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.
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.
Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:
AB InBev expanded its EBITDA margin this quarter (JSE: ANH)
Half-year results are now available
AB InBev released results for the second quarter, which means we have half-year results available as well. For both the second quarter and the six months, revenue was up by 2.7%. Volumes dipped, so it was pricing that took this into the green. This also explains why EBITDA margins have improved, as pricing power is important for protecting and improving margins.
For the half year, normalised EBITDA margin expanded by 165 basis points to 34.4%. The momentum over the period was strong, as second quarter margin was up 236 basis points to 34.6%. For the half, normalised EBITDA was up 7.8%.
Underlying earnings per share for the half improved by 21.2% to $1.66. Diluted HEPS was up 33.7% to $1.31.
Net debt to normalised EBITDA was 3.42x, which is an improvement from 3.70x a year ago but slightly worse than 3.38x as at 31 December 2023.
Looking ahead, the expectation for the full year result is for EBITDA growth to be in line with the medium-term outlook of 4% to 8%. That’s a very wide range, suggesting that they aren’t confident enough at this point to give more specific guidance. So far, so good at least in terms of hitting the top of that range for the first half.
Steel yourself for these ArcelorMittal numbers (JSE: ACL)
Losses are much worse than in the comparative period
ArcelorMittal has released numbers for the six months to June and they aren’t pretty, with revenue down by 3%. That may not sound bad, but in a business with such high fixed costs, it’s a disaster. The headline loss per share came in at 150 cents, which is far worse than 40 cents in the comparable period.
Net borrowings moved 26.9% higher to R3.8 billion. That’s also a lot higher than R3.2 billion at the end of December 2023. Unsurprisingly, the net asset value of the group has taken a major knock, down 42% in the past 12 months.
It’s also important to note that EBITDA margin was negative, so this loss isn’t being driven by things like depreciation or finance costs. There’s a core problem in the business model in this environment. They are trying to save 3,500 direct jobs and 80,000 more in the value chain for the longs business, but these losses can’t carry on forever. Sales volumes were down 2% for the period thanks to weak demand and realised rand steel prices were down 3% for the same reason. To make it worse, the raw material basket increased by 3%.
Worst of all, China’s domestic steel consumption is expected to remain weak in 2024, putting pressure on steel prices globally. What ArcelorMittal needs more than anything else is for the South African construction industry to pick up. Plant capacity utilisation is all the way down at 60% and you can see in these numbers what the effect of that is. For the second half of 2023, it was up at 68%.
This is perhaps the bravest punt of all for a GNU environment of renewed investment in South Africa, but be very careful of the risk.
Capital & Regional’s numbers show why there are suitors out there (JSE: CRP)
The company has attracted the eye of potential acquirers
Capital & Regional has announced its results for the six months to June. They look great, with net rental income up by 17.1%. The Gyle acquisition is part of this, so be careful of comparability. As we saw with Shaftesbury earlier in the week, valuations have also ticked higher – in this case, by 0.8% on a like-for-like basis.
The 17.1% increase in adjusted profit hasn’t translated into dividend growth though, with the interim dividend up by 3.6%.
It’s also worth noting that net asset value per share moved slightly lower, reflecting the impact of shares issued under the scrip dividend. The dilutionary impact of scrip dividends shouldn’t ever be ignored. The funds may retain cash, but they issue more shares along the way.
On the debt side, the loan to value has reduced to 43% from 44%, with around 80% of debt hedged for the next two and a half years.
NewRiver has until 15 August and Praxis has until 16 August to either announce a firm intention to make an offer for Capital & Regional, or announce that they do not intend to make an offer.
Mondi’s EBITDA is down for the first six months (JSE: MNP)
Trading has been in line with expectations
The paper and packaging industry is notoriously cyclical, so profits will rise and fall accordingly. It’s important to remember that earnings “in line with expectations” is no guarantee that they went up. The expectation could’ve been for them to drop, as we’ve seen in the six months to June 2024.
Mondi’s underlying EBITDA is down 17% for the six months to June. Revenue was only down by 4%, so EBITDA margin has deteriorated from 17.5% to 15.1%. Notably, cash generated from operations fell by 33% and net debt to EBITDA increased from 0.8x to 1.5x.
Despite this, the interim dividend has been left flat at 23.33 euro cents per share. They also paid a special dividend earlier in the period of 160 euro cents per share, linked to the proceeds from the Russian disposal.
The good news is that there was promising momentum over the period, with the benefit of price increases expected to be felt in the second half of the year. Be careful though, as they are planning more maintenance shutdowns in the second half and they expect to realise a forestry fair value loss.
Things should get considerably better from 2025 onwards, when the full benefit of the investment programme will be felt. With return on capital employed of only 10.8% in this period, shareholders will be counting on it.
Mpact has found a buyer for Versapak (JSE: MPT)
It’s taken a few years to get this right
Back in 2021, Mpact decided that selling Versapak would be the right way forward, as the business isn’t a strategic fit with the rest of the group. It’s taken around three years to reach the point where a deal has been announced, which shows you just how long disposals can take.
Greenpath Recycling, a subsidiary of Sinica Manufacturing, has agreed to acquire Versapak for R268 million. There will be some adjustments to the price for stock on hand and employee liabilities at the effective date of disposal. The net asset value as at December 2023 was R239 million and profit before tax was R101 million excluding fair value gains. At a normalised tax rate, there’s an after-tax profit of around R74 million. This implies an earnings multiple for the disposal of around 3.6x. Much as Versapak might not be a strategic fit, it’s debatable whether they should be selling at that price.
The disposal excludes all cash, debtors and creditors, so Mpact is responsible for wrapping up most of the working capital. It also excludes two properties, which I found surprising. The purchaser will lease these properties from Mpact. I can’t think of why Mpact would want to own the properties, so I suspect that the purchaser was simply unwilling or unable to acquire the properties as well.
One of the properties is in Paarl and the other is in Gauteng. Sinica is based in Gauteng as well. Versapak is focused on styrene and PET trays, while Sinica is focused on plastic packaging products. These things are different enough that there hopefully won’t be any Competition Commission hiccups, with a planned effective date for the deal in the fourth quarter of 2024.
Interestingly, the purchaser still needs to obtain the debt funding for the deal. Mpact seems confident that the guarantee from parent company Sinica is strong enough though. The full purchase price is payable on closing date and Mpact will put the proceeds towards settlement of debt.
MTN Ghana is maintaining its margins (JSE: MTN)
And growth is ahead of inflation
After the terrible numbers from MTN Nigeria earlier in the week, it was good to see decent numbers at MTN Ghana. Importantly, growth in service revenue for the six months to June of 31.2% is well ahead of average inflation for the period of 23.9%. The other good news is that EBITDA is up 31.3%, so EBITDA margins have been maintained at 56.1% and there is real growth in profits (growth ahead of inflation).
MTN Ghana is separately listed and has increased its dividend by 30%, so the earnings are being backed up by higher cash flows. They are investing heavily though, with capex excluding leases up by 68.3%.
In further good news, a reduction in debt led to a decrease in net finance costs of 44.9%.
And perhaps most impressively, the Ghana cedi depreciated against the dollar by 22.3% over six months, which is lower than the EBITDA growth. In other words, there was genuine growth in dollars.
These numbers are better in every way than what we saw out of Nigeria. Sadly, Ghana isn’t big enough to rescue MTN’s Africa story.
Little Bites:
Director dealings:
Aside from trades linked to share-based awards, the CEO of Bytes Technology (JSE: BYI) bought shares worth £25.3k.
A director of a major subsidiary of RFG Holdings (JSE: RFG) disposed of shares worth R247k.
Sabvest (JSE: SBP) announced that its indirect stake of 24.66% in Rolfes (held via Masimong Chemicals) is being sold to a foreign buyer as part of a transaction for all of Rolfes. Sabvest will receive R179.5 million from the disposal. Sabvest will use the proceeds to reduce debt.
