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GHOST STORIES #54: 2025 kick-off and fresh views on rent vs. buy

The Finance Ghost

30 January 2025

GHOST STORIES #54: 2025 kick-off and fresh views on rent vs. buy

Listen to the show using this podcast player:

Duma Mxenge of Satrix* joined The Finance Ghost on this podcast to talk about a range of personal finance topics and emerging trends in investing. The discussion then evolved into an in-depth look at rent vs. buy and an unusual approach being taken by The Finance Ghost as he plans to buy a family home in 3 years.

It’s rent vs. buy as you haven’t heard it before, along with tons of other insights to get your head in the game in 2025.

This podcast was first published here.

*Satrix is a division of Sanlam Investment Management

Satrix Investments Pty Limited and Satrix Managers RF Pty Limited are authorised financial services providers. Nothing you have heard in this podcast should be construed as advice. Please do your own research and visit the Satrix website for more information on all their ETF products. This podcast was published on the Satrix website here.

Full transcript:

Introduction: This episode of Ghost Stories is brought to you by Satrix, the leading provider of index tracking solutions in South Africa and a proud partner of Ghost Mail. With no minimums and easy, low-cost access to local and global products via the SatrixNow online investment platform, everyone can own the market. Visit satrix.co.za for more information.

The Finance Ghost: Welcome to this episode of the Ghost Stories podcast. It’s a new year. We are actually quite deep in January now at the time of recording, it’s almost payday for a lot of people who feel like they were last paid about 5,000 years ago. And of course, the journey to financial freedom and just making better choices, you’ll really feel it in January. If you get to a point where you’ve got the right sort of savings number and everything else, then I can promise you that January does become a lot easier and it loses that Janu-worry joke that people like to make. But if you are in the middle of Janu-worry, then thank you for listening to this and hopefully you manage to reduce that pain next year. Listening to podcasts like these should definitely help you with that, just with some of that discipline and some of the techniques that get used.

I’m joined today on this podcast by Duma Mxenge, who is the Head of Business and Market Development at Satrix. Duma, we’ve done this before – in fact, we did this a year ago. I don’t know why Satrix always gives you the year kick-off job with me, but it’s awesome and you’re very good at it, so definitely no complaints!

Last year we talked planning for holidays, we talked financial advisors, we talked about living bonus to bonus. We talked about a lot of stuff. And this year we’ll do something a little bit different. Maybe we’ll touch on some of that as well. But let me welcome you to the show, welcome you to a new year. And thank you for doing this again with me.

Duma Mxenge: Thank you for having me again. I’m not sure from the team whether I’m the usher or the bouncer of the new year, but I’m quite excited to be here.

The Finance Ghost: Yeah, look, I love that. We’ll go with usher. We’ll go with – well, you can pick, actually, because the bouncers are generally quite big, ripped guys. I don’t know what your gym ambitions are this year. Maybe you’ve got some New Year’s resolutions around that. Do you want to be the usher or the bouncer? What’s the vibe?

Duma Mxenge: I guess it depends how 2024 was! I mean, if you’re well behaved, definitely you need to be ushered. If you’re not…bounced!

The Finance Ghost: There we go. You can do both jobs, that’s actually the point. It’s going to depend on the customer rather than you! I like it.

Duma Mxenge: 100%

The Finance Ghost: So look, before we get into some of the financial stuff going into 2025, how was 2024 for you in the markets? Did you find that you reached your goals? Did you have any big surprises or big disappointments with how it all played out?

Duma Mxenge: It was fairly interesting, I think. The interest rates going down or lowering definitely did give me a bit of a breather. In terms of sticking to my goals, definitely I did – there and thereabouts. But you know, what’s also quite challenging with the South African market and I’m sure maybe later on we’ll talk about it, is if you’re a house owner, the other thing that you need to think about is the inflation around your tax and rates as well as the levies and municipality, whether it’s electricity or water. So those are things that you don’t typically get to factor in. But it does help to have an emergency fund on the side to just make sure that you’re able to cushion those surprises.

The Finance Ghost: Yeah, I’ll never stop screaming from the rooftops that property is a lifestyle asset in South Africa and it’s something we’ll talk about today. It just is, and there’s nothing wrong with that. I just think people need to recognise it for what it is. I specifically mean residential property. I don’t mean listed property because that was actually my win last year. I was very happy to call that correctly. Listed property was the place to be. I guess at the time I felt it was obvious, although sometimes markets can really hurt you, but when interest rates are coming down, property and listed property is going to do well. That’s just literally how it works.

Tax-free savings account, Satrix Property ETF, thank you very much. I’ll earn tax-free dividends from a REIT. I’ll get all that CGT tax-free as well. That was the focus in my tax-free savings account last year and that was good for me. I’m renting the house I live in, but I’ve got lots of listed property investments. This just shows how you can alternate. You can be the usher or the bouncer, right? With your money, you can kind of react to what you need to do based on the role you need to play.

Duma Mxenge: No, and I mean just on that, if you look at the SA market, let’s say the All-Share, we pretty much did about 13%, 14% for the year. But to your point, depending on which sectors you got exposure to using ETFs – financials did well, industrials probably, a large majority of it would be your retail-type stocks as well as property. When you have an environment where interest rates are coming down, definitely those sectors tend to do quite well.

Bonds were actually quite a big performer last year if you look at it from an asset class point of view. It was a good year in SA, albeit if you look at it on an aggregated basis, it was more muted. You had to be in the right sectors to do well.

The Finance Ghost: Yeah, you did. Absolutely. Then as much as everyone is very excited about the JSE, the reality is that offshore beat it again – even in a year that was supposedly amazing for South Africa. It was my offshore stuff that way outperformed once more. We’ve got to always keep lifting our heads to the global opportunity set. I understand the familiarity bias of wanting to invest in companies where maybe you are their customer, you eat at these places or you bank with them or they are your cell phone provider or whatever else, whatever other example I can give. Retailers especially, I think people have this real affinity of hey, I do my shopping here, this must be a good business. And then they buy it at a valuation that’s too high or they don’t understand enough about investing and they lose 10% of their money and they can’t understand how on earth this is possible. I do my shopping there’s every week. My mom loves this place. How did this happen to me? Unfortunately, that’s investing.

Duma Mxenge: It’s home bias. I do encourage that, whatever you consume, you should be investing in it because it’s a lot more tangible. So I get people who prefer to stick to local stocks. But to your point, you’re quite right. You have to lift your head up and look at opportunities outside of SA. As a percentage of the global market, we’re like less than 1%, I stand to be corrected. But that being said, on the global equity side again, what drove the large majority of the performance was the tech stocks. Also, you needed to be in the US, so when we say global, I think specifically the US market did well. Emerging markets were a bit disappointing. We expected a lot from it. There was a big – I remember at the beginning of the year – there was a big song and dance in India. The Indian market over the period was also a little bit disappointing. Yes, double-digit but at the low levels. China with the stimulus did well and that was quite a big surprise when we look at it. Again to your point, when you’re looking at global market you need to also just make sure that you are well positioned from an exposure point of view.

The Finance Ghost: Yeah, absolutely. Most of us are sitting with a lot of emerging market risk in our daily lives, right? Our jobs, our sources of income, if you own a house. For me, diversification is not, hey, I’m very deep in South Africa, let me buy some stuff in China and completely ignore the US. You don’t need to treat your portfolio as a BRICS convention. You can actually go and invest in places like the US.

Duma, I actually want to tweak that point you made around investing in the things you use and consume. There’s a lot of truth in that. I think the tweak I would put on that is: use your consumption as part of your research. For example, if you asked me over the next five years – and this is something that I worry about in my own portfolio – over the next five years, who wins? Microsoft or Apple? I look at it and go: I cannot avoid using Microsoft products! It’s impossible. I can’t do it. Every single day of my life, there is no question, I’m using Microsoft all the time. But I don’t own an Apple product. I’m just one of those guys who can’t justify the cost. I don’t really use my phone for much more than the basics. Truthfully, I’m not really a techie person who gets turned on by the actual hardware. I really don’t. Apple for me is just expensive to have in my personal life. I’m not an Apple person.

Lots of people are Apple people and that’s fine. The point I’m trying to make is you can avoid Apple, you can’t avoid Microsoft. For me, Microsoft is business-to-business and Apple is business-to-consumer. One of those is much more defensive than the other.

The reality is that if Apple doesn’t come out with whatever the next smartphone is – and they want it to be the goggles, but is it going to happen? I’m not sure. I’m not convinced, honestly. So, over the next five years, I think that Microsoft beats Apple.

The challenge I’ve got is I desperately want to justify reducing my Apple exposure, but I’m worried that they do come out with some kind of incredible hardware. And then underneath all of that you’ve still got growth in their services business. You’ve got all the share buybacks that they always do.

The point I make is that your consumption should be one part of your due diligence. And then if you want to invest in single stocks, you’ve then got to do the work and you’ve got to learn how to do the work, right? You’ve got to learn how to do the research. And that’s where ETFs are very powerful. You’re taking a much more thematic play. In many ways, you’re just buying market risk, which over time the stats tell us you get rewarded for. Over a long enough time period, you get rewarded for taking equity risk. That’s how ETFs help you, specifically equity ETFs. There are other types like bonds etc. and you’ve raised that. That’s the beauty of ETFs.

I always advocate for both. Do ETFs as your core and then if you want to put in the work on single stocks, then do it, but don’t do single stocks flippantly. Don’t think it’s this easy thing where you just pick a few names and all goes well for you.

Duma Mxenge: No, no, no. You’re 100% right. And I think that’s the beauty of diversification, right, if you invest in ETFs. Just to your point again, Apple versus Microsoft, we are saying, well, why don’t you just hold both? Why don’t you hold Google, why don’t you hold Meta? If you believe in this whole premise around platform businesses are going to win going forward, we don’t know where this AI revolution is going and who the winners are going to be, but you want to make sure that you’ve got one of the winners. It’s going to be one of the big boys that are going to do exceptionally well in this space. Having exposure to technology, albeit expensive from a valuation point of view so they can’t afford to disappoint on the earnings, it’s been surprising us for a number of years now since this wave has started.

The Finance Ghost: Yeah, absolutely. It’s why I own Visa and MasterCard, by the way, because the payments ecosystem is so powerful, but I can’t choose between them. From the outside looking in, they almost do exactly the same thing. So why pick one? What happens if one of them gets accused of fraud or one of them has some crazy thing that happens at board level? I don’t want to take single stock risk when I can buy two things that are similar enough. It’s like making my own little ETF, it’s my own little payments ETF! It just only has Visa and MasterCard in it. So, yeah, I agree with that thinking and I guess that leads into – we’ve talked a lot about offshore and tech and everything else. I don’t want to wait too long in the podcast before we get to something that is quite close to your heart and something that you mentioned to me you want to talk about this year, which is some of the emerging trends in investing and specifically the concept of digital wealth.

Now, I’m terrified you’re about to tell me about meme coins and Trumpcoin and dare I say it, Fartcoin, which sounds like something my 4-year-old would 100% invest in if he understood that. But hopefully it’s not that. Maybe it’s a little bit of blockchain and bitcoin and actual assets as opposed to some of the meme stuff. Maybe it’s got nothing to do with that. I’m curious to hear what this digital wealth trend actually is?

Duma Mxenge: Yeah, so it does, but it doesn’t. But in the main, what we’ve started seeing now in the market, especially on the direct side, retail side, the personal advice, investment etc. is that more and more we’re getting a lot of clients who are extremely interested in investing. And there are a variety of platforms that are out there in order to assist clients. It’s not just a South African story. We’re seeing the same thing in Europe, we’re seeing the same thing in Asia. And it’s usually your younger market, trying to actually start the investment journey. Typically, what people tend to do is that if they’ve got a little bit of money, they’ll basically be digital-led or what we call product-led. You have a platform and you decide, you know what, I just want to use a platform, let me just invest. And typically, when people start off, especially the young generation, they get into crypto because they get so interested in terms of the returns and also just the hype around crypto and how that market has grown. Then as your portfolio grows, provided that you know you’ve done well, you start taking this concept of saying, hang on a minute, I may know a little bit more, this and that from an investment point of view, but I do need assistance.

So what we are seeing now is that there’s this migration where you actually have a hybrid model. It is digital, but also with a financial element attached to it, albeit automated. You get your robo-advice in the space or you can get, let’s call it “light-touch advice” that is provided to you in terms of how you need to think about your portfolio. Ultimately, where all this lands is your traditional financial advice business. What is quite interesting is that you’re getting a lot of practices that are saying look, I’ve got this long tail of clients that I can’t service. More and more they’re looking for a digital partner or platform to integrate into their practice in order to service that market up to a point where they get to a level where it becomes feasible them to actually support that business.

What is quite interesting as we look at the space is that it’s not a one-size-fits-all, so all clients are different. Personalisation is a big thing. Seamless transactions a big thing. Data-driven decision making is a massive thing in the space. You’ve got neo-brokers such as EasyEquities, you’ve got ourselves, basically we are a self-directed platform. You also got robo-advice and you also have telco guys coming to the space trying to figure out how they can tap into the retail market or mass retail market and provide a service specifically around investments. That’s, that’s the broad stroke.

But then I can also get into products. But I just wanted to position in that way, you know, to use that. It is a big trend in the emerging market as well as in the eastern part of Europe as well.

The Finance Ghost: Yeah, it’s super interesting. Thankfully a billion times more useful than meme coins, I’m very pleased to hear that, not that I doubted it for a moment! It’s really tech as a disruptor, right? We covered JPMorgan this past week in Magic Markets Premium and what’s quite interesting is comments made by management around their tech investment cycle. They’ve actually come out and said, hey, we’re now done with the modernisation investment and it’s been a multi-year, gazillion dollar thing, right? We’re now at the point where our tech teams can really turn their focus towards new product development, etc. That’s just a feature of the more institutional places like JPMorgan where they’ve been around forever. Some of the systems are very old and a lot of these startups, a lot of these disruptors see those gaps and say, look, we can’t fight – bluntly, we can’t fight JPMorgan, but what we can do – it’s how do you kill a Dragon? You’ve got to find its weak spot and then you just go for that weak spot. It’s like, okay, they’re a little bit slow here, their systems are old, let’s dive in, let’s go for it.

So much venture capital money is based around finding entrepreneurs or founders who have noticed that weak spot. They need money to attack it and they’re actually building the thing to eventually be acquired by said dragon. When that dragon is like, actually, this is really irritating now, I’d rather just get rid of you guys and buy you, that’s basically how venture capital works, right? It’s tech as a disruptor and it’s doing things, as you say, like servicing the long tail of a client base with more consistent advice. In some respects, they get a better outcome because maybe if it was a human doing it, they wouldn’t necessarily give it the attention it probably needs. It’s almost easier to write in a set of rules, take all the emotion out, and then focus on servicing clients where the value is high enough to justify some, shall we say, creative thought, which is both good and dangerous. Right?

Duma Mxenge: I do think that, whether you want to call it AI Agentic or AI agents, I think they definitely do have a role to play in the space. But I don’t think it’s actually on the conversion side. I think it’s once you’ve converted the client and have invested where you can now start asking questions, pointed questions about your portfolio. I think there’s still a role to be played in terms of human intervention when it comes to convincing a client, especially non-investment clients who are scared to make that final leap of actually investing. You actually need to have a human being saying you’re going to be alright, this is a safe investment, go ahead and invest in it. I think that’s a massive friction point that we haven’t gotten right. When I look globally in terms of how the other guys are also doing it, that piece unfortunately, you just cannot leapfrog. There’s a massive human element attached to it. I could be wrong. Maybe someone can come up with something super cute. But the sense I’m getting is that first-time investors do not want to deal with AI. They want to actually speak to a real human being.

The Finance Ghost: Interesting. That human connection still matters. I think a lot of what’s going to happen in the world over the next few years is finding the balance. That’s also why I’m quite bearish on this whole “goggles” kind of situation. I don’t know that most people want to live like that, actually. So we’ll have to see how it all plays out. It’s certainly going to be something to watch.

Duma, I want to make sure that we also talk about property because I think this is something that’s on the mind of all South Africans all the time. Let’s maybe move onto that, if that’s okay with you?

Interest rates have started coming down. The SARB guidance I’ve seen is for 50 to 75 basis points this year, roughly. Let’s see what happens. Obviously, we’re very much in a world of uncertainty, the SARB is strongly led by what the Fed does in the US we haven’t shown too much propensity to cut unless the US is cutting. We’ll have to see what happens there. Trump’s going to have an impact here, without a doubt.

That’s the question, right, is can South Africans who are looking at this saying, okay, you know, I’ve come through Covid, I’ve come through post-pandemic, I feel like my job is relatively stable, interest rates have come off – can they rely on more cuts or would you recommend that they still stress-test? Should they even be stress-testing for interest rate hikes from here? What approach would you take?

