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Another twist in the Ascendis tale (JSE: ASC)
The High Court has given the TRP a bloody nose
The Ascendis story seems to be far from over. After the Takeover Regulation Panel (TRP) released its findings from its investigation, there was a lot of attention in the market on the parties involved. Ascendis quickly released an announcement noting that the company (and the concert parties) disagreed with the findings of the TRP and would consider next steps.
As a first step in rebuttal, Ascendis and the parties applied to the High Court to have the TRP ruling set aside. The High Court gave a nod of approval to this, setting aside the TRP ruling and compliance notice and remitting the matter to the TRP.
The reason? Lack of procedural fairness. Interesting.
The ball now seems to be in the TRP’s court. This dispute is far from over I think.
BHP reflects on the year with an activities report for the final quarter (JSE: BHG)
Production guidance for the full year was achieved for all commodities
BHP is a very large group, so any given year will include highlights and areas with challenges. Be careful when interpreting a statement that production guidance was met. Meeting guidance and having a good time are two different things.
Starting with the good news for the year ended June 2024, WAIO achieved its second consecutive year of record production – admittedly only up by 1%. The other major highlight is the copper business, with total production up 9% and operational highlights including a year of record production at Spence in Chile and positive news from the other copper operations as well. It’s also worth noting that metallurgical coal achieved the upper end of revised guidance.
One of the disappointments of the year has to be the temporary suspension of the Western Australia Nickel operations, as the global nickel market remains in a terribly oversupplied situation, putting continued pressure on nickel prices.
The market will now wait for detailed financial results.
Vukile is on a debt capital markets roadshow (JSE: VKE)
This is useful even for equity investors
Vukile Property Fund is one of the better REITs on the JSE that enjoys strong support among institutional investors. Being able to raise equity capital is only half the battle won, as REITs require ongoing support from debt providers as well. This is why Vukile is on a debt capital markets roadshow, with the full presentation available here for anyone interested.
One of the key points is that Vukile has achieved considerable geographical diversification, with 61% of the assets located in Spain. The portfolio is yielding 6.6% in Spain (that’s in euros) and 8.7% in South Africa, obviously in rands.
Within South Africa, what makes Vukile interesting is the exposure to the township and rural economies. The group has very little exposure to the Western Cape, with most of the properties up north and focused on retail opportunities in lower income areas that offer strong growth prospects. Importantly, the South African portfolio is currently enjoying positive reversions.
There are a large number of really interesting, detailed slides and charts in the presentation. If you’re interested in property, then I recommend reading it.
Where else have you seen detail like this:
With a loan-to-value ratio of 40.7% and a debt maturity profile of 2.9 years, Vukile is not having urgent discussions with debt providers. Instead, they are ensuring ongoing support from the market and an understanding of the Vukile model and risks, supported by the corporate long-term credit rating of AA(ZA). This is ahead of a plan to access the debt market in August via a public auction, with the proceeds intended to be used to repay corporate notes maturing in FY25.
Little Bites:
Director dealings:
A director of a subsidiary of Insimbi (JSE: ISB) has been selling shares for a little while now. The latest sale is for R85.5k worth of shares.
Riskowitz Value Fund is buying 1.3% of the shares in Trustco Resources, a subsidiary of Trustco (JSE: TTO). Trustco talks about how this is an injection of capital into Trustco Resources, yet the deal is described as an acquisition of shares rather than a subscription for new shares. Either way, the deal is worth $4.55 million. An independent expert has determined the deal terms to be fair. As a small related party transaction, such an opinion was a prerequisite for the deal.
Spear REIT (JSE: SEA) announced that the Competition Commission has approved Spear’s acquisition of Emira’s (JSE: EMI) Western Cape portfolio, subject to certain conditions that are acceptable to Spear.
If you’re a Sygnia (JSE: SYG) shareholder and you would like to read the circular about the proposed share option scheme for staff, you’ll find the circular here.
Grindrod Shipping (JSE: GSH) announced that the High Court of the Republic of Singapore approved the proposed selective capital reduction of the company, which is basically just a clever way to use the company’s balance sheet to take out minority shareholders and pay them $49.6 million – or $14.25 each.
