Mustek’s earnings have fallen severely. HEPS will be between 18.27 cents and 27.40 cents, a nasty drop of between 70% and 80%. They attribute this to the “prevailing local and economic challenges” faced by the business.
So how has the share price managed to retain its gains when earnings have fallen like this? The answer lies in the mandatory offer to be made by Novus (and its concert parties), structured as an offer of R13 per share in cash, or R7 per share plus one Novus share, or no cash and two Novus shares. Mustek is currently trading at R14.05 and Novus at R6.86 per share, so there’s a slight differential but not enough for any arbitrage.
In the absence of the offer, it’s hard to imagine that Mustek could maintain this share price. The latest earnings suggest 22.8 cents at the mid-point. If we double this for an elementary view of annualised earnings, the current share price is a P/E multiple of over 30x!
Detailed results are due for release on 6th March. Perhaps it will become clearer why the Novus management team wants to own more of this thing at this price.
PPC rallied on much stronger EBITDA margins (JSE: PPC)
Revenue is helpful, but margins pay the bills (and shareholder returns)
PPC released an operational update for the ten months to January 2025. Under the recently appointed CEO, their turnaround plan is called Awaken the Giant. They may as well have called it Awaken the Margins.
For the ten months, revenue fell by 3% but EBITDA jumped by a juicy 20%. That’s a 320 basis points improvement in EBITDA margin.
If we dig deeper, we find that revenue in South Africa and Botswana was up 2% despite sales volumes being slightly negative. Despite this modest growth, EBITDA increased by an impressive 32%, taking EBITDA margin from 11.4% to 14.8%. That’s even better than the interim period, which had margin of 13.7%. To add to the good news story in that business, free cash flow was 90% higher and the segment was in a net cash position of R106 million at the end of January.
In Zimbabwe, volumes were down 9% (as was experienced in interim results) and revenue fell 12% measured in rand. Again, EBITDA bucked the trend here, up 6%. This improved EBITDA margin from 21.6% to 26.0%. You may have noticed that the business in Zimbabwe operates at structurally higher margins than South Africa and Botswana. Zimbabwe improved its free cash flow generation, increased the dividends declared to the mothership PPC and still had $13 million in unencumbered cash at the end of January.
Overall, this is a strong trajectory from an earnings and cash perspective, further supported by an expectation for capex to be slightly below guidance for the full financial year. Lower capex means higher free cash flows. This must always be balanced against the risk of insufficient reinvestment in the business.
PPC is pushing ahead with the plan to increase capacity in the Western Cape, with the project in its final design stages before going to the board for approval. In line with what we’ve seen elsewhere in the group, the focus of the new plant is to achieve lower-cost production and better margins, which makes it value-adding to shareholders without relying on market growth.
The announcement ended on the news that the board will consider a dividend for the full year. A capital markets day is planned for 27 March to give more details on the turnaround plan and the strategy going forwards. Overall, the market saw more than enough here to justify the share price closing roughly 14% higher on the day!
Yum Yum numbers at RCL Foods (JSE: SNT)
And the market liked them, too
RCL Foods closed 5.5% higher after releasing numbers for the six months to December 2024. The market clearly enjoyed seeing revenue from continuing operations up by 5.4%, driving a substantial increase in underlying HEPS from continuing operations of 28.9%!
There’s also an interim dividend of 20 cents per share vs. nil in the comparative period.
Aside from the partial recovery of the additional levy raised by the South African Sugar Association in the 2023 financial year after Tongaat and Gledhow suspended payment of their industry obligations, there were also better results in the Grocery and Baking divisions. Interestingly, Sugar saw a dip in margin vs. a very strong base period.
I wasn’t surprised at all to see that Ouma Rusks have 60% market share. Is there anything more South African than a box of Ouma in the cupboard? Conversely, it’s odd to see that pet food came under pressure. I can only assume this relates to dogs, as cat owners know that they are never given a choice but to keep the food bowls full!