Duma Mxenge: Yeah, so I’ve been thinking about this question for quite some time. When you buy a property, it’s not the same as doing your research in terms of a company and looking at the valuation and buying it on a cheap. I say this because it’s a 20-year call. You may get it right for the next five years, but you’re going to get burnt going forward. You do need to do the stress-test and also be super conservative, base it on a high interest rates environment and say consistently at this level for the next 20 years, can I afford this house including the rates and everything? If the answer is yes, I think for me that’s a better call. If interest rates do come down, you can still maintain the mortgage amount that you’re paying towards your bond. You don’t need to go with the fluctuations of the interest rate. That’s a prudent approach, but you and I, we know that is probably the minority as opposed to the majority.

The majority always comes in at the wrong time, which is when interest rates are lowest and you’ve negotiated hard on your entry point. Ultimately when interest rates do go up and they will go up in the next 20 years, then people start feeling the pain when they have to tighten the belts, etc.

The Finance Ghost: Yeah, absolutely. I can actually share what I’m busy with at the moment if you want, in terms of planning around my own property journey. I’m still happily renting. It’s worked for me. I’ve had some big lifestyle changes, all very happy ones in the past year. I’m now looking ahead to saying, okay, my life is a lot more stable now. I can do a lot of planning and in three years’ time, which is mainly driven by age of kids and schools and stuff, I want to be able to live in a specific area in Cape Town. No, it’s not Clifton. It’s definitely not. It always irritates when people talk about – let me just rant for two seconds – “Cape Town’s so expensive” and then they give an example of Camps Bay. Yes, shockingly, Camps Bay is expensive. So is the top of Los Angeles. Or maybe not so much anymore, but it’s just – anyway, there are lots of places you can live in Cape Town that are not Clifton. I’ll share it. My dream is there are a lot of really nice places in Durbanville. It feels a little bit to me like some old Joburg vibes. More established gardens, there’s less wind. I like that. It feels like Joburg by the sea, which is cool. That requires me to now plan towards this thing.

Obviously as an entrepreneur, getting a bond is not straightforward, so that’s an additional complication. You’ve got to really over-save on the deposits you’ll have, etc. But I sat down and did the maths – shock and horror – to say, okay, how much am I really losing out by not buying right now? Because Cape Town property growth is strong, right? It’s by far the best in the country. If you’re going to lose out, it’s going to be down here.

I went and worked it out based on a five-year view and assuming, okay, look, you buy a house and you sell it after five years because things change in people’s lives. Everyone wants to buy a house and live in it forever, but very few people actually do that. The costs of buying and selling are quite hectic etc. And in reality, the house I could buy right now I would probably grow out of in about five years’ time. That’s why I did it this way.

The maths tells me that versus renting and then saving the difference, house prices down here would need to grow by 7%, 7.5% a year just to break even, versus me doing what I’m doing now, which is renting. Obviously rental yields are much lower than interest rates and then saving the difference every single month. That’s what property would need to do.

It’s super interesting, right? Look, it obviously depends on your assumptions and rental escalations, but I’ve just re-signed my lease now. 5% escalation. I’m not sure my landlord is dealing with 5% inflation. I suspect that he’s not. I suspect that it’s worse than that. But obviously I pay my rent on time every month and I don’t make a noise. So here we are. 5% escalation.

Duma Mxenge: I’m just worried that your landlord is also a listener to your podcast!

The Finance Ghost: No, no, we have a good relationship. He knows he can take a risk on another tenant if he wants for an extra 100 basis points. I’m not sure it’s worth it.

But the other thing I’m doing now is I’ve looked at it and said, okay, so what would my bond probably be? And I’m now setting my budget to live to that bond even though I don’t have it. Basically I’m saying if I can’t save that amount every single month, the delta between the bond and the rental, in addition to all the other stuff I need to save, then clearly I can’t afford that house right now and I’ll be very glad I didn’t buy it.

I’m basically giving myself three years of living to the bond that I want to have, saving that excess so I have a much better deposit. And in reality, unless Cape Town house prices and specifically Durbanville do more than 7.5% a year, I’m going to be okay. I’m not worse off for not owning.

I know that was a lot to take in for someone listening to this podcast. Maybe go back and listen to it again. If you can, go and do – if your skillset lies in finance and you can do a bit of the modelling in Excel, go and do it. But even if it doesn’t, just maybe keep in mind, because I think this is a fair set of assumptions, house prices need to do upper-single digits before you are losing out by not owning a house. This assumption is, however, that you are investing the difference between what your bond would cost you, including the cost of owning a house, and your rent. And I think that is the trick that a lot of people don’t catch or they fall over – the behavioural finance element, right?

A bond focuses the mind. It’s very tempting if you’re renting to say, cool, I’m renting for – I’ll just use a number, it doesn’t matter what it is – 15 a month. I would be buying for 25 month. That sounds to me like I now have ten grand a month to go buy a new BMW or new Merc or, well, these days, I don’t know. Does that even get you a BM or a Merc? It’s been so crazy with inflation.

Duma Mxenge: Not at all!

The Finance Ghost: Itprobably doesn’t. Probably go buy like an entry level Golf…

Duma Mxenge: I’ll definitely go for a Chinese model.

The Finance Ghost: Yeah, 100%. Haval! But you go and like finance this new car for ten grand a month and the bank waves you through the door. Don’t go ask them for a mortgage, but by all means ask them for vehicle finance. And the reason is very simple. They’re going to charge you prime plus plenty on a vehicle. They’re going to have to charge you prime minus something on a bond.

That’s the thing to avoid. Don’t go – if you’re saving for a house, don’t go finance a car, rather look at it and save that difference and it will make all the difference to the rest of your life.

So for people who are thinking of do I buy a home now, etc. maybe just go back, listen to all of that again, see if you can live to the budget as though you already have the bond. And as long as you invest that differential, you’re not really losing out. Frankly, outside of Cape Town, I don’t think you’re losing out at all unless something really changes in the property market in places like Joburg or Durban or wherever you are.

Duma Mxenge: Right, yeah, I agree. I wanted to perhaps just test your thinking here just to understand where you’re looking to land. So typically what you find is that someone will rent, buy a house and rightfully so. That’s not your first house, you’re probably going to buy two more additional houses before you land on your dream house, which is super expensive when you go down that path. But people do that because they’re basing it on affordability at that point in time. So every five to seven years, they move from one house to the next. It’s a very expensive exercise, or it’s what you are describing where you basically defer it, stay rented. But the differential is what you invest. And then the call here is, what I’m trying to understand is, is it a three-year, five-year call, then you buy a house? Is that your dream house or the second house? Or do you, depending on, how long one needs to wait, is it that the longer you wait, the closer you are to your dream home where you ultimately want to land? Is that the thinking?

The Finance Ghost: It’s a great question. So my thesis is that the rate of change in your life slows down, right? I’m 36 now. I’ve lived a fairly full life. Things have gone well. Things haven’t always gone well. There’s been a lot of personal change, etc. But the point is that the rate of change slows down. You’re probably not – some people do, but you’re probably not going to have kids in your 40s. You know how many kids you have by then, chances are good, on average. Obviously, there’s always a laatlammetjie here and there. But most people have an idea of where they’re at by the time they get to that sort of age, whereas 20s and 30s, I mean, so much can change, right? You can buy a house in good faith and then get your dream job offer overseas. Now what? Or you meet someone, you haven’t met someone yet, you meet someone and in order for that relationship to work, you now have to move city. And you never thought you would do this, but you’re going to do it anyway.

I think there’s just – I bought the first place I ever stayed in because I did my articles at a bank. So you get this crazy good interest rate. I bought this little apartment because that was the sort of the, the lesson that you get taught by your family, right? Get on the property ladder, bricks and mortars, start paying it off, why pay someone else’s bond, etc. And maybe that was good advice once upon a time, I’m still not sure. I don’t think it’s good advice now. I did the math when I eventually sold that property, I think probably four years after I bought it. Unquestionably I was better off renting, there’s no doubt. I did the maths and I lost out by buying and I got it on a heavily discounted bond. It would have been even worse if I had paid full rate, not staff rate at a bank.

To go back to your question, my argument is if you defer it and you wait until it’s definitely a house that you can see yourself staying in, quite possibly forever, that is the “cheapest” way to buy a house for two reasons. (1) you’re saving a differential between renting and buying for much longer and if you save it properly, you’re getting that uptick. And (2), you’re unlikely to move again, you’re unlikely to have massive upheaval. You’ve chosen schools, you’ve kind of got a 12-year plan. No one in their 20s has a 12-year plan. They think they do, but it doesn’t ever work out that way, right? So that’s where I’m at.

And just also importantly, even if I buy in 3 years’ time, it’s still not a financial decision, it’s a lifestyle asset. I just don’t want to be at the whims of a landlord who can force me to move halfway through a school year or when it doesn’t suit me and then there’s a lack of availability. The Cape Town rental market is an extreme sport on a good day, so you’ve got to be careful with that. It’s still a lifestyle decision, but it feels like one that is then financially responsible as opposed to potentially something that will hurt me. I don’t know, each to their own with this stuff. I’ve thought about it a lot, as you can see, and that’s my approach, basically.

Duma Mxenge: No, no, no, I don’t disagree with your thinking. I think it’s a great way to look at it, but it’s not easy, with all the other external noise, family, friends, people are very pro-property. They may try to convince you otherwise. I think staying the course, once you’ve decided on a decision, I think that’s the best thing you can do.

The Finance Ghost: Yeah, absolutely. Then you’ve obviously got to invest the difference properly, and maybe let’s bring the podcast to a close by talking about some of that stuff, because as interest rates come down, the risk here – so what is the risk I face? The risk is that property prices actually go bananas. Interest rates come down, property prices go literally to the moon. Plus, if I’m investing with a relatively short-term view, I’m not necessarily putting that entire differential in equities that might get the uptick from interest rates coming down. A lot of it needs to sit in your more sort-of fixed deposit type stuff. A little bit of money market, making sure you’re not in a scenario where three years from now, in the year where it’s school-sensitive, that I need to be able to pull the trigger on this, I find myself in a terrible place in the market cycle with a 30% drawdown, that’s a disaster.

So the risk here is house prices go up much more than I think they will and I struggle to generate enough returns on the money that I’m investing. And that by the way, is part of why listed property for me is the hedge. I’m very happy to be in South African REITs because chances are quite good that if residential property goes up very hard, logically speaking, would the REITs not also do that? It just feels to me like there’s a good chance, right? The same things driving residential property would then drive the REITs. So I’m sitting with that exposure anyway. I’m earning dividends along the way and I’ve got a bit of a hedge built in there, so that’s some of the thinking and that’s where you need to have this coherent plan.

I’m definitely not blind to the fact that I’ve done a lot of this and I’ve done a lot of academic qualifications in this space. I don’t think this is the way the average person can run their money realistically. This is why people need financial advisors. This is why you need to speak to people who are very trained in this space. This is why you’re listening to this podcast, right? Because you want to learn. And that’s the win, is you come to a thing like this and you learn. Obviously this whole plan could backfire spectacularly and blow up in my face. That’s the risk in the market. But if you don’t take the risk, you don’t get rewarded, right?

Duma Mxenge: Yeah, no, that’s true. I mean, it also depends how active you want to be. Just going back to your point, the big thing that you first need to solve and agree with yourself on is the term. Anything less than three years, I wouldn’t advocate that you get into the equity market because it can be volatile in the short-term, but in the long-term it can definitely benefit. Anything longer than three years, maybe you will get that output surprise from a return perspective. But I mean, if you’re looking at, let’s say, anything from zero to three years or maybe 18 months, maybe let me push the boat out to three years, is that your money market is probably the best place to be. Your active income funds are also quite good instruments or investments or products that you can actually invest in. Ultimately what you’re looking for is that money that you put in it is “protected” but you are getting the upward interest rate uptake by being invested in such product of this nature. It is a safer, low-risk strategy as opposed to looking at equities. But someone who’s au fait with the market, deals with the market on a daily basis, then you can be super cute in terms of how you think about managing that portfolio or that emergency fund adequately in order to eke out more returns.

The Finance Ghost: Yeah, absolutely. You can do some interesting stuff. And I think it’s important to clarify: my plan is not, hey, I build up a REIT portfolio and I sell it in three years. Definitely not. The money that I’m looking ahead to needing for that house is in money market stuff because I don’t want to be forced into selling equities. That’s dangerous.

I use the South African REIT exposure as the hedge on my balance sheet. Say if I get this wrong and three years from now I’m sitting back going, man, I lost out by not owning. Actually, I haven’t, because in my tax-free savings account, which I’m making sure I max every year, I’m heavily into local REITs. I might have lost out on the physical asset and maybe I’m in trouble now in terms of buying – whoopsie, these things happen. But if I look at my balance sheet holistically, I’m still okay because I caught the property upswing with liquid assets.

It’s still very much a case of saving in money market and investing in equities, which is what you should be doing. Right? Maybe that’s a good place for us to actually bring the show to a close. We went down a huge rabbit hole with the property stuff. Sorry, Duma, actually, I almost feel a bit bad. We really spent half this podcast talking about property. But I think for South Africans, it’s a big question this year, right? It really is on everyone’s lips.

Duma Mxenge: It’s a huge question. I mean, even for those who’ve been in that for a number of years and those who are starting off, this is the first investment, which is a huge investment, big decision. I think it’s great to spend a lot of time just talking about property.

The Finance Ghost: It is, it is – and to actually just get some other views, also from younger people who aren’t necessarily tainted by the whole “property is always what you want to own” sort of generation. With greatest respect to them, there is an older generation who really believe bricks and mortar is life. It’s not necessarily true.

So, Duma, I think to bring this to a close, I’m going to ask you one more question and I want to get your expectation on what’s going to do better this year: local equities or offshore? And by offshore, I generally mean US, but as you mentioned earlier, there are others. You’re very welcome to throw something else in the hat here. What do you reckon it’s going to be? Is the JSE finally going to have its year in the sun this year versus offshore, or do you think that it might be another win for offshore?

Duma Mxenge: Maybe let’s start off with the local market. I think there’s definitely interest in terms of resources doing well this year. Just looking at the survey across all the other markets, the SA is coming up as one of those markets that will probably do well this year, whether it’s GNU, we will still wait and see, the lower interest rates. So there definitely are favourable tailwinds that may actually support the local market. I think there’s definitely great interest.

In terms of China, China versus the US, a lot of people are concerned about the valuations in the US. Like I said, I don’t think this is the time to actually go underweight or to be bearish on tech. It keeps on surprising us on the upside. Maybe in the US you need to be more exposed to technology. Then the stimulus in China is something that we need to keep an eye on. The Chinese are looking in other markets in order to hedge what might happen with the Trump regime, whether it’s going to be favourable or not. They’re not sitting on their hands and doing absolutely nothing. They are considering what other avenues can they look at in order to stimulate growth in terms of the Chinese market in other regions.

So it’s going to be quite interesting. It’s going to be very volatile, a lot of unknowns, but more and more we want to keep an eye and just make sure that we are in the right areas from an exposure point of view. And that’s what I’m looking at from my own personal portfolio as well. I don’t know about you in terms of, you know, what’s, what’s tickling your fancy at this point in time.

The Finance Ghost: I knew for damn sure you were going to throw that question back at me as I asked it. I was like, this one is coming straight back with interest. Look, I think some of the – I mean, it’s the old story in the US market, right? Some of the valuations are just daft. Look at Walmart and Costco. If you haven’t looked at those P/E multiples, then prepare yourself, brace yourselves for the pain.

I do think the tech – look at Netflix yesterday. So at time of recording, Netflix came out yesterday and after-hours it’s up around 14%, just absolutely shooting the lights out. I think these platform businesses have a growth runway that people underestimate. And I think some of the other businesses have a growth runway that people overestimate. So, for example, there’s no ways I’m buying Walmart and Costco at these valuations. There’s just no chance. I think the platform businesses can do a lot still, but they are really, really hot obviously.

I do think we’ll see a slower year. I don’t anticipate that this coming year in the US markets is going to beat last year. There’s just been some crazy returns. My banking shares did like 80% in the US in the past year. It’s extraordinary. I think it’s going to be a bit slower in the US than we’ve seen in recent years.

Does that mean the JSE will go faster? I think the risk is that a lot of the valuations have run ahead of earnings now and you’ve kind of seen a pretty bad start to the year in terms of just a cooling off really. There was a lot of sentiment-driven stuff last year and now we need the numbers to actually start coming through. And when the year kicks off with news of ArcelorMittal closing things down, etc. then I think people get a little bit of a reality check. I think the challenge for the JSE is that when the US does very well, the JSE can do quite well because it’s risk-on. And when the US does badly and people panic, then emerging markets get hit harder because now it’s risk-off.

