Thursday, July 3, 2025
Home Blog Page 38

GHOST STORIES #49: Shari’ah-compliant Investing (with Yusuf Wadee of Satrix)

Listen to the show using this podcast player:

Shari’ah-compliant investing is a fascinating area in the world of finance. For those of the Islamic faith who choose to invest in this way, these products offered by Satrix are an excellent way to diversify a portfolio – especially with the launch of the Satrix MSCI World Islamic ETF which listed on the market on 22 October 2024.

For those who aren’t familiar with the Shari’ah rules and for those who want to brush up on them, this discussion with Yusuf Wadee of Satrix is a great way to understand the technical process behind identifiying companies in an index that must be excluded to make it compliant with Shari’ah principles. Of course, this leaves a different sector exposure mix and a fund with far less underlying debt, so that’s an interesting topic as well.

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 another episode of the Ghost Stories podcast. It’s another one with the team from Satrix and I’m very excited today because there’s a new face on my screen recording, there’s a new voice – not to say there’s anything wrong with all the expert voices we’ve had before from the Satrix team, but of course it’s so nice to get different perspectives on the markets and to cover different topics.

And on this specific podcast, we will be jumping into Shari’ah-compliant investing, which is a really interesting topic that I would like to know more about. I know a little bit about it, but nowhere near enough. So, thanks for listening to this show and joining us for this journey.

Yusuf Wadee, thank you so much for making the time to do this. You are the Head of Exchange Traded Products at Satrix. We were talking before we came online about how you were right at the coalface in the global financial crisis in an equity trading role at a different financial services business. You’ve got tons of experience, you’ve seen the markets dish out some good stuff and some bad stuff, no doubt. And I’m really excited to tap into that expertise today. Thank you for doing the show with me.

Yusuf Wadee: Thanks Ghost. Yeah, thanks for having me. It’s quite a pleasure to be here with you and your listeners and I’m looking forward to an interesting conversation.

The Finance Ghost: Yeah, absolutely. I think, just for a moment, let’s dive into some of that background before we jump into the Shari’ah-compliant stuff just because I think it’s interesting. You were an equity trader during the global financial crisis and I think for a lot of people listening to this, they might have either still been studying at that stage or just weren’t in a financial markets role at the time. Speaking for myself, I only finished university in 2010. Like I was saying to you before we got on the show, I’ve literally only ever known post-global financial crisis banking environments, which is just a completely different thing. You know, back then there were prop trading desks in the banks, etc. And then everything changed in the aftermath of the crisis, didn’t it?

Yusuf Wadee: Yeah, certainly was a very interesting time. You know, it felt like, I guess as far as banking goes, it feels like a “before 2008” and a “post-2008” – you know, back then there was a much more free sense of capital, certainly sitting inside a bank. The type of things that banks would probably get up to and be part of was super interesting. You’d see weird and wonderful things that would possibly take place in the bank that doesn’t happen now. I imagine a lot of hedge funds have stepped into the type of activity that banks would have played in that space, whereby they would play in a lot of different markets and fulfil lots of liquidity holding gaps. Being a price-maker has kind of evaporated to a large extent since. And that’s possibly why you see such a big hedge fund business and that market has developed as a result. But it’s not to say that skill isn’t there, it’s just moved, right? I think whatever existed in banks, a lot of that skill and background has moved to hedge funds. So yeah, it certainly was an interesting time back then.

The Finance Ghost: Yeah, I would agree with that. Banks these days are very much flow trading, it’s basically just execution on behalf of clients. They don’t really take much market risk. Back then, prop trading, the bank was using its balance sheet to actually try and generate trading profits, very much like a hedge fund would do now. So yeah, the world is a little bit different.

And of course over that time period, what we’ve also seen is the proliferation of exchange traded funds, ETFs, which is where you are now. Out of interest, what was the driver of moving from that equity structuring environment and trading and all that kind of thing into the ETF environment, which many see as a more vanilla sort of offering? Although I think on these podcasts we’ve tried quite hard to show that ETFs are a lot more interesting than most people realise, there’s actually a lot going on in them.

Yusuf Wadee: Yeah, so I think it was a natural move and it’s exactly to your point. ETFs aren’t just buy side instruments. Well, they are, we’re kind of managing buy-side third party investment portfolios. But in many ways, an ETF embodies a few parts of the capital market system, we’re listing stuff on the stock exchange and that kind of feels like a corporate finance, debt, capital markets type activity because we’re taking, you know, we’re taking structures and we’re listing them on the stock exchange. So it has an element of that that probably never used to sit in a buy side environment prior to ETFs. Right. So the, there’s an element of origination, there’s also an element of being super JC centric. So you’ve got to be close to your stockbrokers, you’ve got to understand the concept of market making, you got to understand the concept of JC trading. And so a lot of these things are directly resonates with an ETF house, possibly not so much with a traditional buy side house that wouldn’t focus as much on, let’s say the capital market aspects. That is quite unique to etf. So it was an exciting move for me, you know, certainly, you know, to put in practice a lot of the stuff that I’ve dealt with for many years prior on the sell side to now, you know, put that in place on the buy side, etc. And it’s been an exciting journey ever since.

The Finance Ghost: Yeah, it’s always interesting for me to see where people have come from and where they’ve gone and why they’ve done it. And I think moving on now to basically what the focus is on this show which is Shari’ah-compliant investing. I’m quite excited to actually come in here and learn about this, although it’s been great to get more of your background. When I saw it on LinkedIn, I thought, no, I have to ask you about what it was like to be an equity trader in the global financial crisis.

Let’s move into the Shari’ah-compliance stuff and I think let’s just start with why these products exist for your Islamic clients. What is it about the Shari’ah rules that make it important that these things exist? This whole Shari’ah-compliance side is very interesting for me. I think let’s just start right at the beginning which is why do these things exist for Islamic clients?

Yusuf Wadee: So if you look at the universe of investments available to, let’s say, Islamic clients or Muslims or followers of the Islamic faith, probably 90% of what’s out there is not suitable for them should they wish to follow and invest in line with the Islamic faith and in line with Shari’ah principles. Whether they’re looking to save for retirement, looking to contribute to their tax free savings accounts, or whether they’re just looking to have a discretionary savings investment portfolio, a lot of what’s out there is not suitable when they want to invest in line with the Shari’ah-compliant lens.

I guess that brings us to the question: what is Shari’ah investing? In a nutshell, it means investing in a way that abides with Islamic law. If you look at the Islamic faith, apart from just being a faith and having certain tenets of faith, Islam also prescribes to Muslims how to live their lives, how to spend their money, how to earn wealth. It’s a full lifestyle, it’s a religion that really describes a complete holistic life for Muslims.

So what actually happens, and this is sort of where Islamic finance kind of originated because you’d have these scholars, these Islamic scholars who would spend many years learning about Islamic law and studying Islamic law, effectively Islamic jurisprudence, they would, based on Islamic law and based on what is permissible and not permissible, apply that lens to many facets of a Muslim’s life. So, let’s take investments as an example.

These Islamic scholars, let’s call them Shari’ah advisory boards, based on the principles and the basic tenets of Islamic law, they would apply that to the investment universe. If I take an example, let’s take the MSCI World Index, it’s a great index. It’s an index that describes the entire world. It’s the large cap stocks from the 23 biggest developed markets in the world. It’s probably the single most overarching index building block, right? Let’s take this index.

There are 1,400 stocks in this index. I’m using this as an example. What would happen for a Shari’ah advisory board is they would take that universe and they would actually screen those 1400 stocks and they would go through those 1400 stocks and go, okay, what is it about these 1,400 stocks that makes them permissible or not permissible? They would look for certain things. The first thing they would try and screen is business activity. For example, they would look at alcohol. Are any of these companies involved in the manufacture of alcoholic beverages? This is not allowed in Islam, so those stocks would not qualify.

Tobacco. Are any companies involved in the manufacturing of tobacco? This is something which is not seen in a positive light from a Shari’ah perspective, so those stocks would be omitted.

Pork. Pork related products. Companies that are involved in the manufacturing or in the distribution of pork related products would be omitted.

Conventional financial services. Companies that are involved in interest, certainly in the payment of interest and earning of interest or trading of interest, they would largely exclude all conventional banks,  life insurance companies would be omitted because strictly speaking, interest, that is usury, is not permissible in Islam.

Gambling. Companies that are involved in gaming, gaming companies or hotel groups that have significant gaming portfolios or parts of income derived from the gaming sector would be excluded.

Adult entertainment, obviously that would be excluded.

So that would be the first level of screening that a Shari’ah board would actually do. They would screen business activity. Then of course, there’s something called financial ratio screening. They would look at the companies that satisfy each of those things I’ve just mentioned. Then, they would be further screened. They would look at the income statements and their balance sheets and they would look at what percentage of their balance sheets are exposed to interest. How much gearing do they have? How much interest are they earning or paying? Clearly this has the effect of removing companies with excessive leverage or interest exposure. This goes back to the fact that usury or interest is not permissible.

In a nutshell, this is effectively what Shari’ah investing is. You start with the universe of stocks. You’ve got the basic set of Islamic laws that a Shari’ah scholar or Shari’ah advisory board would apply their mind to. They would screen everything. And what you’re left with at the end is a collection of stocks or portfolio that’s very much in line with Shari’ah investment principles.

The Finance Ghost: It’s incredibly interesting, right? Another example of a framework that gets used, but that I’m always very dubious on, is ESG. In Shari’ah finance, I think there are just these really well-established practices and you can’t really get around them. I think of some of the ESG stuff out there and how a company like British American Tobacco features very prominently in an ESG index. That just tells me logically those rules are not working.

Logically speaking, if someone thinks, okay, I’m buying an ESG product, I’m buying stuff that’s good for society, and then British American Tobacco is in there – it’s all good and well if you go and buy shares in British American Tobacco, that’s fine, it’s a personal choice, but why is it in an ESG index?

What I quite like about the Shari’ah stuff is it feels like you can’t just use some understanding of the rules and then wriggle your way around them. I think a lot of that happens in ESG. People talk about greenwashing and that kind of thing. I’ve never seen anyone talk about “Shari’ah washing” so I’m guessing that’s not a thing. I feel like these rules are applied pretty well.

Yusuf Wadee: You’re spot it. I mean, I guess when it comes to financial metrics and ratios, it’s always at the whim of creative CFOs, right? You could get a CFO somewhere that could dress up their financial statements in a myriad of ways. They could try and game a lot of downstream filters. But in many ways, the Islamic Shari’ah principles are pretty steadfast, there’s not much grey, there’s not much leeway in terms of what is permissible. I guess it’s less likely to have, like you said, the big tobacco type example.