The MSCI World Index climbed 11.6% since the beginning of 2024. This was largely pushed by the continued demand for companies linked to Artificial Intelligence (AI), improved corporate earnings in the US market, and other developing economies. Inflation continued to cool in some parts of the world, including the US which published a 3.3% in its last inflation print.
Nvidia became the world’s largest-valued company after its share price hit another all-time high, doubling its gains since the beginning of the year. This helped the NASDAQ Index reach its all-time high, returning 17.2% for the first half of the year. The MSCI US and S&P 500 indices were up 14.5% and 14.9% respectively during the same period. In Emerging Markets, India posted strong returns – closing the first half of the year up 16.7%, while China was up 4.6%. Overall, Emerging Markets were up for the first half of the year, but not as strong as the developed Markets, as the MSCI Emerging Markets Index closed the first half of the year up 7.3%. All returns are in rands.
Was Local as Lekker?
The FTSE/JSE All Share Index was up 5.8% for the first half of the year, trailing global stocks. However, during the first two months of the year, the index was down 5.3% while offshore indices like the Nasdaq were up 12% during that period. Year to date, local markets were led by SA-listed stocks, with the SAPY up 9.6%, while Financials were up 8.9%, followed by Industrials up 5.6%, and Resources up 4.1%. The currency has held up since the end of December 2023 and has ended the first half of the year 0.15% stronger than it began the year. After much anticipation, President Cyril Ramaphosa was voted in for his second term as president. Several political parties agreed to form a Government of National Unity (GNU) with the ANC, which drove a massive recovery in SA Inc. stocks in June.
Fixed Income
The South Africa 10-year Government Bond Yield was back at its March 2024 levels as it closed June at a yield of 10.2%, after peaking at 11.2% in April. The South African Reserve Bank reiterated that interest rates may remain elevated for an extended period as the committee was sticking to its mandate of achieving its inflation targets. The FTSE/JSE All Bond Index closed the half-year period up 5.6% while the STeFI cash index returned 4.2% for the same period.
The US 10-year Treasury Bond Note Yield was up 4.41% at the end of June. It started the year at 3.86% as investment-grade floating notes and high-yield corporates were some of the best-performing fixed income investments. However, US Treasuries and Long-term US aggregated bonds fell behind. The Bloomberg Aggregate Bond Index was one of the worst performers for the first half of the year when compared to other assets, returning 3.3% in rands.
Commodities
The first half of 2024 has been positive for Gold, as geopolitical tensions and hopes for rate cuts this year were some of the factors driving the price, closing the period up 12.8% in US dollars – reaching an all-time high in May. Investors also continued to keep track of Silver and its demand from top consumer, China. The metal was up 22.6% year to date, out-pacing Gold.
A rise in demand for oil and production cuts from OPEC+ drove inventories during the first half of 2024. Some geopolitical tensions in the Middle East also continued to influence the oil price. Brent crude oil futures rose during this period. They rose 10.2% and closed the period at US$85.0 at the end of June.
Europe
After nine months of stable interest rates, the European Central Bank (ECB) lowered rates by 25bps as inflation rates were stable at around 2.6% in May. In the equity markets, the MSCI Europe Index was up 5.6% in rands, with the President of the ECB stating that they were not planning to introduce more rate cuts as they wanted to assess inflation and trends in the economy.
The Bank of England has held interest rates at the same level since August 2023, as the population was gearing up to go to the polls. The MSCI UK Index held up during the first half of 2024. It rose 6.8% in rands while the United Kingdom 10-year Gilt bond yields rose from 3.5% at the beginning of the year to 4.2% at the end of June 2024.
With so many options out there, the only free lunch in investing is diversification. Listen to Kingsley Williams, CIO at Satrix, discuss this with me in a recent podcast:
SatrixNOW is a no-minimum online investing platform from Satrix that allows you to buy and sell ETFs directly.
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Brait is ready to launch its rights offer (JSE: BAT)
Up to R1.5 billion will be raised
Brait has announced that the circular for the rights offer will be released on 18 July, which is this week. This will give the market more details on the Brait story, with shareholders asked to put in R1.5 billion in equity.