So if people are taking their money out of Microsoft, you can be damn sure that most of them are taking their money out of emerging market funds even faster. I think that’s always the challenge for the JSE. I will say this, the sector that I think could be a relative surprise this coming year, not necessarily because I want to invest in it – I don’t hold any South African banking exposure and have no plans to change that – but I do wonder if South African banks might have a better year than the US counterparts. The US really had a crazy year last year with banking. It was all driven by non-interest revenue, which is the hard way to make money. It’s capital markets advisory stuff. With interest rates where they are, they are struggling. And look, if rates come down, the SA banks will also hurt a little bit. But I just think the opportunity for stimulus in South Africa from rates coming down is just higher. It really helps the average South African when rates come down.

That really does land in the banks because South Africans love borrowing money for things. If there’s one thing we just love doing, we want to borrow money and buy stuff. It’s our whole vibe. So that’s good news for local banks.

Yeah, I think there’s an outside chance that South African banks might – big “might” – outperform US banks over 12 months. I want to be very clear that’s over 12 months and that’s not how I’m positioned. I’m holding my US banking exposure because it’s a forever-and-ever play for me. But I think that might be one place where we do okay. Obviously, we’ll see how the year plays out, right? It’s going to be very interesting, as always.

Duma Mxenge: No, that makes sense. Just going back to our own biases. Because you started your career in banking, you understand banking more than any other industry. So that’s why it’s your forever. You’re able to know when to come in and out. We’re all like that, just going back to the biases.

The Finance Ghost: Yeah, but that’s why I avoid crypto. I don’t pretend to understand it because I’m not in tech. Honestly, that’s it, so you’re 100% right. There’s a lot to be said for sticking to your knitting. Just like if, if you’re good at a sport, play that sport. You don’t need to go and then hurt yourself trying to play golf. This is a very real example. You can see I’m sharing a personal pain here about golf.

Anyway, Duma, I think we’ve gone miles over time, but we’ve had a lot of fun and I think it’s been a great show. And to the listeners, I hope you’ve taken something from it. I hope that the house conversation landed. I know it’s complex and it’s an unusual way to think about it, but just try and think through it as rationally as you can, as much as it’s an emotional lifestyle thing.

Duma, thank you for all the chats around the market stuff as well, etc. It’s always good to know what you’re up to. We’ll definitely do another one of these this year. I wish you all the very best for 2025. Let’s hope it’s a good year for you, for Satrix, because obviously the beauty of it is you can go and express all these views in the market by buying Satrix ETFs. You can do it in your tax-free savings account and it’s just a really good way to buy market exposure. There’s a huge range of them. You can go and really tilt your portfolio in whichever direction you want using those Satrix ETFs, so go and have a look at that. Duma, thank you. I look forward to another year of making some great podcasts with the team on that side.

Duma Mxenge: No, thanks, thanks for opportunity and great chat. I always look forward to these discussions. They’re quite thought provoking, so I’ve also learned a thing or two. Thank you for your time and thank you for inviting me to this platform.

The Finance Ghost: It’s a great pleasure and likewise. Thanks Duma. We’ll chat again. Ciao.

Satrix Investments Pty Ltd and Satrix Managers RF Pty Ltd. are authorised financial services providers. Nothing you have heard in this podcast should be construed as advice. Please do your own research and visit the Satrix website for more information on all their ETF products.

GHOST BITES (Anglo American | Barloworld | Hyprop | Octodec)

Ghost Bites

The Finance Ghost

30 January 2025

GHOST BITES (Anglo American | Barloworld | Hyprop | Octodec)

Anglo American’s Jellinbah disposal closed earlier than expected (JSE: AGL)

You don’t often see deals closing this quickly

Anglo American announced the disposal of its 33.3% interest in Jellinbah Group in early November 2024. That’s not very long ago at all, so it’s really surprising to see that the deal has now closed – especially with the festive season in the middle of that period!

The underlying assets are Australian steelmaking coal mines, with Anglo American saying goodbye to these types of assets as part of its plan to move towards a focused portfolio of copper, premium iron ore and crop nutrients businesses. Anglo American had already received A$228 million and has now received the remaining A$1.4 billion, taking total cash proceeds to over A$1.6 billion – or roughly $1 billion at current rates.

The buyer is Zashvin, an existing 33.3% shareholder in Jelinbah. Anglo had no role in operating these mines or marketing the production volumes, so the shareholders in Jellinbah have essentially gotten rid of a silent partner here.

The balance of the steelmaking coal portfolio is being sold to Peabody for $3.8 billion, so Jellinbah was just the appetiser before the main event.

Barloworld has released the take-private circular (JSE: BAW)

If you’re a shareholder, you have 106 pages to flick through

A circular is a monstrous thing and the latest example at Barloworld is no different. Luckily, a number of pages are filled with boilerplate content, which means legal paragraphs or clauses that are replicated with little or no modification. This is the standard stuff you’ll find in every circular, like disclaimers. There are also various pages dealing with the action you should take as a shareholder, most of which won’t apply unless you found your Barloworld shares in your grandparents’ basement and you own certificated rather than dematerialised shares.

The timetable on page 16 of the circular (page 18 of the PDF) is important. It shows how long the process takes and exactly what the steps are. The meetings of ordinary and preference shareholders will be on 26th February and the results will be announced on the same day. Then, if all goes well, the termination of Barloworld’s listing will only happen on 24th June! These things take a long time.

There are then several pages of definitions. Reading those pages is like reading the dictionary – don’t do it in order. Instead, refer back to defined terms as you come across them in the main section. This brings us neatly to page 28 as marked (page 30 in the PDF), which is where the good stuff starts.

We quickly learn that Newco (corporate advisors like to keep it simple) has been set up to make the offer to Barloworld shareholders. Newco is controlled by Barloworld CEO Dominic Sewela (hence the corporate governance hornet’s nest that had to be navigated) and the Zahid Group. The Zahid Group currently has 18.9% in Barloworld, so the buyers of the business are all extremely familiar with it.

An interesting nuance in this deal is that it is structured as a scheme of arrangement (an “expropriation” mechanism in which the deal applies to all shareholders provided enough say yes to it), with a standby offer that triggers if the scheme fails. In that case, those who wanted to sell their shares can still do so. This shows that Newco is happy to buy up any amount of Barloworld shares at this price, but would prefer to get everything. They do however have an exit clause where the standby offer is only completed if at least 90% of holders accept that offer. As the scheme is a 75% approval, it’s unlikely that 90% would accept the offer after the scheme fails. This gives Newco a clever way to walk away from the deal, as they have to specifically choose to waive the 90% rule to go ahead with the offer.

In a case where the waiver applies, it would mean that Barloworld isn’t delisted from the JSE and A2X. This is important, as I avoid holding unlisted shares as a general rule. Liquidity is your friend and unlisted shares are less liquid than the Saudi Arabian deserts from where Zahid Group hails. Of course if the scheme goes ahead or holders of 90% of the shares accept the offer, then we are in delisting territory, but the use of squeeze-out provisions related to a 90% acceptance would likely mean that shareholders probably won’t even have the option to move into an unlisted environment. Not all deals are structured this way.

For those who are interested in the Barloworld Foundation, the circular confirms that it will remain a shareholder of Barloworld after the implementation of the offer. The same cannot be said for Khula Sizwe, the B-BBEE property investment scheme, as its Barloworld shares would be included in this deal.

South Africa’s Competition Commission just loves overreaching into areas that have very little to do with competition, so Barloworld actually felt compelled to make this statement in the circular: “In light of the Newco Offer, the black ownership of Barloworld will improve for purposes of the Competition Act.” They missed a trick on the capitalisation though, as Black Ownership is a defined term in the B-BBEE legislation and is well understood in that context.

Let’s get to perhaps the most important thing: the price on the table. The scheme price is R120 per share, which is a premium of 66% to the price on 12 April 2024 (the day before the first cautionary announcement) and a premium of 83% to the 30-day volume weighted average price calculated with reference to the same date. The standby offer is also priced at R120 per share.

What does this add up to? Well, Newco has had to furnish a bank guarantee of R17.2 billion. Without the bank guarantee, the Takeover Regulation Panel doesn’t allow circulars like these to be issued to shareholders. Think of it as a pre-approved bond for a house vs. the usual approach of making an offer and then seeing if you can raise the finance. R17.2 billion is a big number!

There are a bunch of other sections related to deal exclusivity and restrictions on actions that Barloworld can take in the meantime. There’s also a material adverse change clause, which is always very important. In fact, Barloworld invoked such a clause during the pandemic to try and wriggle out of the acquisition of Ingrain from Tongaat Hulett, a deal which eventually went ahead! The material adverse changes are usually defined as being financial in nature, with Barloworld having the unusual addition of any changes related to violations of sanctions. This obviously stems from the risks of the Russian business.

The Independent Expert Report on page 51 (page 53 of the PDF) sets out the way in which Rothschild & Co went about earning their delicious fees. Interestingly, the Russian business was not valued on a going concern basis, but rather based on Barloworld’s ability to extract cash. The likely valuation range as determined by the expert is R105.53 to R119.43. Of course, the offer has come in just above the top of that range. Isn’t that convenient?

Finally, given the related parties in this deal and the fact that the CEO is spearheading it, Annexure 8 (page 76 as marked or page 78 of the PDF) deals with frequently asked questions around the governance processes. It’s a good read, dealing with issues like the timing of the release of announcements and why the CEO stayed in his role throughout the process, despite the obvious conflict of interest.

I highly recommend that you look through the circular armed with this knowledge of how to navigate it, as you’ll learn so much about M&A from just reading it.

Trading density was the highlight at Hyprop (JSE: HYP)

Foot count growth is harder to come by for malls in high income areas

With the ever-increasing popularity of online shopping, malls in high income areas are going to find it harder every year to grow or even maintain foot count. Now, in theory, that’s fine as long as trading density (tenant sales per square metre) grows sufficiently. After all, tenants survive based on money through the till, not feet through the door. Fewer trips of higher value by shoppers would be acceptable.

For the six months to December, that’s what happened at Hyprop. In the South African portfolio, foot count was up just 0.4% but trading density was up 4.4%. Total tenant turnover was up 4.9%.

As we’ve seen at the likes of Attacq, growth in December was much slower than in November due to the popularity of Black Friday and the way the calendar worked out with weekends in December.

Over in Eastern Europe, the situation with weekends is more complicated. In Croatia, they have the Sundays Trade Act which allows retailers to only operate on 16 Sundays per calendar year and prohibits them from trading on public holidays. Interesting, right?

Luckily growth in that region remains strong, with foot count up 0.8% and trading density up 7.2% in euros. Tenant turnover (also in euros) grew 8.8%.

Results are due for release on 13 March. Hyprop’s share price is up 41% in the past year, with the market feeling a lot more confident about the look-through exposure to Pick n Pay.

Octodec has reduced its asset management fee (JSE: OCT)

This is an old-school structure that has fallen out of favour on the JSE and with good reason

In the heydays of new property listings on the JSE, the trick was to list a fund and then put the management team in a management company that had a contract with the fund linked to the value of properties being managed. Of course, this created a far more expensive structure than was ever necessary, as managers in operational businesses shouldn’t be paid based on percentage of assets. It creates terrible incentivisation to grow at any cost.

To get rid of those legacy structures, many funds entered into expensive management buyouts where they then paid a multiple of the asset management fee to get the structure to go away. The only winners in these situations were the management teams, not the shareholders. Imagine being paid a multiple of your salary and then still arriving for work the next day as though nothing happened?

Most of the structures are now gone from the JSE. Octodec is one of the few remaining ones and even that group has now taken a step towards normalising the situation. CFO Riaan Erasmus has been employed by Octodec rather than the asset management company, which means that the fee charged to Octodec by that company will now be reduced to take that into account.

The announcement doesn’t say whether the reduction in fee is equal to Erasmus’ cost-to-company or a multiple thereof. This is important, as if the management fees were always equal to the cost of employing these executives, then these structures wouldn’t have been an issue in the first place.

Nibbles:

Director dealings:
- The chairman, CEO and a person closely associated with the CEO all bought shares in Sirius Real Estate (JSE: SRE) in their self-invested personal pension structures. We can only dream of such structures in South Africa! The total purchases came to around £150k.
- Acting through Titan Premier Investments, Christo Wiese has bought ordinary shares in Brait (JSE: BAT) worth R1.4 million.

I don’t normally focus on changes to holdings by major institutional investors, but occasionally you see something unusual or interesting. Santova (JSE: SNV) announced that Barca Capital, LLC has now taken its stake in the company up to 15%. Barca is a US-based investor that has a one-page website on which it describes itself as a value-oriented investor.

Supermarket Income REIT (JSE: SPR) announced that Fitch has affirmed its investment grade rating of BBB+ with a stable outlook. As property companies tap the debt markets so often in the regular course of business, this investment grade rating is critical.

Coronation’s (JSE: CML) chairperson, Professor Alexandra Watson, will be retiring with effect from 30 September 2025. Saks Ntombela will take on that role, having served as lead independent director since August 2021. If we are lucky, perhaps he can twist their arm to get the disclosure basics right, like including comparable AUM in their regular AUM updates!

GHOST STORIES #53: International Opportunities Limited – a Chinese equity structured product

The Finance Ghost

29 January 2025

GHOST STORIES #53: International Opportunities Limited – a Chinese equity structured product

China is a land that is fraught with risk and brimming with opportunity. With enhanced upside as well as downside protection, International Opportunities Limited is a structured product that seeks to balance the risks and rewards available in Chinese equity markets.

International Opportunities Limited offers 1.3x geared exposure to the CSI 300 Index, capped at 60% growth for a maximum return of 78% in USD. In addition, there is 100% capital protection at maturity in USD.

Japie Lubbe of Investec Structured Products joined me on this podcast to discuss the investment characteristics of the Chinese market and the way in which this product has been built in that context.

Applications close on 7 March 2025, so you must move quickly if you are interested in investing. As always, it is recommended that you discuss any such investment with your financial advisor.

You can find all the information you need on the Investec website at this link.

Listen to the show using this podcast player:

Full transcript:

The Finance Ghost: Welcome to this episode of the Ghost Stories podcast. It’s a new year and that means lots of new opportunities. In fact, today’s opportunity is called International Opportunities Limited. So no messing around – there’s clearly something to pay attention to here. And of course there is, because it’s another podcast with the team from Investec Structured Products and they always bring us super interesting stuff to learn about and think about for your portfolio.

This time around, Japie Lubbe you are back on the show. Thank you for joining. You’ve been on it before and we’ve met quite a few people from the team actually. It’s always lovely to have you on here. A happy new year to you. It is starting to head towards late January at time of recording, so maybe it’s too late to even wish you a happy new year. I’d rather say that I hope your year has got off to a good start. Thank you for joining me. This is going to be a pretty interesting show, I think!

Japie Lubbe: Thank you.

The Finance Ghost: So, Japie, let’s get into the meat of this thing. What’s quite interesting is that this latest product that we are talking about comes hot on the heels of a product towards the end of last year that was focused on the Indian market, which was a very good excuse to go and just check out what was going on in that side of the world from an emerging market perspective. Now we’re back to the “other big emerging market” if I can call them that, which is China – certainly on that side of the world – and I mean, let’s face it, China has been a bit of a tough story recently. The news of stimulus at the end of last year first caused some excitement and some crazy share price moves in single stocks and then it sort of fizzled out a little bit, maybe due to lack of details, maybe due to some geopolitical uncertainty.

So, it’s a tricky, but it’s an exciting market. It definitely comes with some risk and that’s why the structured products can be so interesting, actually. What attracted you to doing a structured product on this Chinese market as we now head into a new year.

Japie Lubbe: Yeah. I think the first thing that we look at as investment people is: what are the alternatives that I can buy? And when I buy one of those alternatives, how does it add up to what I already have?

In investments, it’s important to identify potential assets that have a low correlation to what you already typically have as an investor. We recognize that mostly, our client base would have developed market exposure through the US and Europe and the UK and maybe some Japan and some MSCI World type exposures. They are invested, obviously because they live here, mostly into South African shares.

We start off by looking at the index correlation between the Chinese market and the other major markets of the world. In our presentation there’s, a matrix which shows how low the correlation is of the Chinese market to the S&P 500, to the EURO STOXX, even to commodities, to the JSE. This is a great addition to a portfolio for a South African because this market is, roughly – I’m going to take a stab here – roughly 30% correlated. Whereas for instance, the S&P 500 is 82% correlated to the FTSE and 90% to the EURO STOXX, so those go up and down together.

What you want is you want markets or assets to be added – they call it the cheapest free lunch, is diversification. So that’s a key thing for us in why we’re looking at China.