Country Bird Holdings wasted no time in making its feelings known about the appointment of Piet Burger as a director at Quantum Foods (JSE: QFH). They immediately sent through a letter demanding that a meeting be called to remove him as director. This is of course in addition to the demand for the removal of the chairman and lead independent director of the board.
Mantengu Mining (JSE: MTU) must’ve lost a bet or something, as their share facility with GEM Global Yield is incredibly overcomplicated. The TL;DR of the convoluted structure is that just over R5 million has been raised under the facility – I think.
Sebata Holdings (JSE: SEB) released financials for the year ended March 2024. Although revenue was slightly higher at R33 million, the headline loss per share jumped to 101.62 cents. The share price is only R1.00, so there’s a rare example of a -1 P/E!
Following Mpact’s 2021 strategic review, its subsidiary, Mpact Operations has disposed of its Versapak division. The division was sold to Greenpath Recycling, a subsidiary of Sinica Manufacturing, for R267,75 million. Versapak produces styrene and PET trays and punnets as well as vinyl cling film out of its two plants in Paarl and Gauteng. Mpact will be apply the disposal consideration towards the settlement of debt.
Sabvest Capital has concluded an agreement with Amsterdam-based Solevo MEA to sell its 24.66% stake in agri-chemical firm Rolfes for R179,5 million. Once finalised, Solevo will dispose of 12.5% of its newly acquired stake in Rolfes to Afropulse who will be Solevo’s local partner.
BHP Investments Canada (BHP) has agreed to jointly acquire 100% of TSX-listed Filo Corp. Filo Corp owns 100% of the Filo del Sol (FDS) copper project. BHP will pay US$2,05bn for its stake. BHP and Lundin Mining have also agreed to form a 50/50 joint venture to hold the projects – FDS and Josemaria (owned by Lundin) located in Argentina and Chile. The joint venture will create a long-term partnership between BHP and Lundin to jointly develop an emerging copper district.
Zeder Financial Services (Zeder Investments) holds an 87.1% interest in Zeder Pome Investments which in turn holds 100% of Capespan Agri (CS Agri) which comprises three primary farming production units in addition to the Paarl-based operation Novo Fruit Packhouse. CS Agri is to dispose of the Novo Fruit operation, which comprises the cooling facility business and packhouse, to Dutoit Agri for a disposal consideration of R195 million, plus stock-on-hand of c.R5 million. The disposal is consistent with Zeder’s strategic review and its initiative to maximise wealth for shareholders.
Rex Trueform has entered into a subscription agreement with the remaining shareholders of Belper Investments to subscribe for additional shares in Belper. Rex Trueform first acquired an initial stake in the property company in 2022 and as part of the transactions, the company advanced a loan of R19,7 million to fund the acquisition of a portfolio of industrial properties. A further loan of R1 million was made in 2023. The consideration payable by Rex Trueform for the subscription of shares will be the extinguishment of the debt owed by Belper which amounts to R27,37 million. Rex Trueform’s interest in Belper will increase by 18.35% to 72.03%.
Sebata has alerted shareholders to the termination of transactions with Inzalo Capital. In August 2019 the company disposed of a 55% interest in the companies comprising the ‘Water Group’ namely USC Metering and Amanzi Meters and the donation of a 5% interest in the Water Group to Inzalo. In February 2020 Sebata disposed of the 55% interests in the companies comprising the ‘Software Group’ namely Sebata Municipal Solutions, R-Data and MICROmega Accounting and Professional Services and the donation of 5% interest in the Software Group. These transactions have been terminated as Inzalo Capital has not met its obligations in terms of the achievement of certain profit warranties. Sebata has, as a result, regained ownership of the equity interests originally disposed of and donated to Inzalo.
Unlisted Companies
The Mahela Group, a leading citrus and avocado producer and ZZ2 Group, a leading avocado and tomato producer, are developing a 400-hectare avocado and citrus farming operation in Weipe, Limpopo. The Skutwater project, as it is known, will see the current combined orchard size increase from 190 hectares to 400 hectares under the first phase with a potential to expand to 1,500 hectares in the second phase. There are also plans to develop expansion opportunities in neighbouring countries. AgDevCo, a specialist investor in African agriculture will take a minority equity investment.
Pepsico SA is to sell its spreads and savoury food ingredient business to Anchor Yeast, the South African unit of Canadian Lallemand International. Financial details were undisclosed.
Thebe Investment, a black-owned investment management company acquired a further 40% stake in Pride Milling earlier this year. Hybrid Capital, a division of Old Mutual Alternative Investments provided the funding to Thebe to facilitate the acquisition.
Orion Minerals has issued 23,675,000 new shares at an issue price of A$1.5 cents, to Webb Street Capital for the provision of professional services to Orion in South Africa.
Lighthouse Properties has, on the open market, disposed of a further 111,070,447 Hammerson plc shares for an aggregate cash consideration of R765,63 million.
Listed company Ellies Holdings has been placed under final liquidation while its operating entity Ellies Electronics remains in business rescue.
The JSE has advised shareholders of Sebata that the company has failed to submit its annual report within the four-month period as stipulated in the JSE’s Listing Requirements. If the company fails to submit its annual report on or before 31 August 2024, its listing may be suspended.
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 414,634 shares at an average price of £27.32 per share for an aggregate £11,35 million.
In terms of its US$5 million general share repurchase programme announced in March 2024, Tharisa has repurchased a further 7,452 ordinary shares on the JSE at an average price of R19.11 per share and 352,595 ordinary shares on the LSE at an average price of 82.25 pence. The shares were repurchased during the period 22 – 26 July 2024.
Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 22 – 26 July 2024, a further 2,772,135 Prosus shares were repurchased for an aggregate €89,04 million and a further 288,256 Naspers shares for a total consideration of R999,78 million.
Four companies issued profit warnings this week: Sea Harvest, Sebata, Merafe Resources and Woolworths.
Egyptian fintech MNT-Halan has acquired Tam Finans in Turkey from Actera Group and the European Bank for Reconstruction and Development. Tam Finans is a commercial finance company with a loan booking exceeding US$300 million. Financial terms were not disclosed.
Sweden’s development finance institution, Swedfund, has invested US$10 million in the Inside Equity Fund II which looks to support SMEs in Zambia, Madagascar, Mauritius, Tanzania, Malawi and Mozambique.
Silicon Badia and Hub 71 have led a US$2 million investment in Egyptian AI startup, Synapse Analytics. The funding will be used to expand the company’s AI technologies across the Gulf Co-Operation Council (GCC) and Africa.
Cartona, an Egyptian B2B e-commerce platform, has raised US$8,1 million in a Series A extension round led by Algebra Ventures and including existing investors Silicon Badia and the SANAD Fund for MSME. Cartona connects small retailers, FMCG producers, wholesalers and distributors on its platform.
Intron Health, a Nigerian clinical speech-recognition startup, has raised US$1,6 million in pre-seed funding. The round was led by Microtraction, and included Plug and Play Tech Center, Jaza Rift, Octopus Ventures, Africa Health Ventures, OpenSeedVC, Pi Campus, Alumni and Angels, BakerBridge Capital, Google, ClEAR, NYU, and Optum. The funding will be used for its AI technology, with a focus on perfecting noise cancellation and handling multi-speaker conversations.
Egyptian edtech, Educatly, has announced a funding round of US$2,5 million led by TLcom Capital and Plus VC. The round also included Egypt Venture and the HBAN syndicate.
When a director’s actions are not aligned with the company’s best interests, it can lead to reputational risks for the company itself, as well as the other directors involved.
In the decision of Denton v Overstreet (CT01531ADJ2023) (1 February 2024), the Companies Tribunal took a decisive stand on the removal of a director as a result of a breach of their fiduciary duties towards the company.
The procedure to remove a director has not always been clear, as the courts, as well as the Companies Tribunal, have not been consistent in their application and interpretation of the legal principles governing a director’s removal. The decision of Denton v Overstreet (CT01531ADJ2023) (1 February 2024) (Denton case) provides some clarity, at last.