But, yeah, these indices for instance, if I look at the fund that we’ve just launched, we’ve partnered up with MSCI and they do have a Shari’ah advisory committee. This is what they do, they’re constantly looking at the indices, they’re constantly looking at the stocks, they’re constantly screening. There are always new companies coming on board and over time, they may need to tighten up or polish up a filter or revisit a financial statement or look at it more closely. So I guess it’s an ongoing, evolving process, but the idea is always, after all is said and done, land on a portfolio that’s in line with Shari’ah investment principles.

The Finance Ghost: 100%, I think it’s the old – it’s either Munger or Buffett, I think it’s Munger who said: show me the incentive, I’ll show you the outcome. And I think that’s a problem for a lot of the ESG stuff is if you can get your ESG score up, you can go and do all kinds of things like raise finance related to ESG metrics, etc.

The great irony of it is that I’m not really sure there’s a huge incentive for corporates to try and dress up stuff purely from a Shari’ah perspective. You can’t go and, by design, raise finance based on Shari’ah principles. There’s no incentive around that, it’s just different. I think it’s an important lesson for financial markets. We’ve both worked in financial markets, you for longer than me, and you know how it works in terms of incentivisation and outcomes and clever structuring and everything else. I have a lot of respect for that from a Shari’ah perspective that there are just these very well-established principles. It’s in or it’s out and that’s it. There are various tests, starting with what does the company do and then getting all the way down to these financial ratios etc. and I would imagine that the product that gets spat out on the other end is an index that obviously has a lot less financial leverage in it.

So in a period of high interest rates, it probably outperforms an equity index that hasn’t had the Shari’ah lens applied to it. Without the Shari’ah lens, there are a lot of overindebted companies in there, companies that get themselves into serious trouble in a high interest rate cycle or that just end up working really hard so their bankers can have a better life. The Shari’ah funds wouldn’t have any of that. It’s quite interesting.

I would imagine for non-Islamic clients, they can invest in this stuff, right? You don’t have to be of the faith, or do you?

Yusuf Wadee: Yeah, our ETFs are totally available for anyone. ETFs are listed on the stock exchange. It’s available on all our platforms, the Satrix Now platform, on all our downstream LISP platforms. And so anyone for whom this product resonates can buy this ETF.

It’s exactly as you mentioned, at Satrix we started out with market cap indices back in 2000 and we started off with the Satrix 40 and then the RESI and FINI and INDI. These are all sector, market cap-based index portfolios. And if that story resonates with people, then they buy the market cap indices. And then following on from that, we launched the range of factor indices, we had the value, momentum etc. – and again, for investors that resonate with a style-based investment approach, if that’s their flavour, then we’ve got those ETFs. And then of course this spills over into the more recent years where we’ve come up with the country-based indices. We’ve got Satrix China, Satrix India, if you like country stories then you buy that.

Where the Shari’ah product fits is under the broader banner of let’s call it SRI, Social and Responsible investing where you know, there’s kind of a different lens to investments, not just financial ratios. In this cluster you’ve got ESG, Environmental, Social and Governance type investment portfolios, you’ve got Shari’ah. I guess the whole point is that for investors out there, where it’s not just about the financial metrics, it’s just not about the financial ratios, it’s about where your money goes, you actually care about where your capital goes and where your capital gets deployed in the capital markets. If that’s important to you, and again you don’t have to be of a certain faith or you don’t have to be of a certain creed, if you’re just someone who feels that you’d like your capital and your cash to contribute to a sector of the market you think is productive in its nature, then spot on – certainly this fund is not just for Islamic or Muslim investors.

The Finance Ghost: Great. And in terms of those sort of returns, do you have a sense of what they look like versus some of their traditional counterparts without the Shari’ah lens? Obviously it all depends on starting dates and all that kind of thing. But just high level, are the returns comparable? Are they roughly comparable over a period of time or is there actually a noticeable difference?

Yusuf Wadee: Yeah, so you mentioned debt and that’s an interesting thing. There’s clearly not a significant element of debt in the Shari’ah investment funds and that’s because these funds get screened for debt. Any companies that are leveraged to the hilt in debt or significantly trading in interest products would be excluded. The point is debt can be double-edged and we’ve seen this in the property market as an example. Pre-2018 property markets were running super hard. These are all generally, if you look at average rate, these are all highly leveraged companies, significant portions of debt, high LTVs, some higher than others. I’m just using property as an example. What you find is that when the going is good, the debt works for you, as long as you’ve got rental escalations and you’ve got high occupancies, it’s a great story. But if you look at post-2018 where some of these companies started with a bit of a wobble and that wobble kind of sped up going into Covid, all of a sudden you got an environment with low occupancy rate. There’s an environment of being unable to push through rental escalations. Then you start having high debt servicing costs and debt becomes a problem. And then all of a sudden that you realise that debt is a double-edged sword.

Shari’ah funds probably wouldn’t benefit, I don’t know if that’s the right word, but wouldn’t be exposed to companies that are significantly leveraged. But whether that’s a good thing or bad thing, I guess time will tell.

If I just look at some of the numbers, If I take 2023, the calendar year as an example, if I look at the new fund we’re about to launch, which is the MSCI World Islamic ETF, this fund would have yielded 32% in that year versus let’s say the MSCI World which would have returned 33%, it’s very close and it’s coincidentally close. These are very different funds, they’re very different indices. For instance, MSCI World has 1,800 stocks, the Shari’ah ETF only has 300 -odd stocks. These are very different ETFs.

We can chat about the sector exposures just now, but the performance has been remarkably similar. And again, it probably talks to what we’ve seen in the market in the last couple of years. The rising tide kind of rises all boats. There’s a little bit of that if I take a slightly longer-term horizon. If I take five years, so the last five years annualised return per year would have been 14% for the Sharia ETF, 14% every year which is not too shabby versus the MSCI World of 16%. Sure, it’s lagging a little bit behind the MSCI World, but not by a lot. And you know, this maybe talks to your point, the exposure to companies with a little bit of debt could play a part, but also maybe not. You know, they are very different sectors. But it is very comparable to other global indices that we’ve launched and I think investors would find that quite exciting, as South African investors looking to obviously diversify away from South Africa.

The Finance Ghost: It’s really going to depend on the time period, right? If it’s a time in the world where technology companies are driving this in a big way, I imagine the tech companies would pass the Shari’ah tests. They generally are not over-indebted, they’re not selling impermissible products. If that’s a big part of the index, it’s going to be in both. And I think that’s part of what you’re seeing there in how close that performance is.

In South Africa it might be a bit different. You would have been quite happy to avoid the local banks. actually for many years in South Africa they really were not necessarily great performers at all. You would have been very happy to avoid companies with too much debt because that’s the other thing in the South African market, companies are borrowing at structurally high interest rates relative to the equity returns that they can generate. It’s not the case in the developed world. You know, a lot of high growth companies can get their hands on debt finance quite cheaply. So it’s just interesting and I think it’s important if you are able to weigh one against the other. Again, the whole point of this is that if you need to invest in Shari’ah-compliant funds, you’re not sitting there going, oh well, I could alternatively have the other index. You’re looking at this and saying, within the Shari’ah-compliant basket, what’s available to me and what am I looking for?

I don’t need to invest in Shari’ah-compliant funds, but it’s just interesting for me to understand the differences between them. It’s fascinating to see how finance really works in practice. I really do love it, obviously, otherwise I wouldn’t do what I do.

I think let’s maybe claw it back from my little intellectual curiosity down to something a bit more practical, which is for investors who are looking for Shari’ah-compliant funds, what does the basket look like from a Satrix perspective? What’s on offer? You’ve already mentioned the World Islamic Feeder ETF, which is the new one, but I think there’s other stuff in there as well, right?

Yusuf Wadee: Let’s spec this ETF. It’s a super interesting ETF. The way we structure it is as a feeder. We will not be replicating the index ourselves. We do feed into an iShares BlackRock ETF and there are lots of benefits of that. We achieve scale pretty quickly. We get the benefit of a larger investment team right off the bat. That’s a model that works for us. A lot of our ETFs are structured as feeders, so that works well.

The other thing I want to mention is that we do purify the dividends. What happens is these funds generate cash, so they do pay a distribution. What our index partner MSCI does, they maintain a tally of stocks, or let’s call it unpurified dividends or components of the distribution whereby let’s say it happened to be derived from an illicit source. What MSCI will do is they’ll publish that and they’ll maintain a tally of what that is and Satrix will dispose of that in a Shari’ah-compliant fashion. Investors receive purified dividends out from our fund and our side. That’s a hallmark of all Shari’ah-compliant funds in South Africa. Our funds will be structured the same way and is no different in terms of sectors. This is where I think it becomes quite interesting.

You talked about the sectors. We’re launching the MSCI World Shari’ah ETF, chosen from the MSCI World from large- and mid-cap stocks globally. It’s a super big universe and from the 23 biggest developed markets in the world. You’re literally choosing from the cream of a crop, really super high quality blue chip companies that exist globally.

Yusuf Wadee: So after screening, what we’re left with is the sector exposure and I think this is quite interesting. The sector exposure for the Islamic ETF is we’ve got tech at about 38% which is quite interesting vs. the MSCI World MSCI world of 32%. It’s got a little bit more tech. And I guess this talks to your point that tech does sort of qualify a little bit easier…

The Finance Ghost: Kind of as expected.

Yusuf Wadee: Right, exactly, exactly. What is interesting though is that there’s a bit more broad-based tech. 18% of the tech is in broad-based tech that sits outside of the Magnificent Seven. And that’s not the case in the MSCI world, you’ve only got 13% that sits outside of the Magnificent Seven. So there is a tech play, there’s an upweighting effect of tech, but you’re getting stuff that’s longer in the tail of tech, which I think is interesting. Tech’s run hard and this could be an interesting play for investors in this portfolio. You’ve got a bigger tech play, but the upweight has come from stuff that’s further down than the Magnificent Seven.

There’s no financials versus the MSCI world, which has got 15% financial. So there’s 15% that needs to find a home. You can kind of see where it goes in the Shiri’ah fund. It goes into healthcare, which gets bumped up from 11% in the MSCI World up to 13%, a 2% bump in healthcare.

Energy gets a big bump. Energy goes up to 13%, where energy is only 4% in the MSCI World. I do think you’re left with quite an interesting portfolio. I wouldn’t want to say it’s more value based, but clearly you’ve got whatever was in the Magnificent Seven spread down into the tail of the tech, which I think is interesting. And healthcare and energy gets, gets a bump, which I think makes for an interesting fund.

If I look at some of the stocks, they are the who’s who of global blue chips. You know, you’ve got companies like Microsoft, Tesla, Exxon, Procter & Gamble, Johnson & Johnson in there. Certainly all the big pharma is there represented in this fund. You’ve got the car manufacturers, the likes of Suzuki, Toyota. You’ve got beauty companies like L’Oreal.

Intel, Rio Tinto, tyre companies like Bridgestone, Continental. This is certainly a very blue chip fund that is looking quite exciting for Islamic investors.