RCL Foods values the Ghost Mail reader base. For more details on the earnings, refer to this piece placed by the company.
Santam releases full details after a great year (JSE: SNT)
Insurance revenue and underwriting margins went the right way
Santam, like most of the insurance sector right now, had a great time in the year ended December 2024. HEPS jumped by a pretty spectacular 51%, although I must highlight that the full-year dividend only increased by 8.5%.
Before we dig into that payout ratio, we should deal with the drivers of the higher earnings. Group insurance revenue improved by 12% and the conventional insurance net underwriting margin jumped from 3.5% to 7.6%. Together with other factors like growth in the alternative risk transfer business and high returns on shareholder funds, it was a year to remember.
Nothing can ever be perfect, of course. Although share of gross written premium of Shriram in India and Pacific & Orient in Malaysia grew by 20%, net insurance results declined by 3%. They blame the high base for this move.
Back to the dividend. A dig through the detailed report reveals that dividends are declared with reference to the group solvency ratio, not just HEPS. Where they are well above the upper end of the target ratio over the medium to long term, they will consider a special dividend. The dividend that has been declared has brought the capital solvency ratio back within target range, so there’s no sign of another special dividend right now.
Total dividends for the year came to 1,400 cents per share. Based on the current Santam share price, it trades on a yield of 3.5%. Together with a share price performance of 33% over the past 12 months, this tells you that the market cares more about growth in the business than growth in the dividend.
Nibbles:
Director dealings:
A director of a major subsidiary of Lewis (JSE: LEW) sold shares worth R8.9 million. I can’t help but wonder whether the strong end they had to 2024 has washed away to some extent in 2025.
An associate of a director of Visual International (JSE: VIS) subscribed for shares in the company worth R5 million at a price of 4 cents per share. The current market price is 2 cents per share.
The CEO and founder of Datatec (JSE: DTC) bought shares in the company worth R4.8 million. He quite regularly adds to his stake in the company that he built.
A non-executive director of KAP (JSE: KAP) bought shares in the company worth R999k.
A director of Motus (JSE: MTH) bought shares worth R476k.
Acting through Titan Premier Investments, Christo Wiese has bought R300k worth of ordinary shares in Brait (JSE: BAT).
The CEO of KAL Group (JSE: KAL) bought shares worth R43.5k.
Oddly, the CEO of Crookes Brothers (JSE: CKS) sold shares worth just R1k.
MC Mining (JSE: MCZ) announced that the key condition to the second closing of the KDG deal has been met. The first close saw KDG subscribe for an initial stake of 13.04% in MC Mining. With regulatory approvals now met for the largest deal, the parties have agreed to nine instalments to reach the aggregate amount of $77 million for the share subscription. With all said and done, KDG will hold 51% of MC Mining. The final payment is expected to be in February 2026.
NEPI Rockcastle (JSE: NRP) has released a circular dealing with the payment of the recently announced dividend. There’s a big change this time: no scrip dividend is being offered, presumably in an attempt to avoid further dilution in distributable income per share. Instead, shareholders can choose between a cash dividend or a reduction of capital, which is ultimately a tax deduction.
Barloworld (JSE: BAW) is in the process of investigating potential export control violations in respect of sales of certain goods to its Russian subsidiary. The US Department of Commerce, Bureau of Industry and Security (BIS) has granted an extension of the deadline for this to be completed. Barloworld will therefore need to submit a final narrative account of voluntary self-disclosure by 2 June 2025.
Sappi (JSE: SAP) is offering €300 million in senior notes due 2032. They will use €240 million of this to redeem all outstanding senior notes due 2026. The rest is for general corporate purposes. Unsurprisingly, the new issue is of sustainability-linked senior notes, with Sappi able to tap into that kind of funding due to the nature of its business. The company separately announced that a new document about the group is available on its website, but they gave the home page link instead of where you’ll actually find the doc. After a few minutes of searching, I lost interest. It’s really not that difficult to include the specific URL in the SENS announcement.
