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Weekly corporate finance activity by SA exchange-listed companies

Marylou Greig
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Weekly corporate finance activity by SA exchange-listed companies

The support by Pick n Pay shareholders of management’s plan to turnaround the ailing retailer was clearly evident in the results of its Rights Offer, attracting R8,2 billion in subscriptions, double the initial R4 billion targeted. The offer, which was fully underwritten, consisted of an issue of 252,206,809 new shares at a subscription price of R15.86 per share. The subscription price represented a 32.48% discount and constituted c.33.8% of the company’ share capital. Proceeds will be used to recapitalise the company as will the net proceeds of the intended Boxer IPO.

The GPI Women’s BBBEE Empowerment Trust will purchase 8,310,834 Grand Parade Investments shares at R3.39 per share from the company’s wholly owned subsidiary GPI Management Services. The purchase price of these treasury shares is R28,17 million, will be funded by a capital contribution for the full amount by GPI Management Services.

Grindrod Shipping, 83% owned by Taylor Maritime Investments, is to delist from Nasdaq effective 26 August and from the JSE on 30 August 2024. The delisting follows regulatory approval of the company’s selective capital reduction, which will see a share buyback of 3,5 million shares at $14.25 per share from shareholders.

A number of companies announced the repurchase of shares:

In line with its share buyback programme announced in March, British American Tobacco this week repurchased a further 355,122 shares at an average price of £27.49 per share for an aggregate £9,76 million.

In terms of its US$5 million general share repurchase programme announced in March 2024, Tharisa has repurchased a further 9,783 ordinary shares on the JSE at an average price of R19.51 per share and 351,667 ordinary shares on the LSE at an average price of 83.59 pence. The shares were repurchased during the period 29 July – 2 August 2024.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 29 July – 2 August 2024, a further 3,738,623 Prosus shares were repurchased for an aggregate €119 million and a further 285,326 Naspers shares for a total consideration of R991 million.

Three companies issued profit warnings this week: Hulamin, Impala Platinum and MTN.

One company issued a cautionary notice this week: Trematon Capital Investments.

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

Enter at your own risk

Doron Joffe and Asanda Lembede
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Enter at your own risk

Unilateral mistakes in signing agreements when using unconventional methods.

The growth of the global economy has fostered an environment for cross-border transactions to thrive. However, in many instances where parties are concluding agreements in cross-border transactions, differences in location and time may give rise to the need for remote contract execution mechanisms to conclude the deal.

Over the years, with the advancement of technology, we have seen a deviation from conventional methods of concluding contracts to the use of electronic contracts, smart contracts, and the holding of written contracts in escrow, which may be used for written contracts where a party to the contract is not available to sign the contract on the closing date, but signs a signature page prior to the closing, which is then attached to the rest of the contract.

What happens when a pre-signed signature page is attached to an agreement that contains material terms that the signatory had not agreed to be bound to?

As a point of departure, a party’s signature is evidence that the party agrees to be bound by the terms of the contract, in line with the caveat subscriptor rule. However, what recourse can be sought where the pre-signed signature page is attached to a version of the contract that contains material terms that the party had not agreed to be bound to? This article explores the consequences of a party’s unilateral mistake, and the contract law principle of iustus error as confirmed by the Supreme Court of Appeal (“SCA”) in Ruth Eunice Sechoaro v Patience Kgwadi (2023).

The Sechoaro case

In this case, Kgwadi (Respondent) had married her since deceased ex-husband (Mr Kgwadi) in community of property in May 1987, and said marriage was dissolved in October 1991. As a result of the divorce, they concluded a settlement agreement which did not deal with the division of a property that formed part of their joint estate. In its judgment, the divorce court had granted Mr Kgwadi 14 days to apply to the court for variation of the settlement agreement. At the time of their divorce, the Respondent and Mr Kgwadi were joint owners of an immovable property in Boksburg (Property). Since the settlement agreement did not deal with the division of the property, they verbally agreed that each of them would be entitled to half of the value of the Property. It was verbally agreed that Mr Kgwadi would pay the Respondent 50% of the value of the Property upon its sale; however, Mr Kgwadi never did. In September 2010, Mr Kgwadi remarried Ruth Sechoaro (Sechoaro), to whom he bequeathed 50% of his estate.

In March 2012, the Respondent was severely injured in an accident and remained in hospital for six months. During her stay, a messenger from a law firm (whom the Respondent assumed to be representing Mr Kgwadi) presented her with a document entitled, ‘variation agreement’, the terms of which were that, inter alia, the parties now agreed to amend the settlement agreement relating to the Property, and that she forfeited her 50% share in the Property to Mr Kgwadi at no value (the Variation Agreement), which the Respondent signed.

Mr Kgwadi passed away in 2014, and an executor of his estate was appointed (the Executor). The Executor and the Respondent attempted to sell the Property; however, the Respondent was informed that she was not entitled to 50% of the proceeds of the sale of the Property due to the Variation Agreement. The Respondent launched an application in the High Court to challenge the enforceability of the Variation Agreement on, amongst others, the grounds that she signed the Variation Agreement without any intention to be bound by its terms. The High Court found in favour of the Respondent. Sechoaro subsequently applied to the High Court for leave to appeal, which was dismissed. She subsequently applied to the SCA for leave to appeal.

The SCA had to consider whether the Respondent’s unilateral mistake (error) in signing the Variation Agreement under a misunderstanding of its contents is reasonable (iustus) and excusable. The court, in its application of the iustus error principle, found this to be the case on the premise of the following:

• Based on the facts, it is common cause that the Respondent was reasonable in not expecting the agreement she had signed to contain a term that forfeited her 50% share in the Property at no value;

• Mr Kgwadi’s decision to present a Variation Agreement – which contained a clause that was materially different to what had been agreed with the Respondent – 20 years after the initial settlement agreement, was done deliberately to deceive the Respondent;

• Mr Kgwadi must reasonably have known, contrary to the clause in the Variation Agreement, that the Respondent would not have agreed to that agreement; thus, when he received the signed agreement, he was aware of her mistake and was the cause of it; and

• The Respondent acted consistently under her assumption that the Variation Agreement did not contain a clause that bound her to forfeit her 50% share in the Property at no value.