As part of the balance sheet activities, the convertible bonds are to be partially repaid by R150 million and the exchangeable bonds will be partially repaid by an aggregate reduction of the principal amount of R750 million.
The bond maturities will be extended by three years to December 2027 as part of the transactions.
In further debt news, the Brait Mauritius Limited revolving credit facility will be extended to March 2028, with the limit increasing from R0.6 billion to R1.0 billion.
Christo Wiese is underwriting the rights offer via Titan, his investment company, but shareholders are allowed to apply for excess applications and can trade their nil paid letters. This is somewhat surprising, as they could’ve taken the more aggressive route and not allowed either of these courses of action, thereby allowing Titan to snap up even more shares than would otherwise be the case.
Titan will earn a market-related underwriting fee of 1%. They are underwriting up to R1.5 billion. That’s a nice way to put R15 million in the bank, isn’t it?
Flat sales at Richemont in the latest quarter (JSE: CFR)
Asia Pacific is where the problem lies
Richemont has reported its sales for the three months to June, reflecting the first quarter of the new financial year. Sales growth was a tepid 1% at constant exchange rates. Sales actually fell 1% as reported, with Asia Pacific dragging the team down with an 18% decline at constant rates and a 19% decline as reported. China, Hong Kong and Macau fell 27%, with South Korea and Malaysia in the green and helping to mitigate some of that impact in the Asia Pacific region.
Richemont is quick to highlight that the group number has a tough base effect, with growth in the comparable quarter of 19% at constant rates and 14% as reported. Whilst that is true, it means that the two-year growth stack is nowhere near as impressive as the rates that the market was getting excited about last year.
As the largest region (32% of group sales), Asia Pacific managed to ruin the party seen elsewhere, like 10% growth in the Americas and a whopping 59% in Japan (both constant rates). The result in Japan was driven by domestic demand and tourist spending, with an uptick in tourism in Japan due to the weaker yen. Middle East & Africa rose 8%, with tourist spending in the UAE and Saudi Arabia as the major driver.
If we look by channel, group retail sales were up 2% and wholesale and royalty income fell 5%, both constant currency. Surprisingly, online retail was up 6%, so there’s some positive momentum there. The online happiness certainly isn’t being experienced at YOOX NET-A-PORTER which is an ongoing disaster, presented as a discontinued operation and reflecting a 15% sales reduction.
A view by business area shows that Specialist Watchmakers got the worst of it, with sales down 13% in constant currency. Jewellery Maisons grew 4% and the other category was up 6%.
It’s been a poor week in the headlines for the luxury sector, with Burberry getting particularly smashed out there (down 16.5% in the past week). Richemont’s share price brushed off the weak sales update, holding onto the year-to-date growth of around 9%.
Little Bites:
Director dealings:
A director of a subsidiary of Insimbi Industrial (JSE: ISB) sold shares worth R13.2k.
Salungano (JSE: SLG) announced that creditors have supported the business rescue plan put forward by the business rescue practitioners for Wescoal Mining, which will continue operations for the benefit of all affected parties.
Cash shell Trencor (JSE: TRE) released a trading statement for the six months to June. It reflects a drop in HEPS of between 86.1% and 84.6%. This is because of the forex impacts of the cash balances, which have the biggest impact on the results in any given period while the company counts down the time until it can clear out the legacy cash and shut down the shell. Based on the indemnities previously given to other parties, the process to wind up the company should be able to commence after December 2024.
If you’re curious about Orion Minerals (JSE: ORN) and you want to know more about the company, they are hosting a live investor webinar at 8:30am on Thursday morning. Refer to the SENS announcement for sign-up details.
Accelerate Property Fund’s (JSE: APF) name is turning out to be incredibly ironic in the context of financial results. They’ve been delayed yet again, with the company now promising to issue them by 21 July.
Tiny listed company Numeral (JSE: XII) has released results for the three months to May. They reflect revenue of $10k and operating income of $1.7k. No, I don’t appear to be missing any zeroes there.
Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:
The Bell is finally ringing – at R53 per share (JSE: BEL)
After years of speculation and even arguments with activist shareholders, there’s a deal
At long last, Bell Equipment is being taken private. Although the deal was only announced on Monday, Bell was up 10% on Friday. Perhaps some people just have really good crystal balls.