It’s not uncommon to see large property funds go on major asset disposal programmes when they need to make substantial changes to their portfolios. Assura (JSE: AHR) is one such example, selling seven assets for £64 million into a joint venture in which they retain a 20% stake and earn management fees. This takes them to a total of 30 assets sold since the start of the financial year for a total of £200 million. The weighted average net initial yield on sale is 4.8% and they’ve used the proceeds to reduce the debt used to buy the £500 million private hospital portfolio that was acquired in August 2024 at a 5.9% yield. In other words, they’ve bought low and sold high, which is what you want to see! The pro-forma loan-to-value will reduce to 47%. There is still very little volume in this fund on the local market.
Sygnia (JSE: SYG) shareholders approved the odd-lot offer. It will be priced based on the 30-day VWAP calculated with reference to 7 March, so the price for the offer will be announced on 10th March. Remember, an odd-lot offer only applies to holders who have fewer than 100 shares. At the current share price, that’s a position of roughly R2.3k and lower.
Revenue from continuing operations up 5.4% to R13.6 billion
EBITDA from continuing operations up 25.1% to R1.55 billion
Underlying EBITDA from continuing operations up 20.5% to R1.39 billion
Tangible benefits yielded for shareholders
Earnings per share from total operations up 12.8% to 135.1 cents
Headline earnings per share from total operations up 35.4% to 109.4 cents
Underlying headline earnings per share from continuing operations up 28.9% to 99.8 cents
Interim dividend of 20 cents per share declared
Segmental commentary
Groceries benefitted from a favourable product mix in pet food, improved margins resulting from lower raw material input costs, savings initiatives, production efficiencies and reduced load- shedding.
The Baking business unit delivered an improved performance, despite muted volumes in most categories. A focus on continuous improvement and net revenue management initiatives, lower input costs and the suspension of load-shedding drove their improved result.
After consecutive years of record performance off a high base, Sugar continued to deliver strong results, aided by continuous improvements in operational performance and reduced industry exposure to lower margin raw exports. Despite higher sales volumes, Molatek was down on the prior period mainly driven by a less favourable sales mix and rising input costs.
AECI announces a B-BBEE deal for AECI Mining (JSE: AFE)
This is a broad-based trust structure with notional funding
AECI is taking steps to improve the Black Ownership of AECI Mining. In that industry, it should hopefully increase the competitiveness of the business.
The AECI Foundation has been set up as a Broad-Based Ownership Scheme and will subscribe for B ordinary shares in AECI Mining, giving the foundation a 15.5% effective interest. The shares specifically reference the South African operations of AECI Mining, so they are avoiding unnecessary dilution of other businesses.
This takes AECI Mining to the all-important level of at least 51% Black Ownership, with the foundation focused on benefits for children in the areas in which AECI Mining operates.
The transaction value is R522 million. The foundation is getting a cash contribution from AECI Mining of 35% of the value, with notional vendor financing making up the remaining 65%. The funding rate on the notional vendor financing is the lower of dividends declared in respect of the B Ordinary shares and 60% of the prevailing prime rate. This is an evergreen structure, with the funding in place until it has been reduced to zero.
To help the foundation with its objectives, there is a trickle dividend of 20% of distributions from AECI Mining for the first 10 years and 25% thereafter.
Simply, this means that existing AECI shareholders are incurring a cost of 35% of R522 million, as even though the money goes out and comes straight back, their economic interest is being diluted and no new capital is coming in. Also, 60% of prime is much lower than the cost of equity, so AECI shareholders have also funded the rest of the stake at a rate that is highly favourable to the foundation.
What do they get in return? Apart from some feel-good pages in the next integrated report, they will hopefully reap the benefits of 51% Black Ownership. In a perfect world, the value of this would more than offset the cost of the deal. This rarely happens in practice, but perhaps AECI will be different!