The doctrine of iustus error

As a principle, iustus error has been developed by our courts over time, and functions as a corrective measure that provides that a party will not be bound where they mistakenly gave their consent, where that mistake is reasonable and excusable. In Du Toit, the court held that where prior to the agreement, the mistaken party created an impression that directly contradicts the provisions of the agreement, the other party must draw the mistaken party’s attention to the discrepancy. Where a party continues to rely on the mistaken party’s discrepancy, this reliance is said to be unreasonable, and the error iustus.

Lessons learnt

Commercial agreements are commonplace in trade and will continue to exist for as long as trade does. To ensure that contracting is efficient, inexpensive and speedy during cross-border trade, entities must develop mechanisms that allow for agreements to be concluded by individuals while they are in different locations across the globe.

While the practice of escrowing pre-signed signature pages or entire agreements for release on the agreed closing date is becoming more common, contracting parties must ensure that the final agreement and its terms align with what the parties had negotiated to be bound to. Where a dispute arises, it may not suffice to say that by virtue of the mistaken party’s signing the agreement, they are bound to its terms, irrespective of their mistake. Failure to draw the mistaken party’s attention to their mistake, and further relying – unreasonably – on a mistaken party’s consent to be bound will make the error iustus, and the terms of that agreement will not be binding.

Doron Joffe is an Executive and Joint Head of Department and Asanda Lembede a Candidate Legal Practitioner in Corporate Commercial | ENS.

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

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

Ghost Bites (Afrimat | AngloGold | Hulamin | HomeChoice | Nedbank | Powerfleet | Sasfin | Trematon)

The Finance Ghost
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Ghost Bites (Afrimat | AngloGold | Hulamin | HomeChoice | Nedbank | Powerfleet | Sasfin | Trematon)

Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:

Afrimat looks ahead to a better second half (JSE: AFT)

The second quarter showed promising signs in an otherwise disappointing first half

Afrimat comes up pretty regularly as a stock pick for a GNU-inspired theme. The business update for the first half of the financial year suggests that this makes sense, as March to May was lacklustre thanks to challenges in infrastructure and ArcelorMittal’s business, while June to the first week of August saw a pick up in domestic demand and additional tender activity in infrastructure projects. In other words, the post-election period has already been stronger.

The improvement in volumes after the election won’t be enough to offset the tough start to the period, so Afrimat expects volumes to decline for the six months to August. Transnet isn’t something that can be sorted out overnight either, with volumes for the first half of the year down 20% year-on-year. This is particularly frustrating when Afrimat can still make decent margins despite the depressed prices in the international iron ore market, as Afrimat is a low cost operator.

Speaking of iron ore, local volumes were down an awful 70% in Q1 thanks to reduced volumes taken by ArcelorMittal. Importantly, Afrimat notes that Q2 saw significant improvement and that volumes to ArcelorMittal should return to normal ranges in the remainder of the financial year. That’s a pretty important read-through for the volatile ArcelorMittal share price.

The Lafarge acquisition has been a major focus for investors, with excitement around what Afrimat can do with the asset. Improvement will take time, particularly as the cement kilns have been described as “extremely unreliable” – not what anyone wants to hear. Lafarge made losses in Q1 and is expected to make losses in Q2 as well. Afrimat is working hard at turning this story around and is satisfied with the progress thus far.

Another important update is that a single super phosphate plant has been commissioned, with sales volumes for fertiliser being ramped up to achieve planned volumes of 30,000 tons by 2025. This will be a positive contributor in the 2026 financial year.

AngloGold has taken advantage of gold prices (JSE: ANG)

Production is up and cash costs per ounce are done, leading to a great outcome

AngloGold closed 6% higher on a day that was slightly green for gold counters in general. This is because the company managed to grow production by 2% year-on-year for the six months to June, with production in Brazil showing a significant turnaround. Total cash costs per ounce fell 1% year-on-year to $1,158/oz. All-in sustaining costs per ounce were only up 2% to $1,589/oz.

These are good numbers in isolation. They become really great numbers when average gold prices were roughly 13.5% higher for the period, driving a lovely outcome of adjusted EBITDA moving 65% higher. Free cash flow was an inflow of $206 million vs. an outflow of $205 million the prior year – a casual swing of more than $400 million.

Get ready for the growth in HEPS, coming in at nearly 430%! The interim dividend has followed suit, up by 450%. Talk about being rewarded for patience while AngloGold sorted out its production issues!

The momentum over the period was also very encouraging, as second quarter production was 12% higher than in the first quarter. At this stage, guidance for FY24 has been maintained.

Hulamin is being impacted by softer global markets (JSE: HLM)

Earnings have dropped for the six months to June

Hulamin had a tough start to this period, with disappointing export markets having a negative impact on the first quarter of the year. Things started to improve in the second quarter at least, with demand from export customers up to historical levels once more.

A resilient local market over the period couldn’t do enough to make up for the export market weakness, leading to a drop in earnings for the period. HEPs is down by between 13% and 21%, while normalised HEPS is down by between 36% and 41%.

To add to the difficulties, Hulamin suffered a fire in June that impacted a line that produces export products. Plant repairs are expected to be completed by 15 September and the company is comprehensively insured for asset replacement and business interruption.

HomeChoice has highlighted significant earnings growth (JSE: HIL)

Detailed earnings are a couple of weeks away

HomeChoice has released a trading statement dealing with the six months ended June. The great news is that HEPS will be up by between 25% and 45%, coming in at between 179.6 cents and 208.4 cents.