The Finance Ghost: So Yusuf, listening to you talk about what happens with distributions and the different weightings is really interesting. Does that mean that the dividend yield is probably lower on a Shari’ah-compliant fund, or do some of those sector exposure differences then make up for it? Because it sounds like there are some bigger dividend payers sitting there like energy potentially, healthcare, the value-based sectors that you’ve mentioned.

Yusuf Wadee: Yeah, we wouldn’t expect dividends to be too different from some of the global headline indices like the MSCI World. It will be very comparable. If you’ve got MSCI World at 1.5%, 1% odd or just slightly more than that, we would expect this ETF to be very similar.

That’s because whatever you are foregoing in the financial stocks, you’re probably topping up in pharma or you’re topping up in energy and these are also big divi payers. I think it would be very comparable from a distribution perspective. And again, it’s because it’s kind of what we see for most global stocks.

South Africa is a big divi player and that’s just because of where our P/Es are and our multiples are, so South African stocks have traditionally been big distribution payers globally though. And yeah, these markets have run hard, so whilst there’s still lots of growth potential, you generally find the scale of the distribution, the dividends that you’d earn from these global indices aren’t directly comparable to what you would earn locally. But having said that, again, we wouldn’t expect there to be a penalty or anything like that on this ETF.

The Finance Ghost: Absolutely. The components of returns internationally are just so different. High multiples, multiple expansions and more capital growth, so dividends are a smaller part of the total return. Whereas to your point, in South Africa, because of where we’ve been for the last 10 years and how low sentiment has been and how poor it’s all been, the dividend’s actually been quite a big component of what’s going on. So again, it helps to understand these different markets.

That brings me to the second last question, which is that I know you also have a Shari’ah Top 40 ETF as part of the Satrix offering, which would track the JSE Top 40, but again in a Shari’ah-compliant manner. I would imagine no British American Tobacco, no banks, no AB InBev. I would think those would be some of the obvious differences. Right?

Yusuf Wadee: Yeah, spot on. This was a fund we acquired from ABSA. A few years ago Satrix bought out ABSA’s exchange traded funds business. We acquired about 19-odd exchange traded funds. We pretty much bought all the ETFs except the commodity ETF, that stayed with ABSA. In and amongst the funds that we bought, this was one of the funds, the Satrix, or rather at the time it was the New Funds Shari’ah Top 40 ETF. It’s been in existence for a good few years, so we took it over and we rebranded it, it’s one of our new funds in our stable.

We’re looking to try and support it and see where we can take this fund from here. A little bit about this fund, it’s constructed using a FTSE/JSE index. There’s a company called Yasaar, an independent Shari’ah advisory committee out of the UK. They provide Shari’ah services for global multinationals out of the UK. They’ve partnered with FTSE to come up with the FTSE/JSE Shari’ah index. That’s the licence for this ETF. It tracks the Top 40, but it’s a Shari’ah-compliant version of the Top 40. It is quite interesting, there are only 18 stocks in this portfolio. It’s very different to what we’ve just been discussing, there are only 18 stocks in this portfolio.

The Finance Ghost: It’s because of the South African market, right? Lots of property and all that kind of stuff which has got to come out because of the leverage.

Yusuf Wadee: No, exactly, exactly. The South African stock market, I mean the universe isn’t that vast, right? There’s only so much in this universe and I guess it talks to the challenges of trying to launch a broad based, robust Shari’ah ETF in South Africa. It’s much easier to do globally, the sandpit is so much bigger, but locally it is a bit restricted.

Just for comparison, this ETF like I said only has 18 stocks in there, which I think is a nice mix. To give you a sense of the biggest sector in the Top 40, I’m talking about the generic Top 40, is financial services at 32%. For the Shari’ah version, the biggest sector is metals and mining at 57%. It’s exactly to your point, after you kick out financial services and a lot of the REITs, you are kind of just left with a mining play. And I think that’s been a story with a lot of local Shari’ah funds. They do tend to become resources-centric and again it’s just a function of a limited universe that’s available.

The Finance Ghost: Interesting. So last question, Yusuf. This has been such a great show. I’ve really enjoyed this.

The fees on these ETFs compared to the non-Islamic funds, are they more expensive? Because I mean someone in this whole process needs to make some money for doing all of the Shari’ah work. Are the fees a little bit higher on these ETFs?

Yusuf Wadee: Yeah, so certainly, Shari’ah investing has been around in South Africa for a few years. There’s certainly a few players that play in this space. Traditionally, Shari’ah product has been offered between 1% and 2% a year total expense ratio. That’s really been where Shari’ah product has been priced at. However, at Satrix as you know, our ethos is all about index-tracking and low cost and efficient portfolio management, and so our global ETF will come in at 55 basis points, so we think that’s super competitive.

The Finance Ghost: That’s very good!

Yusuf Wadee: Yeah, so this is the equivalent of 35 basis points for the non-Shari’ah version. The normal MSCI World is 35 basis points, this version is 55 basis points. You know, the additional 20 points is exactly to what you said, there’s a little bit more administration, there’s a little bit more screening and Shari’ah-licensing services that we need to incur on our end. That’s possibly where the additional 20 basis points can be attributed to. Likewise for the local version, the local Satrix Shari’ah Top 40 comes in at 40 basis points. This is in keeping with where we’ve priced our other sector and specialised indices, around 40 basis points.

Our headline indices are super efficient and cheap. We’ve got Top 40 at 10 basis points, we’ve got the All Share, roundabout there 15 basis points, the Satrix Global Investor. But those are very different, those are the broad-based, low-cost front-facing funds that we’ve got. The Shari’ah ETF is in keeping with our other sector funds – RESI, FINI, INDI, DIVI at the 40 basis points mark, which we think is super competitive for clients.

The Finance Ghost: I mean for context, the difference between I think you said 55 basis points on that fund and then going and investing in some kind of actively managed Shari’ah-compliant fund at 1.5% to 2% a year, that fund manager has got to do 100 basis points or more outperformance every year just for you to be in the same place. And it doesn’t sound like much, but it’s a lot. Some of the rockstar investors in the world are that because they’ve built, or rather because they’ve beaten the index by maybe 100 or 200 basis points over a long period. And that’s the difference between someone who no one’s ever heard of and someone who’s world famous. So it’s a huge difference. And that’s the benefit of low cost. That’s exactly the point.

Yusuf Wadee: I mean in a long-term game, that’s exactly what this is, right? This is a 20-year, 30-year game. You’re investing for very long-term horizons. It becomes a game of inches. These 50 points, 1%, you know, they add up and they become super significant over time. Spot on, investors are well advised to consider what they pay for financial services product and review these things from time to time.

The Finance Ghost: Yusuf, thank you, this podcast is actually quite a bit longer than I originally planned, but it’s been so interesting that I was very keen to just keep on digging into this with you. So thank you so much for everything that we’ve talked about on the show. And for investors who want to learn more, go check out the Satrix website or you’ll be able to navigate there to the various Shari’ah compliant funds.

Good luck with this MSCI World Islamic Feeder ETF. It sounds like a super interesting product. I think anything that lifts South Africans heads to the broader global opportunity set is always worthwhile. As lovely as it is to have such positive sentiment at the moment locally, let’s not forget that diversification is a huge part of portfolio management. To your point on that top 40 ETF, I think you said 18 stocks for it to be Shari’ah-compliant, for true diversification you need more than that and that’s why this Islamic feeder ETF on the Satrix MSCI World is now coming in. Congrats on that and all the best with it. And thank you for the time today.

Yusuf Wadee: Thank you.

Satrix Investments (Pty) Ltd is an approved financial service provider in terms of the Financial Advisory and Intermediary Services Act, No 37 of 2002 (“FAIS”). Satrix Managers (RF) (Pty) Ltd (Satrix) is a registered and approved Manager in Collective Investment Schemes in Securities. The information above does not constitute financial advice in term of FAIS. Consult your financial advisor before making an investment decision. Past performance is not indicative of future performance. For more information, visit www.satrix.co.za. 

GHOST BITES (Coronation | enX | Salungano | Shoprite | Trematon | Vodacom | Vunani)


Coronation has achieved modest earnings growth excluding the SARS matter (JSE: CML)

Of course, including the SARS matter means a huge year-on-year move

Coronation has released a trading statement, which means earnings will move by at least 20% vs. the prior period. In this case, you have to be careful. The trigger here is that HEPS is expected to increase by between 225% and 245% for the year ended September, which is obviously a somewhat bonkers percentage.

The explanation is simple: after a successful fight against SARS in court, Coronation has been able to reverse the provision related to the SARS assessment. This is essentially a double whammy, as the provision was a negative in the comparable period and a positive reversal in this period. It tells you nothing about how the core business is doing.

To get to that answer, it’s much better to look at fund management earnings per share excluding the impact of the SARS matter. This metric is up by between 0% and 10%, which means mid-single digit growth at the midpoint. Not terrible by any means, but nothing special either.


enX has flagged a drop in continuing HEPS (JSE: ENX)

The Eqstra disposal makes a big difference to these numbers

When a group has been through a major disposal, it’s very important to focus on continuing operations when looking at earnings. This is because there’s little point in comparing a smaller group to what used to be a bigger group – inevitably, earnings would be lower. The exception of course is where a loss-making business was disposed of, in which cases earnings go up thanks to the disposal!

Regardless of the direction of the distortion, looking at continuing operations is the right approach to get rid of the problem. At enX, revenue from continuing operations fell by 3% for the year ended August and HEPS on the same basis is down by between 6% and 16%.


Salungano’s headline loss worsens (JSE: SLG)

The coal miner suffered a significant drop in volumes

Salungano is a coal group operating with only one Eskom contract and mines that are below capacity or no longer in operation. That’s not a recipe for success, with sales volumes for the interim period dropping from 2.7 million tonnes to 2.1 million tonnes. Revenue fell by 30% to R1.6 billion and gross profit was down 26%, with the silver lining here being a 20 basis points increase in gross margin to 7.7% thanks to the coal mix.

Adjusting for non-recurring accounting gains, the operating loss was a nasty R236 million vs. R16 million in the comparative period. EBITDA was R322 million and finance costs were R156 million.

With all said and done, the headline loss per share deteriorated sharply from 19.64 cents to 90 cents.


Shoprite is still growing at a double-digit rate (JSE: SHP)

If you’re a Pick n Pay punter, rather look away now

The performance at Shoprite remains astonishingly good. For the quarter ended September, they achieves sales growth of 10.4% and opened a net 68 stores, with 53 net store openings in the core Supermarkets RSA segment. Pick n Pay’s loss in space is truly Shoprite’s gain.

Supermarkets RSA grew sales by 11.4% for the period, driven by a combination of organic growth and store openings. That’s slower than 13.3% last year, but that growth rate could never have been maintained. Internal selling price inflation came in at just 2.6% for the period, supporting growth in volumes.