Companies Act: statutory removal of a Director
The provisions relating to the removal of a director have been codified in Sections 71(1), 71(2) and 71(3) of the Companies Act 71 of 2008 (Companies Act).
Prior to the Companies Act coming into force, a director’s duties were regulated in terms of the common law. The Companies Act codifies and extends the common law principles, in that Section 76 of the Companies Act provides for an increased standard of conduct expected from directors, compelling them to act honestly, in good faith, and in a manner which they reasonably believe to be in the best interests of, and for the benefit of, the company.
Directors are entrusted with a fiduciary duty to use their authority and perform their roles honestly, in the company’s best interests, and with the expected level of care, skill and diligence. In terms of Section 77(2)(a) of the Companies Act, should they fail to meet these obligations, a director may incur personal liability for any loss, damages or costs sustained by the company as a consequence of any breach of their fiduciary obligations, and it may be necessary to remove them from their position.
The Companies Act outlines procedures for the removal of directors by the board of directors of a company, the Shareholders of the company, and removal by an authorised judicial body. The board’s ability to remove a director is restricted to the ‘closed list’ of specific grounds, which include the director’s ineligibility, disqualification or incapacity, or neglect of their fiduciary duties. Conversely, the shareholders and the relevant authorised judicial bodies are not constrained by a ‘closed list’ of specific grounds for director removal under the Companies Act, and rather have an ‘open list’, which is in line with the basic corporate governance principles that directors are appointed at the discretion of the shareholders.
Removal in terms of sections 71(1) and 71(2): procedural importance
Section 71(1) of the Companies Act provides that “a director shall be removed by an ordinary resolution adopted at a shareholders meeting by the persons entitled to exercise voting rights in the election of that director”. The judiciary and the Companies Tribunal have long since emphasised the importance of following the correct procedural steps to remove a director, which are as follows
• a shareholders’ meeting must be convened to vote on the director’s removal. Section 61(3) of the Companies Act provides that the board can convene a shareholders’ meeting if a formal request is submitted to the company. Should the board neglect its obligation to call a meeting, the shareholders’ recourse is to petition a court, under Section 61(12) of the Companies Act, to compel the board of the company to schedule the meeting;
• it is mandatory to notify the director concerned of the proposed shareholders’ meeting and provide them with the proposed resolution for their removal. The period of notice should match the one that a shareholder is entitled to when a shareholders’ meeting is called. The shareholders may not vote on the resolution to remove the director unless such director was notified of the shareholder meeting;
• the reasons for the director’s removal must be provided to the affected director in sufficient detail; and
• the director must be afforded the reasonable opportunity to make representations on their impending removal.
Any deviation or failure to apply the Companies Act’s procedures could result in the review and potential reversal of the director’s removal by the authorised judicial body.
Removal in terms of section 71(3): procedural importance
The board and shareholders have the power to dismiss a director, only if there are at least three directors in the company. As seen in the Denton case, where a company has fewer than three directors, the board cannot remove a director; instead, the removal procedure must be facilitated by the Companies Tribunal.
In the Denton case, the Companies Tribunal sanctioned the director’s removal in terms of Section 71(3) because the director concerned was found to not have acted in the company’s best interests. The director concerned was removed, in terms of Section 71(3), as the Companies Tribunal found that the director’s non-deliverance of promised funding to the company, post utilisation of the company’s services and connections, jeopardised its financial well-being and thus amounted to a breach of the concerned director’s fiduciary duties towards the company. Therefore, it is imperative for directors to meticulously follow and align their actions with the provisions of the Companies Act, in order for their actions not to be construed as a breach of their fiduciary obligations towards the company, resulting in removal from the office of director.
Additional considerations
In following the procedure set out herein, to remove a director from office, certain additional considerations should be borne in mind, such as the following:
• Per the Companies Act, all director elections, appointments and removals are to be timeously filed with, and processed by, the Companies and Intellectual Property Commission. • From a labour law perspective, if a director is also an employee of the company, removal of said director can involve certain nuances that should be considered in order to mitigate any claims against the company. A suitably qualified legal professional should be approached to facilitate the removal of a director, especially if it becomes apparent that there will be an intersection in the law that applies to the removal of a director.
Tessa Brewis is a Director, Jamie Oliver an Associate Designate, Deepesh Desai an Associate and Ashleigh Solomons a Candidate Attorney, Corporate & Commercial | Cliffe Dekker Hofmeyr.
This article first appeared in DealMakers, SA’s quarterly M&A publication.
South Africa grapples with a trio of pervasive economic challenges: entrenched poverty, glaring inequality, and staggeringly high unemployment rates, which disproportionately affect the nation’s youth. With a formal unemployment rate of 32% and youth unemployment nearly doubling that figure, the urgent need for innovative solutions cannot be overstated.
Incubators have emerged as vital entities in nurturing entrepreneurial ventures, but South Africa’s efforts in this domain are dwarfed by the sheer scale and success of China’s thriving incubation system. By meticulously examining and adapting lessons from China’s innovation ecosystem, South Africa can drastically enhance its incubation strategies, unlocking the potential for sustainable growth and economic development.
This article draws from research into partnership strategies between South African and Chinese incubators. The recommendations focus on reimagining the South African incubator sector and strategically leveraging commitments made by the Chinese government to share knowledge and expertise with the African continent, paving the way for transformative collaboration.
Streamlining Engagement through an Incubator Association
Establishing a unified Incubator Association is essential to collaborate with Chinese counterparts and showcase South African capabilities effectively. This association would act as a bridge between the two countries, navigating the complexities of cross-cultural business practices and facilitating meaningful partnerships.
Moreover, it would serve as a platform for knowledge sharing within the South African incubation community, enabling the refinement of strategies for successful collaboration with China. By presenting a united front and leveraging the collective expertise of South African incubators, this association can position the country as an attractive destination for Chinese investment and collaboration. Presently, the South African incubator sector is disparate and unorganised, making it difficult to leverage its collective expertise.
Establishing a Shared Data Repository
One of the key initiatives that could revolutionise the South African business landscape is the adoption of a shared data platform akin to those employed in China following its 13th Five-Year Plan. If the South African innovation ecosystem could tap into China’s data repository, accessing valuable insights, such information could be a catalyst for local innovation. Such a binational public-private partnership would foster new business creation and development by making a wealth of data – including governmental, geographic, environmental, legal, scientific and statistical information – readily accessible to entrepreneurs in both countries.
By recognising the pivotal role of data in driving economic innovation and empowering businesses with the insights they need to succeed, South Africa can create an environment that fosters growth and unlocks new opportunities for collaboration and investment.
Leveraging AI for Business Matching
Building on the idea of a shared data platform, there is a further need to leverage data about our business practices, interests and goals. One of the most significant barriers to effective international collaboration is the knowledge gap about potential partners. To overcome this challenge, implementing an AI-driven online business matching platform could be a game-changer. This platform would connect companies based on their capabilities, needs and complementary strengths by leveraging advanced algorithms and machine learning techniques.
This innovative solution would transcend geographical and cultural barriers, enabling South African and Chinese businesses to find the perfect match for their collaborative endeavours. By harnessing the power of technology to facilitate robust and meaningful partnerships, South Africa can position itself at the forefront of the global innovation landscape.
Revitalising the Development Finance Ecosystem
Entrepreneurs in South Africa often face significant hurdles when accessing finance and navigating the complex bureaucratic processes associated with business registration. The current paradox of a system that readily offers consumer credit but hesitates to fund business ventures must be urgently addressed.
South Africa must embrace a more risk-tolerant approach to development finance to create an environment that truly supports entrepreneurial expansion and innovation. This approach requires a comprehensive re-evaluation of the financial ecosystem, including introducing targeted initiatives to support early-stage ventures, streamlining regulatory processes, and cultivating a culture that values and encourages entrepreneurship.
By taking bold steps to revitalise its development finance landscape, South Africa can unlock the potential of its vibrant entrepreneurial community and create a thriving ecosystem that drives economic growth and job creation.