The even better news is that this comes after two years of practically identical interim HEPS of 144.8 cents in 2022 and 143.7 cents in 2023. Finally, there’s some growth.

Detailed results are due for release on 18 August.

Nedbank achieves double digit growth in HEPS (JSE: NED)

Results are out for the six months to June

Nedbank closed 4% higher on the day of results, which tells you that the market liked them. Things mostly went in the right direction, with revenue up by 4% and headline earnings up by 8%. By the time we view it on a per-share basis in the form of HEPS, the increase is 11%. A double-digit increase is nothing to feel upset about.

The dividend has increased by a similar percentage, up 11.5% to 971 cents per share.

When these numbers are combined with the most increase in net asset value per share of 2%, there’s a solid outcome for shareholders in terms of total return.

One area for criticism is the cost-to-income ratio, which has moved higher from 52.9% to 55.3%. Lower is better here, with Nedbank struggling to keep expense growth below income growth. Nedbank Africa and Nedbank Wealth were the culprits here, with income under pressure (flat in Wealth and down in Africa) and expenses moving higher in both businesses.

Despite the pressure on cost-to-income, HEPS came out alright thanks to the group credit loss ratio moving significantly lower from 124 basis points to 104 basis points. It also strongly helped that both Corporate and Investment Banking and Retail and Business Banking both reported a strong uplift in earnings.

Return on equity, a key metric for banks, improved from 14.2% to 15.0%. They aim to get this up to 17% by 2025, which won’t be easy.

In case you’re wondering, Nedbank expects the prime rate in South Africa to decrease by 50bps to 11.25% by the end of the year.

These are great numbers for Jason Quinn to present to the market for the first time as CEO of the bank. He will certainly hope that the momentum continues. Keep an eye out for improvement in Wealth and Africa as two areas that need to get better.

Nedbank has placed the full results in Ghost Mail, available at this link.

Powerfleet’s earnings will be late, but they’ve released what they can (JSE: PWR)

The SEC is asking questions about the accounting for the merger with MiX Telematics

Powerfleet intended to host its earnings call for the quarter ended June 2024 on August 8th. This isn’t going to happen anymore, as the SEC sent a “comment letter” to the company asking for additional information regarding Powerfleet’s determination of the account acquirer in the recent deal with MiX Telematics. This is a technical accounting debate that doesn’t impact cash flows.

Although earnings are delayed, Powerfleet has noted that revenue for the quarter should be up 10% vs. the combined revenue of the two companies in the comparable period. Importantly, pro-forma adjusted GAAP will be up 40% on the same basis. I treat adjusted GAAP numbers with great caution, as US companies are absolute experts at turning GAAP losses into non-GAAP profits with things like share-based payments.

Indeed, there is a net loss attributable to shareholders of $23 million, although this also includes once-off restructuring and deal costs.

Perhaps most importantly, revenue and adjusted EBITDA for the full year are expected to exceed previous guidance of $300 million and $60 million respectively, although they don’t indicate by how much.

A bloody nose for Sasfin (JSE: SFN)

The Prudential Authority has fined the bank R160.6 million for historical non-compliance

There’s a lot going on at Sasfin. First, let’s do the good news. The disposal of Capital Equipment Finance and Commercial Property Finance to African Bank has received final regulatory approvals, which means that the R3.25 billion deal will go ahead.

Sadly, some of this money looks set to go directly to a fine of R160.6 million that has been imposed by the Prudential Authority of the SARB for historical non-compliance in the foreign exchange business. The total fine is actually just under R210 million, but R49 million has been suspended. Sasfin is taking legal advice around potential reviews or appeals of this sanction.

And of course, there’s the offer by WIPHOLD, Unitas and Sasfin Wealth to shareholders of Sasfin. It’s an odd one, as the success of the transaction is based on only a certain portion of shareholders accepting the offer. I’m not holding my breath for that to happen.

Trematon is diluting its stake in GenX (JSE: TMT)

Now we know why the company has been trading under a cautionary

Trematon has announced that an offshore investor, Dr Khamis Obaid Mubarak Al Ajmi, will be adding a 60% stake in GenX to his portfolio of school operations in Qatar and Oman. Trematon currently has an indirect 75.8% interest in GenEx and this will drop to 30.3%.

GenEx is a startup business that is part of the Generation Education Group and focused on delivering an edu-tech platform. The company lost R8.1 million in the year ended August, so this is a classic example of a sub-scale startup.

The deal takes the form of an investment of $3 million in GenX by the investor, with the proceeds used to expand GenEx to the Middle East and United Kingdom, alongside further growth in South Africa. That should do wonders for the sub-scale problem.

This is a Category 2 transaction, so shareholders won’t be asked to vote on it.

Little Bites:

  • Director dealings:
    • Although one must be careful in reading too much into the sale of vested shares, it’s interesting to note that Stephen Koseff and an associate sold shares in Investec (JSE: INL | JSE: INP) worth just over R3 million. It’s not clear whether this only relates to the taxable portion, hence why I’ve included it.
    • Various directors and senior managers of British American Tobacco (JSE: BTI) reinvested dividend income into shares in the company worth nearly £120k.
  • Under immense pressure from Country Bird Holdings to call a meeting, Quantum Foods (JSE: QFH) has announced that the shareholders’ meeting will be held electronically on Wednesday 11th September. An electronic meeting tends to be a good way to squash some of the dialogue that might otherwise happen, so I would’ve been happier to see an in-person meeting being called. The agenda is the proposed removal of the chairman, lead independent director and newly appointed independent director. The drama is coming soon!
  • Grand Parade Investments (JSE: GPL) announced a B-BBEE deal that will see the GPI Women’s BBBEE Empowerment Trust acquire shares worth R28.2 million from a GPI subsidiary. The deal will be funded by a capital contribution from a subsidiary of GPI. The way the accounting works is that these are treasury shares before and after the deal. They still need shareholder approval though and a circular has been issued accordingly.
  • Ascendis Health (JSE: ASC) announced that Lihle Mbele has been appointed as interim CFO. She is currently the Group Head of Finance at the company.
  • Though it hardly matters when the share price is R0.01 and Kibo Energy (JSE: KBO) is suspended from trading, be aware that the company has settled various creditors through the issuance of shares.
  • Tongaat Hulett (JSE: TON) reminded the market that the meeting to vote on the equity subscription as part of the business rescue plan is scheduled for Thursday 8 August. Will there be a final twist in this tale?