Altvest’s credit fund gets a boost (JSE: ALV)
Executives have given personal sureties here – in return for a fee
Among larger listed companies, you’ll practically never see things like personal sureties. This is because the listed company is an institution that is completely separate from its founders and executives. But among startups and even small listed companies, the link between founder and company is much stronger.
Altvest is firmly in the startup camp and the management team is focused on scaling the group by getting the underlying financial services verticals to grow. One such vertical is the Altvest Credit Opportunities Fund (ACOF), which aims to provide predominantly women-owned SMEs with access to finance. The good news is that Altvest has managed to lock in a five-year loan of R75 million from the Small Enterprise Development and Finance Agency (SEDFA) to boost the ability of that fund to lend to SMEs.
Aside from cession of the SEDFA-funded loan book as security, Warren Wheatley and his wife Tatum Wheatley have had to give sureties over shares in Altvest that they hold directly and indirectly. In return, they are receiving an annual fee of 2% on the pledged security, which comes to R1.7 million per annum. By my maths, the fee is actually 2.3%.
The board of Altvest has approved this arrangement based on the view that these are normal commercial terms.
Speaking of the board, there are three directors who won’t make themselves available for re-election at the AGM. To help fill one of the gaps, the chairperson of ACOF (Norma Sepuma) is being appointed to the group board as lead independent non-executive director. This also tells you that ACOF is the focus area at Altvest at the moment and is perhaps their most obvious route to achieving scale.
Merafe impacted by lower ferrochrome prices (JSE: MRF)
This is how cyclical businesses work
Merafe has released a trading statement dealing with the year ended December 2024. Like all commodity companies, there are good times and bad times. This wasn’t a good time.
Due to lower ferrochrome prices, weaker volumes and the rand going the wrong way for them, HEPS is down by between 19% and 39%. This puts it on between 36.9 cents and 48.9 cents. The share price closed 4.4% weaker at R1.09, which means a trailing P/E of 2.5x!
Merafe always seems to trade at one of the lowest P/Es on the local market due to the risks of the business model.
Forex remains a headache at MTN Nigeria (JSE: MTN)
Well, more like a migraine
MTN Nigeria has released results for the nine months to September 2024. There aren’t many highlights, so brace yourself accordingly.
Firstly, total subscribers fell by 0.9%. That’s not a great start, with NIN-SIM regulations as the major driver. Active mobile money wallets tanked by 21.8%. The small silver lining is that active data users increased by 5.1%.
Despite this, service revenue increased by 33.6%. Sounds great, except EBITDA fell by 5.3% due to inflationary pressures and the impact of Naira depreciation on operating expenses. This means EBITA margin plummeted by 14.9 percentage points to 36.3%, a truly horrible outcome. The renegotiated tower lease contracts only helped by 2.3 percentage points.
Once forex losses (the translation effects, not just the impact on underlying contracts exposed to the USD) come into play, you find a loss after tax of N514.9 billion. Again, in the interest of finding silver linings, the Q3 number was a profit after tax of N4.1 billion, so at least the downward spiral has stopped.
Adjusting for the net forex loss, profit after tax was down 59.2% to N118.5 million. Sadly, that’s like me adjusting for my genetics and my enjoyment of Magnum ice creams and then claiming to be a successful 100-metre sprinter. They go and step further and adjust for the forex impact on operating expenses, in which case profit after tax would’ve been up 13.3%. I can’t even think of an analogy for that!
Capital expenditure was 27.8% lower and free cash flow was 21.9% higher. That’s probably the brightest of silver linings here.
Although the company is making efforts to reduce its foreign currency exposure, there’s also only so much that they can do. MTN Nigeria faces immense structural challenges.
A cyclical smack at Northam Platinum (JSE: NPH)
HEPS has halved
Northam Platinum released results for the six months to December 2024. As regular readers will already know, the PGM sector has been a mess. Northam Platinum is just another victim of the cycle.