To achieve sustainable economic growth and address its pressing challenges, South Africa must adopt a holistic approach that combines valuable lessons from China’s incubation success with targeted initiatives tailored to its unique context. South Africa can lay the foundation for a thriving innovation landscape through the preceding recommendations.
These strategic partnerships with Chinese incubators will not only provide access to invaluable expertise and resources, but also position South Africa as a hub for entrepreneurial excellence and a prime destination for international investment. The path to prosperity lies in the power of innovation and collaboration. By taking advantage of these opportunities, South Africa can embark on a transformative journey that will reshape its economic landscape and provide a beacon of hope for its youth.
Krish Chetty is a Senior Research Manager | Human Sciences Research Council.
This article first appeared in Catalyst, DealMakers’ quarterly private equity publication.
Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:
AECI’s dividend is a thing of the past (JSE: AFE)
And yet the share price is only slightly down this year
For the six months to June, AECI suffered a drop in revenue of 4% and a substantial decrease in EBITDA of 24%. It only gets worse as you work down the income statement, with HEPS down 57% and no interim dividend declared.
They describe recent organisational restructuring as going to the “third level below the Executive Committee” so they really have made a large number of changes. The market is being remarkably patient with the management initiatives based on the share price this year, which is only slightly lower despite the struggles.
Some of the pain is strategic, like statutory shutdowns in AECI Mining that contributed to lower volumes of ammonia sales in South Africa at a time when ammonia prices were also lower. If the cost of shutdowns, including alternate sourcing of ammonium nitrate solution, is excluded (which you can’t really do), the AECI Mining segment was flat year-on-year at profit level. In reality, profit was down 12%. They expect volumes to increase based on a recovery in mining activity in South Africa. The export business is also doing well.
AECI Chemicals saw revenue fall 4%, yet profits from operations increased by 9%. That’s great cost management, with operating margin up from 8% to 9%.
AECI Property Services and Corporate recorded a loss of R484 million vs. a loss of R42 million a year ago. This included major corporate costs for various restructuring activities.
Net debt is up to R5.1 billion from R4.4 billion at the end of December 2023 due to investment in working capital and the level of spend on restructuring activities. This is marginally higher than the guided range for gearing levels, so they need to bring that in line.
Against this backdrop, it’s not surprising that the dividend is gone for now. They are hoping for a much stronger second half of the year, which should improve the balance sheet and hopefully bring the dividend back sooner rather than later.
Altron’s positive momentum from the last financial year continued (JSE: AEL)
HEPS is strongly in the green
Altron closed 5% higher after releasing a strong trading statement for the six months to August. The great news is that continuing HEPS is at least 20% higher than the comparative period, which is the bare minimum disclosure for a trading statement. In other words, there’s a good chance that the move is much higher.
The Own Platforms segment has delivered solid growth in EBITDA. This includes Altron FinTech, Altron HealthTech and Netstar. The IT Services segment saw revenue growth come through in Altron Digital Business, but EBITDA went the wrong way. Altron Security at least saw positive growth in EBITDA. Over at Altron Arrow, revenue is down and margins are steady, which means profits are down as well.
On the discontinued operations side, offers received for Altron Document Solutions were below the board’s assessment of value in the business, so they’ve chosen to keep that business. It will be included in continuing operations and profits are higher.
Altron Nexus is still part of discontinued operations.
The Altron share price is up a massive 64% this year, showing what happens when a turnaround starts to work.
MTN Nigeria has released half-year numbers (JSE: MTN)
EBITDA has gone firmly the wrong way
MTN’s troubles in Nigeria seem to be continuing, with MTN Nigeria’s EBITDA down by 10.9% despite service revenue increasing by 32.6%. When margins are disintegrating like that, there’s real trouble. EBITDA margin fell by a whopping 17.4 percentage points to 35.6%. When you consider that the inflation rate averaged 32.8% over the period, that service revenue increase doesn’t look impressive anymore either.
Although these are local currency numbers, the weakness of the Nigerian currency still has an impact as some operating costs are linked to foreign currency. Adjusting for the effects of forex, EBITDA margin would’ve been 50.9%. This shows just how rough the macroeconomic situation is for the business, with an effort underway to reduce exposure to USD-denominated letters of credit.
And despite all this pain, they have to keep investing in the business, with capex up 19.9%. At least free cash flow was still positive at N362.5 billion, admittedly 7.1% down on the comparable period.
There doesn’t seem to be any relief on the horizon for MTN here.
Rentals are up and so are valuations at Shaftesbury (JSE: SHC)
There wasn’t much growth in value per share in the past six months, but there was some at least
Shaftesbury is focused on the West End in London, which is a great place to be. Leasing activity in the six months to June achieved rentals that were on average 7% ahead of the December 2023 levels, so that’s impressive. Valuations also seem to finally be heading in the right direction, with a net tangible asset value per share of 193.4 pence per share, up 1.6% vs. December 2023. The rental growth is finally driving a modest uptick in valuations. For the past couple of years, we’ve generally seen property valuations go backwards in developed markets as yields moved higher.
It gives further support to the balance sheet valuations that £216 million in disposals at a premium to book value were completed since Shaftesbury’s merger with Capital & Counties, with £86 million reinvested in acquisitions. The loan-to-value ratio is 30%, slightly better than 31% at the end of December. Either way, the balance sheet is strong.
The interim dividend of 1.7 pence per share was 3% higher than the comparable period.
Woolworths still needs to steady the ship (JSE: WHL)
Earnings have dropped in the year ended June
The Woolworths share price is down 24% in the past year, putting it in an unpleasant situation where it has strongly underperformed Shoprite and Spar for that matter. In fact, it’s only a bit better than Pick n Pay:
In the results for the 53 weeks to June 2024, we can see why this has been the case. You have to be careful with comparability, as a 53 period isn’t comparable to 52 weeks. Also, they sold David Jones in the prior year. It’s therefore important to look at adjusted numbers on a 52-vs-52 week basis.
Group turnover excluding David Jones and on a 52-week basis only increased by 4.3%. Things got slower in the second half, with growth of only 3.2%. Online sales were up 13.3% for the year and contributed 9.2% of group sales, so at least there’s some growth there.
In South Africa, the Food business grew turnover by 9.0% on a 52-week basis. Price inflation for the period was 7.9% and comparable stores grew 6.9%, so this suggests that there was still a negative move in volumes. Also take note that the inclusion of Absolute Pets in the fourth quarter boosted the numbers, with sales growth of 9.6% in the second half. The summary is therefore that volumes are under pressure but Woolworths has continued expanding, including with trading space growth of 3.2%. Investing into a period of Pick n Pay weakness is probably the right approach. Online sales were up by a substantial 52.8%, contributing 5.5% of South African sales. Woolies Dash increased 71.2%.
The Fashion, Beauty and Home business in South Africa could only manage a 0.4% decline in sales on a 52-week basis. Comparable store sales were up 1.3% if I’ve interpreted the announcement correctly, with a trading space decrease of 0.2% that helped drive the overall decrease. Comparable sales were impacted by a decline in sales volumes that mostly offset the price movement of 8.9%. That price movement is driven by a combination of inflation and full price sales, with the latter being very encouraging. Online sales grew 30.4% and contributed 5.6% of South African sales.
Financial Services saw the book decrease by 2.9% year-on-year, or 1.8% excluding the disposal of part of the book Impairments improved from 7.3% to 7.0% for the period.
Across the pond, Country Road Group saw a further deterioration in conditions in the second half, with consumer sentiment under real pressure. Sales fell 6.8% for the year and 8% on a comparable 52-week basis, with comparable stores down 13.1%. Even though there was a strong base, it’s still really messy. Trading space was up 4.0% due to expansion of concession channels, with the business using a tough period to help build out the right footprint for an upswing. Online sales increased to 27.6% of total sales.
Adjusted HEPS on a 52-week basis fell by between 10% and 15%. It’s much worse if you include David Jones because of the impact of the timing of the disposal. As reported, Group HEPS is down by between 27% and 32% for the 53-week period to between 350 cents and 375.7 cents. Note that this includes the extra week of trading.