The Bell family holds 70.13% through IAB and another 14.82% across various family holdings, so the free float in Bell was already very low. Original attempts to take the company private at opportunistic prices were unsuccessful, with the family now stumping up R53 a share to get the deal across the line. At a huge premium of 82.3% to the 30-day VWAP, it almost feels like they’ve over-corrected on the offer price and offered too much!
The reasons for the delisting are the usual ones: limited share liquidity, constrained ability to raise capital and significant costs of remaining listed.
The offer is worth R762 million, with the offeror having obtained a bank guarantee from Investec in this respect.
Although the independent expert hasn’t opined on the fairness of the deal yet, I can’t see there being any issues at this price.
Bell traded below R5 a share in the worst of the pandemic. It has achieved elusive ten-bagger status, although I’m not sure if anyone would’ve timed it perfectly to buy at the bottom and hang on for the delisting offer! Still, a lot of people did well out of this one.
This is structured as a scheme of arrangement. If it gets the requisite number of votes, the offeror will get all the remaining shares in the company.
Murray & Roberts won a contract in Latin America (JSE: MUR)
When you’re light on good news, you have to celebrate everything
Murray & Roberts has enjoyed a 55% rally in the share price this year, benefitting from the improved sentiment on the JSE without anyone really referencing the company as a stock pick. It’s a risky choice, which might be why market commentators have stuck to the old faithfuls like Afrimat. After all, Murray & Roberts is down nearly 80% over three years.
With the company trying to execute a turnaround, any good news is celebrated. If it’s big enough, they won’t be shy to use SENS to tell you about it. This is the case in the latest update, with Cementation Americas (part of the Murray & Roberts Group) being awarded a mine construction project in Latin America worth $200 million over several years.
If this sounds like business-as-usual to you, that’s because it is. Like I said, it’s been a tough time for the group and they want to get good news into the headlines.
Northam Platinum is doing the best it can (JSE: NPH)
They can’t control PGM prices but they can control production
Northam Platinum released a voluntary production update for the year ended June 2024. It reflects a 10.3% increase in refined 4E metal production from owned operations and 10.6% including purchased material. Either way, that’s good. They exceeded their guidance thanks to outperformance at Booysendal.
PGM price weakness has been the theme lately and Northam is trying to limit the pain by being focused on internal efficiencies and cash conversion.
The share price has had a choppy ride this year and is down 8% year-to-date.
Pick n Pay has released the rights offer circular (JSE: PIK)
It feels like the market has been waiting forever for this
The market has known about Pick n Pay’s rights offer for so long that it has felt like a lifetime for the circular to be released. Although nothing has materially changed since the other announcements, it’s always worth taking a look at the circular to see what we can dig up.
The first interesting bit is the use of proceeds from the R4 billion rights offer. Apart from reducing debt making progress on the turnaround strategy, they also foresee this as being enough for incremental operational funding requirements for the rest of the 2025 financial year. This implies that the group is still absorbing cash at the moment – a good reminder that turnarounds aren’t easy.
There’s other interesting stuff, like a note that the retail business has been divided into six regions rather than three. Presumably this is to help the executives get in their cars and actually visit the stores. If I were them, I would pay particular attention to customers getting thoroughly ignored in the bakery queue for nearly ten minutes. That’s just one of my joyous experiences that I can think of in a Pick n Pay recently. They have 7,000 employees on the “frontline multi-skilling programme” which hopefully includes a module on how to sell a donut to a guy with a sugar craving.
Importantly, they talk about not following a “scale-at-all-cost” approach to the store footprint, which sounds like they will have fewer stores thanks to cuts made to the long tail of sub-economic stores. That’s tough for landlords, of course. Where it makes sense, they will convert Pick n Pay stores to Boxers. Another initiative is to convert some corporate-owned stores to franchise stores.
There’s also this paragraph, which is particularly incredible when you consider that Checkers is a corporate-owned model, as is Woolworths Food. Somehow, I think this is a management problem rather than a business model problem:
Here’s a more positive data point: if load shedding continues to stay away, there’s a significant potential saving for Pick n Pay this year. They spent R698 million diesel in the year ended February 2024. Consider this amount in the context of the size of the capital raise and you’re getting a good idea of what load shedding really cost the economy last year.