Revenue is down 3.1% and operating profit has fallen by a nasty 55.2%. Operating margin has decreased from 16.1% to 7.5%. Not only is HEPS down by 49.7%, but the dividend per share has plummeted by 85%!
One of the interesting things at Northam is that you get an idea of how much variance there is in the PGM mine cost curve. For example, while Booysendal manages to produce at R18,000 – R19,000 in terms of unit cash cost per 4E oz, Eland is all the way up at R36,000 – R37,000. That’s literally double the cost! Zondereinde is at R27,000 – R28,000 and the group average is thus R25,500 – R26,500.
For context, Northam’s revenue per refined 4E ounce was R31,835/oz, so Eland is running at a loss per ounce and there’s not much headroom left at Zondereinde either.
Like all companies in this sector, all that Northam can do is try to control factors that are controllable, namely production volumes and cost of production. They have to hope that PGM prices will do the rest.
Primary Health Properties achieved decent dividend growth (JSE: PHP)
It’s just a pity about property valuations
Primary Health Properties has released results for the year ended December. This is a large UK healthcare property fund that recently added a JSE listing. Liquidity has been pretty light, but should improve over time.
The numbers for the year look respectable for hard currency returns. Net rental income was up 2.9% and HEPS increased by 8.3%. The dividend per share increased by 3%.
Property valuations did come under pressure though, with net tangible assets per share down 3.3%. That does rather blunt the benefit of growth in earnings.
The average cost of debt ticked up slightly to 3.4% and so did the loan-to-value ratio, up from 47.0% to 48.1%.
In a separate announcement, the company let the market know that they’ve acquired a clinic in Ireland for €22 million at an earnings yield of 7.1%. The property is fully occupied and leased, with a remaining term of just over 12 years and fixed rental uplifts in 2027 and 2032. That does sound like a solid deal at an attractive yield for the underlying country and sector exposure.
Cause for celebration at Sabvest (JSE: SBP)
The investment group’s portfolio did well in 2024
Sabvest released a trading statement dealing with the year ended December 2024. The company has correctly identified net asset value per share as the performance measure for trading statement purposes. There are still investment holding companies out there using HEPS as the trigger for trading statements, an approach that is as useless as it is frustrating.
Sabvest has a strong story to tell, with net asset value per share up by between 17% and 21% for the year. This takes it to between R127.95 and R132.33. With the share price currently at R90 after closing 4% higher on the day, there’s still a substantial discount to net asset value at play here. This is an issue that plagues all local investment holding companies.
Safari Investments had a solid year (and a bit) of growth (JSE: SAR)
Take note of the impact of the change to the year end
Safari Investments has released results for the six months to December 2024. The nuance here is that due to a change in the company’s year end, the comparable period is the six months to September 2023. Although it’s not a huge difference, a quarter of inflation etc. is a factor.
The numbers are strong, with operating profit up 9% and the investment property value up 10.7%. The SA REIT net asset value per share increased by 14.7% to R10.55 per share. With the share price currently at R6.75, there’s quite a discount to NAV at play here.
The interim distribution is 34 cents per share. If we take the simplified approach of doubling this number, that’s 68 cents for the year and thus a forward yield of roughly 10%. This is why there’s such a discount to NAV, as the market is pricing the company off its dividend rather than its NAV. This is standard in the property industry.
A tough year for Thungela (JSE: TGA)
And deeperexposure to Australia
Thungela released a trading statement for the year ended December 2024. Coal had a difficult time in that year, as evidenced by a drop in HEPS of between 24% and 31% at Thungela.
This was despite a reduction in the total number of shares outstanding, so the underlying pressure on the business was slightly worse than the HEPS range implies.
With results due for release on 17 March, investors will have to wait a couple of weeks to get full details. In the meantime, Thungela separately announced that the acquisition of Bowen’s 15% interest in Ensham in Australia for AUD48 million has now met all conditions precedent and the deal has closed. This deal is of course part of ongoing efforts to diversify the group and reduce reliance on key risks like South African infrastructure.