Supermarkets non-RSA managed just 3.2% growth in rand, but 19.7% in constant currency – a reminder of the challenges facing African currencies. The Furniture segment was good for 7.6%. Finally, the other operating segments managed 10.2% growth, with OK Franchise sales up 13.6%. That’s a big slowdown from 22.0% growth in OK Franchise in the comparable period, but remains an impressive growth rate.

In terms of corporate activity, the sale of the Furniture segment to Pepkor is making progress and they hope to still complete the deal before June 2025. The purchase of the remaining 50% in Pingo Delivery wraps up this month thanks to approval received from the Competition Tribunal.

And finally, the group has invested R997 million in share buybacks in the financial year-to-date. The average purchase price per share is R289.29. Since 2021, they’ve deployed R2.6 billion in share buybacks at an average price of R211.59 per share.

With the share price up 5.6% on the day to R305.51, those buybacks look like smart moves.


Trematon releases the circular for the Aria Property disposal (JSE: TMT)

It remains to be seen what the group will do with the cash

Trematon is an investment holding company that has an unusual portfolio. I can point to Generation Education and Club Mykonos Langebaan as easy examples of how broad the exposure is. There’s other stuff in there as well, although the portfolio will be simplified if the disposal of the 60% stake in Aria goes ahead.

The deal will see Trematon receive R293 million. It’s not obvious yet what Trematon will do with the capital, so don’t bank on receiving a special dividend straight off the bat.

I must commend Trematon and the advisory team for getting this deal done with total costs of R1.52 million. That’s only 0.5% of the transaction value, which is vastly better than larger corporates are able to pull off. This is the difference between an entrepreneurial organisation like Trematon and a board that specialises in managing Other People’s Money.

60% of the net asset value of Aria works out to R288.4 million and the purchase price is above that level. They already have irrevocable undertakings from holders of 70.69% of shares and they only need 50%+1 approval for the deal, so the meeting itself should be a dead rubber.


The Competition Tribunal has prohibited the Vodacom – Maziv deal (JSE: VOD | JSE: REM)

This is of relevance to Remgro shareholders as well

Back in November 2021, Vodacom and Remgro announced a deal that would build a fibre powerhouse by combining the fibre assets owned by Community Investment Ventures – part of Remgro – and those held by Vodacom. This would include Vumatel and Dark Fibre Africa within the Remgro stable, all of which would be combined into an entity called Maziv in which Vodacom would have a 30% interest.

The Competition Tribunal has decided to prohibit this deal, which I find particularly odd given the obvious public interest elements of the deal. The parties committed to substantial investment of R10 billion over 5 years, predominantly in low income areas where access to internet is desperately needed. There were a bunch of other benefits, like internet access for schools. The Department of Trade, Industry and Competition agreed that the transaction would have substantial positive public interest effects.

When the full decision becomes available, it will be interesting to see how the Tribunal justified this decision. I’ve seen some weird stuff out of the South African competition authorities, so nothing really surprises me these days.


Vunani hit by a drop in fund management and investment banking performance (JSE: VUN)

The interim numbers are poor

With a market cap of just over R300 million and a share price down 24% over 5 years, Vunani won’t come up through a screening process as one of the better financial services groups in South Africa.

One of the major challenges is that they are simply sub-scale, with reliance on just a couple of business lines. The insurance and asset administration businesses were flat performers on the revenue line for the six months to August and managed to increase profits, but the fund management business suffered a 17% drop in revenue and a swing from profit of R9.7 million to a loss of just under R5 million. Along with investment banking advisory services also moving into the red (in this case from R1.7 million profit to R4 million losses), the overall move was negative for the group. Profit after tax deteriorated from R36.1 million to R22.8 million.

It gets even worse at HEPS level, with a 63% reduction to 6.7 cents.


Nibbles:

  • Astoria Investments (JSE: ARA) released its results for the quarter ended September. The group only revalues its unlisted investments at June and December, so the NAV move for the inbetween dates isn’t terribly useful. The NAV is down 0.5% year-on-year in rands, or up 9% in dollars. More importantly, the group noted that it has received a non-binding offer in respect of its 49% shareholding in ISA Carstens. A cautionary announcement has been issued in this regard.
  • AngloGold (JSE: ANG) is in the process of acquiring Centamin, a listed gold group with its flagship asset in Egypt. In an important step, the deal has now achieved Centamin shareholder approval. Unless there’s a major surprise coming, the deal should wrap up in November.
  • Orion Minerals (JSE: ORN) is working hard to complete the feasibility studies for the Prieska Copper Zinc Mine and the Okiep Copper Project. The former is expected to be completed by Q1 in 2025 and Okiep may well be completed sooner, with an expected delivery date in late Q4 2024. To get them across the line, Orion has retained the services of some heavy hitter consultants to help them model and optimise the mining plan. After raising over R136 million in July 2024, Orion has the funding for the early development work off the back of these plans.

GHOST BITES (Balwin | Coronation | Delta Property Fund | Gold Fields | Mantengu Mining | Pick n Pay | PPC | Renergen | Southern Palladium)


Not much to smile about at Balwin (JSE: BWN)

Of course, what they really need is more rate cuts

Balwin’s results for the six months to August 2024 are a sad and sorry tale of a property developer that has been in the wrong place at the wrong time. The high interest rate period has been really tough for them and there is far too much exposure to places like Gauteng, where sentiment lags far behind the Western Cape.

This leads to not just pressure on apartment sales volumes, but also on pricing as Balwin ends up discounting units to keep them moving. In turn, this leads to poor capital growth for buyers of Balwin properties, as there is new stock all the time and at competitive prices to keep the developer alive. In such a case, the motivation to buy properties isn’t great – and so the cycle continues.

The solution to this? Lower interest rates, but a much larger decrease than the recent 25 basis points cut is needed to really boost Balwin’s business.

Balwin saw a 23% reduction in apartments recognised in revenue in this period. Gross margin fell horribly from 28% to 23% as they cut prices, with growth in the annuity business managing to make the group gross margin picture look more consistent. As helpful as the annuity side is becoming, it doesn’t make up for the problems in the core business.

Revenue fell by 28%, a combination of fewer sales units and a lower price per unit. This led to HEPS dropping by a nasty 57%.

The silver lining, unsurprisingly for anyone who lives down here, was the Western Cape. It contributed 46% to total apartment sales and. More importantly, 94% of apartments brought to market were recognised in revenue in the corresponding period.

Much as I feel sorry at times for Balwin, I then read stuff like how they want to introduce rental developments and I remember that much of this is self-inflicted. Investors absolutely do not want to buy a mix of rental units and development profits, especially as the yields on residential properties are so weak.

In my view, instead of obsessing over the annuity side of the business, Balwin needs to get the basics right, try do as much as possible in the Western Cape and wait for the interest rate cycle to come to them.


Coronation’s circular for the B-BBEE deal is available (JSE: CML)

Very little imagination went into this structure

When Coronation first announced that they would be implementing a B-BBEE Ownership deal to take the group to 51% Black Ownership, my immediate reaction upon reading the overview was that this was a deal structured in a very old school fashion – and that’s not a compliment.

As a strong dividend payer and given the obvious focus of the group on the investment industry, they had a perfect opportunity here to list a retail scheme that would help with an unfortunate situation in which there are very few B-BBEE structures to choose from on the local market. Instead, they’ve gone with the tried and trusted approach of an employee share ownership scheme (ESOP) and broad-based ownership scheme (BBOS).

Now, an ESOP comes with all kind of practical challenges. Not only does it tend to exclude some staff members and create irritation along the way, but it often leads to disappointing outcomes for staff members who are included.

On the BBOS side, the use of a Public Benefit Organisation is cute and all, but it doesn’t come close to the brand win that Coronation would’ve achieved with a separately listed, tradeable scheme.

Worst of all, the deal is structured as the purchase of listed shares using notional funding. It would’ve made far more sense to structure this in the way that Phuthuma Nathi is structured at MultiChoice i.e. as an ownership structure in the unlisted subsidiary, thereby avoiding issues related to dilution and the volatility in the listed share price.

The corporate, legal and other advisors made over R20 million for this incredibly vanilla deal. Nice work if you can get it.


Delta Property Fund with a flurry of property sales – five of them! (JSE: DLT)

The purchasers aren’t related parties, so this is most unusual

Delta Property Fund still has a long way to go to try and bring its balance sheet in line. The fund is in the unfortunate position of having a portfolio of largely low quality properties, so they really aren’t easy to sell. Still, at the right price, anything can go.

In a surprising update, Delta has entered into five sales agreements that have nothing to do with one another! The property values range from R2.8 million to R23 million, with a total across the five of R63.6 million.

They are getting rid of a lot of vacant space here but goodness knows it comes at a “cost” – the five properties were last valued at around R173 million. In case you wondered why a fund might be trading at a discount to net asset value, there’s a perfect example.


Gold Fields completes the Osisko acquisition (JSE: GFI)

This is a major step in improving the quality of the Gold Fields portfolio

In early August, Gold Fields announced a deal to acquire 100% of Osisko, a deal that had various conditions precedent related to competition authorities and shareholders. It’s quite amazing how quickly this whole thing wrapped up, as the deal has now been completed.

Gold Fields paid $1.39 billion for the deal (net of cash received). Despite a significant portion being funded by debt, Gold Fields has maintained its investment grade credit rating and is looking forward to a strong 2025, boosted by this new asset in Canada.


Mantengu Mining with a Sublime deal that nobody understands (JSE: MTU)

I somehow doubt they paid $100k for a net asset value of R205 million

Mantengu Mining is acquiring 100% in Sublime Technologies from Sintex Minerals and Services, a company based in the US. Sublime is in Mpumalanga and manufactures and distributes silicon carbine with around 2% global market share.

That’s the part of the announcement that makes sense. We now get to the confusing part.

The net asset value of Sublime was R247 million as at December 2023 and the current assets and liabilities come to a net asset value of R205 million. This includes $1 million in cash (no, I’m also not sure why we’ve switched currency now). Profit after tax for the year ended December 2023 was R12 million.

The purchase price for this? “The rand equivalent of USD100,000.00” – which implies $100k. It simply cannot be right.

Instead of spending time on SENS making wild accusations about share manipulation, perhaps Mantengu Mining should focus on writing SENS announcements that make sense.


Pick n Pay: a long, long road ahead (JSE: PIK)

In a separate announcement, they’ve laid out the Boxer investment case

As you surely know by now, Pick n Pay consists of a very good business (Boxer) and a bad business that is struggling to achieve any kind of turnaround (Pick n Pay). I’ll start with the former, which is coming to the market soon.

Pick n Pay is separately listing Boxer as they need to unlock cash by reducing their stake in that business. The initial guidance was a raise of R6 billion to R8 billion, with Pick n Pay expecting it to be towards the upper end of the guidance. This is because the market loves Boxer, with a two-year compound annual growth (CAGR) rate of 14% in store rollouts and a three-year CAGR in turnover of 18.6%. Turnover for the first half of the year was up 12% and trading profit was up 11.8%. That’s decent in isolation and utterly incredible when viewed against the disaster that is Pick n Pay.