Here’s the biggest shock of all, if you’ve never seen how much money underwriters make for being willing to support a capital raise. Get ready for the costs of the rights offer, coming in at a cool R114 million:
Strategic and operational incompetence has a price. A very large price, indeed. Let’s hope that with a new management team in place, Pick n Pay will get things right.
If you would like to read the rights offer circular (and I always recommend making time for this stuff if you can), you’ll find it here.
Sappi has sold the Lanaken Mill land and assets (JSE: SAP)
Alas, it could not be saved as a mill though
In November 2023, Sappi announced that it would be reducing capacity for graphic paper in Europe. The paper industry is a cyclical game of note, but there are also underlying structural trends that can impact supply and demand. Either way, the writing was on the wall for the Sappa Lanaken mill in Belgium, with production ceasing by the end of December 2023.
Sappi has found a buyer for the asset in the form of UTB Waalwijk B.V., a Dutch company that specialises in industrial property conversions. This suggests that the property will be given a new lease on life – literally. But it probably won’t be a mill.
More importantly, the price is €50 million, of which €40 million will be paid in cash. For some reason, the announcement doesn’t indicate how the other €10 million will be paid. The transaction is expected to close in October.
Sasfin is being taken private – or is it? (JSE: SFN)
The share price was so bad that it’s barely up YTD after the take-private jump
I’ve joked more than once that Sasfin’s returns are so poor that shareholders would be much better off selling their shares and taking out a fixed deposit with the bank instead. It seems as though the family has given up on any prospects of meaningful share price growth, so they are taking it private instead alongside Women Investment Portfolio Holdings, commonly known as Wiphold.
The actual structure is interesting, with those parties subscribing for shares in Sasfin Wealth before that company makes an offer to shareholders of R30 per share in Sasfin Holdings. This is a premium of 66% to the 30-day VWAP.
They will also put together a scheme for management of Sasfin Wealth to have a 15% interest in the enlarged share capital of Sasfin Wealth. This will be funded mainly by a vendor finance scheme.
The concert parties hold 73.1% of Sasfin, so the offer is for the remaining 26.9%. There’s a real twist in the tale around this, so read on,
This is an offer rather than a scheme, so shareholders could choose to remain invested in an unlisted version of Sasfin. Personally, I would rather watch re-runs of Ireland’s last minute drop goal than have unlisted shares in Sasfin.
Now for the weird bit. As you read through the announcement, you get to a particularly interesting paragraph:
From my understanding of this, they will only go through with this offer if holders of no more than 10% in Sasfin accept the offer. This sounds doomed to fail, unless I’m missing something here. How can they assume that fewer than half of the non-concert party shareholder will accept the offer?
If you’re wondering if they perhaps have irrevocable undertakings from parties other than the concert parties, then you’ve been paying attention to deals. Alas, there are no other irrevocables. Only the concert parties have indicated that they won’t accept the offer from Sasfin Wealth. This is the 73.1% referenced above.
Odd.
Little Bites:
Director dealings:
The CEO of Stefanutti Stocks (JSE: SSK) has bought shares worth just under R3 million.
A director of Newpark REIT (JSE: NRL) bought shares worth R1.4 million.
A director of a major subsidiary of Lewis (JSE: LEW) sold shares worth R718k. The announcement notes that they relate to share awards but isn’t explicit on whether this is just the taxable portion.
A director of a subsidiary of Insimbi (JSE: ISB) sold shares worth R8k.
Clientele (JSE: CLI) must’ve cracked open the champagne yesterday, as their acquisition of 1Life Insurance is now unconditional. The deal is deemed to have closed on 1 July. They are paying for the acquisition through the issuance of Clientele shares, so I think it’s a goodie.
Dis-Chem (JSE: DCP) is subscribing for a 50% interest in OneSpark in the US, a company that is a related party to Dis-Chem because of the relationship with the founders. The deal is for a share subscription worth R156 million, so it’s a meaningful transaction. PwC has provided an opinion that the terms of the deal are fair to Dis-Chem shareholders. If you want to read the opinion, check it out here.