Nibbles:
Director dealings:
There’s yet more buying of Tiger Brands (JSE: TBS) shares by the CEO and this time he’s really put the hammer down. Across two tranches, the latest purchases add up to R3.3 million.
The chairman of Primary Health Properties (JSE: PHP) bought shares in the company worth around R540k.
A director of Kumba Iron Ore (JSE: KIO) bought shares worth R500k.
An associate of CEO Warren Wheatley bought shares in Altvest (JSE: ALV) worth R39k.
Barloworld’s (JSE: BAW) standby offer is open for acceptance until at least 14 April. It all comes down to whether they reach a reasonable level of acceptances, in which case the offerors will be happy to pick up the shares. Technically, unless there’s a 90% acceptance rate, the offer will lapse. The offerors do have the discretion to decrease this acceptance rate and move ahead with buying shares that are tendered by shareholders. To get more details, you can refer to this press release by the company.
This should be a big month for Orion Minerals (JSE: ORN), with the company expecting to be able to publish the results of the New Okiep Mining Definitive Feasibility Study (DFS) during the week of 10th March, followed by the Prieska Copper Zinc Mine DFS in the final week of March. These documents are the foundation for further capital raising activities.
Kudos to Equites Property Fund (JSE: EQU) for their approach to engaging with investors. They’ve released a follow-up presentation dealing with the Q&A from the pre-close presentation. Aside from more details on the UK portfolio, they also indicate that the cost of debt in South Africa is expected to decrease in FY26 by between 10 and 15 basis points depending on rate cuts and other factors. Finally, there’s more detail on the land holdings in South Africa, with land parcels being a key feature of most logistics funds that need a lot of space in exactly the right place for warehouse and DC developments. You’ll find the presentation here.
Labat Africa (JSE: LAB) has gone through major changes and is turning into an IT company. They still needed to catch up on outstanding financial reports though, so they’ve only just released results for the six months to November 2024 (and corrected some errors in the comparative period). HEPS jumped from 0.78 cents to 1.29 cents, but those results are not a great reflection of the future of the group and the recent strategic acquisition that was made.
Mantengu Mining (JSE: MCZ) announced the appointment of Shamim Mansoor as Chief Investment Officer at the company. She is highly experienced in the sector, with tons of experience at the sharp end of finance.
The disposal by Stefanutti Stocks (JSE: SSK) of SS-Construções Limitada in Mozambique has been delayed once more. The parties have agreed to extend the date for fulfilment of conditions precedent to 31 March 2025.
Rex Trueform (JSE: RTO) is further increasing its stake in Belper Investments. They are buying another 5.72% in the industrial property company, which means the stake will be up to 84.74%. The deal is worth R3.86 million, payable in monthly instalments from March to August 2025. This is also relevant to African and Overseas Enterprises (JSE: AOO) shareholders, as Rex Trueform is a 50.57% subsidiary of that company.
Sable Exploration and Mining Limited (JSE: SXM) has entered into a memorandum of understanding with Boo Wa Ndo Holdings for the acquisition of a 55% interest in the prospecting rights and mining permits over two properties in Limpopo. The properties have vanadium, titanium and magnetite resources. Sable will pay for this by issuing 6 million shares at R1 per share.
Visual International (JSE: VIS), a true example of a penny stock with a share price of just R0.02, has announced the acquisition of Stellendale Gardens. This is a long-outstanding deal that was awaiting the approval for rezoning from agriculture to business. The purchase price of R28 million is being offset against a R26 million loan receivable from a related party, so there’s a R2 million gain for the company. They will now look for partners to help with this mixed-use development.