Boxer only has 4.2% market share of the formal grocery market, so there’s much room for growth even though the group is purely focused on lower income consumers. They use what is called a “soft discounter” strategy, which means a far tighter range that you would get at a typical Pick n Pay supermarket, but still wide enough to give consumers a worthwhile shopping experience. Balancing the importance of assortment with the value of a focused range and thus great prices is how Boxer has achieved success.

One of the key drivers of Boxer’s growth will be the shift from the informal into the formal market as South Africa continues to develop. This is no doubt a key part of Boxer’s medium-term outlook of turnover growth in the mid-teens, while achieving a trading margin of 5% and spending 2.5% of annual turnover on capex. They expect to pay 40% of headline earnings as a dividend in the medium term.

It’s not all roses, of course. Boxer’s gross margin declined from 20.7% to 20.3% in the interim period, with strong investment in price to drive volume and turnover growth. This is why trading margin was flat at 4.1% despite the saving in diesel costs, as Boxer put that money into better prices instead. It’s a highly competitive market in which Boxer is up against the likes of Shoprite amongst others.

Of course, the biggest irritation of all is that retail investors were shut out of this capital raise. For a business that is built on empowering South Africans, it seems like such a waste that they didn’t bother including retail investors in the pre-listing capital raising process despite having all the time in the world to do so.

The listing is expected to happen before the end of the year. It’s important to remember that Pick n Pay is retaining a controlling stake in Boxer after the listing, so they are only partially realising their investment here.

We now move on to Pick n Pay, where that business saw its trading losses worsen by 9.1% due to gross margin pressure. It is very difficult for a weak retailer to survive in this environment, particularly when facing tough competitors who are putting on the squeeze.

There were bright spots elsewhere, like Pick n Pay Clothing with 9.8% sales growth and Pick n Pay Online at 60.6%. Company-owned supermarkets saw like-for-like growth swing into the green at 3.1%, which is a lot more than the franchise base can say.

The group’s comparable loss before tax was 25.7% worse than last year. They are excited to confirm that for the first time in several years, they performed in line with the plan! I guess that above all else, this is a great example of the happiness it can bring your life to have really low expectations.

The first 8 weeks of the second half of the financial year reflect a sales decline of -1% in Pick n Pay South Africa, or +1.3% on a like-for-like basis. This shows the impact of store closures. Over at Boxer, they are up 9.6% or 5.2% on a like-for-like basis.

They still expect to make a substantial full-year trading loss in Pick n Pay this year. The good news is that they hope it will be about half of the loss suffered last year. The bad news is that it’s still a huge loss and they are by no means out of the woods yet despite a large capital raise.


PPC’s earnings head in the right direction (JSE: PPC)

The mid-point suggests double-digit growth in HEPS

PPC has released a trading statement dealing with the six months ended September 2024. An importance nuance here is that the prior period results are being presented in such a way that CIMERWA in Rwanda is shown as a discontinued operation. The focus is thus on continuing operations rather than total operations.

Earnings per share, which includes the impact of impairments (particularly in the base period), will be between 11% and 31% higher. Headline earnings per share (HEPS) excludes impairments and will be up by between 0% and 18%. This is why HEPS is used by the market as a better indication of underlying performance.

It seems as though the uptick in earnings isn’t coming from the best possible places. Rather than highlighting revenue growth, the narrative in the announcement focuses on cost reductions, higher income from the average cash balance and the partially offsetting impact of a higher tax rate.


Never a dull moment at Renergen (JSE: REN)

There’s a fight with a solar developer that could have far-reaching effects

There’s a rather awkward situation underway at Renergen which goes to the very core of the business case. A group called Springbok Solar is busy building a project in an area designated for future natural gas extraction. Now, Renergen notes that they hold a valid petroleum production right granted under the MPRDA, so that should not be possible without Renergen’s permission.

But here’s the catch: Springbok Solar is challenging aspects of the production right in law, something that could take years to go through the courts and which casts material uncertainty over Renergen at a time when they really can’t afford it, with hopes to list on the NASDAQ soon.

Renergen has been negotiating with Springbok Solar around permission for their project, but they seem to have reached a stalemate relating to Renergen wanting a buffer zone around the gas bearing structures.

This is a mess. If this cannot be resolved, Renergen has a huge overhang regarding its right to extract helium. Springbok Solar also runs risk of course, as their project could be declared unlawful one day, but it feels like they have less to lose and they know it.


Southern Palladium releases the prefeasibility study (JSE: SDL)

This is a huge moment for any junior mining group

Southern Palladium has achieved a key milestone: the release of a prefeasibility study for the Bengwenyama PGM project. The life of mine is estimated at 29 years and they believe that the cash costs will be “firmly at the low end” of the global cost curve thanks to shallow mining depths and a high grade. They expect cash costs of $644/6E ounce.

The estimated post-tax internal rate of return is 28%, with a post-tax capital payback of 3.5 years from first concentrate production. EBITDA over the life of mine is expected to be $5.6 billion at a margin of 50%.

The initial capital expenditure estimation is $385 million, including a 15% contingency.

The important thing is that key metrics are better than the scoping study suggested, so the economics of the project are getting better as they do more work on the plan.

The next steps are to get the Environmental Authorisation and Mining Right. They then need to complete the required drilling and complete a definitive feasibility study, after which there’s a final investment decision and the development of the mine.


Director dealings:

  • Director dealings:
    • Various members of the Mouton family bought shares in Curro (JSE: COH) worth R5.3 million.
    • The CEO of De Beers has sold shares in Anglo American (JSE: AGL) worth around R2.3 million.
    • A director of CMH (JSE: CMH) has once again sold shares worth R258k.
    • The CEO of 4Sight Holdings (JSE: 4SI) and an associate sold shares worth around R250k.
    • A director of Standard Bank (JSE: SBK) bought shares worth R119.5k.
    • The CEO of Spear REIT (JSE: SEA) and an associate bought shares worth R39k.
  • Europa Metals (JSE: EUZ) is busy with a potential reverse takeover by Viridian Metals Ireland that will completely change the nature of the portfolio in Europa. They are at term sheet stage with a 150 day period of exclusivity. Europa Metals’ shares are suspended from trading while they work through the conditions to figure out if there’s a deal. For now, it’s a game of wait and see.
  • Hyprop (JSE: HYP) announced that GCR Ratings affirmed its long-term and short-term credit ratings with a stable outlook.
  • Sasfin (JSE: SFN) still needs to send out the circular for the take-private and delisting of the company. They received a dispensation from the JSE for the 60-days rule but they don’t expect to miss it by much, with the circular expected to be out by 1 November.
  • Copper 360 (JSE: CPR) has appointed Ferdinand Nel as CFO with immediate effect. The current CFO, Stephan du Plessis, will become Commercial Director.
  • Oando (JSE: OAO) expects to publish its 2023 annual financial statements before 1st November, bringing an end to a process that had delays to an acquisition and the related audit work.

GHOST WRAP #82 (Clicks | Dis-Chem | The Foschini Group | Cashbuild)

Listen to the show here:


The Ghost Wrap podcast is proudly brought to you by Forvis Mazars, a leading international audit, tax and advisory firm with a national footprint within South Africa. Visit the Forvis Mazars website for more information.

This episode covers:

  • Clicks and Dis-Chem as the dynamic duo in arguably the most appealing retail model.
  • The Foschini Group’s latest acquisition in the UK, proving once more that the group isn’t scared of risk.
  • Cashbuild’s positive momentum in both the share price and sales growth.

Don’t wait until 2025 for your financial goals

0

As October (which also happens to be Financial Planning Month) draws to a close, it’s easy to just write off the rest of this year and promise yourself that you’ll start in January. Instead, this is the time to plan and build momentum.

As the year draws towards a close, it’s time to get a head start on your 2025 financial goals. “October isn’t just about reviewing where you are — it’s about taking action to get ahead,” says René Basson, Head of Brand at Satrix. “By using this time to reassess your financial strategy and set clear, actionable goals, you can build momentum that will carry you into 2025. It’s about making intentional choices now to ensure long-term success, rather than waiting for the new year to start planning.” 

October is Financial Planning Month, but don’t worry if you didn’t take advantage of that. You still have the ideal opportunity to review your progress and put plans in place for the year ahead. 

Here are key actions you can take to ensure you’re on the right track: 

  1. Review Your Financial Goals: Take a moment to assess your short-, medium-, and long-term financial goals. Do these still make sense for your current situation and life stage? How are you tracking against achieving them?   
  2. Check Your Budget and Automate Investments: Examine your monthly budget and consider automating your investments — essentially, “paying yourself first.” If you’ve set up recurring investments, ensure they still align with your financial standing and goals.  
  3. Evolving Your Financial Products: As your life changes, so should your financial products and protections. Major life events — like marriage, having children, or career shifts — can significantly impact your financial needs. It’s vital to regularly review and update your insurance coverage, savings plans, and investment strategies to ensure they match your evolving circumstances.   
  4. Think Long Term: Don’t rush into decisions. Investing is a long game. Being informed about your portfolio’s performance allows for better decision-making that supports long-term growth.  

Focus on Your Investments 

When reviewing your portfolio, Basson recommends paying attention to the following: 

  1. Diversification: You should consider investing in different asset classes (e.g. property, shares, bonds, cash etc) and across various industries and geographies. This portfolio diversification will mitigate the risk of your investments underperforming, should the economy take a downward trajectory. By diversifying your investments, you lower the risk of some of the higher-risk asset classes. With Satrix, you can easily opt for exchange-traded funds, for example, which give you a ‘basket’ of shares to diversify your exposure, and Satrix ETFs offer a variety of asset classes and geographies.
  2. Risk Profiles: Based on your risk tolerance and investment personality, you can adjust your investment portfolio accordingly and ensure you’re comfortable with the risk profile of the funds you’ve chosen. This also aligns with your life stage – how far you are from retirement will help determine how you build a risk-adjusted portfolio.  
  3. Fees: Be aware of the fees you’re paying for your investments. High fees can erode long-term growth, so it’s critical to know what you’re paying and whether the fees are justified. Satrix, for example, offers low fees and no minimums, to democratise investing and make it more accessible to all South Africans. You can start your investing journey from as little as R10.  
  4. Market Awareness: Keep yourself informed of what is happening in the markets but avoid knee-jerk reactions to short-term volatility. Consider market developments that could inform your decision-making. Also, consider your investment vehicles; are you only invested in one vehicle? If so, should you consider adding alternatives to help diversify your portfolio?  
  5. Performance: Be aware of the performance of your portfolio. Underperformance may warrant a review but be sure to consider market movements and know that volatility is to be expected. The aim is to be aware of your portfolio details so you can monitor it effectively and not make rash decisions. Investing is a long game so be prepared for ups and downs. The purpose of a review is not necessarily to make changes, but to be fully appraised of your portfolio’s standing and be prepared should you wish to make adjustments. Remember, the longer you’re invested, the more you can capitalise on the magic of compound interest.   