Nedbank Group Interim Results 2024

Nedbank
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Nedbank Group Interim Results 2024

Nedbank Group Interim Results 2024

Strong financial performance in a difficult macroeconomic environment

The operating environment during the first 6 months of 2024 was challenging and economic activity remained weak, impacted by geopolitical uncertainty, high interest rates, persistent inflation and general uncertainty ahead of the national elections in South Africa (SA). Household finances remained under pressure as real incomes contracted and job prospects remained muted. Corporate activity was also weak on the back of the uncertain political and economic environment.” 

Jason Quinn – Chief Executive

VIEW THE FULL INVESTOR SUITE HERE >

VIEW THE SHORT FORM ANNOUNCEMENT BELOW

Nedbank-Interim-Results-Advert-Final

Nedbank Group is one of South Africa’s four largest banks, with Nedbank Limited as their principal banking subsidiary.

They offer a wide range of wholesale and retail banking services, as well as other financial products, through their frontline clusters: Nedbank Corporate and Investment Banking, Nedbank Retail and Business Banking, Nedbank Wealth and Nedbank Africa Regions.

www.nedbankgroup.co.za

Offshore Equity Markets Soar: A Strong First Half of 2024

Siyabulela Nomoyi, Satrix
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Offshore Equity Markets Soar: A Strong First Half of 2024

Although everyone is talking about this market sell-off and where it could go, the build-up to the volatility in the markets was a strong first half of the year. Siyabulela Nomoyi of Satrix reminds us of the journey the markets took us on for the first half of 2024.

The first half of 2024 was remarkable for offshore equity markets, driven by tech advancements, rate cuts, and pivotal elections. Investors saw robust returns, particularly in developed markets, while emerging markets also posted gains. This period was defined by the stellar performance of tech giants, shifts in monetary policy, and political changes influencing market dynamics.

Here’s a quick snapshot of what the year has delivered to date:

Equities

  1. Tech Dominance: Nvidia became the world’s largest company by market value after its share price nearly doubled this year. Nvidia’s significant presence in major indices (8% of the Nasdaq 100, 7% of the S&P 500, and 5% of the MSCI World Index) drove strong returns in offshore equities. By the end of June, the S&P 500 was up 14.9%, the Nasdaq 100 up 17.2%, and the MSCI World Index up 11.6% in rand terms.
  2. Emerging Markets Lag: Emerging markets saw positive returns but lagged behind developed markets. The MSCI Emerging Markets Index was up 7.3% in rand terms, trailing the MSCI World Index by 4.3%. This was mainly due to China, which makes up 25% of the index and only rose 4.6%, compared to India, which rose 16.7% and makes up 19% of the index.
  3. South Africa’s Performance: South Africa, making up 3% of the MSCI Emerging Markets Index, also had positive returns but couldn’t keep pace with US-based tech companies. The FTSE/JSE All Share Index was up 5.8%, driven by listed property shares, with the South African Property Index (SAPY) up 9.6% and the FTSE/JSE Financial Index up 8.8%.
  4. European and UK Markets: European and UK markets experienced some volatility, with the European Central Bank (ECB) lowering rates by 0.25%. The ECB president indicated no further rate cuts were planned. In the first half of the year, the MSCI Euro Index was up 5.6% and the MSCI UK Index was up 6.8%, both in rand terms.

Rates and Reactions

The world carefully watched worldwide central banks’ monetary policies:

Interest Rate Cuts: The pace of rate cuts varied, with Mexico and Switzerland reducing borrowing rates in the first quarter, while the ECB lowered rates by 0.25% in the second quarter. US markets expect the US Fed to cut rates by year-end, bolstered by a low June inflation print of 3.0%, though the upcoming US elections add uncertainty.

Bonds’ Reaction: The FTSE/JSE All Bond Index was up 5.6% over six months, with the South African Reserve Bank (SARB) keeping rates unchanged in May. Offshore bonds lagged, with the Bloomberg Aggregate Bond Index down 3.3% in rand terms. The US 10-year Treasury Bond Note Yield was up 4.4% at the end of June, boosting investment-grade floating notes and higher-yielding corporate bonds. However, US Treasuries and long-term US aggregate bonds created some drag, resulting in underperformance.

A Big Election Year

In South Africa, the ANC lost its majority, leading to a Government of National Unity and the re-election of President Ramaphosa, boosting SA stocks. Mexico elected its first female president, but fiscal concerns led to a 5% drop in the peso and an 8% fall in the IPC Index. In India, political changes caused volatility, with the Nifty50 Index dropping 6% post-election but maintaining strong equity returns overall. In the US, uncertainty prevails with President Biden officially withdrawing from the race. Trump’s policies are viewed by many economists as potentially inflationary, which may prolong higher-for-longer inflation.

ETF Exposure: What Satrix has seen so far

The best-performing Exchange Traded Funds (ETFs) tracked offshore indices with double-digit returns, led by the Satrix Nasdaq 100 ETF with a 17.2% increase. The Satrix India and Satrix S&P 500 ETFs followed with returns of 16.7% and 14.9%. ETFs tracking the MSCI World and MSCI World ESG indices were up 11.6% and 10.5% respectively.