Vunani (JSE: VUN) has renewed the cautionary announcement related to the potential disposal of a minority shareholding in a subsidiary. They don’t say which subsidiary this is.
Paul Miller is an ex-investment banker with extensive experience not just in the markets, but in junior mining as well. He understands how important it is for a market to have an active base of retail investors, connecting capital to opportunities and encouraging more listings. Access to capital is the lifeblood for the junior mining sector, but it goes far beyond that.
Through Utshalo, he is working to encourage listed companies to include retail investors in their capital raises, rather than only picking up the phone to a few investors in an accelerated bookbuild.
With Orion Minerals as the perfect example of what can be done in South Africa, Paul joined The Finance Ghost on this podcast to talk about why this is so important and how Utshalo can help. You can find out more about Utshalo at this link.
Utshalo is a division of Ince (Pty) Limited, a juristic representative of Insurance Supermarket Insurance Brokers (Pty) Limited, registration number 2012/044142/07, an Authorised Financial Services Provider, FSP number 43986
Read the transcript below:
The Finance Ghost: Welcome to this episode of Ghost Stories, coming to you from a very cold and rainy Cape Town. I just drove past the vlei near my house, and the water was just about up to the road, actually, which is not something that you see too often. And Paul, maybe we’ll see some money flowing through the JSE like we’ve seen the rain flowing into the rivers here in Cape Town. I don’t know. Time will tell. But if anyone’s going to know, and if anyone’s going to help influence that, it’s you. And it’s very good to have you on the show.
For the listeners today, my guest is Paul Miller, the founder of Utshalo. And Paul, there’s been some really cool press releases about what you’re up to in the past week, and obviously we’ll dig into all of that. But first, let me just welcome you to Ghost Stories and thank you for doing this with me.
Paul Miller: Thanks, I look forward to it.
The Finance Ghost: Let’s start at the beginning, because you’ve got a very interesting history. I mean, you’ve been at the cutting edge of finance, let’s face it, for a long time now. You’ve done investment banking. You ran a JSE-listed company at one point. You are a busy man today with a few business interests as well, one of which is Utshalo, which really comes from your experience in the markets and obviously a passion for that. Let’s just start there.
What drove you to actually start this business? And ultimately, what problem are you trying to solve in the world? Because, of course, that’s what makes a startup a startup, right? A burning desire to solve a problem.
Paul Miller: Absolutely. I had a most wonderful time as a corporate financier working for Nedbank prior to the global financial crisis. I was in the corporate finance team and what I really enjoyed was equity capital markets and equity capital raising. I had previously been a management consultant, spent some time on the mines, and I was asked to be a mining specialist. So I became a mining specialist equity capital markets corporate financier, and hit that purple patch when everyone was talking about the commodity super cycle and the new mineral rights regime in South Africa had driven a lot of change in deal making. I pursued raising equity capital for junior miners and bringing junior miners to the JSE as secondary inward dual listings, and had some amazing success. I was the JSE sponsor on Aquarius Platinum, the first new generation inward dual listing. Now we have 60 or so. I led the listing of Eland Platinum, which was a five bagger for the investors who came in originally. I went to Canada and got Canadian listed companies and brought them to the JSE. It was a fantastic time and possibly the highlight of a career. I was then founding managing director of a coal exploration and mine development company and we raised money in the April ahead of the October crash to build a coal mine and supply a ten-year contract to Eskom.
So that was the foundation. I then went coal mining for five years to return to banking afterwards, and then in 2017 went back to the market to raise money with the individual listing of Alphamin Resources. And it was in that ten-year gap that really, when I suppose the terrain had changed under my feet – and it was looking at what had changed between 2007 and 2017 that’s really led to a challenge.
The Finance Ghost: I should have said you were at the coalface, not the cutting edge, because you were literally at the coalface for quite some time. That’s a pretty fascinating career.