This quarter, take the opportunity to align your financial decisions with your life goals, ensuring you’re ready for the road ahead. By acting now, you’re not just preparing for 2025 – you’re setting yourself up for lasting financial success. Basson concludes, “Proactive planning today lays the foundation for a prosperous year. Take charge and make 2025 your best financial year yet.” 

Disclosure

Satrix Investments (Pty) Ltd is an approved FSP in terms of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision. Satrix Managers (RF) (Pty) Ltd (Satrix) is a registered and approved Manager in Collective Investment Schemes in Securities and an authorised financial services provider in terms of the FAIS. 

While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSPs, their shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaim all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information. 

A version of this article was first published here.

GHOST BITES (BHP | Dis-Chem | Finbond | FirstRand | Mondi | Sibanye-Stillwater | Sun International | The Foschini Group)


BHP finalises the Samarco settlement (JSE: BHG)

Almost a decade after the disaster, agreement has been reached

BHP and Vale (the co-shareholders in Samarco) and Brazilian regulators have locked in a framework agreement that remains subject to approval by the Brazilian Supreme Court. Unless something goes badly wrong in that process, everyone now has certainty over what will happen.

The total settlement is worth $31.7 billion, of which $7.9 billion has already been spent on remediation and compensation since 2016. $18 billion will be payable over 20 years in the form of instalments and a further $5.8 billion is attributed to the estimated financial value of various activities that Samarco has an obligation to perform.

Remember, BHP is paying up for half of this settlement. Based on the extent of payments to-date and the time value of money, the existing provision of $6.5 billion is sufficient for this agreement.

BHP always reminds the market that this settlement doesn’t resolve legal action elsewhere, specifically in Australia, the UK and the Netherlands.


Dis-Chem gives a masterclass in margins (JSE: DCP)

This is what you want an income statement to look like

The shape of an income statement tells you so much about a company. Ideally, you want to see margins heading in the right direction, something that is by no means guaranteed even when revenue growth is strong. No such issue at Dis-Chem thankfully, where revenue increased 9.6% (an impressive number even viewed in isolation) and operating profit was up 17.5%.

The expansion in margin was thanks to savings in payroll costs after the group implemented a different staffing framework in the stores. The beauty of retail is that if you can figure out a way to do something better, you can then roll it out across all the stores. Like-for-like retail employee costs increased by only 0.7%!

Going back to revenue growth for a moment, retail revenue was up 7.1% and comparable store growth was 4.8%. Wholesale revenue was up 10.1%, with the acceleration vs. retail revenue driven by sales to independent pharmacies up 30.3% and The Local Choice franchises up 21.8%.

Thanks to better gross margins, total income was up 10.4% and expenses were up 9%, leading to the operating margin expansion. If you’re wondering how expenses grew by 9% when staff costs were so flat, the answer lies in the investment in new stores.

Speaking of investment, net finance costs increased by 19.2%, mainly due to the loan facility to fund the Longmeadow warehouse property. Capital expenditure in this period was R330 million, of which R194 million was expansionary expenditure.

With the dividend up 16.1% and so much investment in the core business, this remains one of the most lucrative retail models in South Africa. Things have slowed down in recent weeks though, with sales between 1 September and 22 October only up by 5.6% vs. the comparable period. This might be why the share price took a breather on the day, down 3.7% and taking the year-to-date increase to 17.3%.


Finbond’s cautionary announcement fizzles out (JSE: FGL)

Whatever the potential deal was, it’s not happening right now

Cautionary announcements are exactly that: a cautionary tale for shareholders in which something may or may not happen that could significantly impact the share price. I see it far too often on the market that punters assume that a cautionary announcement will lead to a deal. In reality, many such announcements end up being a non-event.

This is the case at Finbond, where the cautionary has now been withdrawn. They were in discussions with shareholders regarding a potential corporate action, which I’m speculating was a possible offer and take-private of the group. For whatever reason, there’s no deal on the table right now.


A bloody nose in court for FirstRand (JSE: FSR)

This could have serious implications for the motor finance industry

FirstRand is exposed to a review by the UK’s Financial Conduct Authority of the use of discretionary commission arrangements and sales by lenders in the UK motor finance market. The debate here is on whether the commission payments to dealers by financiers meet all requirements and are fair to customers.

As legal reviews are uncertain in nature and can lead to substantial penalties if they go against the company, FirstRand raised a provision of R3 billion for the year ended June 2024.

There’s been a significant development in legal proceedings related to claims brought by claimant law firms. Earlier rulings in lower courts went the way of FirstRand, but it’s all gone wrong in the UK Court of Appeal where a judge found that commission disclosures were inadequate. Even worse, the judge has found that motor dealers have a fiduciary duty of loyalty to customers, which is far more onerous than just treating customers fairly.

Given the potential impact of this ruling on the entire consumer finance sector in the UK, FirstRand is seeking permission to appeal to the UK Supreme Court.

Logically, I can’t see how a fiduciary duty can be imposed on motor dealers. It would turn the industry on its head and probably lead to far greater profit margins needing to be made by dealers to make up for it, so used cars become less affordable for consumers as a result. Stranger things have happened, so this court ruling must’ve created some nervous faces in many boardrooms.


A fire at Mondi’s Stambolijski paper mill has led to permanent closure (JSE: MNP)

Mondi has been consolidating its European operations anyway

In late September, a fire broke out at Mondi’s Stambolijski mill in Bulgaria. It caused such extensive damage that Mondi doesn’t see a business case for repairing the mill, as the prospects for the business just don’t justify the spend.

This affects around 300 employees, so I’m sure it’s not a decision that was taken lightly. Mondi will incur net closure costs of €100 million, so it gives you an idea of how weak the future looks for the mill when you consider that closure is the better route.


A positive tax development for Sibanye-Stillwater (JSE: SSW)

After so much bad luck, here’s something positive

Sibanye sounds thrilled about the changes to Section 45X of the Inflation Reduction Act in the US, with the hope being that they will have a significant positive impact on the group’s platinum operations in Montana.

The legislation was introduced back in 2022, but the wording of the 10% Advance Manufacturing Production credit excluded extraction costs of critical minerals and thus had very little positive impact on Sibanye’s business. After much lobbying, this has now been amended and the extraction costs will be eligible for the credit.

Sibanye doesn’t give an indication of the quantum of the benefit at this stage.


A blow to Sun International’s acquisition ambitions (JSE: SUI)

The Competition Commission doesn’t like the Peermont deal

Sun International is hoping to acquire Peermont in a deal that would bring the flagship Emperors Palace asset into its stable. The market always knew that it would be a tricky one for competition authorities, expecting an approval with disposal conditions rather than a clean approval.

It’s not even as good as that unfortunately, with the Competition Commission recommending to the Competition Tribunal that the deal be prohibited in its entirety.

Sun International and Peermont will receive copies of the recommendation and the Tribunal will use it in its preliminary deliberations. This is where the competition lawyers will earn their fees one way or another. Although it’s not impossible that the Tribunal goes ahead and approves the deal despite the recommendation by the Competition Commission, the risk of this deal failing has now gone through the roof.


The Foschini Group is clearly feeling confident right now (JSE: TFG)

They have announced the acquisition of another UK retailer

The oddly-named retailer “White Stuff” is being acquired by The Foschini Group’s UK subsidiary, TFG London. They are buying the entire thing in one shot, giving them ownership of a clothing and accessories retailer with 113 stores and 46 concessions in the UK, along with 6 stores and 25 concessions in Europe. Online sales are a major part of the story, contributing 43% of total sales.

In the year ended April 2024, the business achieved revenue of £154.8m and EBITDA of £8.6m. That’s only an EBITDA margin of 5.6%, which doesn’t sound terribly impressive to me. Perhaps they are looking at synergies with the existing UK business, although the announcement doesn’t go into any detail on this.

As the deal is too small to trigger a detailed announcement, we also don’t know what TFG is paying for this retailer. Hopefully, they’ve learnt from the many mistakes made by local retailers on the international stage and paid a reasonable price with deferred payment structures.


Nibbles:

  • Director dealings:
    • The ex-CEO of Italtile (JSE: ITE) sold shares worth R4.2 million.
    • A director of CMH (JSE: CMH) has once again sold shares in the company, this time to the value of R416k.
    • A director of a subsidiary of AVI (JSE: AVI) received share awards and sold the whole lot worth R324k.
    • The CFO of Spear REIT (JSE: SEA) bought shares worth R150k.
    • The company secretary of Famous Brands (JSE: FBR) sold shares worth R50.4k.
  • In a clear sign of succession planning, Octodec (JSE: OCT) announced that Riaan Erasmus will be joining as not just the CFO, but also as the deputy CEO of the property group. One of his responsibilities will be assessing the possible internalisation of the management company.
  • Southern Palladium (JSE: SDL) has released its quarterly activities report for the three months ended 30 September 2024. The focus in this quarter has been to make progress on the Pre-Feasibility Study, scheduled for release in the 4th quarter. The group is on track for a big end to the year!

UNLOCK THE STOCK: Pan African Resources

Unlock the Stock is a platform designed to let retail investors experience life as a sell-side analyst. Corporate management teams give a presentation and then we open the floor to an interactive Q&A session, facilitated by the hosts.

We are grateful to the South African team from Lumi Global, who look after the webinar technology for us.

In the 44th edition of Unlock the Stock, Pan African Resources returned to the platform to talk about the performance and prospects in an environment of favourable gold prices . The Finance Ghost co-hosted this event with Mark Tobin of Coffee Microcaps and the team from Keyter Rech Investor Solutions.

Watch the recording here:

How Marvel cracked the universe

Getting warm bodies in cinema seats is no easy feat in the age of streaming (just ask the likes of Ster-Kinekor or NuMetro). Yet despite the rising challenge, Marvel managed to create something in 2008 that drew audiences back to cinemas in droves – and they managed to keep that drive going for just over a decade. 

You either are a superhero movie person, or you just aren’t. Depending on which one of the two camps you fall into, the period between 2008 and 2019 either felt like a never-ending assault of comic book plotlines, or the best time of your life. For your resident cinephile, the golden age of Marvel movies was less about the content of the films (although I’ll readily admit that I liked that too) and more about my fascination with the big machine that was churning these box office hits out at what felt like an unstoppable pace.

Pay close attention to the story that I’m about to tell you, because I think this might be the last time in our lifetimes (or ever) that we see this kind of success in the cinema game – and it’s worth knowing how it happened. 

Born to be rivals

First off, we need a basic understanding of the two big players in the superhero movie space. In the red corner (with the red logo, of course), you have Marvel. In the blue corner, you’ve got DC.

Both of these businesses started with comic books in the 1930s. DC was the first mover, kicking off in 1934. In 1938, they created their most famous character: Superman, believed by many to be the original superhero. The success of the Superman storyline prompted DC to create more superhero plots, and characters like Batman, Wonder Woman, Aquaman, the Teen Titans and The Flash soon joined their ranks.