On the vanilla side, the Satrix Property ETF’s index was the best performer, up 9.5%. On the factor side, the Momentum factor index was the best performer, up 6.0%, followed by the Low Volatility index, tied to the Satrix RAFI 40 ETF, up 5.3%.

Investor Insights and Actions

Investors should consider strategic portfolio diversification with offshore exposure, including emerging market jurisdictions such as India. It’s critical to keep an eye on political developments and interest rate shifts, while also committing to stay the course to avoid knee-jerk reactions.

SatrixNOW offers easy access and exposure to local and offshore ETFs and funds.

This article was first published here

*Satrix is a division of Sanlam Investment Management

CIS disclosure Satrix Investments (Pty) Ltd is an approved financial services provider in terms of the Financial Advisory and Intermediary Services Act, No 37 of 2002 (“FAIS”). The information above does not constitute financial advice in terms of FAIS. Consult your financial adviser before making an investment decision. While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSP, its 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.  Satrix Managers (RF) (Pty) Ltd (Satrix) is a registered and approved Manager in Collective Investment Schemes in Securities. Collective investment schemes are generally medium- to long-term investments. With Unit Trusts and ETFs, the investor essentially owns a “proportionate share” (in proportion to the participatory interest held in the fund) of the underlying investments held by the fund. With Unit Trusts, the investor holds participatory units issued by the fund, while in the case of an ETF the participatory interest, while issued by the fund, comprises a listed security traded on the stock exchange. ETFs are index tracking funds, registered as a Collective Investment and can be traded by any stockbroker on the stock exchange or via Investment Plans and online trading platforms. ETFs may incur additional costs due to being listed on the JSE. Past performance is not necessarily a guide to future performance and the value of investments/units may go up or down. A schedule of fees and charges, and maximum commissions are available on the Minimum Disclosure Document or upon request from the Manager. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Should the respective portfolio engage in scrip lending, the utility percentage and related counterparties can be viewed on the ETF Minimum Disclosure Document.  For more information, visit https://satrix.co.za/products

Ghost Wrap #75 (MTN’s African subsidiaries | ArcelorMittal | Curro)

The Finance Ghost
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Ghost Wrap #75 (MTN’s African subsidiaries | ArcelorMittal | Curro)

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:

  • MTN’s African subsidiaries and the difference in performance in Ghana and Uganda vs. the terrible situation in Nigeria.
  • ArcelorMittal and the dangers of operating leverage.
  • Curro clawing its way back towards pre-pandemic earnings.

Ghost Bites (Copper 360 | Mpact | MTN Uganda | Pick n Pay | Telkom)

The Finance Ghost
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Ghost Bites (Copper 360 | Mpact | MTN Uganda | Pick n Pay | Telkom)

Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:

Copper 360 has started mining at Rietberg Mine (JSE: CPR)

This is the first time in over four decades that copper is being mined in the O’Kiep Copper District

Copper 360 announced that underground mining operations have commenced at Rietberg Mine in the Northern Cape. The target for the first month is 12,000 tonnes, which will increase over 4 months to 45,000 tonnes per month. They are targeting plant recoveries of 75% to 85%, with previous tests suggesting that 92% might be possible.

In other words, they are setting realistic targets against the backdrop of the excitement that copper is finally being mined in the O’Kiep Copper District once more. Rietberg was previously closed in 1983 and has significant copper reserves.

Copper 360 is following what it calls a Cluster Mining Model, with plans to re-open historically dormant mines in the area that have defined ore-bodies and established underground infrastructure. They have identified 12 mines and 60 historical prospects across their mining right, each with a comprehensive dataset.

You would expect the share price to jump at this update, yet it was trading 7% lower in late afternoon trade on a risk-off day for markets.

Mpact won’t look back on this period with much joy (JSE: MPT)

An increase in paper volumes would do wonders for them

Mpact has released results for the six months to June. It’s quite interesting to see them trying to focus on growth in the NAV in this period, which isn’t a performance metric that I would typically associate with a company like this. The real story is that revenue from continuing operations is down 1.1%, with the paper business driving the downturn.

In a business with high fixed costs like this, a dip in revenue is really problematic for revenues, especially when it comes from lower volumes. This leads to an under-recovery of overheads, with unused capacity costing money and not generating profits. Underlying operating profit fell by 20.4% for the period, suffering from the lower volumes as well as higher depreciation from major projects in 2023.

Return on capital employed for total operations fell from 18.8% to 14.4%, with capital expenditure on major projects still underway. Hopefully, the cycle will improve for Mpact as the projects are finalised, driving much better returns in future. There’s obviously no guarantee of this.

Looking deeper, Paper Manufacturing achieved flat volumes as export sales improved and domestic sales faltered. Production downtime due to disappointing demand was 13% of capacity during the period, which explains the drop in profits in the paper division. Paper Converting added to the challenge by suffering a 1.4% decline in volumes. For Paper as a whole, revenue was down 3.3% and underlying operating profit fell by 27.6% to R397 million.

The Plastics business saw revenue increase by a meaty 10.6%, with volumes up 2.7% thanks to recent product investments. Despite the substantial improvement in revenue, operating profit was only flat year-on-year. They continue to invest here, including an acquisition of a 30% stake in Africa Tanks (of the plastic water variety) for R73 million.

After a period of capital expenditure, net debt has increased significantly from R2.66 billion as at December 2023 to R3.23 billion. Net finance costs increased by 12% year-on-year. The Versapak disposal for R268 million is expected to close in the second half of 2024. Unsurprisingly, Mpact will apply those proceeds towards reduction of debt.