The second thing is, if you look as far back as five years ago, we’ve done an evaluation of the performance of the Chinese equity market on a total return basis compared to the S&P and the Nikkei and the EURO STOXX, MSCI World, India, which you mentioned, the JSE Top 40. It’s very interesting to note that the Chinese market was the best performing market for the first two years of that time. Then as we know, Covid hit and the Chinese market with all markets came down, but the others all recovered and this one didn’t. Why? Because the Chinese government, they applied a lot more tough love. They didn’t give a lot of money to their people, to corporates, to businesses, as the US did, and even South Africa and Europe and other countries.

These other countries that allocated a lot of government money to stimulate the economies ended up with, on the flip side of the balance sheet, a whole pile of debt. They’ve got a lot of debt, but the people got a lot of money from this stimulus. This chased up interest rates, chased up inflation in those countries and also resulted in quite good growth in asset pricing. Shares went up a lot, properties would have gone up a lot. We’ve seen what’s happened to gold, we’ve seen what’s happened to Bitcoin.

So these assets – a lot of them got this cash that came from government printing money or issuing money to the populace. China, exact opposite! What you have in Chinese equities, the last five years the total return is 9% including dividends. The US is 94%. The Nikkei, which is Japan, is 96%. The MSCI world is 71%. Huge numbers, whereas China stayed back a lot. So from a pure valuation perspective, that gives us a good entry level for people that want to consider it now.

When we look at the actual valuations of the market, which is on that same screen, when we look at the price/earnings ratio, the price to book, the return on equity, and we compare the Chinese market to all these other major markets, it stacks up very well. In other words, it’s cheap. The market is cheap because it hasn’t gone up a lot of late, but the GDP is still reasonably strong. China’s growing at over 4% and that compares favourably to most markets in the world. So we think that a good reason to target it is that the valuations are good as we speak.

Then if you look at other important metrics for investment, we look at an index comparison where we have a look at: how much did the GDP of each of these major markets grow over the last 10 years and how did that compare to the total return of the equity market? This is at major index level for the 10 years. I’ll just quote you two. The Chinese market: equities total return went up 52%. That includes the 10 years of dividends, but the economy grew 86%. In the US, the shares went up 191% total return and the economy grew 52%. And you can look at the comparative countries there.

So what you have, where the stimulus was given to the economies, the GDP still did what the GDP would do, but the assets grew fast because there was free money, more money, investable money coming from the governments, stimulating the economies. And we notice a very big divergence between what’s happened in China and what’s happened in the rest of the world. So we think as an investor, if you’re going to be contrarian, you got to go where it’s different to the other places for the fact it will probably recover and probably normalise.

Then if we look at the size of the markets. In other words. I don’t think all the readers and listeners are often versed with how big China is. If you compare the market capitalisation of China versus most other countries, the biggest market out there is the US market at $51 trillion value. Second is China at $6.2 trillion, then followed by the EURO STOXX at $4.8 trillion, FTSE say $2.8 trillion, India $3.6 trillion. India is just over half the size of China based on market value of equities and South Africa is at $0.9 trillion. China is roughly seven times bigger than our market cap on the JSE. So just put these markets into perspective.

The next thing that’s important is looking at the ability of the countries to stimulate. You mentioned up front, they’ve started trying some stimulus and I’m sure they’re going to carry on until they find something that works. But their ability to stimulate is driven by two major factors. And one of them is the amount of debt you have to your GDP. China for instance, has 90% debt to GDP versus the US at 122% and Japan at 250%. The debt levels worldwide are actually very high.

The interest rate that you pay on the debt is the other big thing. In China, the interest rate’s 1.5% because inflation’s at 0.4%. In the US, you’re paying 4.5%. Say you’ve got debt as a country and you’ve got to service that debt and you’ve got 122% of your country’s GDP is the debt level. And now you’re paying 4.5% interest rate compared to another superpower who has only 90% of GDP versus your 122% and is only paying at 1.5% interest rate. Can you see? So the country that can stimulate and support the economy and the investors if trouble comes – because we don’t know, might be another COVID, there might be some other headwinds in life – is the country with the deepest pockets and the least overdraft in simple language.

China compares very favourably on debt to GDP and the interest rate on the debt.

The next thing that we look at is if we invest in the CSI 300, which is the index we’re using in this offering, it’s very, very nicely diversified across mainland China companies. There’s a composition pie chart which shows the actual breakup of the market. The biggest sector is Financials with 24.5% followed by Technology with 17.4%, Industrial 16% and so on and so forth. But not massively dominated by any one share. Let’s say the biggest share in the market is Consumer Staples at 4%. You don’t have a massive dominance but you’ve got 300 shares very widely dispersed and a very nice underlying asset base to cover.

Then if you look at the next thing that we like about and why we’ve selected China, we look at the price/earnings ratio that the market’s trading at. It’s trading at roughly 16x and the average from inception has been like 18x. So you’re buying a market where the price/earnings ratio is a bit below the long-term average. Now you’ve probably seen that the US is trading massively above its long-term average and so are most of the developed markets of the world.

As an investor, you want to try and identify markets – this is at market level, at index level – where they’re trading at compelling multiples. Especially if you’re confident that they’ve got the ability in future to have good earnings because then they’ll re-rate to the average or better and you’ve got a tailwind for your equity valuation.

The other thing about the Chinese market is that the volatilities that we’re buying these indices at are quite low by historic norms. They’re trading at substantially below the long-term average volatility. Which is quite strange in the sense that the equity markets in China have been depressed and have gone down, but in reality they went down four years ago and for four years they’ve just been bubbling along. They picked up a bit last year because last year the first of the stimulus has started coming through. And it looks as if now with the most recent discussions with Mr. Trump and his Chinese counterparts that if they’re anywhere reasonably friendly, you could get that the Chinese market actually does quite well. We’re fond of buying where the assets are well priced.

Other things that we notice is that the dividend yields on those markets are at like 2.5% versus interest rates for five-year money is 1.4%. Now when you get that, it creates an opportunity because the forward price of the market is below spot, because the dividends are higher than the interest rates embedded. This makes call options very cheap. That’s why it gives us a lot of upside potential.

But let’s say you as an investor wanted to buy an ETF and protect it. It would cost you roughly 11.5% premium to protect $100 for five years. Now we’ll show you in our structure, we don’t have to lay out that money because we’re going to use bonds that give us $100 back. We don’t have to buy protection like you have to buy car insurance or household insurance or medical insurance, so that’s very favourable.

The other thing that’s very favourable about China, I see the latest numbers came out that they anticipate it’s just had a 5% GDP growth, but their inflation is 0.4%. Understand that when you’ve got that type of growth and your inflation is so low, you’re going to dominate exports to the world. Even if someone wants to introduce a tariff on you, you just say, no problem, I’ll add that tariff to my price because no one can produce that product at the price. You can see you’ve got lots of power in the fact that you’ve got the cheapest manufacturing, so that’s very good.

Then the other thing we really like is the fact that they’ve got growing foreign reserves. China has been a big buyer of gold, they’ve been a big buyer of US bonds. As a country, the foreign exchange reserves have been growing. In a world where people are really maxing out on their credit cards and the available cash to spend, the Chinese government is actually to a large degree sitting pretty because they don’t have those massive debt-to-GDPs and high funding costs. They’ve got reserves both in bullion and in foreign exchange reserves.

So those are the major reasons why in this offering, we’ve really wanted to go for China.

The Finance Ghost: Japie, there’s an investment masterclass in there. You’ve got tons of experience. I learn a lot from you when we do these. I’m sure everyone listening learns a lot. I think you’ve run through just so much good stuff there, ranging from the macroeconomics through to understanding the volatility. We’ll get into some of that just now that helps make options a bit more affordable, etc. But even more than that, just stuff like trading below long-term average P/E multiples. That’s something that I apply every single time I take single stock exposure. You can have academic debates all day long about whether something should trade at 10x or 12x or 15x or 20x, but the strongest sign is: is it trading below where it has historically been? And are there good reasons, yes or no? Because then you’re actually using tons and tons of market data. You’re not coming up with your own esoteric argument for should it be 10x or 12x or 14x. You’re saying, hey, this is where the market has been pricing it for the longest time, now it’s less, is there a good reason or are they missing a trick? Just lots and lots of cool stuff coming through there. I’d almost encourage someone go and listen to that again because there’s so much to learn in what was that, like 15 minutes basically?

Something I just want to reference so that people are certain which index we’re talking about here: it is the Shanghai Shenzhen CSI 300 index or CSI 300 for short. Not CSI Miami that you once watched on TV – CSI 300. Not a name that people are familiar with. Everyone knows the S&P and the NASDAQ and the Top 40.

The other thing that I just want to pick up there was you talked about the relative market cap. It’s quite incredible that if you add together the MSCI India and the FTSE 100, so that’s India plus the UK, you’re at roughly the same size – not exactly, but it’s very close – the same size as the Chinese market. That is quite extraordinary. You know, it really, really is. It’s obviously an exciting market. Yes, it’s had a tough few years, but investing is about understanding what’s going to happen in future, not just what has happened.

There’s some really cool stuff that you’ve raised there. However, there’s also a lot of risk, obviously, and that’s why structured products are very, very helpful. Because China, the US obviously with President Trump coming in, you’ve already referenced tariffs. There’s a lot going on there. There’s a lot of geopolitical uncertainty. We don’t know what will happen. There was this whole recent story with Tencent being added to that list of: are they a company that assists the government with military type stuff? A lot of this is just posturing and politics and there’s going to be more of it.

I think the only thing we can be certain of is uncertainty. There’s going to be more of this. You’ve got these two global powers who are having a bit of an argument. It’s the old joke of when the elephants are fighting, it’s the grass that gets trampled. And the idea is to not make your money the grass. You don’t want to be trampled by this stuff. I think if you have naked exposure to China, so in other words, unstructured exposure, you’re just holding an ETF, obviously it can just keep dropping, right? Cheap, can always get cheaper. That’s unfortunately a lesson that most of us have learned in the markets at some point or another. But you’ve done a lot of backtesting here. You’ve obviously structured this thing for downside protection. I think let’s deal with that before we get to the upside because I think the upside around China is relatively understood. It’s the downside that worries people and scares people away. So how have you addressed that in this product?

Japie Lubbe: So firstly, what we looked at is just to say from the inception of that index in 2005, if we did – the product that we’re doing is a five-year share and it has 100% capital protection in dollars over the five years and it gives 130% gearing to the first 60% of any positive performance in the index. So if the index is at 4000 points, it ends at another number, that percentage, we times that by 1.3 until that percentage got to 60%. So if it was 60%, it maxed out at 78%. And all the returns are in US dollars. The capital is protected in US dollars and the growth formula and the payout from the banks that we trade with is in US dollars. The entire discussion is in US dollars.

Now, if we look at the five-year rolling returns, there’s a back-test in the presentation, and we simulate that against what you would have had, had you had the product as opposed to having the index. In this case, this is the price of that index and the five-year rolling returns are shown. We’ve superimposed on that an historic view if we had the product. What this demonstrates to us is roughly 27% of the time, if you’d been an investor for five years, starting a new five year every day for the last 20 years, 27% of the time, you would have lost money. That’s the hurtful thing with China. That’s what puts people off, is that you have too much where you could have lost…

The Finance Ghost: I mean, that’s – sorry, Japie, that’s a big number, right? 27.6% of the time. I mean that’s, that’s more than you would typically see on a lot of other markets, am I right?

Japie Lubbe: Absolutely. Because the other markets are all high now, you see, so they’re all – because they’re very high in valuation, the back-testing would show that they haven’t done that. But that doesn’t tell you what’s going to happen tomorrow morning. That only says what happened historically.

What happened historically says to us at Investec, we’re not going to put our reputation at risk where people go into this Chinese market and then lose their money. So that’s why we say the best way to address it for our own money and for clients for their money is to have 100% capital protection in dollars. So that addresses the issue of why the protection. The protection is very important.

Now secondly, you can mitigate risk, as I said earlier in the discussion, by just going like you buy car insurance, like you buy household insurance or medical insurance. But it’s very expensive to buy that on the Chinese markets in dollars for five years. That’s why that’s not a plausible solution because let’s say you had a $100 and you had to pay 12% to protect it. You’re only getting 88% of the upside on the total return of the market.

Now our product here shows that historically this product would have beaten the direct market 86% of the time. Why? Because in the negative 27% at a time, this thing would have given you nought, not a loss. And in the majority of the return where it was giving a mediocre return, you’d get 30% more. So the only time you lose out is if the market does more than 78%, which happened to be about 14% of the time. We’re saying that this could happen because of all the metrics that we’ve identified. But for our type of clients, we don’t want them to face the risk of the downside. We’re happy to say if it did more than 78%, I made peace, I only got 78%. 78% is 12.2% in dollars IRR with no capital at risk.

The Finance Ghost: Thank you very much. You’ll take that all day, right?

Japie Lubbe: Exactly. You’ve got credit risk, but I’m talking about the market risk. We address it now…

The Finance Ghost: Japie, sorry to interrupt there, but in terms of fees, I mean are those returns – that back-testing you’ve done there, those returns are net of fees? So it’s beaten the index that many times net of fees?

Japie Lubbe: Yes, our product is net of fees. The market is just the actual market before fees. Because it’s just the index.

The Finance Ghost: Exactly. So that’s the point I wanted to raise. You can’t buy the market…

Japie Lubbe: Exactly.

The Finance Ghost: …you’re still going to, even if it’s an ETF, it’s going to have a small fee. But it adds up, whereas what you’re saying here is this is net of fees. If the return is zero, if it’s capital protection time and you’re just getting your money back, there aren’t fees that come off that. You’re literally putting in $100, getting back $100, in dollars admittedly, but still.

Japie Lubbe: Yeah. Your next question being, how do we do this? In our presentation we show the instrument breakdown. There’s this company that we incorporate in Guernsey. We list on the Bermuda Stock Exchange and the company buys the assets. There’s only three assets and they buy them on day one. We, Investec, are the investment advisor to the company, recommending to the board of directors which assets to buy. We don’t run an active process so we don’t have any changes to the assets during the five years. It’s a five-year fixed term.

The investors who buy the shares, there is liquidity provided for them should they want to sell the shares. But most people, 98% of people, keep it for the five years.

In our pack we show that we start with $100, so let’s take the listeners through how we spend $100.

The first thing that we do is we contract with one of the major banks of the world. We’ll talk about the credit separately but it’ll be one of the major four US banks. We buy a credit-linked note from them that references 1/3rd each the tier-two debt of five potential banks. But all the paper is investment grade paper i.e. better than SA government paper. We spend 74% of the primary capital day one to buy that bond and it’s bought inside this Guernsey company. The Guernsey company gets an annual tax exemption so it doesn’t pay income tax on that growth and it grows from 74 to 100. So that’s how we protect the capital. 74% growing at about 6% yield. It compounds to 75%, 76%, 77% – when the sun sets in five years’ time, there’s exactly $100 on that asset. And it’s that asset that enables us to say to you, you can have your capital protected.

Now the second thing that we do is we put roughly 7.5%, because this is a new company, 7.5% in a bank account which is for the distributor’s annual fees, our annual fees, the lawyers, the auditors, because these companies are highly regulated. Regulated in Bermuda, Guernsey and South Africa under the Companies Act, being signed off by the Companies Act for Distribution in South Africa. Why I think it’s such a good deal, just to come from a fees perspective – the total fees for five years, which are all built in, is 7.5%. If you pick up the phone at your desk and phone a bank and ask for protection for five years, they charge you 12%. Here the fees are built in and it’s only 7.5%. So you can’t do it cheaper. You’ve got no chance to do it cheaper.

The third thing…

The Finance Ghost: And Japie, sorry, the other way to think about that is the per annum fee, right? Which works out to, what is it, almost 1.5% a year?

Japie Lubbe: 1.5%, which is cheaper than active management….

The Finance Ghost: Well, that’s what I wanted to say…

Japie Lubbe: Yeah.

The Finance Ghost: There’s many a unit trust, there’s many an actively managed fund out there that doesn’t have the capital protection. Yes, they might be making more investment decisions, but they don’t give you the protection on the downside and you’ll end up paying more than that, typically, or at least that.

Japie Lubbe: The big thing is, just compare A to B: B is worth 11.5% more because you don’t have to buy protection, you’ve got protection. It’s like me saying to you, look, I’ve got two cars in the parking lot. One’s a green one and one’s a blue one. You can pick. I’m going to give them to you for free. Now, if you take the blue one, I’ve covered you at Santam for the next five years on your insurance. Which car is worth more? Because you know when you drive the blue one, if you drive into a Ferrari, you’re covered, the insurance paid. But you drive the blue one and you drive into a Ferrari, you’re selling a flat in Cape Town because you’ve got to pay.

The Finance Ghost: It sounds like personal hurt in that story. Japie, I hope you haven’t driven into any Ferraris uninsured?

Japie Lubbe: Yeah, just be careful. You don’t know what you drive into!