AYO Technology (JSE: AYO) has once again missed a deadline, this time for the release of the financials that it told the market would come on 28th February. These financials are for the year ended August 2024, so the listing has been suspended by the JSE for lack of compliance. The delay relates to the auditor’s engagement quality control review. AYO has now opted to just promise the market that they are doing their best to finalise it, rather than committing to another date for release.
Salungano Group (JSE: SLG) has been suspended from trading by the JSE since August 2023. They are working on catching up on the financial reporting backlog, with results for the year to March 2024 expected to be released by the end of March 2025. The missing interims for the six months to September 2024 should be released shortly thereafter, with the suspension from trading expected to be lifted in mid-April.
African Dawn Capital (JSE: ADW) has managed to scratch around enough to find an auditor, with CBS Group appointed as the external auditor of the company.
For decades, alcohol and cigarettes have been the go-tos for taking the edge off life’s chaos. With Gen Z opting out of these vices, Big Alcohol and Big Tobacco are scrambling to stay relevant in a world where wellness is the new rebellion.
Every once in a while, I see a trend on TikTok that makes me question the general trajectory that humanity is on. The latest example is something called “rawdogging” flights. It sounds like a filthy innuendo, but the reality is far more dull: it means that people (usually young people) are choosing to sit through long-haul flights with zero distractions or comforts. No movies, no naps, no music, no books, no snacks – sometimes not even water. Just pure, unfiltered existence, staring at the back of a seat for 7 hours or more. For Gen Z, rawdogging is a flex, a test of mental endurance, and (to the horror of airline marketing teams) a growing badge of honour.
The first time I saw a TikTokker bragging about rawdogging an overnight flight, I was confused about why anybody would choose to do something like this – and why it was being applauded. But then I thought about another trend that’s become associated with Gen Z, and two circles converged to form an unexpected Venn diagram.
Think about it: this is the same generation that is making headlines for drinking and smoking substantially less than their predecessors, despite the fact that they’re living through one major event after another. Take your pick – a global pandemic, massive geopolitical unrest, a housing crisis, skyrocketing costs of living, massive job disruption caused by AI – and that’s all just in the last five years. To be fair, no world wars though. We will firmly hope it stays that way!
Past generations reached for a drink or a cigarette (or a Prozac) to take the edge off stress, social anxiety, or existential dread in the same way that most of us would tune into on-flight entertainment. But Gen Z? They’re essentially rawdogging life – no alcohol, no cigarettes, no chemical crutches. Instead of numbing out, they’re opting in: cold plunges over cocktails, breathwork over bar tabs, functional mushrooms over a pack of Marlboro Reds.
For the alcohol and tobacco industries, this shift is a crisis. After decades of selling their products as the ultimate coping mechanisms, they now have to pitch to a generation that sees water bottles as aspirational (Stanley cups, anyone?). So what does this mean for the future of these industries? And how long until Big Tobacco pivots into smoke-free meditation retreats?
What do the numbers say?
For decades, drinking (often to excess) has been a rite of passage into adulthood, especially in Western cultures. From sneaking cheap booze as teenagers to using alcohol as a social lubricant well into adulthood, previous generations have treated drinking as a fundamental part of fun, friendship, and even professional networking. Think of weddings, work functions, nights out on the town – few social settings have been complete without a drink in hand.
But Gen Z is rewriting that script. They’re drinking less, drinking later, or not drinking at all, and the numbers prove it. The UK’s largest recent study on drinking habits found that in 2019, 16-to-25-year-olds were the most likely of all generations to be teetotallers, with 26% steering clear of alcohol entirely. In the US, the number of college-age Americans who don’t drink jumpedfrom 20% to 28% in just a decade. Youth drinking rates have also plummeted across Southern hemisphere countries like Australia and New Zealand. During lockdown, 44% of Gen Z Australians reported cutting back on alcohol, more than double the rate of any other generation. In New Zealand, binge drinking among young people has dropped by more than half since 2001, and the downward trend hasn’t slowed.