Despite all the feel-good stuff around the GNU and expected improvements in local conditions, Mpact still expects full year earnings to be “under pressure relative to last year” – in other words, earnings will be down year-on-year even if they have a solid second half. The Plastics business is doing the heavy lifting at the moment, with Paper suffering from lower average selling prices.

There’s still an interim dividend despite all the challenges, showing that the business is still in good shape overall. At 30 cents per share, it’s 33.3% down on the comparative period of 45 cents per share.

MTN Uganda is one of the better African stories (JSE: MTN)

Like in Ghana, the business in Uganda shows what is possible

If only MTN’s story in Nigeria was anything like they are experiencing in Ghana and Uganda. Alas, Nigeria is large enough to ruin basically the entire story, even though other subsidiaries show us that there can be good reasons to do business in Africa.

MTN Uganda has released numbers for the six months to June. They reflect service revenue growth of 20.4%at a time when inflation was only 3.4%, so that’s an excellent outcome. If you can believe it, the Uganda shilling actually improved against the dollar by 2% over the six months, so it’s an particularly good result by global currency standards.

EBITDA increased by 22.4%, which means that EBITDA margin increased by 90 basis points to 51.5%. By the time we reach profit after tax, the increase is 29.7%. The cash flow story looks great as well, as capex was only 8.6% higher.

These are genuinely strong numbers, which makes the situation in Nigeria even more depressing.

The Pick n Pay rights offer structure worked – the underwriters got nothing (JSE: PIK)

The banks never wanted to own the shares anyway

Pick n Pay has released the results of its rights offer and the outcome is a great example of corporate finance in practice. In a rights offer, there are various structuring tricks available to either encourage or discourage the market from taking up the shares. It all depends on whether the underwriters actually want the shares or not.

In this case, the underwriters were the banks. They certainly didn’t want to end up owning the shares, but they needed to help support the raise to protect other exposures they might have. They were also only too happy to earn underwriting fees along the way. To encourage the market to take up the shares, the offer was at a heavily discounted price and excess applications were allowed, which means investors could take up more than their pro-rate entitlement.

If not for excess applications, only 98.7% of the rights offer shares would’ve been taken up – still a surprisingly strong outcome. Here’s the real kicker though: they received excess applications for 107.2% of the total shares being offered, which means there was vastly more demand for shares than supply. They could’ve filled the entire offer just from excess applications! Those who applied for excess shares therefore didn’t get anywhere near the full allocation they hoped for, as the remaining 1.3% had to be split among them fairly.

By all accounts, this was a successful rights offer – especially for the underwriters who ended up collecting fees without being stuck with the shares. It turns out that they were the Smart Shoppers after all.

Telkom’s earnings growth for Q1 is excellent, but beware the base effect (JSE: TKG)

The group has warned against extrapolating the Q1 growth rate for the full year

For the first quarter of 2024, Telkom managed to grow group EBITDA by an impressive 24.1%, a number that looks even better in the context of 3.9% revenue growth. The group is quick to point out that Q1 last year was a soft base, with much tougher comparatives for the rest of this year. In other words, don’t assume that this growth rate is going to carry on for the rest of 2024.

The Telkom Mobile business saw a particularly strong jump, with revenue up 5.3% and EBITDA up 35.7%. The number of mobile subscribers increased by 14.6% to over 21 million. As a reminder that the telecoms industry is a treadmill of note when it comes to pricing, mobile data traffic increased by 25.8% but mobile revenue only grew by 12.9%. The problem for these companies is that their services keep getting cheaper over time, rather than more expensive.

At Openserve, fixed data revenue grew 7.1% and EBITDA was up 16.8%. This is despite total Openserve revenue dipping by 2.4% thanks to voice and legacy revenue going backwards. The EBITDA performance was thanks to a huge decrease in diesel spend, as load shedding was practically non-existent in this quarter vs. the base period.

Over at BCX, revenue was up just 2.4% as this business continued to struggle. The IT hardware and software business was up 22.5%, but Converged Communications fell 3.2% as customers migrated from legacy services. EBITDA for BCX fell 8%, as the revenue growth is being experienced in a low margin area. BCXis a headache for Telkom.

As for Swiftnet, revenue increased 5.2% and EBITDA was up 7.7%. The disposal of Swiftnet is sitting with the Competition Tribunal for final approval.

On the balance sheet, Telkom is enjoying decent support in local debt capital markets and has a stable outlook on its rating by Moody’s. The expectation is for credit metrics to improve in the next 12 – 18 months.

It’s been quite the rollercoaster over the last year, with Telkom somehow finding less support in a post-GNU environment with less load shedding:

Little Bites:

  • Director dealings:
  • Bell Equipment (JSE: BEL) has indicated that the circular for the offer by IA Bell and Company will be released by 13 August. There’s also been a change to the independent board, with a director stepping down from the board based on historical insignificant shareholdings in Bell. They are playing it very safe in terms of governance here.
  • RMB Holdings (JSE: RMH) announced that the special dividend announced in July has now received approval from the SARB. It will be paid on 2 September.
  • Due to delays in the handover between the old and new auditors, Salungano Group (JSE: SLG) has indicated that its financials for the six months to September 2023 will only be published by 31 October. They really are falling behind now, as they still need to do the March 2024 results after that.

What ChatGPT can teach us about first mover disadvantage

Dominique Olivier
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What ChatGPT can teach us about first mover disadvantage

Just because you macheted a new trail through the jungle, doesn’t guarantee you’ll be the first one to reach El Dorado. Sometimes, the same path to innovation is the one that makes it that much easier for your competitors to catch up with you.

Since its debut in 2022, ChatGPT has become the fastest-growing consumer app in internet history. Its parent company, OpenAI, went from zero to more than $1 billion in revenue last year – and that’s fast even by Silicon Valley standards. You would expect this to be the startup success story of the decade, if not the century. However, the tech company that has thrown half the world into panic and the other half into giddy excitement has yet to turn a profit. And while OpenAI’s numbers are still being inked in red, competitors are catching up fast.