The next thing is – we spent 74% and 7.5%, so we’ve clearly got 18.5% left over on day one. What we do with the 18.5% is we go to a panel of banks. They have to have a rating of at least S&P A or better and have been cleared by us for credit. We say to them, we’re going to ask you a question. If we were to buy unlimited upside to the CSI 300 in dollars for five years as a call option, what would the call option cost? And it just coincidentally happens to be 18.5%.

But we don’t think at Investec Capital Markets where we work, in corporate institutional banking, that that market will easily do more than 60%. So we say okay, we’ll sell you a cap at a level of 60%. And they say no problem, then we rebate you 4.3%. This means the net is 14.2%, 18.5% less 4.3%. But because you physically got cash of 18.5%, if you divide it by 14.2%, that’s what gives you 1.3. That’s 130% gearing.

So the leverage in this, the gearing, doesn’t come from borrowing money, you’re not borrowing money like a hedge fund may do. You just have more premium available than what that call spread costs.

The principle is very simple. If you bought a new car and you went to Santam and you said I want to insure this car and they said it’ll cost you R5,000 a month. Say it was a R1,000,000 car just for the discussion, and you said I’m going to use this car just around the house, so I don’t think I’m going to have a claim of more than R600,000. And you said to them, I’m prepared to limit my claim to R600,000. They said well, we’ll give you a rebate – now it only costs R3,000 a month, because for them they’re only insuring a R600,000 car, not a R1,000,000 car. They look at what the claim potential is. It’s the same principle.

Let’s have a look what’s going to happen over five years. Either the stock exchange in China, the CSI 300 shares, go down. Let’s say they went down 40%. We can’t really easily foresee that because they’re really low. But they can for the reasons we said: there’s risk. Then the bond pays out the $100. The fees and costs always amortise to nought. The option is worth nothing because that’s when they refer to an option as underwater. It’s out of the money because it’s a call option. If the market goes down, it’s worth nought. But that doesn’t stress us because the $74 still grew to $100. And we say to you, there’s your $100 back. Now it’s your prerogative to buy the market the next morning available at $60. The investor who bought the ETF or the unit trust or the direct shares if that scenario played out has got a big problem because their valuation shows they worth roughly $60 plus or minus the alpha, plus or minus dividends received. But that’s the problem they’re stuck with, whereas this investor avoids that problem by virtue of the structure.

Thirdly, if the market is up anything up to 60%, so let’s take for this discussion it’s up 50%, then they take 50% times 1.3, entitled to 65%. What we’ll do at that stage is come to them and ask them whether they want to sell their shares or keep their shares. You can then if you keep the shares, lock in the profits you made commercially and then obviously you’re going to pay tax one day when you sell the shares, but that’s on the sale of the shares.

So that’s really, how we give that protection. So then as far as the question about – let’s talk about the credit. So what is your risk here? You’ve taken out the market risk because of the structure as we’ve discussed. You have the risk to the suppliers of the assets. The suppliers of the assets are the banks. Now, what we’re going to use here is one or two or more of the following banks: Citigroup, Goldman Sachs, Morgan Stanley and Bank of America. There’s a full description of the credit risk and the summary of the amount of money and assets these banks have.

Then, they’re going to reference, one of them is going to reference to 1/3^rd each either Barclays, Soc Gen, NatWest, Deutsche Bank or Lloyds, 1/3^rd each the tier-two debt. That’s a credit-linked note and that note – all the assets that you could potentially target there are all investment grade paper by international recognition. The document, you should have a good look at the document, the probability of default – these days you can just go on Bloomberg and get a two year probability of default of any issuer or any instrument and it’s very, very low. You can have a look and see. We’re confident that those are good banks to use.

We’ve done, in the time that I’ve been at Investec, in 23 years we’ve done 107 worldwide listings and of them 87 have matured of which we gave a profit 83 times – 96% – and we haven’t had one loss. The other three, we gave the people their money back. Our selection of the credit has been very, very successful historically. Obviously you’ve probably seen that US banks are coming out with their profits. Last week there were quite a few declaring their profits. With the interest rates where they are now and the economy, they’re fairly strong. These banks seem to be well capitalised and the regulation is very high. So, that’s the risk, is the risk that any of those banks get a problem.

The other risk is that the guy that sells us the call options gets a problem. We’ve never had that in 23 years and we only use the best banks.

Then obviously, as with any investment, you can have regulations change, you can have tax change, things outside of our control. Fortunately, we haven’t had that in the past. I’m just saying as far as risk is concerned, if anybody’s interested in the offering, the prospectus is available and the risks are spelled out very clearly. But I’m just saying high level for this discussion, those would be sort of risks you’d contemplate.

For us, we think that China has got very reasonable valuations as we speak. It’s a great asset to add to a portfolio. They have a lot of capability to assist the public and corporates with a lot of spare cash and reserves in China as a country with low interest rates and low inflation. I was staggered to find out that China only exports 15% of anything that they export to the USA. So 85% exports are non-USA! I think that one must be careful not to make too much of this whole tariff thing. I think it’s a great ploy for politics and a great way to get votes. I’m not so sure that when you think logically about it, that you’re going to impose so many tariffs because it’ll unfortunately just result, I think, in inflation in the US. You’re going to import this inflation because they’re just going to add it to their price simply because there’s no other supplier who can do it cheaper. I think that that’s the real thing.

For us though, in our way we structure products, we really want to be sure here that we give the clients the best chance to not lose any money and give them the best chance to make substantial money in the context of having capital protection. Clearly if you went live to that portfolio and the market did 90%, you’d get 90%, but that’s not the part of your money you necessarily want to deploy. You want to have diversification at a time where other markets are expensive into a market that’s better priced, but because it’s got some unknowns and uncertainties, we think if you get capital protection in dollars and the growth is on that market’s performance, but in dollars, that might be a nice addition to your portfolio.

The Finance Ghost: So Japie all of that is really, really good and makes a world of sense. And this is the point, right? This is to help investors diversify a portfolio in a way that is somewhat risk-mitigated, takes into account some of the challenges of being in China, but as I always write, you have to get comfortable with equity risk because without the risk you’re not going to get the returns. That’s literally how finance works. You can’t run away from risk, you just manage it and you try and manage it alongside the returns available to you. That’s exactly what a product like this tries to do, which is why I always find it so interesting.

Of course, the other risk which is very hard for you to mitigate but is something that investors must consider is their risk of making a mistake in terms of either how much money they put in or understanding their five year liquidity. Unfortunately, life happens, things do happen – divorce, death, let’s call a spade a spade, this stuff happens, it’s a reality. Other things can go wrong for people financially, etc. Obviously, you should always speak to a financial advisor. You should always be doing that. You should always be putting an amount in here that you’re comfortable with. But for when things happen, is there a way to potentially get some money out within that five-year lockup period? I know you do normally have some kind of liquidity mechanism, so I think let’s just talk about that briefly.

Japie Lubbe: Yeah, sure. So obviously we’ve done this for 23 years. We’ve probably got across our products, 21,000 investors’ deals on our books and we are definitely very mindful of liquidity.

There are three levels of liquidity. The first level of liquidity is John wants to sell and Peter wants to buy. They operate under the same distributor, under the same financial advisor. That just transfers from John to Peter. There are no costs involved. You want to sell an asset to me, I buy your asset. It’s a willing-buyer, willing-seller.

The second one, which mostly happens, is that John wants to sell, but there’s no direct buyer that says I’ll buy your shares. What Investec does is we then enter and we say that if you accept a 1.25% early redemption fee, early redemption of your shares, then Investec will buy it. So that’s what happens 99% of the time. We as a bank buy the shares and we then hold them in secondary stock. Then another person looks at the secondary stock schedule every month and they can ascertain if they want to buy it. They like the share. We show them a matrix which shows if the market goes up or down, how will that impact your secondary share? But John left, John sold his shares, Investec owns the shares and Investec on-sells the shares.

The third level of liquidity is if Investec doesn’t want to buy the shares, we’ve only had this four times in 23 years. Why would they not want to buy the shares? It’s only if the capacity to buy the shares is full up. In other words, you got a certain credit limit, you can’t buy more than so much. Then we unwind the shares. What does unwind the share mean? We just go to the market and sell that bond which has now accumulated from $74, it’s now priced at say $80 or $82, $89 – it’s got a price every day. We sell that product, that bond into the market. We also have contracted with the option provider that he gives us daily liquidity. This has already been taken into account on the screen price the client’s looking at. The fees and costs, they put in a bank account, 7.5% amortised once a year down to nought. Whatever’s left in the bank is then credit, so then the client gets paid out. That takes a little bit longer. That takes about, say three weeks, two-and-a-half, three weeks. But that’s only happened four times in history.

What is more normal is that they want to sell their shares, they tell their advisor and we obviously authenticate that they’ve requested the sale and the bank details and that it’s going to the owners account. That normally takes, I would say, 10 days at the max. So it’s not as liquid as when you own say BHP Billiton stock, you just press the button and in two days’ time you’ve got the money in your account. This takes slightly longer. So that’s how the liquidity works. And just to give you an idea, over the 23 years that we’ve done this, we only find 1% to 2% of people actually ever sell early. But they can. And we recognise that if they couldn’t sell, that would be a deterrent.

The Finance Ghost: Yeah, things do happen, so it’s good that the mechanism is there. I think, as we bring this podcast to a close and we encourage people to go and read the documentation and listen to the podcast again, what is the minimum investment amount? Just so people understand what sort of numbers we’re talking about. And then – look, they should always be speaking to a financial advisor, but for those who want to do their own stunts, can they reach out directly or do they have to come to you through an advisor? What are the different channels through which people can actually invest?

Japie Lubbe: Yes, so the majority of the business gets placed through financial advisors. We have roughly 310 companies worldwide that market and sell the products. It’s very, very extensive. Mostly if you speak to your own financial advisor, they should have a licence. But the licensing works on who’s allowed to sell shares. If you go through an advisor, then the minimum is $10,000. This is a foreign share and you can use your R1,000,000 allowance, money cleared through SARS, more than R1,000,000 or money you already have overseas. If you buy in a trust or in a company, you can use asset swap, you can swap your rand to dollars and then they buy it for you. Investec’s got capacity, most other banks have.

Then if you go through a platform, so some people, especially let’s say younger investors or people that are starting out in life, they go through EasyEquities or DMA. There are other online platforms that also make it available. So if you don’t need advice, in other words, if you just say I’m reading this document, which you can, they can link into your podcast and well you’ve answered all my questions, then I can just go online and buy.

If you need advice, so you want to see how this fits into a bigger portfolio. How much must I buy? What’s the approach to allocation? Etcetera, then you can reach out to us. We know many good advisors, we can put you onto them.

Our team, by the way, don’t act as advisors. We are manufacturers, we don’t register under FAIS. That keeps it very simple and independent. We assist all the advisors in the market. I think that the first protocol would be if anybody’s got any questions or any uncertainty or wants to clarify anything, you’re always welcome to check with us. We’ll give you factual information about how it works, what it does, all that good stuff. So that’s really the essence of it.

The Finance Ghost: Excellent. Japie, thank you. Certainly we always encourage people to speak to your financial advisor, do the research, all of these things. We can’t stress this stuff enough. The purpose of this podcast is to really give you the information on the product and also some understanding of some of the risks and opportunities in the Chinese market. Obviously you’ll need to form your own views on that. The starting point of being interested in this product is: hey, I want to own the Chinese market! If you only want to buy the Magnificent Seven in the US for the rest of your life, then this is not the one for you. But if you’re looking for diversification, you’re looking for emerging market exposure, you’re looking for something a bit interesting, then this is well worth considering.

Japie, thank you so much. I’ll make sure that the links to the documents are in the podcast notes. For those of you who are listening to this, maybe you don’t have the transcript in front of you, just go onto the Ghost Mail website, go and find the links to the relevant Investec documentation, go and check it all out.

Japie, last thing before we close off is just the closing date for this investment. When do people need to be ready to act by?

Japie Lubbe: We’re closing this one on the 7th of March.

The Finance Ghost: Perfect. Thank you. So there’s a bit of time, but not a lot of time. Japie, thank you so much for your time today. It really has been another great podcast. I love having you on the show. We’ve done this a few times now. I feel like this is the third time. I’m not 100% sure, but it’s lovely to have you back, so thank you. Good luck with this raise. I’m sure it’ll be just as successful as all the others. And to those who are interested in the opportunity, as I say, go and read the documentation. You can’t possibly read enough. If you want to learn more about structured products, even the stuff that’s closed previously, you can’t necessarily get into anymore, go back and listen to some of the other podcasts with the Investec team because you’re going to pick up a lot of themes that come through in how these things are structured and what they’re all about. I would recommend going and checking that out as well. Japie thank you for your time today and good luck with this one.

Japie Lubbe: Thank you.

This podcast is for informational purposes only and does not constitute advice. You must speak to your independent financial advisor before investing in any product, and especially this one. Investec Corporate and Institutional Banking is a division of Investec Bank Ltd. – an authorised financial services provider, a registered credit provider, an authorized over the counter derivatives provider and a member of the JSE.

Ts & Cs apply to this product and you should refer to the Investec website for full details.

GHOST BITES (Attacq | AVI | Rainbow Chicken | Renergen | Shoprite | Tiger Brands | Woolworths)

Ghost Bites

The Finance Ghost

29 January 2025

GHOST BITES (Attacq | AVI | Rainbow Chicken | Renergen | Shoprite | Tiger Brands | Woolworths)

Attacq alludes to two-pot benefits (JSE: ATT)

It’s about time that companies started acknowledging this boost

As we’ve seen in company announcements this year (Mr Price and Lewis in particular, as well as Vukile further up the value chain – all covered recently in Ghost Bites), the two-pot system seems to have made a big difference to semi-durable consumer categories in the final quarter of 2024. The money went into clothes and homeware, with Attacq now giving us another important data point for this discussion. Attacq even takes the step of acknowledging the two-pot boost, noting that the Homeware, Furniture and Interior category at its malls grew beautifully in October and November. Apparel also put in a double-digit performance in November.

Overall, Attacq’s retail portfolio saw turnover growth of 8.8% in November and 3.2% in December. There were four weekends in December 2024 vs. five weekends in December 2023, so this likely contributed to a muted December relative to November. The bulk of the growth was therefore seen around the Black Friday period rather than over the Christmas period. For example, Mall of Africa as the most important asset saw growth of 10% in November and 5.7% in December.

Retailers (and their landlords) saw the benefit of two-pot liquidity at the end of 2024.

AVI squeezes out margin gains despite minimal revenue growth (JSE: AVI)

The company has a strong reputation for doing this

AVI has released a trading statement for the six months to December. Group revenue could only manage 1.1% growth, although there are much larger swings at segmental level.

The largest division is Food & Beverage, up 3.1% as a decent outcome. The star performer was Entyce Beverages, the third-largest segment, with growth of 8.1% thanks to price increases. Special mention also goes to I&J with growth of 3.9% thanks to better selling prices that offset the impact of poorer catch mix.

On the negative side, Snackworks (the second-largest segment) fell 1% due to a strong base period. Fashion Brands was down 6.9%, a really disappointing result given the strong performance we’ve seen from some clothing retailers towards the end of 2024. Personal Care fell 6.1%, so the smallest segment got even smaller.

Although the group revenue result isn’t impressive here, the margin performance certainly is. They haven’t given exact percentages, but the management narrative is that there was “sound growth” in operating margin thanks to higher gross profit margins and tight control over expenses. Net finance costs were marginally higher than last year, so most of this benefit reaches the bottom line.

With all said and done, HEPS is expected to be 8% to 10% higher for the period. To generate that kind of growth from a revenue increase of just 1.1% is really impressive.

There’s a pot of gold at the end of Rainbow Chicken (JSE: RBO)

The latest trading statement shows the recovery

Rainbow Chicken has released an initial trading statement for the six months to December. The percentages in question are a bit crazy, with HEPS expected to be at least 1,100% higher!

It’s hard to visualise that, so I’ll give you the HEPS number in cents as well. In the comparable period, they managed just 2.46 cents. In this period, they expect at least 29.55 cents.

There are a number of reasons for this, many of which relate to the operational metrics in the business. They’ve also been given a helping hand by lower input costs thanks to reduced commodity pricing, as well as the magical disappearance of load shedding and fewer avian influenza costs. On top of all this, finance costs are lower as well.

The share price is R3.76, so annualising this interim result (an extremely dangerous thing to do but useful for context) suggests a forward P/E of 6.4x. Full results are due for release on 7th March.

Renergen issued a chunk of shares (JSE: REN)

This isn’t exactly at favourable pricing

Renergen finds itself in such a tough spot. The company needs to keep raising capital in order to fund its projects, but the share price has been one-way traffic as the market has bailed on them based on production delays and other weirdness around the company, like the dispute with Springbok Solar that is due to go to court soon.