DC’s success didn’t go unnoticed, and soon a competitor appeared. Marvel published their first comic book in 1939, and soon introduced a steady stream of characters including Captain America, Spider-Man, Iron Man, the X-Men and the Fantastic Four. The legendary Stan Lee took over the reins at Marvel in 1973, and things went well for a while – but the good times wouldn’t last.

The rise of television led to a slump in the comic book industry, and Marvel was caught unprepared. They filed for bankruptcy in the 1990s and quickly changed tactics, experimenting with playing cards and launching Marvel Studios as a way to get their ideas off pages and onto screens. By the late 90s, Marvel Studios had successfully pulled Marvel out of the ditch. Little did anyone know that this hail-Mary gamble would go on to become their greatest win yet.

In the red corner

To distinguish their big screen ventures from their comic books, Marvel created what’s known as the Marvel Cinematic Universe, or MCU. The concept behind this name was to hint at the idea that all of their films would exist within the same shared “universe”. Much like the original Marvel Universe in comic books, the MCU would be established by crossing over common plot elements, settings, cast, and characters. Every film would tell its own story, but elements of that story would ripple into other films in the same universe.

It sounds like a fairly simple idea, but before the release of the first Marvel film in 2008, this had never successfully been achieved on screen, and for good reason. Beyond logistics like studio buy-in and the ability to lock in key actors for the (very, very) long run, the creativity needed to see the big overarching story and the patience required to tell it in pieces through individual films is rarely found. 

How does that differ from something like a franchise? Take Rocky for instance, which is a standalone film with sequels (and prequels) that all feature the same characters (usually played by the same actors). So why is Rocky a franchise, not a universe?

I think Patrick Shanley of The Hollywood Reporter said it really well: “The key differences between a regular franchise, such as The Fast and the Furious or Pitch Perfect films, and a shared universe is the amount of planning and interweaving that goes into each individual film. It’s all too easy to make a film that exists solely for the purpose of setting up future instalments and expanding a world, rather than a film that stands on its own merits while deftly hinting or winking at its place in the larger mythos. In that, the MCU has flourished.”

For Marvel, the stars aligned at exactly the right time. They had a rich IP trove of established characters and stories to draw from, plenty of budget to play with and an impressive list of directors and actors locked in. All the ingredients to create something very interesting were right there.

Let’s talk about phases

Once they established their Universe concept, Marvel started talking about phases. Traditionally, comic books would focus on telling one character’s story per book, but every once in a while they would do a “mega event” limited series, which would bring a bunch of characters together into one book to fight a common enemy. Marvel Studios president and chief producer Kevin Feige envisioned that each MCU phase would work the same way: a collection of movies about singular heroes, culminating with an Avengers film (which brings the whole team of heroes together).

MCU Phase 1 was launched in 2008, when Robert Downey Jr. first stepped out as Tony Stark/Iron Man, and concluded with the MCU’s first ensemble film, The Avengers, in 2012. In the five years between Iron Man and The Avengers, Marvel released Hulk, Thor, an Iron Man sequel and Captain America. Each film helped to set up the backstory and motivations of its titular hero, which meant that audiences who had been following along felt a deeper connection to the characters by the time they were thrown together into a big, showy ensemble film.

Phase 1 was well-received by audiences and critics, and superhero fever started to heat up. For a budget of $1 billion total across the 6 films in Phase 1, the MCU raked in $3.8 billion at the box office alone (so not taking into account the profits made on merchandise and streaming). The recipe was working, and Marvel looked unstoppable.

Phase 2 kicked off in 2013 and wrapped up in 2015. Marvel repeated their formula: five individual hero movies, culminating in Avengers: Age of Ultron. This time, they spent $1.79 billion across all the films to bring home $5.27 billion at the box office.

Phase 3, which in my opinion was the peak of the MCU, was its most ambitious endeavour yet. Marvel managed to churn out 11 films between 2016 and 2019: 9 individual character films, and a two-part mega ensemble in the form of Avengers: Infinity War and Avengers: Endgame. Against a budget of $2.4 billion for the whole phase, the MCU delivered an astronomical $13.5 billion at the box office, as well as the highest-grossing film of all time (the grand finale, Endgame)*.

Like all good things, it couldn’t last forever. Phase 4 and onwards shifted the focus onto a combination of films and series for streaming, which led to a mixed bunch of hits and misses. The same audiences who managed to stay mostly hooked through the 23 films of Phase 1-3 were starting to show a bit of superhero fatigue, and with Covid-19 rearing its head and casting disarray over the Phase 4 release plan, it makes sense that things simmered down at this point.

In the blue corner

Behind the blue logo we find DC Comics, providing another excellent example of first mover disadvantage. While we’ve already established that DC started the comic book game, it’s clear that once their competitors got a foothold, they couldn’t quite keep up. 

Consider this: DC has the same treasure trove of IP that Marvel does. They even play in the same genre, which means they had the right content at the right time when superhero fever took hold. They had already seen successes with superhero films – just think of the various iterations of Batman and Superman that we’ve seen on screen in the last few decades. So why did they come second in the superhero race?

First of all, let me assure you that DC did come second. After officially launching the DCEU (DC Extended Universe) with Man of Steel in 2013, they released another 15 films, capping the collection with Aquaman 2 in 2023. For a total budget of $2.65 billion across the 16 films, they made a box office return of $7 billion. If you read carefully, that means they made $6.5 billion less across their collection of films than the MCU did for Phase 3 alone. To add insult to injury, 8 out of the 16 films failed to break even at the box office, indicating a 50% miss rate for the DCEU. 

Where did DC stumble?

In my opinion (and remember, it is an opinion column), the issue with DC has always been that they lacked continuity. How many Superman actors can you name off the top of your head? Doesn’t it feel like there’s a new Batman, played by a new face, in theatres every five years or so? Every time DC brings in a new actor to play a familiar character like Batman or the Joker, they essentially reset the entire franchise and retell the story. Given their history, it was probably always going to be a challenge to unlearn the pattern and build a universe instead of a franchise.

Continuity plagued them at every step of the journey, from storytelling to talent. One of the outright winners for the DCEU was director Patty Jankins’ Wonder Woman, which rocked the box office in 2017. Audiences loved the movie’s female protagonist, and wanted to see more. Now, here was an opportunity for DC to play to their advantage: DC comics traditionally had a greater number of female heroes and villains, something that their main competitor, Marvel, lacked. DC made bold claims about 6 more female-led superhero movies, featuring characters like Batgirl and Harley Quinn – but ended up cancelling all of them. Instead, they produced a lukewarm Wonder Woman sequel (which didn’t break even at the box office) and shifted the Wonder Woman character into a supporting role in ensemble films like The Justice League.

Perhaps one of the franchise’s most persistent challenges has been the numerous controversies surrounding its cast members. Some DCEU actors have faced well-publicised legal troubles (like Amber Heard), while others have sparked social media backlash (Gal Gadot and Zack Snyder). Even those not involved in scandals have been subject to speculation about potential recasting (Ezra Miller and Henry Cavill). In fact almost every major actor in the DCEU has been touched by some form of controversy, significantly damaging the franchise’s public image.

The idea of a cinematic universe isn’t a new one – in fact, DC planned (but didn’t execute) their first crossover film way back in 2002. They would have launched the DCEU with a Justice League film in 2008 – the same year that the MCU kicked off – but put those plans on hold to focus on their Green Lantern film. When that bombed, they postponed all DCEU plans until 2013.

By the time Man of Steel finally made it to screens in 2013, Marvel was on a roll and getting on with Phase 2 already. DC entered a blood-red competitive ocean with half of a concept and a prayer, and while it’s admirable that they managed to get a few winners on the screen along the way, it really isn’t that much of a surprise that the MCU rained all over their parade.

What’s next for DC, now that they’ve wrapped up their DCEU project? Given what you’ve just read, you probably won’t be surprised to learn that they are relaunching their universe – this time calling it the DCU – with a spate of new actors and directors. 10 films have been announced.

They’re starting with a Superman reboot. Obviously.

*this title was claimed by Avatar upon its re-release in 2019. Not really very fair, if you consider that Avatar essentially got two runs at the box office and Endgame got one… but anyway.

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.

INVESTEC PODCAST: Mini-budget preview: Improved outlook for state finances?

Listen to the podcast here:


A rerating of SA sovereign bond yields, a stronger ZAR, and sidestepping a fiscal slippage, have sparked optimism for a healthier national balance sheet. But structural challenges persist, impeding the potential for growth. In the latest episode of the No Ordinary Wednesday podcast, Investec Chief Economist Annabel Bishop and Treasury Economist Tertia Jacobs discuss the Finance Minister’s priorities ahead of the mini budget on 30 October.

Also on Spotify and Apple Podcasts:

GHOST BITES (Afrimat | Anglo American / Amplats / Kumba | Cashbuild | Clicks | Datatec | Mantengu Mining | Nu-World | Spear REIT)


A tough period for Afrimat (JSE: AFT)

As luck would have it, the industry suffered a negative swing just as Afrimat took a chance on the Lafarge deal

You need to be harder than cement to manage a business in this industry, as you simply never know when the cycle will bite you. Despite the uncertainty, you have to keep investing in new business lines and riding things out, hoping for decent returns when viewed with a long-term lens.

Historically, Afrimat has done a great job of this. That doesn’t mean that every period will be great, though. The six months to August 2024 are proof of this, with a low iron ore price and major infrastructure challenges locally, as well as pressure on local industrial customers and of course the losses at Lafarge in the early days of the turnaround.

Combine all these factors and you get the unusual outcome of revenue up 44.3%, yet HEPS crashing by around 80%. The jump in revenue is thanks to the Lafarge acquisition. The pain in HEPS was also driven by the Lafarge acquisition, along with a halving of operating profit in the Bulk Commodities segment. Although group operating profit increased 4% to R555 million, this was thanks to a bargain purchase gain related to the Lafarge deal of R263 million (the opposite of goodwill i.e. when you pay below net asset value for an acquisition). Bargain purchase gains, much like goodwill impairments, are excluded from headline earnings.

In terms of outlook, some of the challenges that hurt this period are looking better, like signs of life in the Lafarge turnaround strategy. They also expect local iron ore volumes to improve in the second half of the year. Notably, the GNU hasn’t yet resulted in an uptick in large infrastructure or development projects, a comment that echoes what we saw recently at PPC.


Anglo group companies released production and sales updates (JSE: AGL | JSE: AMS | JSE: KIO)

And yes, lab-grown diamonds continue to hurt De Beers

Let’s begin with Anglo American Platinum, currently the ugly duckling in the group although you would never say it with a 13.8% jump in the share price on the day! Any signs of life in the platinum sector will be met with celebration as everything has been so depressed. Even after that rally, the share price is down 21% year-to-date.