The pros and cons of pioneering

You can think of a first mover in any industry as a sprinter who gets a head start in a race. By being the first to introduce a new product or service, they effectively start a lap ahead of all the other runners. Their early entrance gives them a chance to build a strong brand and loyal customer base before any competitors show up. It also gives them some breathing room to fine-tune their offering, and maybe even a chance to set the market price.

However, once a first mover gets going, competitors take off from their starting blocks, hoping to get into the slipstream of that success and snag a piece of the action. If the original pioneer has a big enough head start, a solid market share and dedicated customers, or the stamina to keep innovating, there’s a good chance that they can stay ahead of the pack. More often than not, they find themselves getting overtaken eventually.

In the rush to be the first, a company might cut corners or skip essential features just to launch quickly. If the initial product doesn’t hit the mark with consumers, competitors are then incentivised to take advantage by offering something that better meets customer needs. So, while the first mover takes on the heavy lifting and risks, later entrants can often swoop in with a polished product and win over the market.

They have the benefit of hindsight, even if it wasn’t their own.

The context: how ChatGPT is (and isn’t) making money

OpenAI started as a nonprofit, using around $130.5 million in donations to fund its research and development while committing to share its findings through open-source projects. But in 2019, the company shifted gears and restructured into a limited partner model, blending nonprofit and for-profit elements. They created a for-profit subsidiary that could issue equity and attract top talent, while employees working on profit-driven projects moved to this new entity.

This reorganisation allowed OpenAI to bring in venture capital, blending cutting-edge research with commercial ventures like ChatGPT subscriptions, aimed at making AI accessible and affordable. Importantly, the for-profit arm is bound to the nonprofit’s mission, with profits capped at 100 times any investment. The same nonprofit board continues to oversee all OpenAI activities.

The bulk of OpenAI’s revenue comes from licensing fees for its AI models and products. Pricing access is based on tokens, which represent the number of words generated. It also earns through partnerships, with Microsoft being the most notable partner. Microsoft invested $10 billion in 2023, pushing its total investment to $13 billion. This partnership helps OpenAI reach a broad customer base, offering API access to enterprises and developers alike. Microsoft uses OpenAI’s tech in its Bing search engine’s Copilot tool.

In just nine months post-launch, ChatGPT had been adopted by teams in over 80% of Fortune 500 companies, including big names like Block, Canva, Carlyle, The Estée Lauder Companies, PwC, and Zapier. To boost revenue further, OpenAI introduced ChatGPT Plus, a premium version of the chatbot priced at $20 per month, offering priority access to subscribers. Free users still have access, but only to older versions (like 3.5 instead of 4.0), which may experience downtimes during high demand.

OpenAI has raised a total of $13.5 billion over ten funding rounds, with investors like Thrive Capital, Founders Fund, Arrowshare Ventures, angel investor Thomas Witt, and E1 Ventures getting involved. The company also supports AI startups through its $100 million OpenAI Startup Fund, launched in May 2021, offering consulting and product commercialisation help.

It all sounds great on paper, but despite generating more than $1 billion in revenue in 2023, OpenAI hasn’t yet turned a profit. The development of ChatGPT-4 alone reportedly cost $540 million.

If OpenAI does reach profitability, Microsoft will first recover its investment with a 75% share of the profits and will then receive a 49% share up to $92 billion in profits. As of December 2023, OpenAI was in talks to raise new funding, potentially valuing the company at $100 billion, up from an $86 billion valuation earlier in the year. Co-founder Sam Altman is also exploring up to $7 billion in funding to invest in semiconductor infrastructure to support the AI industry’s growing needs.

Hurdles on the horizon

OpenAI may have been first out the gate, but whether or not it has the legs to stay in the lead remains to be seen.

1. An expensive lead

    Jumping into the game early comes with a hefty price tag. For OpenAI, creating ChatGPT meant pouring a ton of resources into research and development. This kind of investment can put a lot of pressure on a company, especially when competitors can simply mimic the technology at a fraction of the cost. The stats speak for themselves: various online sources suggests that it costs approximately 60% to 75% less to replicate an existing product than it does to create a new one. In the case of OpenAI, this means that even with substantial revenue, profitability remains a distant goal, given the massive upfront costs. Meanwhile, competitors like Copilot (created with OpenAI’s own technology) and Llama are free to innovate from a much smaller cost base.

    2. Regulations and other headaches

    One of OpenAI’s biggest challenges has been keeping up with and anticipating regulations around data privacy, AI ethics, and misuse of technology. As the first mover, they often face the brunt of regulatory scrutiny, making them the guinea pig for policymakers figuring out how to handle new tech (not to mention the recipient of multiple lawsuits). The rules aren’t always clear, and the stakes are high. A company in this position needs to move with extreme caution, often slowing down to ensure compliance, while competitors can watch and learn from their experience.

    3. Innovation fatigue is a real thing

    Continuously rolling out new versions like GPT-4 is exhilarating but also exhausting. It’s a relentless cycle of development and improvement to stay ahead. Keeping the excitement alive while managing expectations becomes a constant balancing act. While innovators have run a hard race already, competitors with fresher legs are able to execute on their ideas with greater speed and efficiency.

    4. Investor scepticism

    Securing funding as a first mover is often a challenging feat. Investors tend to be cautious with unproven innovations, opting instead for projects that have already demonstrated viability. OpenAI had to overcome this scepticism, convincing backers that their advanced AI technology was more than just a fleeting trend. And, truth be told, the full potential of their innovation is still being debated. Even with heavyweights like Microsoft on board, there’s no guarantee that future funding rounds for the next iteration of GPT will be smooth sailing. On the other end of the spectrum, competitors who have built on OpenAI’s foundational work might find it easier to attract investment, as the technology’s market acceptance has already been established.