Down well over 50% in the past 12 months, this creates an even bigger problem for shareholders as this forces Renergen into a scenario where they have to issue shares at depressed prices. This is highly dilutive to existing shareholders. This snowball effect is going to continue until there’s a material improvement in the market’s trust in the Renergen story. Sadly, growth companies are all about storytelling. When the story goes the wrong way, things can unravel quickly.

This is why Renergen has had to issue shares representing 5% of shares in issue at a price of R5.33. This is a discount of 10% to the 30-day weighted average share price. It says something about the recent trajectory that it’s above the spot price!

Another powerful local result from Shoprite (JSE: SHP)

And this is despite only modest food inflation

The juggernaut that is Shoprite continues to work its magic. For the six months to 29 December 2024, group sales from continuing operations (i.e. excluding furniture) increased by 9.6%. Within that, Supermarkets RSA (almost 84% of group turnover) put in another double-digit performance, growing by 10.4%. Supermarkets non-RSA grew just 4.1% and other operating segments were up 6.2%.

There was a slowdown into the end of the year, with Q2 growth at Supermarkets RSA of 9.6% vs. Q1 growth of 11.4%. Still, it’s a tremendous outcome, particularly when viewed in the context of food inflation of just 1.9% vs. 7.7% last year. This means that they achieved substantial growth in volumes, once again picking at the carcass of struggling competitors.

Checkers Sixty60 grew by 47.1%, so the army of turquoise scooters is only growing from here.

Interestingly, it was the higher-income formats that really shot the lights out. Checkers and Checkers Hyper grew 13.5%, whereas Shoprite and Usave were only up by 6.7%. Importantly, that mid-single digits performance is still very decent when viewed in isolation. It just looks unimpressive relative to the Checkers performance.

In terms of new formats, they’ve clearly got the hammer down on Petshop Science. 53 new stores were built, taking the total to 128 stores. Checkers Outdoor added 11 new stores (now 26 in total) and Uniq grew by 11 stores to 30 stores. Little Me is taking its first steps very slowly, with just one new store to take the total to 12 stores. It must be a fun job to have responsibility for these smaller chains, with the ability to grow them as incubated businesses within the Shoprite group.

Within other operating segments, we also find important formats like OK Franchise (up 8.8%) and the new Medirite Plus standalone pharmacies. There are now 17 such pharmacies and they operate distinctly from the 122 in-store pharmacies.

Moving on, Supermarkets non-RSA was impacted by currency translation effects. Constant currency sales grew 17.9% vs. reported sales of 4.1%. They increased the store base by 10 stores to 269 stores across nine countries.

The furniture business is being disposed of to Pepkor and is awaiting Competition Commission approval. They haven’t given any further details on the financial performance of that division at this stage.

The release of results is scheduled for 4th March. Given the lack of load shedding and the ongoing strong turnover growth, I suspect that the jump in profits will be substantial.

Tiger Brands will only roar at home (JSE: TBS)

The company is selling its stake in South American business Empresas Carozzi

I’ve been writing recently about South America and whether it represents a better opportunity for growth than the rest of Africa. Tiger Brands would be best placed to opine on this issue, as they’ve given both a try. Africa was a tough story in the end, whereas the South American investment (Empresas Carozzi in Chile) has been described as performing “pleasingly” since the investment was made all the way back in 1999.

Still, Tiger Brands has decided to focus purely on the Southern African market, so there’s no space in the portfolio for a Latin American platform. It therefore makes more sense to sell the 24.38% stake. The purchaser is the holder of the remaining shares in Carozzi, which also makes sense as selling a minority stake to an unrelated third party isn’t easy.

There’s a big number on the table, with total proceeds of $240 million. The structure of the deal is that Tiger Brands will receive a dividend of $59 million and a price for the shares of $181 million.

If we just focus on the price for the shares, it works out to around R3.35 billion. The attributable earnings were R621 million, so that’s a P/E multiple of around 5.4x. This is well below the P/E that Tiger Brands is trading at, so keep that in mind when thinking about the impact on HEPS going forwards. For context as to the size of this deal, Tiger Brands has a market cap of just under R50 billion.

The share price had a muted reaction to the announcement, up 1.9% for the day.

Another poor end to a calendar year for Woolworths in the apparel business (JSE: WHL)

They really need to get the supply chain right

Another year, another set of excuses around the impact of supply chain delays on the Fashion, Beauty and Home (FBH) segment at Woolworths. In 2023, they blamed port delays. In 2024, they blamed late deliveries from suppliers. The net impact? At a time when two-pot money flowed into the likes of Mr Price and Lewis, Woolworths managed growth in the last eight weeks of 2024 of just 0.9% in the FBH segment. Highlights like 17.3% growth in Beauty and 25.2% growth in online sales don’t make up for that issue.

Thankfully, Woolworths Food continues to do the heavy lifting. Growth for the 26 weeks to December was 9.0% excluding the acquisition of Absolute Pets. Woolies Dash jumped by 49.2%, proving once more that people have money for high quality convenience offerings. The acquisition of Absolute Pets obviously had a positive impact, contributing to overall growth in Woolworths South Africa of 9.1% despite FBH managing just 2.5%.

It gets even worse across the pond, where Country Road Group saw sales decline 6.2% for the period and 7.8% on a comparable store basis. On top of this, they had cost pressures that led to a negative trend in margins. On the plus side, at least they sold the flagship David Jones property in Melbourne for a meaty A$223.5 million.

Overall, adjusted HEPS for the interim period is expected to be between 16% and 21% lower. HEPS without adjustments fell by between 22% and 27%. It’s quite incredible to look at this chart of Woolworths vs. some of its apparel competitors:

If you’re a Woolworths shareholder, even those delicious chocolate almonds will struggle to cheer you up after seeing that chart.

Nibbles:

Director dealings:
- The CEO of Clicks (JSE: CLS) bought shares in the company worth R3.5 million.
- The CFO of Spear REIT (JSE: SEA) bought shares in the company worth R22k.

Cash shell Trencor (JSE: TRE) has declared a gross special dividend of 730 cents per share. With the share price currently at R8.04, this gets most of the cash back to shareholders. They are retaining a buffer for the winding-down period. Separately, the company announced that HEPS for the year ended December 2024 was between 25 and 32 cents.

Novus (JSE: NVS) has been granted an extension for the distribution of the Mustek (JSE: MST) mandatory offer circular. Novus has been granted an extension to 14 March 2025.

London Finance & Investment Group (JSE: LNF) announced in December that they would be returning all cash to shareholders. They expect to send out the circular by the middle of February 2025, with a further expectation that any payout won’t happen before May due to the various regulatory processes. They reckon that the payment will be somewhere around 71 pence per share.

Alex Maditse has been appointed as the chairman of Netcare (JSE: NTC). This comes after the retirement of Mark Bower in September last year. Maditse has been serving as lead independent director since July 2024, so this is a logical progression. The company will appoint a new lead independent director in due course.

GHOST BITES (Astoria | Lewis | Vukile)

Ghost Bites

The Finance Ghost

28 January 2025

Astoria announces the sale of ISA Carstens (JSE: ARA)

The selling price is slightly below the carrying value in the accounts

Astoria, like basically every other investment holding company on the JSE, is struggling with a share price that trades at a heavy discount to the disclosed underlying value of the portfolio. We’ve also seen this issue at certain times in the cycle in the REIT sector as well. The cure is the same in both cases: recycling capital at or close to book value, demonstrating the credibility of the value to the market and suggesting that perhaps the discount isn’t warranted.

Of course, the best cure is to then use the proceeds for share buybacks at the deeply discounted value. All eyes in the market are on Reinet and whether we will see this in the aftermath of the British American Tobacco disposal. The same principle applies at the Astoria now that the disposal of ISA Carstens has been announced, albeit at much smaller scale!

ISA Carstens is the tertiary education business that focuses on the health and skincare industry through campuses in Stellenbosch and Pretoria. They are the leader in this space, with a track record of 45 years. Given the popularity of private tertiary education at the moment, the business seems to be well placed.

Speaking of private education, the buyer is NetEd, an investor in various education groups with EXEO Capital as its shareholder of reference. This is therefore not a related party deal.

Astoria paid R28.7 million for the 49% equity stake back in December 2020 and R14.9 million for a shareholder loan. Having received most of the loan back in repayments, the selling price is R4.2 million for the loan and R66.8 million for the equity. Calculating the internal rate of return (IRR) is made complicated by the timing of loan repayments etc. but it’s still a tidy return. The fact that capital was tied up in the loan just means that you can’t look at purely the equity purchase price and subsequent disposal price to work out the return. In reality, it looks like an IRR in the teens was likely achieved.

The carrying value of the investment as at 30 September 2024 was R69.3 million for the equity and R4.2 million as the remaining balance on the loan. The price is therefore below the carrying value, but not by much.

There are still important conditions precedent here, not least of all the conclusion of a share purchase agreement between NetEd and the 51% holder of ISA. Getting the founding family across the line is core to the deal. There is also a due diligence coming, so that also leaves some uncertainty on the table.

Astoria’s market cap is R528 million, so this is an important deal as a percentage of the NAV. If it closes, shareholders will focus on what the cash will be used for: buybacks, a special dividend or more transactions.

Plenty of momentum for Lewis – and not just at Ferrari (JSE: LEW)

The non-Hamilton variety is also getting more and more attention

Revenue growth of 13.6% for the nine months to December – not bad for a “boring” furniture shop that has relied on excellent use of share buybacks to help drive HEPS in recent years!

Lewis is taking full advantage of improved conditions in South Africa and the share price reflects this. After closing 3.5% higher yesterday, the 12-month return is a massive 87%.

Sustaining a rally like that requires strong numbers. Thankfully, Lewis is achieving this. Merchandise sales are the core of the business and they grew 9.9% in the third quarter, representing an acceleration from 7.7% in Q1 and 9.3% in Q2. Interest income and ancillary services income did the rest of the hard work, up 19.6% in Q3. Admittedly, that’s actually lower than the 20.1% growth for the nine months!

One of the big surprises was the trend in cash sales in the quarter to December 2024. We saw powerful numbers at Mr Price in that metric and we’ve now seen it at Lewis as well, with cash sales up a huge 14.4% for the quarter. For context to how big that shift is, the nine-month number is only 1.5%!

Collection rates on the book are down slightly, but not to a level that would cause concern. Overall, this is a really strong result and it looks increasingly as though the proceeds of the two-pot withdrawals landed in household goods and perhaps clothing. See Vukile below for more on that.

Vukile’s township centres had a strong festive season (JSE: VKE)

The two-pot money seems to have flowed into cash purchases at retailers

Here’s another data point that will help you figure out where the two-pot money went: festive sales data at Vukile. The South African portfolio managed 6.1% growth in trading density (sales per square metre) across November and December. Within that performance, we find township centres as the best performing segment with growth of 9.6%. Now compare this to the update from Lewis above and Mr Price a few days ago, both of which reported strong cash sales. The conclusion we can safely reach is that cash-strapped South Africans got their two-pot payouts and spent them on clothes, furniture and other basic household needs.

Need more proof? Within the retail categories, unisex wear was up 7.7%, ahead of groceries at 7.2%. Even home furnishing managed growth of 6.0%! This performance wasn’t just a food story, that’s for sure.

It’s less depressing if we don’t talk about what that means for retirement one day for the average South African. Let’s rather hope that ongoing economic improvement will improve those prospects and give people a better chance of saving each month. People are doing what they can, when they can.

It’s also interesting to note that footfall at Vukile’s South African malls was consistent year-on-year. The lower-income areas are better places for malls these days in my view, as they are far less vulnerable to disruption from online shopping.

Looking abroad to the Castellana portfolio, turnover in Spain was up 4.9% in November and 4.8% in December. Discretionary categories seemed to do particularly well, so that bodes well for underlying retailer margins and hence their ability to pay the rent. Fascinatingly, despite Spain being a developed market, footfall increased markedly for Black November and the period as a whole.

Portugal echoed this trend, with footfall higher and discretionary categories leading the way. November sales increased 8.5% and December was softer, up 2.8%.

In terms of corporate activity, Vukile recently announced that the acquisition of Bonaire Shopping Centre may still happen after the flood damage, provided that the centre is reinstated. A deal that has now closed is the acquisition of 50% of Alegro Sintra in Lisbon on a first year net initial yield of 8%. The supermarket in the centre was excluded from the transaction as that GLA is actually owned by the supermarket that occupies it. Vukile hopes that the relationship with the new partners in that centre could open up other opportunities in the region.

On the disposal front, December saw Castellana close the sale of 28.8% in Lar Espana for EUR 200 million in proceeds. This gives them a strong balance sheet to deploy into other opportunities.

Vukile’s share price is up 14% in the past year and has dipped 5.8% in January. It trades on a trailing dividend yield of 7.5% at the moment, so the high quality nature of this asset isn’t a secret to the market.

Nibbles:

Director dealings:
- The wife of the CEO of Purple Group (JSE: PPE) bought shares worth around R150k.

Grindrod (JSE: GND) has announced an update to the conditions precedent for the acquisition of the remaining 35% in Terminal De Carvao Da Matola Limitada. There are still some important outstanding regulatory approvals in Mozambique, so the long-stop date for the deal has been extended to 17 March 2025. Extensions are pretty common in deals like these, although it’s important that they don’t get out of hand.

There’s never a dull moment at Sibanye-Stillwater (JSE: SSW). With the resignation of the Chief Commercial and Development Officer, the headlines were full of views around how this signals a need for optimisation at Sibanye rather than acquisitions. Given the state of play in PGMs, that’s probably accurate, but the signals will get confusing if someone is appointed as a replacement. In the meantime, the CFO is acting in that position on an interim basis.

Labat Africa (JSE: LAB) has released a cautionary announcement around discussions that could have a material effect on the share price. There are huge changes to the business model there, so they must be busy with trying to piece together the next chapter of this company’s life.

With Trencor (JSE: TRE), moving ever closer to being unwound, the recent substantial changes to the share register have continued. We now know that M&G Investment Managers has reduced its stake from 8.54% to 3.57%.

Short Stories v.05: Ideas for good

Dominique Olivier

26 January 2025

Every so often, I come across a story that I think would work well for this audience, only to find that it is actually just too light to justify a full article. Never one to deny you informative (and interesting) content, I’ve decided to intersperse my usual long writing format with the occasional collection of short stories, tied together by a central thread but otherwise distinct from each other.

A few months ago, I wrote a collection of Short Stories about big-name businesses who were doing all sorts of shady things in order to make more money. In case you missed it, you can catch up here. Today’s article is essentially the opposite of that; an optimistic palette-cleanser highlighting how big brands are using their funds, power and influence to tackle real-world problems and make a real difference.

At their core, businesses exist to solve problems. Whether it’s providing consumers with a product or service, making life more convenient, or helping address gaps in the market, every business is in the business of offering solutions. But sometimes, in the rush for profit, it’s easy to forget that businesses also have the power to solve problems beyond the ones tied to their products. They can also address broader societal and environmental challenges – problems that affect the planet, communities, and future generations.

Savlon: soapy chalk

Handwashing with soap might seem like a simple, universal habit, but for many children in rural communities, it’s anything but routine. Soap is often considered a luxury, and the belief that water alone is enough to clean hands remains widespread.

The implications of this gap in hygiene are sobering. According to the World Health Organisation (WHO), India has the second-highest child mortality rate in South-East Asia for children under five, much of which is attributed to poor hygiene, sanitation, and environmental factors.

In many rural Indian schools, children rely on chalk and slates for their lessons. When lunchtime rolls around, they’re sent to wash their hands at communal taps. But soap isn’t always available, and even when it is, children often skip using it—simply rinsing off the chalk dust with water before drying their hands on their clothes.

Savlon, in collaboration with Ogilvy Mather India, saw an opportunity to tackle this issue in a way that was both practical and engaging. Enter Healthy Hands Chalk Sticks: chalk infused with powdered soap. The idea was ingenious. As children wrote with the chalk, a fine layer of soap powder coated their hands. When they washed up at lunchtime, the powder turned into soap upon contact with water, encouraging proper handwashing while also surprising and delighting the students, who loved watching the chalk dust transform into foam.

This wasn’t just a cute idea – it was meticulously developed. The chalk underwent rigorous safety testing to ensure it was completely safe for young hands. And when the initiative rolled out to over 100 schools, it became more than a classroom innovation – it sparked a nationwide conversation.

The campaign’s success caught the attention of the Food Safety and Standards Authority of India (FSSAI), which endorsed the initiative. It also led to a collaboration with Akshaya Patra, the world’s largest provider of midday meals. Together, they distributed soap-infused chalk to over a million children across India, embedding better hygiene habits in classrooms and homes alike.

Honda: vibrating shoes

In 2017, Honda launched IGNITION, an in-house initiative aimed at addressing social challenges by harnessing the creativity, technology, and design expertise of its employees. Since its inception, the program has delivered some impressive innovations, but one standout idea has left a particularly meaningful mark: Ashirase.