Long story short: Food is doing pretty well again, FBH in South Africa needs to turn the corner and Australia is once again a major headache, this time without David Jones!
Little Bites:
Director dealings:
An associate of a prescribed officer of Dis-Chem (JSE: DCP) sold shares worth R6.9 million in an off-market deal.
A director of Hudaco (JSE: HDC) exercised share options and sold all the shares received with a total value of R4.3 million.
An associate of a director of Hammerson (JSE: HMN) acquired shares in the company worth £80k.
Two directors of Premier Group (JSE: PMR) each acquired exactly the same number of shares worth R992k.
At the RECM & Calibre (JSE: RACP) AGM, the company noted that the name change to Goldrush Holdings will be effective from 14 August, with an associated accounting change that will see Goldrush consolidated rather than presented as an investment. This will give investors plenty of detail on this key investment. For the first four months of the year, the Bingo division is slightly down on revenue, Limited Payout Machines are flat on revenue despite having fewer sites, Sports Betting is in line with the prior year and Online has grown strongly. Total revenue for Goldrush is 5% higher year-on-year for the four month period. A further driver of profitability will be lower diesel costs as load shedding gently disappeared.
The ex-CFO of Tongaat Hulett (JSE: TON), Murray Munro, received a public censure and fine of R6 million back in April 2023. He was also disqualified from holding the office of director for a listed company for 10 years. He appealed to the Financial Services Tribunal and the application was dismissed, so the censure and penalties all stand.
MC Mining (JSE: MCZ) released an activities report for the quarter ended June. Run-of-mine coal production was 4% lower year-on-year. The trial with Paladar Resources for the sale of export quality coal seems to have gone well, with all high-grade inventory sold by the end of the quarter. Despite this, MC Mining elected not to extend the agreement. Sadly, thermal coal prices have remained depressed and well down on last year. Premium steelmaking hard coking coal prices are proving to be more resilient. Production costs per saleable tonne were 7% higher year-on-year, Of course, we now enter a period in which there are wholesale executive management changes after the recent corporate activity, with Godfrey Gomwe’s resignation as CEO effective from 30 June. Christine He is now the CEO.
Kore Potash (JSE: KP2) noted in a quarterly update that all outstanding commercial points on the EPC proposal were resolved in a meeting in Dubai in July. The legal advisors now need to finalise the agreements between Kore Potash and PowerChina. The next major step once these agreements are signed will be to finalise the funding with the Summit Consortium. The share price is up 212% this year in anticipation of agreements being finalised.
Southern Palladium (JSE: SDL) also released a quarterly activities report, noting that the pre-feasibility study campaign was successful. An updated mineral resource estimate will be released in the third quarter of calendar year 2024.
Shareholders of Spear REIT (JSE: SEA) have spoken loudly and clearly: the acquisition of the Western Cape property portfolio from Emira (JSE: EMI) was approved by 100% of votes present at the meeting!
Brimstone (JSE: BRT) released a trading statement for the six months to June. As this is an investment holding company, I would far rather focus on net asset value (NAV) per share rather than HEPS. The trading statement relates to HEPS though, which is up between 105% and 115%. I would largely ignore this and wait for results on 27 August.
Rex Trueform (JSE: RTO) and parent company African and Overseas Enterprises (JSE: AOO) announced a small related party deal that will see Geomer Managerial Services provide advisory services to Rex Trueform and subsidiaries. The previous agreement entered into in 2022 expired in June 2024 and this is a new agreement. The deal continues until June 2026 or fees for services rendered equal R12 million, at which point the agreement terminates automatically. Marcel Golding is a director of Geomer and a shareholder in it, so that’s why this is a related party deal. The terms have been determined as fair by an independent expert, even though I think it’s ridiculous that there’s literally a target for fees to be earned, at which stage the agreement terminates. Exactly what kind of behaviour is being incentivised here? Glad I’m not a minority shareholder in either company.
Dipula Income Fund (JSE: DIB) announced that Global Credit Rating Company (GCR) kept the ratings unchanged and affirmed the national scale ratings of Dipula of BBB+(ZA) for long-term and A2(ZA) for short-term credit.
Sebata Holdings (JSE: SEB) announced that the disposal of 55% in the Water Group businesses, along with the associated donation of 5% in that group, have fallen through. Ditto for the similar transactions for the Software Group businesses. In both cases, Inzalo Capital couldn’t meet the profit warranties, so Sebata regained ownership of these interests with effect from 1 July 2024.
Trustco (JSE: TTO) announced that the long stop date for fulfilment of conditions for the Legal Shield Holdings transaction has been extended from 31 July to 30 September. A circular will be distributed to shareholders soon.
The Trader’s Handbook is brought to you by IG Markets South Africa in collaboration with The Finance Ghost. This podcast series is designed to help you take your first step from investing into trading. Open a demo account at this link to start learning how the IG platform works.
Listen to the podcast using the podcast player below, or read the full transcript:
The Finance Ghost: Welcome to episode three of The Trader’s Handbook. I must say, I am really, really enjoying these podcasts with the team from IG Markets South Africa and Shaun Murison, as always my guest on this podcast. We really hope that you’ve enjoyed these first two episodes that we’ve put together. This is now episode three as mentioned, and hopefully you’ve started to learn about the differences between trading and investing.
And if you have joined us from the start in these podcasts, you should certainly have your demo account open by now. If you haven’t done that yet, go off and do it, get that demo open. There really is no replacement for having an on-screen view of the IG platform and how it all works. And I must say, I’ve been having quite a lot of fun with mine, particularly trading those Mr Price attempts to break above a resistance level, but we’ll maybe talk about that during the show. But Shaun, thanks as always for making time for this podcast and sharing your knowledge with the listeners. Lots of fun stuff for us to talk about today.
Shaun Murison: Great. Thanks for having me.
The Finance Ghost: I’m keen to start with this Mr Price trade, actually, and again, the idea is that this podcast is evergreen. If you’re listening to this long after we’ve recorded it, going and looking at a Mr Price chart probably won’t make a whole lot of sense to you. But the point is to also bring real-world examples to the podcast, because the idea, as I mentioned, is to open up a demo account to actually be out there trading. Yes, it’s monopoly money, but treat it as real money and learn from it.
What I’ve done with that Mr Price trade, it’s something we mentioned on the last podcast as well, is I’ve used the strategy now of taking smaller positions on the short, and when that share price does bounce a bit, just adding to the short, I think I closed one leg of it as well that was solidly in the green. I guess what I’ve learned from this is that throwing everything at a single price point is maybe not the best way to go. I’m keen to get your views on that. I’ve sort of taken smaller positions and tried to just not be a hero on that chart and try and pick exactly the right place.
Source: IG Markets platform, 30 July 2024
It seems so far, so good. But what is quite interesting is if I look at a chart of Mr Price on the platform, it’s been trading between roughly 200 bucks and 210 rand a share. Now, if I had timed my short perfectly at 210 rand and closed at 200 rand, if you work it out, that’s a return of about 4.8%. Now, that might not sound spectacular. That’s money market stuff.
But here are two things to remember. The first is that that is money market stuff in twelve months, not money market stuff in the space of a week or a few days. And that’s one of the key differences with trading, right, is you lock in these returns over a short time period. And of course the second point is leverage, something we spoke about in episode two. Go back to episode two if you want to hear more about it. But let’s touch on it here again, Shaun, because the point is, on a ten times leverage basis, that is a return of 48% on the margin that I had to post for the trade, right? I mean, that’s my understanding of it. It’s worth confirming that I understand it correctly. And that’s because when you are trading CFDs, you only put down a portion of your exposure as cash, so your returns are magnified accordingly.