    The danger for pioneers

    So, is there a lesson to be taken from the trials and tribulations of ChatGPT? Having done the research, I would say this: being recognised as a creative genius is nice, but for most businesses, making money is even nicer. Beware of the lure of pioneering – the world needs new ideas, sure, but how many of those are still around (remember that article on Stigler’s Law)? Far more profitable, in my opinion, to refine an existing idea based on consumer feedback than to risk it all on invention and still be overtaken.

    Perhaps the greater question, which I will leave unanswered, is why we remain motivated to keep creating new things, despite these clear risks. Maybe it’s because we know that between pioneering and profiteering, there’s only one that truly moves the world forward.

    About the author: Dominique Olivier

    Dominique Olivier is the founder of human.writer, where she uses her love of storytelling and ideation to help brands solve problems.

    She is a weekly columnist in Ghost Mail and collaborates with The Finance Ghost on Ghost Mail Weekender, a Sunday publication designed to help you be more interesting.

    Dominique can be reached on LinkedIn here.

    Ghost Bites (Curro | Mantengu Mining)

    The Finance Ghost
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    Ghost Bites (Curro | Mantengu Mining)

    Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:

    Curro has finally recovered to 2020 levels – but not 2019 levels (JSE: COH)

    A trading statement for the six months to June has been released

    Curro has guided the market on earnings for the six months to June. When it comes through as a trading statement, you know that the percentage difference is at least 20%.

    In this case, the difference might be as high as that, but won’t quite reach that point based on the mid-point of guidance. For the six months to June, HEPS is expected to be between 10.9% and 21.3% higher.

    Curro has been operating in tough conditions in the past couple of years. A recap of HEPS over the past few interim periods shows that they have finally recovered to 2020 levels. They are still a long way off 2019 levels, a time before Covid caused much pain:

    • 30 June 2019: 50.0 cents
    • 30 June 2020: 38.7 cents
    • 30 June 2021: 19.4 cents
    • 30 June 2022: 27.5 cents
    • 30 June 2023: 34.6 cents
    • 30 June 2024: 38.4 cents – 42.0 cents

    It’s been a long slog for the company in the post-pandemic period, with equity capital raised along the way that has made it more difficult to recover earnings on a per-share basis. Here’s the share price over 5 years:

    Mantengu Mining’s Birca Copper deal is in serious doubt (JSE: MTU)

    At least lawyers will be making money here, even if nobody else will

    In May 2024, Mantengu Mining announced the acquisition of Birca Copper and Metals for just under R30 million. This is a high grade chrome ore business in the North West Province. The mining area is the subject of a mining right granted to a company called New Venture Mining Investment Holdings, which is in force until 2045.

    A prerequisite for the deal was for New Venture Mining to transfer the mining right to Birca Copper and Metals, otherwise Mantengu Mining would simply be walking into a potential disaster. There’s now high drama, with New Venture Mining claiming that Birca Copper and Metals has breached certain terms of their relationship and thus New Venture Mining is cancelling the mining right agreement with immediate effect.

    Naturally, this means that the Mantengu acquisition of Birca is dead, which would be fine if it wasn’t for how much effort has already gone into the deal. Mantengu is going to engage with New Venture Mining to try and find a workable solution. If they can’t, then the lawyers will have to work to cancel the acquisition agreement and restore Mantengu as near as possible to the status quo ante.

    In dealmaking, the golden rule is that no deal is ever complete until all conditions have been satisfied. The more complicated the deal, the higher the likelihood of disappointment.

    Little Bites:

    • Director dealings:
      • A non-executive director of Richemont (JSE: CFR) bought shares in the company worth R557k.
      • An associate of a director of Vukile Property Fund (JSE: VKE) bought shares in the company worth R247.5k.
      • A director of Visual International (JSE: VIS) has bought shares worth R33.4k.
      • A director of a major subsidiary of Stefanutti Stocks (JSE: SSK) bought shares worth R13k.
    • Although not a director dealing in the traditional sense, Capitec (JSE: CPI) announced that Michiel Le Roux entered into another hedging transaction via Kalander Finco. This is basically a structure that uses the shareholding in Capitec as a way to raise financing, with a hedge over the shares to protect the lender. These structures are nothing new for Le Roux and wealthy listed company founders in general. The latest tranche is a European option transaction with expiry dates of 3.34 years on average, with a put strike price of R2,497.55 and a call strike price of R4,477.00. The current Capitec share price is R2,815.
    • MC Mining (JSE: MCZ) announced what nobody ever wants to see: a loss-of-life incident at the Uitkomst Colliery. There was a fall of ground incident that is being investigated. The colliery has temporarily halted operations until further notice.
    • For whatever reason, there was a small error in the Sebata Holdings (JSE: SEB) headline loss per share for the year ended March 2024. Instead of a loss of 101.62 cents as published, it should’ve been 102.2 cents.
    • The applications filed by the liquidators of Constantia Insurance Company to provisionally wind-up Conduit Capital (JSE: CND) and wholly-owned subsidiary Conduit Ventures were dismissed by the Western Cape High Court with costs.
    • If you’re keeping your fingers on the pulse of the business rescue process at Tongaat Hulett (JSE: TON), then be aware that the monthly status reports for the various entities have been published here.

    Unlock the Stock: SA REIT focus with Keillen Ndlovu

    The Finance Ghost
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    Unlock the Stock: SA REIT focus with Keillen Ndlovu

    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 40th edition of Unlock the Stock, we took a different approach with the SA REIT Association by welcoming highly respected independent property analyst Keillen Ndlovu to the platform. He shared an excellent presentation on the sector and engaged in a vibrant Q&A. 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:

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