Ashirase is a navigation system designed to help visually impaired individuals walk safely and confidently. It’s a simple yet ingenious solution – a smartphone app pairs with a vibration device tucked into any pair of shoes. Inside the device is a motion sensor that works seamlessly with the app to guide users step-by-step.

Gentle vibrations inside the wearer’s shoes communicate directional cues. A buzz at the front of the foot signals the user to walk straight, while vibrations on the left or right indicate when to turn. This design lets users focus on their surroundings without needing to look at a screen or juggle additional tools, keeping their hands free for a cane and their ears open to ambient sounds.

But Ashirase is more than just a navigation aid – it’s about making the journey as stress-free as possible. Honda’s goal was to create a system that felt intuitive, almost second nature. By simplifying the process of navigation, Ashirase restores a sense of ease and natural flow to walking.

Originally planned for release by March 2023, Ashirase hit some delays during real-world testing. Instead of rushing to market, Honda took the opportunity to refine the device, incorporating valuable feedback from users to ensure the final product would be as effective as possible.

The good news? The wait is nearly over. With updates underway, Ashirase is now expected to make its official debut later this year, marking a significant step forward in accessible innovation.

Energizer: bitter batteries

Ask any parent and they’ll tell you: babyproofing a home is no joke. As babies grow, their combination of increased mobility and relentless curiosity means that parents are constantly scanning for potential hazards – especially the small objects that babies and toddlers are so magnetically drawn to put in their mouths.

Among the most dangerous household culprits are lithium coin batteries, commonly known as button batteries. These tiny power sources are commonly found in household items like remotes, clocks and even toys, and they can cause catastrophic damage if swallowed. Within hours, the acid in these batteries can burn through the esophagus, often with fatal consequences if left untreated. According to the Consumer Product Safety Commission (CPSC) tens of thousands of young children have been hospitalised over the course of the last decade due to button battery ingestion.

Energizer understood this problem and decided they didn’t want their products to be a contributing factor. Their solution? The 3-in-1 Shield battery.

These batteries look and function exactly like regular button batteries, but with three layers of childproofing built in. The first line of defense is child-resistant packaging which is impossible to open without a pair of scissors. The second layer takes a more sensory approach – a bitter coating on the batteries themselves. Made from bitrex, the world’s bitterest substance, the coating is completely non-toxic and offers a repulsive, bitter taste to encourage kids to spit the battery out. The third layer of protection is Energizer’s Color Alert technology. If the battery touches saliva, it releases a non-toxic dye that turns the child’s mouth bright blue almost instantly. This provides an immediate visual signal to caregivers to act fast and access emergency medical care.

As part of their campaign, Energizer partnered with Reese’s Purpose, a nonprofit dedicated to identifying and addressing child safety risks. Together, they’re working to raise awareness and advocate for change, hoping to protect more families from these preventable tragedies.

See it in action here:

@keepingupwiththekorzons
Make sure you’re helping keep your home safer especially after the holiday season with the @Energizer 3-in-1 Child Shield™ batteries. Start your year off right with Energizer and the link in my bio! 🫶🏻 #EnergizerAd #holidays #babyproofing #childsafety #fyp
♬ 轻快愉悦享受生活 – HD235( 音乐)

Phillips: old stuff new

We all love receiving gifts, but not every present is a keeper – and that’s OK. Returns exist for a reason. However, what’s less obvious is the environmental impact of those returned items. Every year, around 10 million returned gifts are discarded instead of being resold or reused. Why? Because for many companies, it’s simply cheaper to produce new products than to process and reintroduce returns into the market. This wasteful practice contributes to an alarming amount of landfill waste, particularly following the festive season.

Philips decided this status quo wasn’t acceptable. Aware that their products are designed for durability and longevity, the company shifted its approach for the last holiday season. Instead of promoting new inventory, they chose to exclusively sell refurbished and returned products. These items were offered at lower prices and backed by upgraded warranties, ensuring that customers felt confident in their purchases.

To drive home the importance of this initiative, Philips also launched an augmented reality installation that illustrated the environmental cost of returns in real time. This visual representation highlighted just how significant the problem is and why solutions like theirs are urgently needed.

The results were significant. Philips sold out of their refurbished inventory and, in the process, diverted an estimated 185 tonnes of e-waste from landfills. The success of this campaign shows that consumers are open to sustainable shopping options when they’re presented as a viable and trustworthy alternative. As someone who’s supported the thrifting and repairing economies for years now, I can tell you that this comes as no surprise.

This move by Philips isn’t just a one-off success: it’s a blueprint for how businesses can rethink their approach to returns and waste. By proving that refurbished products can be just as valuable as new ones, Philips has set a precedent for industries looking to address the growing environmental challenges tied to overproduction and waste.

Renault: borrowed wheels

Living in a big city shouldn’t be a job requirement, but, unfortunately, too often, it is. This isn’t a problem that’s unique to South Africa. Take France, for instance: 40% of the population lives in areas without public transport, yet just 5% of commutes are possible without it for those outside city centres. And then there’s the reality that one in five job seekers can only find opportunities over 50 km from where they live, which leads to 54% of them dropping out of the job market due to mobility issues. It’s a real mess.

But Renault wasn’t about to let this problem go unnoticed. Realising that job markets in France can be brutal – especially when new employees face three-month trial periods where they can be let go at any time, and no access to loans to buy a car – Renault decided to step in. In a move that was tailor-made for the challenge, they offered 6,000 cars to those working these trial periods, letting them pay in instalments only once the job was permanent and the pay secured. The kicker? This was all rolled out through 50 dealerships strategically placed in areas with no easy access to mobility.

The result was nothing short of life-changing for many who would otherwise have been stuck, unable to reach work and forced to miss out on opportunities. Renault’s solution is a masterclass in building meaningful connections between brands and consumers, all while driving business forward.

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.

Dominique can be reached on LinkedIn here.

GHOST BITES (Blue Label Telecoms | Reinet | The Foschini Group | York Timber)

Ghost Bites

The Finance Ghost

25 January 2025

GHOST BITES (Blue Label Telecoms | Reinet | The Foschini Group | York Timber)

Blue Label Telecoms takes another step towards taking control of Cell C (JSE: BLU)

Getting regulatory approvals out of way is always worth celebrating

Blue Label has announced that Cell C has obtained approval from ICASA for the transfer of telecommunications licences held by Cell C to The Prepaid Company, a wholly-owned subsidiary of Blue Label.

Now, the plan isn’t actually to transfer the licences. They will still be held by Cell C. Instead, they are clearing the way for a change in control of Cell C, which has the same overall effect in terms of ownership of the licence. Blue Label’s plans are for The Prepaid Company to own more than 50% of Cell C, so they are getting the regulatory approval done in the meantime.

This tells you a lot about how tricky these approvals can be.

Reinet had a strong finish to 2024 (JSE: RNI)

Of course, the market is focused on the British American Tobacco sale

Reinet has reported its net asset value (NAV) as at December 2024. They do this every quarter, so one of the metrics they include is the percentage growth between September and December. In this case, they managed growth of 5.1% in that quarter, so it was a great finish to the year.

Reinet also makes a point of reminding the market that the compound annual growth rate (CAGR) is 9.2% since March 2009, including dividends. British American Tobacco has been the underpin of that journey and the big change going forwards is that Reinet has sold all its remaining shares in that company.

A smaller disposal happened in the quarter and therefore impacted the NAV growth in that period. The big clean out happened in January though, so British American Tobacco is still part of Reinet’s NAV as at December 2024 – for the very last time!

In case you’re wondering about the traded discount, the NAV as at December 2024 was EUR 38.12, or around R737 at current exchange rates. Reinet is trading at R453, so there’s a hefty discount here for a company that just turned a big chunk of NAV into cash. The market doesn’t seem to be expecting a special dividend or large buyback here. If Rupert springs a surprise and takes that route, the share price could do some exciting things.

Bash seems to be doing the heavy lifting at The Foschini Group (JSE: TFG)

These numbers don’t look good alongside Mr Price

The Foschini Group (TFG) has released an update for the quarter ended December, which also gives us nine-month year-to-date numbers. Although the third quarter was a positive swing in momentum (group sales growth of 8.4%), the first half was so poor that the year-to-date numbers are still uninspiring with sales growth of 1.6%.

A silver lining is that gross profit is up 5.7% over nine months. That’s still nothing special by any means, but at least gross margin went the right way – especially in TFG Africa.

The gold lining (if you’ll allow me to invent such a thing) is the growth in Bash, the online platform that aggregates the entire TFG offering into a single platform. This approach clearly works, with sales up 47.2% for the quarter and 20.8% year-to-date. Astonishingly, there are still naysayers out there about eCommerce. Online sales are now 11.3% of total retail sales for the group. You really need to have your head in the sand to think that this isn’t relevant.

When we look at the regions, the cracks really start to show. TFG London sales fell 0.1% for the quarter if you exclude the acquisition of White Stuff – and of course, that’s a very important adjustment to make. White Stuff grew sales 18.3% year-on-year, so perhaps that deal will inject some energy into TFG London. TFG Australia was down 3.0% for the quarter.

In terms of category level insights, I was surprised to see that Homeware in TFG Africa grew 5.5%, ahead of Clothing at 5.3%. Given the success of the apparel business in Mr Price at the moment, TFG seems to have a pretty serious problem there. Another negative surprise was a 2.6% decline in cellphones, which is also at odds with what we saw from Mr Price. Beauty is the highlight of the TFG offering, up 19% for the quarter. It’s not a fluke, as the year-to-date performance in Beauty is 14.7%.

This performance did nothing to improve the negative sentiment in the sector that has plagued share prices this month, with TFG closing 3.8% lower for the day. The market didn’t even get excited about sales growth in TFG Africa of 14.6% for the three weeks to 18 January, which is clearly a strong start to the year.

TFG is planning a substantial expansion of the footprint this year. Given the underperformance of the bricks-and-mortar offering, I’m not convinced that more is more. It feels like they need to focus on sorting out what they already have and getting the growth up to scratch vs. peers.

York has raised the funding for the Stevens Lumber Mills deal (JSE: YRK)

An increase to an existing term facility got it across the line

Back in June 2024, York Timbers announced the acquisition of several properties (and the trees on them) from Stevens Lumber Mills. One of the conditions related to financing, naturally.

Thankfully, in April 2024, York had entered into a term loan facility with Nederlandse Financierings-Maatschappij Voor Ontwikkelingslanden N.V. (just rolls off the tongue, doesn’t it?) of R350 million. This facility turned out to be the key that unlocks the finalisation of the deal with Stevens Lumber Mills, with an increase in the facility of R75 million.

The York Timbers share price benefitted from the general improvement in sentiment in 2024, with a 12-month performance of 22.2%.

Nibbles:

Director dealings:
- An executive at Richemont (JSE: CFR) sold shares worth R9 million. Separately, another executive sold shares worth R13 million linked to share options.
- Acting through Titan Premier Investments, Christo Wiese has bought R415k worth of shares in Brait (JSE: BAT).
- A director of Mantengu Mining (JSE: MTU) has bought shares worth R89k.
- As you might expect, various directors of Sirius Real Estate (JSE: SRE) have accepted shares in lieu of dividends under the dividend reinvestment programme.

I don’t usually comment on changes to major shareholders, but I think it’s worth highlighting that All Weather Capital has rapidly increased its stake in Trencor (JSE: TRE) from 6.66% to 13.29% between 19 December and 22 January. I’m not sure if they held shares before that but it hardly matters – the direction of travel is clear here. Trencor is a cash shell that is due to be wound up in the near future. Perhaps that future isn’t far away now?

African Dawn Capital (JSE: ADW) announced a deal back in October 2024 that would see EXG Partners invest R5 million in wholly-owned subsidiary Elite group for a 50% stake in that company. They would also provide a loan of R15 million to Elite. The commercial terms seem to have stayed the same, but there’s been a change of ownership in EXG Partners that turns this into a related party transaction as the CEO of African Dawn Capital and his son have now become beneficial indirect holders of EXG Partners. This means that the Category 1 circular will need to be a related party circular and will include all the protections that are needed for minority shareholders, like a fairness opinion by an independent professional expert.

The latest in the Trustco (JSE: TTO) saga is that the listing has been suspended as Trustco hasn’t released financial statements for the year ended August 2024 in time. Then again, they are currently “trading” under cautionary because they might drop all their listings. This is also the same company that has made noise about wanting to be on the Nasdaq, but can’t get financials out in time. It’s a soap opera.

AYO Technology (JSE: AYO) finds itself involved in another court action, this time after a minority shareholder with a stake of 0.13% lodged a notice of motion in the High Court to wind up AYO. At this stage, the board believes that this isn’t a price sensitive development, with the company’s legal advisors having considered the claim and its probability of success. Of course, anything is possible. There really is never a dull moment with this company.

GHOST BITES (Cashbuild | Sasol | Super Group)

Ghost Bites

The Finance Ghost

24 January 2025

GHOST BITES (Cashbuild | Sasol | Super Group)

Positive momentum continues at Cashbuild (JSE: CSB)

I remain happy with my long position here

I take an approach of selective exposure on the JSE. Cashbuild is one such example, as I think this is an appealing way to play the South African recovery story. They don’t have the manufacturing capacity issues that Italtile has, hence they are my choice in the sector. So far, so good.

The latest quarterly update is also encouraging, with revenue in the second quarter up 6%. The existing stores were responsible for 5% growth and new stores contributed 1%. For the six months, this means group growth was 5%. It’s no rocketship of course, but my expectation is for more of a steady grind.

With volumes up 8% for the second quarter, it seems as though there may have been deflationary effects over the quarter. Inflation was just 1.5% at the end of December 2024, but that sounds like a snapshot view rather than the percentage that applied over the period.

Even P&L Hardware is posting consistently positive results these days and Cashbuild Common Monetary Areas also swung positive, so the momentum is building.

It’s also good to see discipline in the footprint strategy, with 3 new stores and 6 closures of underperforming stores. They refurbished 11 stores. Growth for the sake of growth isn’t helpful to shareholders. It’s more important to optimise the business.

Are things ever going to improve at Sasol? (JSE: SOL)

The latest update has done no favours for the share price

Sasol dished out a tough start to the day for its investors, with an early morning update that was filled with disappointing news. The share price reacted sharply, down over 4% in early trade and eventually closing 4.7% lower.

The coal quality at Secunda Operations (SO) remains a problem, with production for the six months down 5% year-on-year. This has led to a deterioration in production guidance for the facility.

Despite a strong quarter at Natref, 2025 got off to a terrible start with a fire at the refinery on 4 January. Supporting piping and infrastructure was damaged, with repairs anticipated to be completed before the end of February. This means that production for FY25 is expected to be 5% – 10% lower than FY24, a major downgrade vs. previous guidance of growth of 0% – 10%. If Sasol has insurance for the lost profits, they are keeping very quiet about it – I didn’t see any mention of insurance in the report.

These issues set the scene for a report that also includes uninspiring numbers in the chemicals business, yet again. The average basket price fell during the quarter, so the half-year result is now an uptick in revenue of just 1% year-on-year in both the African and American segments of the chemicals business and 2% higher in Eurasia. Sales volume guidance for international chemicals has been adjusted downward.

Any silver linings? Well, they believe they have a solution to enhance the coal quality supplied to SO, with the benefits only expected to be felt in H1 FY26. They’ve also left the market guidance for both mining and gas unchanged.

The announcement includes references to “Final Investment Decision (FID)” all over the place. I worry about the level of bureaucracy in a company when they start inventing their own terms and then capitalising them to make them sound important. It’s just a decision. That’s all.

Speaking of decisions, the decision by the market has been pretty clear:

Super Group had a very tough interim period (JSE: SPG)

The exposure to the automotive retail industry isn’t helping

Super Group has released a trading statement dealing with the six months to December. You need a strong stomach for this one, with HEPS down by between 19.7% and 29.9%. Ouch!

Let’s start with the automotive dealerships businesses, which are suffering from the disruption to the sector by Chinese brands. Although Super Group is improving its representation of these brands, the legacy showroom footprint is the challenge. The South African business seems to have been more resilient than in the UK, with Ford really struggling in that market.

It also doesn’t help that the UK (like most of Europe) is obsessed with regulation. The Vehicle Emissions Testing and Standards (VETS) legislation requires original equipment manufacturers to ensure that 22% of new car sales are battery electric vehicles, otherwise there are financial penalties. This will increase to 28% by 2025. As Ford isn’t managing this very well in their passenger car business, Super Group will look to consolidate (i.e. cut back on) its dealership footprint in the UK.