And that’s just alcohol. Cigarettes are facing an even steeper fall from grace.
According to Gallup’s latest poll, smoking rates among American adults have dropped sharply, and Gen Z is leading the decline. Back in the early 2000s, 35% of Americans under 30 admitted to smoking cigarettes. Today, that number has plummeted to just 6%.
While Gen Z is the least likely generation to smoke cigarettes, they’re the most likely to vape. Gallup’s data shows that 18% of 18-to-29-year-olds use e-cigarettes, compared to just 1% of those 65 and older. In other words, while the classic cigarette is becoming a relic of the past, the nicotine habit itself isn’t exactly disappearing; it’s just changing form. Still, the total number of nicotine users under 35 today is lower than it was 25 years ago.
Why is this happening?
There’s no single reason why Gen Z is turning away from drinking and smoking; it’s more like a combination of growing up in a high-stress and always-on world, having more information at their fingertips, and being generally more risk-averse than their predecessors.
They’ve seen the warnings, heard the horror stories, and don’t need to learn the hard way. With endless research just a Google search away, entire TikTok communities like #SoberTok, and open conversations about addiction and mental health, Gen Z has a far more nuanced understanding of what alcohol and nicotine do to the body and mind.
It’s not just about physical health – many simply don’t like the idea of being drunk. A 2019 Google study found that 60% of UK Gen Z associate drinking with a loss of control. Unlike past generations, who could afford the occasional night of debauchery without permanent consequences, Gen Z knows that every questionable decision can be documented and broadcast online in seconds. 49% admit that their online image is always in the back of their mind when they’re out drinking. And with increasing reports of drink-spiking, especially among young women, the idea of a carefree night out feels more like a gamble than a good time.
So if Gen Z aren’t spending their disposable income on booze and cigarettes, then where is that cash going? You guessed it: wellness. According to McKinsey’s latestFuture of Wellness research, Gen Z and millennials are leading the charge when it comes to spending on wellness, outpacing older generations in everything from fitness to mental health. The survey, which polled over 5,000 consumers across China, the UK, and the US, found that Gen Z is particularly drawn to wellness purchases that focus on appearance and overall health. They’re also shelling out more than their elders on mindfulness-related products like meditation apps, therapy sessions, and wellness retreats (which, given their well-documented mental health struggles and the state of the world in general, isn’t exactly shocking).
56% of Gen Z consumers in the US say fitness is a “very high priority”, compared to just 40% of US consumers overall. And it’s not just about looking good now: young people are already investing in preventative health solutions, caring about longevity and healthy aging in ways that were once reserved for Boomers browsing the supplement aisle.
Raise a (water) glass to tomorrow
At first glance, the decline of drinking and smoking might seem like a problem only for alcohol and tobacco companies. But for investors, it’s a reminder that market dominance is never a guarantee, especially when consumer priorities are shifting. A company might look solid today (and for fifty years leading up to today), but if its core audience is aging out and the next generation isn’t buying in, those numbers won’t stay impressive for long. Does that verse sound familiar, De Beers?
Smart investors don’t just look at where a business is now, they look at where it’s going. Who is the future customer? What pressures are shaping their choices? And most importantly, is the business evolving to meet them where they are? Gen Z has made it clear that they’re swapping their party nights for pilates, thank you very much. Businesses that see this shift as an opportunity, rather than a crisis, will be the ones still standing in the decades to come.
Editor’s note: perhaps that position you’ve got in British American Tobacco or AB InBev isn’t so “defensive” after all, is it? I don’t hold a stake in either company for all the reasons that Dominique set out in this excellent piece.
About the author: Dominique Olivier
Dominique Olivier is the founder of human.writer, where she uses her love of storytelling and ideation to help brands solve problems.
She is a weekly columnist in Ghost Mail and collaborates with The Finance Ghost on Ghost Mail Weekender, a Sunday publication designed to help you be more interesting.She now also writes a regular column for Daily Maverick.
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