Shaun Murison: Yeah, that’s exactly it. Let’s break down that trade. Essentially, you bought it for R200 and you sold it for R210, and you took a short position, so you did it the other way. But the fact remains the same is that you bought it for less than you sold it for. You essentially did well, you made some money. We talk about contract for difference. What is a contract for difference – it’s a contract for the difference in that price. In this case, it’s that share price of Mr Price. The difference between R200 and R210 is R10 per share. If you had 500 shares, you’d have made R10 for each share. 500 times ten, you would have made R5,000.
Now, when we talk about the leverage and that now, what is the value of that position? If you had 500 shares at R210 a share, you multiply those two together and you get position size of – what’s that – R105,000. That would be your exposure in the market. And that’s what you’re generating your profit or your loss from. Now, you didn’t have to outlay that full amount of money. You only had to outlay a deposit, which would be 10% of that.
You are generating a profit and loss from that full exposure, from that full value of that number of shares multiplied by that share price, but you’re only putting a 10% deposit down. Like you correctly said, instead of making 4.8% on the actual capital you’ve outlaid, you’ve made 48%.
That’s great when it goes for you, but obviously you just need to manage your risk on the downside. If that moved against you, your losses would be magnified by the same amount.
The Finance Ghost: I was just about to say it looks great when it goes right and it looks quite ugly when it doesn’t. I guess that’s part of why I took that approach. And again, it’s only a demo account and it’s monopoly money, but there’s no point in having a demo account if you’re not going to use it like you would your own money. Otherwise, what are you doing? I would never take my own money and go and “Hail Mary” it into a single point on that chart and say, okay, there’s my full possible Mr Price exposure on this trade idea.
Just to recap from the last show, the trade idea here is that Mr Price is having a bit of a tough time in the South African market. Clothing retail is not easy. There’s lots of competition. There’s a fundamental thesis underneath this. And interestingly enough, since the last show, they actually released an update which shows that their sales, if you reverse out acquisitions, are under pressure. Yes, they might be winning a bit of market share because everyone is struggling, but they are also struggling, and that share price is struggling to break above that kind of R210 level. It really is straining to get there.
That’s kind of where I took the approach of these smaller positions, but then I need to be careful of trading fees. I think that’s maybe a good opportunity to talk about that, because if you do lots and lots of small trades, then you do need to be careful of how the trading fees are affecting your net return. This is the dark side of my I-like-small-positions coin, and that’s because the trading fees do have a minimum charge per trade. It’s not just a percentage fee, right, so I think let’s maybe run through that in terms of how these fees work and what you would suggest to people using the platform just to kind of take this into account and manage it.
Shaun Murison: Firstly, that’s where we make our money, obviously, on the transactional fees. We’re not charging you to have an account with us, but that is your barrier to making a profit, essentially your cost of getting in, getting out. If you look at those trades, entry level brokerage rates or your commission charge for a trade like that, you’re looking at 0.2% of the value of your trade when you buy, and then 0.2% of that value of the trade when you sell. For example, if you were trading R100,000 worth of shares at 0.2%, that transaction cost would be R200. It is relatively small. We charge a minimum charge and that’s R50 per trade. But I think it’s important to realize that R50 is not over and above that 0.2%; it’s either/or. You’re paying 0.2% or R50 for the trade, whichever of those figures is greater. And then obviously it’s on the buy leg and it’s on the sell leg.
If you’re looking at the position size on JSE equities, so trading CFDs on local shares, then where does R50 equal 0.2% in terms of the size of your position or your exposure? What we also call notional value would be about R25,000, if you had a R25,000 position. But remember that you’re not outlaying that R25,000 when you’re putting a refundable deposit down for that trade, which would be in this case or that case with Mr Price was 10%. It would be R2,500.
The Finance Ghost: Okay, perfect. This is where you do need to be careful with trying to make a couple of 100 bucks on a trade. Unfortunately, you’re going to eat a lot of that up as fees.
Shaun Murison: If you trade those shares during the course of a day, in and out the same day, then there are no further costs. If you’re holding positions overnight, you do pay interest on a long position and you receive interest on a short position. And that’s set to JIBAR rate -2.5% for the short position where you receive, and for the long position, it’s at plus 2.5%. That is divided by 365, so it’s a daily rate on a yearly interest rate.
I think – especially if you’re going long in the market – I think that’s one of the reasons why you’re not going to hold your positions for extended periods of time. A couple of days, a couple of weeks, even a couple of months is fine, but you start holding it for years and stuff, then that interest calculation would obviously catch up with you. Obviously on the short side, you would be receiving interest, so that wouldn’t be a factor. I just want to just take note that that’s entry level fees if you’re trading local shares, the JSE listed shares as CFDs. International markets, if you’re trading e.g. US shares and that it’s a different fee structure we trade, it’s a cent or two for a share. For each share in UK shares, for example, that entry level rate is 0.1% transactional fee or commission charge.
The Finance Ghost: And I guess the way to think about it, or maybe remember it is when you’re buying a loan position, I need to put down some margin, but I would have had to put down everything if I was just investing normally. Yes, I’m incurring interest, but to be fair, I’ve also only put down 10% of the capital than would otherwise be the case. The idea is there’s 90% of my money still sitting somewhere earning a return, right?
Shaun Murison: Earn interest on your cash balance. Yes.
The Finance Ghost: Okay, perfect. Another example of a position that I decided to put on in my account is Richemont. You can see that I’m loving the shorts here because, of course, that for me is one of the big differences between investing and trading. It really is quite fun to be able to actually take a short view on this thing. And Richemont – well, the broader luxury industry at the moment – is having a pretty tough time of things, actually.
Look, again, I’m no technical analyst, but I’ve learned a little bit, I guess, from doing Magic Markets and from reading and everything else. And I’m keen to get your views on this thing. And I want to give people, again, good examples of the kind of thing you can look at, because I come at it with this fundamental thesis to say, luxury at the moment is struggling in China. You can see it in Richemont’s numbers, we’ve seen it in LVMH, we’ve seen it elsewhere, we’ve even seen it in Porsche, actually, we’ve seen it in a bunch of places right now. And that’s not good for the luxury sector, which typically trades on pretty high ugly multiples. And high ugly multiples have a way of hurting you if something goes a little bit wrong.
I’m looking at my short now on Richemont, and I’ve made R1,098 before fees. Yay me. I will try not to spend it all at once, but it is pretty cool. It’s definitely a whole lot better than losing R1,098. R1,122 now, Shaun, the longer this podcast goes on, the richer I am becoming! It’s very fun to see it on the screen. I guess what I wanted to run past you though, or get your views on, is that double top pattern, if you kind of draw Richemont share price. I mean, do you see that there? Is that something that you would potentially look at getting involved in? I’m just curious, how would you look at that chart and actually have a view on it and some of the technical things that, again, you would look at, some of the indicators you might draw to just assist that fundamental thesis.
Source: IG Markets platform, 30 July 2024
Shaun Murison: I think we definitely need to have a one of these podcasts just on technical analysis and just the do’s and don’ts and understanding the concept. Double top, interesting formation. I think maybe a little bit early on there, but I can see what you’re talking about. For the listeners, a double top is just that m-shaped price pattern. And what does it mean or what does it suggest? It’s saying that a market that’s been an uptrend, you see that pattern in an uptrend is higher highs and higher lows. When you see that pattern, the market stopped making higher highs. And then it’s when it breaks the bottom parts or that support level, we say it’s making lower lows and could be the building blocks of a new downtrend. Changing in market direction from up to down.
When you look at Richemont, I can see why you’d say that we do have the start of that m-shaped formation, that double top reversal pattern. But I would say that maybe, technically speaking, from a technicals point of view, might be a little bit early on that.
The market has some way to go lower before it actually confirms that pattern. For me, in the longer term, I think that trend is still actually up, but we’re having a shorter-term correction of that trend. I’d rather be waiting for that weakness to play out and see where it lands. If it finds support, then maybe look at picking it up. If it breaks support, then I’d be on your side of the market with Richemont.