Remember when Europe forced diesel vehicles down everyone’s throats until the emissions scandal broke? I really don’t understand why highly efficient petrol engines are so evil, but then again I’m not incentivised somewhere in the EV value chain like so many political lobbyists are. Sadly, companies like Super Group have to deal with the fall-out.

Against this backdrop, one would hope that the other businesses are doing well. Alas, Supply Chain Africa has to deal with pressures like coal export volumes and turnaround times at South African ports, along with the exposure to political unrest in Mozambique and the impact on coal export volumes through Maputo in the final quarter of 2024. You may recall reading about the Maputo port in the recent Grindrod update, as Grindrod and Super Group sit at different parts of that value chain. Copper exports are also being rerouted from Durban to Dar es Salaam and Walvis Bay, so the problems with our ports are really hurting the business.

The only other continuing operation is Fleet Africa, which earned itself a small paragraph in the announcement that talks to decent performance. It’s nowhere near big enough to carry the can by itself.

In the discontinued operations, SG Fleet in Australia is in the process of being sold. This is about the only thing that saved the Super Group share price in the past year, as the market liked the price on the deal. This will do wonders for the balance sheet, although Super Group expects to pay a R16.30 special dividend to shareholders so much of the cash will flow out of the group.

The other discontinued operation is Supply Chain Europe, which is also taking huge strain from the state of the automotive sector. They will try and find a buyer for this business. I doubt they will get great offers, as this is the exact opposite of selling when things are good.

After the special dividend, what is really left in Super Group that is structurally appealing? They are in a tough space right now and they really need a turnaround in South African infrastructure, as I can’t see things getting much better on the automotive side.

Nibbles:

Director dealings:
- A director of a major subsidiary of Southern Sun (JSE: SSU) sold shares worth R2.7 million.

Labat Africa (JSE: LAB) has lamented the slow pace of regulatory change and has blamed this for the difficulties being felt in the South African cannabis market. For this reason, they are now looking at FinTech opportunities. This explains why the new CEO, Irfaan Mohammed, has a background in the ICT sector. The acquisition of Classic International for R16.275 million has been settled through the issuance of Labat Africa shares. Hopefully the new chapter for the company sees far more success than before.

Oando (JSE: OAO) announced that Oando Energy Resources (OER) has been awarded operatorship of Block KON 13 in Angola’s Onshore Kwanza Basin. OER will have a 45% participating interest and will lead the development as operator alongside its partners. This is the entry point for Oando into the Angolan oil and gas market and is part of the long-term strategy for its upstream operations.

GHOST BITES (Coronation | Mr Price | Quilter | Vukile)

Ghost Bites

The Finance Ghost

23 January 2025

GHOST BITES (Coronation | Mr Price | Quilter | Vukile)

Coronation’s AUM has moved sharply higher (JSE: CML)

To their credit, the lazy disclosure format is also used when they have a good news story

As you would expect after the year that we had in the markets in 2024, assets under management (AUM) at Coronation has moved higher. It came in at R676 billion as at the end of December 2024, a long way up from R629 billion as at the end of 2023.

For some reason, Coronation never discloses the comparable number in the SENS announcement, forcing investors to dig through the SENS archive to find it. I genuinely have no idea why they do this, but at least they didn’t magically change that approach now that they have a positive story to tell.

The share price is up 24% over 12 months, but is 28% lower over 3 years. In the sector, my preference is still the companies that have built their own distribution channels. You can look at PSG Financial Services (JSE: KST) to see what I mean, or Quilter (JSE: QLT) further down in this update.

Mr Price just keeps winning (JSE: MRP)

It’s incredible how wrong I was on this one

Early last year, when the Mr Price share price started running, I wasn’t convinced by the rally. In fact, I thought it would sizzle out and possibly head lower.

Here’s a chart of how spectacularly wrong I was:

There are a few lessons here worth sharing, all of which I apply with my own money. (1) Going short is much braver than going long, not least of all because you’re betting against inflation when you’re short. I prefer to just avoid things that I feel could go down, rather than short them in the hope of a profit. I leave that for the hedge funds and traders! (2) It’s impossible to get everything right in the market (no matter who you are), so position sizing is key. I avoid a highly concentrated portfolio. (3) Momentum is a very powerful thing and the South African market loves it when a business is doing decently, so much so that getting to a P/E of over 20x is possible.

Today, Mr Price is on a P/E of 19.6x. For context, you can buy Nike on 22.6x. Do with that information what you will.

What is supporting the Mr Price story? To be fair, some really solid recent growth. In an update for the 13 weeks to 28 December 2024, they achieved double-digit sales growth and won market share as well. They managed this at a higher gross margin than in the comparable period, so it wasn’t achieving by slashing prices either. In retail, this sort of narrative is precisely what you want to see.

The two-year compound annual growth rate (CAGR) at group level is 10.3% and the latest growth is 10.6%, so that’s remarkably consistent. They’ve won market share for six consecutive quarters!

There are a bunch of other interesting nuggets in the update. For example, online sales grew 21.9% year-on-year in December, so more and more people are choosing to do their festive shopping online. This hasn’t stopped Mr Price from expanding the store footprint, with trading space growth of 4.9%.

It also seems as though people have money again, with cash sales up 11.1% and credit sales up just 5.7%. This trend is helping the entire business of course and is contributing to strong performance by recently acquired chains like Studio 88 and Power Fashion. When it comes to acquisitions though, Yuppiechef looks like the superstar. It has achieved a two-year CAGR of 18.4% and achieved its best-ever market share in December – all while increasing its gross profit margin!

This bucks the broader trend in Homeware, which was the slowest growing category at 7.9%. Although that’s a decent number in isolation, it’s much lower than 10.9% in Apparel and a really strong 16.5% in Telecoms.

Strong sales continued in January, albeit against a really tough base in which load shedding was running rampant. The performance in most of 2024 sets a difficult base off which to grow in 2025. The trailing P/E multiple is also very high, so that’s another headwind for the share price this year.

I was horribly wrong in 2024 about the share price but that doesn’t mean that I don’t still have a view on it. As always, my view is one of many you should be considering – including the most important view of all, being your own!

Personally, this isn’t a chart I want to own right now:

The fact that Mr Price closed over 3% lower despite releasing such strong numbers tells me that the market is now pricing in miracles, not just strong performance. That’s a dangerous situation.

A strong finish to 2024 for Quilter (JSE: QLT)

The momentum in net inflows is excellent

I’ve written many times about the value of building out a distribution angle to an asset and wealth management business. You need to go out there and fight for assets, as it’s too hard to hope that just sitting back and managing them will get the job done. Quilter is a great example of this and the results are clear to see.

2024 saw record core net inflows of £5.2 billion. The momentum into the end of the year was extremely encouraging, with the fourth quarter contributing net inflows of £2 billion. Most of the uptick came from the Affluent segment, boosted by Quilter’s platform business that enjoyed strong flows from both Quilter channels and independent financial advisor channels.

The combination of positive market performance in 2024 and solid inflows took assets under management and administration from £106.7 billion as at the end of 2023 to £119.4 billion by the end of 2024. That’s a particularly good performance in a year that was characterised by elections and uncertainty around tax changes for wealthy clients.

The Quilter share price closed 3% higher and is up 54% over 12 months.

Vukile’s Spanish acquisition is still on the table (JSE: VKE)

Repairs from the flood damage are going well

Last year, Vukile announced the possible acquisition of Bonaire Shopping Centre in Spain. The rain in Spain may fall mainly on the plain as the old movie goes, but in 2024 it fell basically everywhere. The torrential flash flooding caused havoc and this shopping centre wasn’t spared from the impact.

This is why every single acquisition always includes a material adverse change clause. Before a deal closes, you need to make sure you’ve got wriggle room in case something crazy happens.

The deal was delayed for a full assessment of the damage to be made. In good news, the deal is still on the table and the exclusivity arrangement that Vukile’s subsidiary Castellana has on the deal is still in force. The current owners are making progress towards fixing up and reopening the centre.

Will this affect the pricing on the deal? At this stage, we don’t know. We don’t even know if it will definitely go ahead. We do at least know that it still has a strong possibility of happening.

Nibbles:

Reinet (JSE: RNI) has given a strong clue as to the direction of travel of its balance sheet. The company always releases the net asset value (NAV) of the Reinet Fund ahead of releasing full results. This represents most, but not all of the group balance sheet. The fund saw its NAV per share increase by 5.1% from September 2024 to December 2024, which is a strong end to the year. As at that date, the stake in British American tobacco was still included in the fund.

Copper 360 (JSE: CPR) has acquired 100% of Mulilo Springbok Wind Power, a wind energy generation facility in the Springbok area in the Northern Cape. The project is at an advanced stage in terms of feasibility studies and engineering plans, along with fully authorised environmental impact assessments. The initial cash payment is R5 million and there are deferred cash payments of R1 million per MW of installed capacity. This obviously ticks two boxes for Copper 360: energy security and renewable energy.

After closing the acquisition of 11.35% in Legal Shield Holdings, Trustco (JSE: TTO) has confirmed that the first tranche of 200 million shares have been issued to Riskowitz Value Fund. This increases the total issued share capital by around 20%.

The deal between Europa Metals (JSE: EUZ) and Viridian Metals still hangs in the balance, as negotiations around funding for the deal haven’t yet resulted in anything concrete. The term sheet signed in September gives 150 days of exclusivity for the deal, so there is still time. The company has simply noted that the festive season led to delays in negotiations. Let’s hope they hit the ground running this year and get it done!

In case anyone is keeping score, recent trades in Brait (JSE: BAT) by Christo Wiese’s investment companies (in this case Titan Premier Investments) have led to a situation in which Titan’s beneficial interest in Premier Group (JSE: PMR) has increased to 45.04%. I know it’s confusing, but Premier Group (the listed food company) and Titan Premier Investments (one of Wiese’s many private investment entities) are two completely different things.

GHOST BITES (BHP | Clicks | Grindrod | Jubilee Metals | MTN)

Ghost Bites

The Finance Ghost

22 January 2025

GHOST BITES (BHP | Clicks | Grindrod | Jubilee Metals | MTN)

BHP looks to be on track to achieve guidance this year (JSE: BHP)

At the halfway point, they are optimistic about hitting the upper half of production guidance

BHP has released its operational review for the six months to December. This is the precursor to the release of interim financial results.

Unsurprisingly, the focus of the announcement is on copper, BHP’s pride and joy at the moment. Copper production increased 10%, with Escondida doing the hard work (up 22%) as Copper SA suffered power outages related to the weather. This is the benefit of diversification at a company the size of BHP. This diversification will be further enhanced by the recently completed Filo del Sol and Josemaria deals in Argentina.

Other operational milestones included the signing of the settlement agreement for the Samarco dam failure, as well as moving the WA Nickel operations into a period of temporary suspension.

Overall, BHP is on track to deliver full-year production guidance. In fact, they reckon they could hit the upper half of guidance at a number of facilities. For now, they’ve left FY25 guidance unchanged other than at Copper SA where they have had to lower guidance based on the first-half weather impact.

They also expect to deliver unit cost guidance across all assets.

In terms of pricing, copper prices increased 9% year-on-year and that’s pretty much where the highlights end. Iron ore and steelmaking coal fell 22% and 23% respectively, while nickel continued its problematic trajectory with a 12% decrease. Thermal coal increased by just 1%.

For now, the focus on copper is paying off.

For some reason, it seems that the market has now decided that Clicks is growing too slowly (JSE: CLS)

Keep an eye on this share price

The Clicks share price has a reputation on the local market for trading at stubbornly high valuations. Despite the high valuation base coming into 2024, the stock benefitted from the general improvement in SA sentiment and delivered a 12-month chart that looks like this:

Now, take note of how things have started washing away this year. Clicks fell 3.7% on Tuesday after releasing a trading update. In case you’re wondering, the JSE ended the day flat, so we can’t attribute this to a broader sell-off. No, in this case, it seems that the market is nervous about growth.

Clicks is still growing, but only by high single-digits. For the 20 weeks to 12 January, group turnover was up 8.1%. That’s very similar to the 8.0% in the comparable period, so it’s odd that the market suddenly doesn’t like that number.

The retail stores (Clicks / The Body Shop / Sorbet) grew 8.7% overall and 5.9% on a comparable basis. That might be where the worry lies, as comparable store growth was 8.4% in the comparable period. Inflation has come off significantly, down at 3.5% vs. 7.5% last year. The increase in volumes (2.4% vs. 0.9% last year) wasn’t enough to make up for the slower increase in prices.

There’s also a sign that gross margins might be under some pressure, as commentary in the announcement points to stronger growth in promotional sales than in non-promotional sales.

On the wholesale side of the business, UPD has a positive story to tell with wholesale turnover up by 9.5%. That’s much better than a drop of 0.8% in the comparable period.

Interim results are only due for release in April. Until then, that share price is looking vulnerable to me.

Grindrod’s Port of Maputo saw a slight reduction in volumes in 2024 (JSE: GND)

Under the circumstances, that’s pretty good

Doing business in the rest of Africa is no joke. Sure, there are good news stories like Jubilee and MTN today (you’ll see them further down), but in both cases those stories are actually just improvements on really bad situations that probably shouldn’t have happened in the first place.

Over at Grindrod, their particular challenge is that there has been major political unrest in Mozambique. Naturally, this has impacted the safety of road travel – not that the country is exactly famous for hassle-free road trips on a good day!

Despite this, when we look at the full year numbers for 2024, the Maputo Port Development Company suffered only a 1% decline in volumes. That’s encouraging for 2025, which will hopefully be a far less disrupted year.

I must also note the tone of the press release, which is basically a love letter to the Mozambique government that is dripping with please-don’t-hurt-us energy. Why? Because property rights are a fluid concept in many frontier markets, so companies operating in that space need to walk a tightrope with government and constantly point out the value flowing to those in power.

Also note that the wording is always about the benefits to “government” rather than the people of the country. It’s sad how different those concepts tend to be in practice.

Why should investors pay attention to this? Simply, because it’s a risk. A major risk, in fact. The JSE is littered with sad stories about companies that got hurt by African risks like post-election conflicts and crazy regulatory moves. Investing is about balancing risk and reward. Always ask yourself whether the rewards are sufficient to compensate you for taking the risk.

Great news for Jubilee – they’ve secured power for Roan (JSE: JBL)

At least this uncertainty has been taken off the table

Jubilee Metals‘ last set of results were a cautionary tale of the many challenges of doing business in frontier markets, such as the rest of Africa. Power availability has been a major challenge, impacting the ability of the Roan facility to operate and thus negatively affecting production.

Investors were left hanging after the results, with no obvious timeline regarding a dependable power supply and thus a restart of Roan. The happy news is that they didn’t have to wait very long for an update, as Jubilee has now announced that regulatory approval has been granted for the power supply agreement and that power delivery commenced on 20 January.

That must feel even better than when the TV used to work again after 6 hours of load shedding!

Importantly, the new deal sources power from multiple sources, so reliance on a single source has been mitigated. The cost of the power is comparable to the existing power agreement, so there isn’t even a cost downside to offset the reliability upside.

The company is now preparing to flick the big switch on Roan to get it up and running again. The share price closed 7% higher in appreciation.

MTN finally has some luck in Nigeria (JSE: MTN)

Now they just need to solve the other major problems

After much pain suffered by telecoms companies in Nigeria (of which MTN is most relevant to us in South Africa), the Nigerian Communications Commission has finally approved a 50% tariff adjustment. That’s a huge jump, which calls into question why they didn’t just do smaller increases each year? Anyway.

This won’t be popular with consumers of course, but it helps the telecoms sector be more sustainable. At the end of the day, if companies cannot operate profitably in the country, then consumers lose over the long-term anyway and to a far greater extent.

Nibbles:

Director dealings:
- An executive of Richemont (JSE: CFR) sold share awards worth R44 million. Again, it’s not clear whether this is the taxable portion or not.
- An associate of the CEO of Invicta (JSE: IVT) bought shares worth R9.4 million.
- Acting through Titan Fincap Solutions, Christo Wiese bought R8.2 million worth of shares in Collins Property Group (JSE: CPP).
- An independent non-executive director of Bytes Technology (JSE: BYI) and his associate bought roughly R740k worth of shares.
- An associate of an independent non-executive director of iOCO (JSE: IOC) – formerly EOH – bought shares worth R130k.
- An associate of the CEO of Purple Group (JSE: PPE) bought shares worth just under R100k.
- The CEO of Spear REIT (JSE: SEA) bought shares worth R27k for members of his family.

The CEO of Thungela (JSE: TGA), July Ndlovu, is retiring soon. In fact, he’s retiring in July this year, surely one of the easier facts to remember! Moses Madondo has been appointed as CEO designate. He is currently the CEO of De Beers Group Managed Operations. Frankly, I would also jump at the opportunity to move from diamonds to coal.

Trematon Capital (JSE: TMT) is one of the many companies that has moved its listing to the General Segment of the Main Board of the JSE.

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