In terms of production, Anglo American Platinum managed 22% growth in refined PGM production for the third quarter despite a decrease in mined volumes. Sales volumes were up 16%, supported by higher production. Refined production guidance has been revised to 3.7 to 3.9 million ounces vs. 3.3 to 3.7 million ounces previously. That’s obviously good news. Further good news is that they are on track for the cost guidance range of R16,500 to R17,500 per PGM ounce, most likely at the upper end of the range.

Moving on now to Kumba Iron Ore, production fell 3% year-on-year but increased sequentially vs. the second quarter. Sales volumes increased 2% year-on-year but fell sequentially, so it follows a different shape to production volumes. That’s what happens when the logistics are so unreliable in terms of trains and ports. Not only is Transnet a source of uncertainty and usually disappointment, but the weather plays a role as well.

Despite Kumba literally curtailing its ambitions to align more with what Transnet is able to actually provide in infrastructure support, they still expect sales volumes to be towards the lower end of full year guidance of 36 to 38 Mt.

We end with the mothership – Anglo American itself. Aside from the obvious mentions of Anglo American Platinum and Kumba Iron Ore and how they roll up to group numbers, Anglo American is highly focused on copper at the moment (they are on track for full year guidance despite a planned closure in this quarter) and also highlighted another record quarter at Minas-Rio iron ore in Brazil.

As for De Beers, my thesis on rough diamonds continues to play out, with words like a “protracted recovery” and a reduction in rough diamond production in response to market conditions. Production fell by 25%. You can safely ignore the corporate spin here – the reality is that lab-grown diamonds have taken a chunk of market share, exactly as I expected.

Overall, there aren’t too many highlights in the Anglo group story right now. The share price is up 21% this year as the market has retained some of the gains linked to the excitement around a potential deal with BHP, even though it didn’t happen.


Cashbuild does indeed seem to have bottomed – there’s finally growth! (JSE: CSB)

I’m long Cashbuild and very happy to see this

I’ve written about Cashbuild extensively in Ghost Bites and elsewhere. The TL;DR is that the stuff that broke the business (high interest rates / poor consumer sentiment / prioritising loadshedding spending on solar) has all improved and should continue to improve. It therefore doesn’t require a leap of faith to think that Cashbuild should benefit.

In the first quarter of the new financial year, revenue is up 5%, with 4% from existing stores and 1% from new stores. Sales volumes were up 3%, so people are gingerly emerging from their caves of despair and spending on their properties once more.

Selling price inflation was 1.4% year-on-year, so that helps drive volumes as most people are getting increases ahead of that level.

Even battered P&L Hardware South Africa is up, with growth of 9%!

The share price is up 6.6%. More importantly, it’s up nearly 30% since the bonkers V-shaped drop in August that I treated like an early Christmas present. I love the markets, especially when they are kind to me.


Clicks looks incredibly strong (JSE: CLS)

Retail turnover growth and better margins have driven this outcome

In the results for the year ended August 2024, Clicks points out that the total shareholder return over the past 10 years has been a compound annual growth rate (CAGR) of 20.7%. That is extraordinary, which is why the group has a strong international shareholder base. As emerging market retail businesses go, Clicks is one of the best.

This is evidenced by growth in the dividend of a substantial 14.3% for this financial year, accompanied by return on equity of 46.4%. These are the kind of numbers that investors just love to see.

Growth is being driven by retail turnover, which increased 11.7% overall. Comparable store turnover was up 8.4%, with pricing up 6.3% and volumes 2.1%. This means that not only is Clicks expanding the number of stores and accelerating growth, but they are achieving excellent numbers in the existing store base as well.

Comparable retail costs grew 7.4%, so there’s margin expansion at store level. Total costs were up 12.5%, with store rollout and other costs running ahead of total turnover growth in this period.

The slower side of the business is distribution turnover, where UPD only grew by 3.3%. This highlights that much of the growth is in beauty and personal care products rather than pharmaceutical products. There’s nothing wrong with that for Clicks shareholders, as the better margins are made in the “front shop” anyway. At least there’s positive momentum in margins in medicine as well, with an increase in the regulated Single Exit Price and a resultant 70 basis points improvement in distribution margin.

With group trading profit up by 15.1% and headline earnings up 11.9%, these numbers are hard to fault. Clicks is a cash generating machine of note, with cash from operations of R6 billion and capital expenditure of R890 million. They plan to keep expanding in the 2025 financial year and I wouldn’t bet against another great set of results coming through, assisted by improved consumer spending as interest rates come down.

The share price spiked during the day and eventually closed only 1.6% higher. Year-to-date, the price is up 17.4%.


Datatec’s earnings are much higher and there’s a dividend (JSE: DTC)

This is despite a 5.5% dip in revenue

Datatec is a lesson in the importance of gross margin. Although revenue was down by 5.5%, a significant improvement in gross margin from 15.1% to 16.6% means that gross profit was up 3.5% on a net basis. Along with efficiencies in the expense base that led to EBITDA margin increasing from 2.9% to 3.9%, this was enough to drive EBITDA 27.2% higher and HEPS a beautiful 66.7% higher.

Now, some of this is due to accounting changes in products, in which only the gross profit is recognised on a net basis vs. the revenue and the cost of sales. That is why Logicalis International, by far the biggest part of the group, saw gross margin jump from 24.4% to 28.5% despite revenue being 10.9% lower.

Either way, EBITDA growth looks fantastic and the group declared an interim dividend of 75 cents per share, compared to no interim dividend last year.

That’s a great set of numbers that will no doubt have investors smiling!


Mantengu Mining is ever so slightly profitable – and angry about its share price (JSE: MTU)

This is an extremely odd narrative to be pushing

Mantengu Mining expects to report positive HEPS of between 1 and 2 cents for the six months to August. That’s a huge improvement vs. the loss of 10 cents in the comparable period, driven by a substantial uptick in chrome concentrate production.

Things are certainly looking better, with the company expecting production to get even better going forward.

This is a great story to be able to tell, so why is management saying outlandish things about the share price? This is worth repeating verbatim from the announcement:

“The Board continues to be of the opinion that its shares are being manipulated downwards and thus the company is pursuing both civil and criminal legal action. Mantengu’s wholly owned subsidiary, Langpan Mining Co (Pty) Ltd, has a JSE approved Competent Person’s Report with a valuation of R851 million using December 2021 market prices. This computes to R3.88 per Mantengu share and excludes Mantengu’s recent acquisitions of Meerust Chrome (comparable size) and Blue Ridge Platinum (Pty) Ltd, yet the current share price is trading at approximately R0.80 cents per share.”

If they can prove market manipulation, then all well and good. Personally, it sounds to me like someone needs to sit them down and explain that (1) markets aren’t fair and (2) companies trade at discounts to the directors’ valuation all the time, especially smaller companies on the market that are barely profitable.

If the shares are so wildly undervalued, then why not calm down on the capex and pursue share buybacks instead?

Comments like these bring the entire market into disrepute. If they don’t have absolute proof of manipulation, then the JSE should be stepping in here.

And by the way, since it closed 35% higher on the day, is that also manipulation? Or is it only manipulation when the price goes down?


A decent second half at Nu-World (JSE: NWL)

Here’s another sign of improved consumer sentiment

Nu-World isn’t a business that you’ll hear about very often. The group is focused on consumer goods, specifically of a more durable nature like appliances. Things got a lot better in the second half of the year, with durable goods sales improving for the first time since mid-2021 based on retail statistics. This can only get better from here as lower interest rates start to have a meaningful impact in the economy.

For the full year ended August, Nu-World managed revenue growth of 8.3% and HEPS growth of 7.1%. When you consider that HEPS was down 5% for the interim period, that’s a huge positive swing in the second half of the year.

This confidence resulted in an 8.3% increase in the dividend and thus a higher payout ratio. Although there are international businesses in the mix here and this isn’t a pure-play on South Africa, these are encouraging signs regarding local sentiment.


Spear sees positive leasing momentum (JSE: SEA)

Tenant sentiment seems to have improved

The positive impact of the GNU is slowly making its way through the economy. It will take longer to land in an uptick in construction projects (as discussed in Afrimat further up), but it has at least had an impact on general business confidence. This leads to more positive decisions on things that are less daunting than large construction projects, like simply entering into a lease. Spear REIT has highlighted optimism in the tenant base and the conclusion of leases where tenants were uncertain before the GNU and then felt inspired to put pen to paper.

This was also a major factor in the group achieving positive reversions of 3.57% for the six months to August, which means new leases are at higher rental rates than the expired leases. Notably, reversions were still negative in the commercial (office) portfolio at -2.19%. Occupancy rates in the office portfolio improved considerably though, so positive reversions can’t be far away.

Overall, Spear managed growth in distributable income per share of just over 2% for the interim period. The distribution per share is up 3.1%, so the payout ratio increased slightly to 95%.

The loan-to-value was under 24% as at the end of August but that was before the Emira deal closed. As Spear announced earlier in the week, this has increased to between 31% and 33% now that the Emira deal has concluded.

The interim distribution represents a six-month yield of 4.1%. You have to be careful just doubling this as an annual yield when there are so many changes to the underlying Spear portfolio, but it gives you an idea at least.


Nibbles:

  • Director dealings:
    • The CEO of Fortress Property Fund (JSE: FFB) has pledged shares worth R30.6 million for a loan facility with a limit of R23 million. This isn’t a trade in the traditional form, but can lead to trades if the debt facility is used and something goes wrong. It also shows you how listed company executives use their shares to gain access to financing.
    • A director of a major subsidiary of OUTsurance (JSE: OUT) acquired shares worth nearly R5 million.
    • A senior executive of British American Tobacco (JSE: BTI) and a close associate of that executive sold shares worth £73k (roughly R1.7 million)
    • It would be nice to see better disclosure from DRDGOLD (JSE: DRD) on director dealings, as the company pools share awards, sells shares and allocates the sale based on how much each director wanted to sell. This doesn’t tell us to what extent directors sold only the taxable portion of each award or the entire thing.
  • Vukile (JSE: VKE) released a cautionary announcement that subsidiary Castellana Properties has entered into negotiations to acquire a shopping centre in Spain. The growth story looks set to continue there, although there’s no certainty of this particular deal going ahead of course.
  • Salungano Group (JSE: SLG) is currently suspended from trading and expects to release interim results by the end of the month. They won’t be pretty, with a headline loss per share of between 88.04 cents and 91.96 cents, much worse than 19.64 cents in the comparable period.
  • Pat Quarmby is stepping down as chairperson at KAP (JSE: KAP), with Johan Holtzhausen stepping up from lead independent director to chairperson.
  • If you are a South32 (JSE: S32) shareholder and looking to learn as much as possible about the company, then they have released the CEO and chair addresses from the AGM over SENS. It won’t give you much in addition to the financial results that the AGM relates to, but by all means give them a read for additional information.
Verified by MonsterInsights