The Finance Ghost: I think there’s a really important point coming through there, which is to say that most of these large companies on the market are actually great businesses, and long term, they make money. Let’s not pretend otherwise. If you go and draw a chart over a long enough time period, these things tend to go up. It’s got to go pretty badly for that to not be the case. Maybe that’s an important point to cover. A lot of these shorts, or most shorts, are very, very tactical. It’s short-term timing discrepancies and a share price that’s run too hard and everything else, as opposed to saying, oh, long term, Richemont doesn’t go up. No, I don’t think that’s a smart trade. Short term, is Richemont under pressure? Maybe. So far so good. And I think that’s an important point for us to maybe cover off and get your views on.
Shaun Murison: Yeah, that’s exactly. I mean, remember, there’s a bias to the upside. Generally in markets, most of the money that comes in is long-only investment. And you do need to distinguish between timeframes. A lot of when you look at technical analysis, a lot of the themes there are trading with the trend, so trading with the general direction of that market, but recognizing that markets don’t move in a straight line. With the example of Mr Price, which we chatted about, and Richemont, both of those principles seem to be, well, those longer-term direction is up. But I recognize what you’re seeing is that maybe they’re looking a little bit overbought in the near term, so maybe they’ve run a little bit too far and needing of a correction.
Just from my point of view and following a trend-following type perspective, it’s not to try and pick the tops, but rather to wait those bits of weakness out and see where I can join that longer term uptrend. But it really is relative to the timeframe that you are trading. I think if you’re trading against a trend, it can be done, but you just need to be a lot more nimble and quicker in and out of that market. And of course, you always just need to manage your trades and manage that downside risk with things like your management tools like stop losses and things like that. There’s a bit of a saying that it’s better to be long and wrong in the market than short and caught. You’re doing well at the moment, so just be nimble.
The Finance Ghost: Absolutely. No, for sure. And look, to be clear, I think at the moment I’m really experimenting with the shorts because as I said, that really is the key difference for me at the moment between the trading and the investing side in my life, and that’s why I’m playing with that the most on the demo account. I haven’t only done shorts, though, there are a couple of longs. Prosus is one example which has now taken a bit of a knock from a general sell-off in tech, but I actually added to the position this morning, so we’ll see what happens. Prosus is one of those that I’m really liking what management is doing at the moment. Maybe it’ll keep dropping, I’ll keep adding to it. There’s maybe an example of something I would typically invest in rather than trade in because it is a bit of a longer-term view now.
Having said all of that, of course the underlying thing to think about in Prosus as well is China. I’m not blind to that. That’s not something that I would go and throw a whole lot of money at. For all the reasons that Richemont and friends are struggling right now, Prosus carries that risk in China as well. But that all comes down to portfolio strategy, the amount of exposure you take to an individual company.
Source: IG Markets platform, 30 July 2024
My style generally is to have a lot of smaller exposures. I’ve never been a high concentration kind of guy. And Shaun, you’ve pointed out to me when we’ve been chatting offline a bit the past couple of weeks that it’s quite a contrarian style, some of those trades that I’ve put on, and maybe that talks to the position sizing as well. I think you can be contrarian, but then I think you have to be careful. You can’t be taking 20% or 30% of your portfolio and taking a risky bet. There’s just too much variability in the market. There really is. And it can literally wipe you out. It can be short and caught, as you said, and that’s not where you want to be.
Shaun Murison: When to get out seems to be a big focus for traders, timing the market, and we use technical analysis tools to try assist us with that. But the success of trading is really about how you manage that risk. If you’re taking a longer-term view, and you can do that in trading – just control the position size and we talk about position sizes, how many contracts or how many shares you’re going to be buying.
If you want to hold it for a longer period of time, the suggestion is maybe having a smaller position with a wider stop loss, because you do need to manage that downside risk. If you’re going to be in the market a little bit quicker, well, then maybe the suggestion is to have a larger position with the tighter stock.
Every trade is different, but it’s really about understanding: what is your intention? And what is your view. Are you in it for a couple of minutes or a couple of days or in for a couple of weeks or a couple of months?
The Finance Ghost: Of course, none of this is possible unless you actually have a brokerage account. You can’t have any of this fun whatsoever if you don’t have a brokerage account that can do this for you. This is obviously where IG comes in. And I think let’s start with the absolute basics here, Shaun, what is a brokerage account? It sounds like such a fundamental, basic question, but it’s quite an important one.
Shaun Murison: Look, I mean, when you trading financial markets, you need a link to those markets, and essentially a brokerage account is an account that links you to that market. We talked earlier on about, you have commission fees and that, and I suppose it’s in principle similar to having a bank account. You’d have a trading account or a brokerage account, same thing. And obviously that account will allow you to buy and sell different financial assets. With IG, everything is in a CFD form, but it would be things like shares, forex, commodities, gold, oil, exchanges around the world, lots of different things.
The Finance Ghost: And how should a trader go about actually comparing these different brokerage accounts and then choosing one that works for them? Because of course there are various providers in the markets and IG certainly has a great reputation. I must say, I’ve had quite a few people reach out to me since we actually started this collaboration saying, hey, I’m a big fan of the platform, really cool to see you guys working together. That’s been nice, I must say. And in your view, obviously biased view, but also not a biased view because it’s objectively, how should a trader actually look at these different accounts and say, hey, this is who I want to trade with or not. What are some of the characteristics that you think a trader should actually look at before choosing a brokerage account?
Shaun Murison: Look, I think the most important thing when choosing a broker is making sure that the broker you’re choosing is regulated in all the jurisdictions in which they are offering their services.
If you add to that, you want a competitive cost structure, as we’ve said, that is your barrier to making a profit, but you want that balanced with access to research, trading tools, things like technical analysis tools, live news feeds, broker ratings, mobile access. And another important feature would be just make sure that that platform or the trading platform is reliable. You don’t want to get stuck or let down when you’re trying to get in out of a trade. Then if you, you know… I know a guy!
The Finance Ghost: Yes, exactly. And that guy’s waiting for you to open a demo account and play around on IG. Definitely. Let’s just talk about IG for a moment. The focus here is CFDs. This is something we’ve covered in previous shows, that is ultimately the IG model. As we think about these different types of brokerage accounts, that’s how you operate.
Shaun Murison: Yes. Because of exchange control, we separate local products with offshore products. But if you’d open a brokering account with IG from a local account, you’d be able to trade everything in a form of a CFD obviously.
Shares, indices, exchange traded funds. If you had the offshore account with us, which would be supported from the South African office as well, you could trade anything around the world. Like we said, forex, commodities, global indices, shares on different exchanges around the world.
The Finance Ghost: Another point I just want to touch on as we learn more about the platform: I noticed in my demo account that there’s a section called deal and there’s another one called order, and within both then there’s an OTC option and a DMA option. I’m keen to understand a little bit more about these concepts. Deal versus order, and then OTC versus DMA as we just learn more and more about this platform and how all the CFD trading actually works.
Shaun Murison: Okay, so deal is if you wanted to buy or sell at the available price in the market right now, you don’t want to wait, you just want to get in – use the deal function. If you have a particular price in mind though, that you prepare to buy or sell whichever market, then you use the order function. You put your order in at the price that you like and you’d wait for the market to get there. Obviously it doesn’t have to get there. Anything can happen in the market. You do run the risk of not getting into the trade if you use the order.
But then obviously the positive side of that is you get the price that you want if it does move to your order. Deal, I want to get in the market right now. An order is, well, I’d like to get into the market if it gets to this price. I think that would be a simplified version of that.
When you talk about OTC, OTC means over the counter. That is a trade that you’re looking at the market prices, but it doesn’t go through the exchange. When you look at DMA, that means direct market access. You’re looking at the price of those underlying exchanges, but your trade does go through that exchange through our order book.
The Finance Ghost: Okay, and then last question for this show for listeners who really just can’t wait to get stuck in. How should they go about opening an account with IG Markets South Africa? Not just a demo account, but a full-blown account. What does that process actually look like?
Shaun Murison: Very, very simple process. You just need to go to that ig.com website, fill out the application, and you’d be assisted by one of the client support services in terms of getting it open and funding that account. But if you are new to this, make use of that demo account first, I think. Iron out your mistakes, get used to the platform. But certainly IG is here to support you through that whole process.
The Finance Ghost: Great, Shaun, well, thank you so much. I think it’s been another excellent episode, and to the listeners, I would go back, listen to the previous two, make sure you’ve caught up with the full season thus far. There’s still lots more of this to come. Nice combination of looking at practical trades and examples of the thinking behind them, but also how the platform works and a lot of the other concepts. And there’s still lots, lots more to come in the episodes ahead. Shaun, thank you so much for your time again this morning. And to the listeners, go and get that demo account open and go and play around. Thank you very much.
Shaun Murison: Thanks.
The Finance Ghost: CFD losses can exceed your deposits. In our gorgeously diverse country, there really is a new reason to trade every day. Current affairs to political news can make the markets move and cause volatility, which can be advantageous to a trader. Diversify your portfolio by opening a trading account with IG and explore the possibilities of CFD trading, or practice your trading skills on an IG demo account.
Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:
BHP makes a copper acquisition (JSE: BHG)
The target is Filo Corp in Canada
After having a good ol’ sniff around Anglo American (JSE: AGL) and subsequently walking away based on an unwillingness by the Anglo board to propose the deal to its shareholders, BHP has found love in Canada. Unsurprisingly given BHP’s narrative around Anglo, the target company is involved in copper.
Filo Corp. is listed on the Toronto Stock Exchange and owns 100% of the Filo del Sol copper project in South America. BHP will be acquiring the firm alongside Lundin Mining, with BHP and Lundin creating a joint venture to hold Filo as well as the Josemaria projects in Argentina and Chile. Lundin currently holds 100% of Josemaria. By pooling their interests in the region, they create potential synergies around infrastructure and staged expansions.
BHP’s total cash payment for the deal is expected to be $2.1 billion, so this is a meaty cheque to write. The total deal value is $4.1 billion, representing a 32.2% premium to Filo’s 30-day VWAP before the date of press speculation around the deal. Interestingly, to pay for its part of the deal, Lundin will offer shareholders in Filo an option to accept cash or shares in Lundin.
To provide interim financing to Filo while the deal is underway, BHP and Lundin have agreed to subscribe for shares worth a total of C$115 million.
Glencore needs a strong second half to the year (JSE: GLN)
The first half of the year hasbeen weak relative to the expected second half
Glencore expected 2024 to be a tale of two halves and that seems to be playing out, with full year production guidance maintained despite a significant drop in production in the first half of the year.
With various issues related to ramp-ups and annual shutdowns (within Glencore’s control) and more tricky matters like geotechnical events, there are a number of reasons why second half production will look better than the first half across several commodities.
Own sourced copper was down 2% for the first half. Cobalt fell 27%, zinc was down 4% and nickel came in 5% lower. Ferrochrome production fell 16% (see Merafe below) and coal was down 7%.
There is no room for error in the second half, which is always a bit scary in a sector as operationally unpredictable as mining.
Merafe’s earnings have dropped sharply (JSE: MRF)
The company made the decision to decrease production based on market conditions
Merafe’s attributable production from the Glencore Merafe Chrome Venture fell by 17% for the six months to June, due to the Rustenburg smelter not being operational in 2024. They made this decision based on prevailing market conditions, as it was cheaper to not run that smelter at all for the period than to run it at a loss-making level.
HEPS for the six months will be between 23% and 43% lower at between 24.0 and 32.4 cents, which isn’t a surprise in the context of the production number combined with lower commodity prices.
Merafe’s cash balance is R1.72 billion, up from R1.66 billion as at the end of December 2023. Included in this cash is R344 million set aside for future environmental obligations, so not all that cash is available.
At Shoprite, Sixty60 continues to deliver (JSE: SHP)
And group sales growth is still in the double digits
Shoprite has released an operational update for the 52 weeks to June 2024. The group increased sales by 12% for the year, which is a really impressive outcome. Nothing seems to be able to stop them!
If we consider the two halves, group sales increased by 13.9% in the first half of the year and 10.2% in the second half, so there’s a slowdown there – if you can call 10.2% a slowdown. Supermarkets RSA is where things cooled off, from growth of 14.6% in the first half to 10.1% in the second half. A significant part of this trend was the stores acquired from Massmart, which weren’t in the base period for the first half but were there for the second half.
Oddly, the Furniture division saw sales growth improve in the second half, from 1.7% to 3.2%, giving full year growth of 2.3%. Supermarkets non-RSA was pretty consistent through the year, with full year growth of 6.1%. The Other Operating Segments bucket did well, up 21.1% for the year. OK Franchise was the star of the show there, with sales up 23.8%.
The core of the group is Supermarkets RSA, contributing 81% of group sales. With 12.3% full year growth after a performance of 17.8% last year, they really have washed away the competition over the past two years. Internal selling price inflation was 5.8% for the full year and 3% for June, so food inflation has thankfully calmed down. That’s good for consumers, but not necessarily for grocery retailers that use food inflation to offset inflationary pressures in other costs like energy and security.
Within the underlying businesses, Checkers and Checkers Hyper grew by 12.3%. Sixty60 continued to deliver in every way possible, with sales up 58.1%. Shoprite and Usave were up 10.7% and LiquorShop grew 20%. Some of the new formats are being rolled out quickly, like Petshop Science with 33 new stores and UNIQ clothing with 13 new stores.
Of course, this doesn’t tell us anything about profitability yet. The market has to wait for detailed financials to see that, due for release on 3 September. It certainly helps that load shedding costs for the second half came in at R254 million vs. R500 million in the first half. Electricity costs went up of course (because Eskom actually supplied the stuff), with the group guiding mid to low single digits growth in water and electricity costs overall.
The share price peaked its head above the R300 level for the first time before closing just below it:
Zeder announces another disposal (JSE: ZED)
This time, it’s Novo Fruit Packers
In June, Zeder announced the disposal of Theewaterskloof Farm. In July, the disposal of Applethwaite Farm was announced. To make it a trio of deals, the company has announced the disposal of the Novo Fruit Packhouse operation in Paarl.
This is part of the Capespan Agri asset that is included in Zeder Pome Investments, in which Zeder holds 87.1%.
The price is R195 million plus the value of stock-on-hand, limited to R5 million. The net assets as at 31 December were R214.5 million and profit after tax for the year ended December came in at R16.4 million, to give you a sense of valuation.
The purchaser is Dutoit Agri.
Little Bites:
Director dealings:
The group company secretary of Vodacom (JSE: VOD) has sold shares worth R387k.
An associate of a director of Pick n Pay (JSE: PIK), James Formby, purchased shares worth R295k.
Acting through Titan Premier Investments, Dr Christo Wiese has bought another R63.2k worth of shares in Brait (JSE: BAT) and R198k worth of nil-paid letters as part of the rights offer.
With all the noise around the board of Quantum Foods (JSE: QFH) at the moment, it’s interesting to note that Piet Burger has been appointed as an independent, non-executive director. He has held executive positions at Tiger Brands and Pioneer Foods previously. With Country Bird trying to remove the chairman of the company at the moment, it’s quite a time to join.
NEPI Rockcastle (JSE: NRP) will be holding a capital markets day in Romania on 1 October, so I’m sure that a few lucky property analysts will get on a plane. For the rest of us plebs, the presentation will be made available on the day.
Mark Bower will be stepping down as chairperson of Netcare (JSE: NTC), having been on the board since 2015 and in the role of chairperson since January 2023. Alex Maditse, currently an independent non-executive director, has now been appointed as lead independent director.
Ellies Holdings (JSE: ELI), the listed holding company, has been placed under final liquidation. Operating entity Ellies Electronics is still in business rescue and the business rescue plan is being implemented.
Efora Energy (JSE: EEL) is suspended from trading. Although the company has made a major effort to catch up on financial reporting, it still owes the financials for the year ended February 2024 to the market. They expect to achieve this by 2 August, so they are nearly there. In the business itself, the transfer of the Alrode Depot to Efora has been completed.
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