Paul, obviously there’s a piece of me that’s quite jealous that you got to do this pre-global financial crisis. I’ve only ever known post-global financial crisis. I finished university in 2010 and then did my articles and then did my years in corporate finance. So I only really saw a market that was just so much harder to raise equity capital in. In 2014 to 2017, if you were a property fund, you could phone up Java and basically have your money an hour later in an accelerated bookbuild. And even that’s not so easy anymore. We’ll get into one of the property capital raises just now. But generally speaking, we’ve seen obviously a big knock to the ability to raise capital on the local market for whatever reason. And maybe this government of national unity and improved sentiment will make it better. But the reality is that if companies struggle to raise money, the motivation for being listed takes a serious dive. Listing is not a great way to achieve an exit for your shareholders because they’re either locked in for a period of time or they have to keep announcing to the market every time they go through a 5% threshold. It’s like sending a massive smoke signal to say “hey sorry, I’m selling”. And then investors follow as well and the share price crashes. So listing is not great for exiting; it’s really good for raising capital. I mean that’s the point. That is what listing is really all about. And from what you’re saying, it feels like some of that has really fallen away since you were involved in the markets.
Paul Miller: No, it had. And I got a cold dose of reality with the Alphamin listing. Think about it. It was a R2 billion market cap company at the time. We were looking to raise R500 million locally. Today, it’s a R19 billion company, and South African institutions would not even see us because the company was too small. Look at what they’ve lost. There were people with mining analyst in their job title who wouldn’t even take the meeting. And today it’s a R19 billion company and all that value has gone to Canadians. So that was the experience at the time.
But if you look at how the problem was diagnosed at the time, people said it was because the JSE was too expensive, and their rules were too onerous. And I refuse to accept that, as this is a far more complicated problem.
And quite frankly, the JSE is no more onerous and no more expensive than any other exchange. And if you see what has been achieved in Canada and Australia, you realize the hollowness of that description. You then hear people say, no, no, it’s an international trend. It’s happening everywhere. But it isn’t.
It is happening in some other markets. And we can get into the differences between the different markets. But I was concerned that the diagnosis was wrong. So I spent some time pondering it and then when I came up with what I thought was wrong, I wrote a whole series of op eds. Anyone who who would take an op ed on the issue, I wrote for. I think I wrote seven for Daily Maverick, I wrote for the Financial Mail, I wrote for Investors Monthly. I put all my ideas out there for two reasons. One, I needed to test them, and secondly, I wanted people to tell me if I was right or wrong. And I wanted to change the narrative about what was wrong. It could not simply be that the rules were too onerous and the costs were too expensive. Because even if they are, the JSE would at some point improve, and they do all the time. They had multiple initiatives over 20 years to improve their attractiveness.
I then came up with what I thought was the problem. And it was in that process that the inspiration for Utshalo came, because other countries and other markets have similar problems. And there has been a fintech response. So, in the UK, we see PrimaryBid, in Australia we see OnMarket, and we didn’t see a similar thing here. And that’s the gap that we’re trying to fill.
The Finance Ghost: Let’s talk the UK. And maybe before we get into where else, there’s a bit of a listings crisis, because I know the London Stock Exchange is struggling at the moment. You’ve raised the PrimaryBid name. Now, I had never heard of PrimaryBid until literally the past week when I read the Sirius Real Estate capital raise announcements. They’ve done a large private placement in South Africa, which is a very well-trodden path as I referenced earlier. You phone up… well, I referenced the advisor who was leading at the time, but you can find any advisor really, they’ll do the book running for you, make a few phone calls and raise the money. That’s how it works in South Africa. Retail investors kind of get shut out, unfortunately.
Institutional investors can take up the stock and they get it at a discount of a few percentage points to the 30-day VWAP, typically because they need to be incentivized to come in. And it’s frustrating obviously, because for retail investors they often get shut out and that clearly is your mission in this world. And again, we’ll talk about what you’re busy doing with Orion Minerals just now. Let’s just do Sirius Real Estate quickly because PrimaryBid is a name that is now familiar to someone who is reading every SENS announcement, as I do, and they’ve raised, or they are raising as we speak, a little bit of retail investor capital in the UK market, but nothing in South Africa. And Sirius is such a well-known name in South Africa. And perhaps most frustratingly, it’s a well-respected name because they do a lot of great stuff with their portfolio in Europe and it’s not hard to find a South African investor looking to diversify with offshore exposure. You would think that there would be no shortage of demand to come in and grab the shares at a small discount to the VWAP, and yet they haven’t done it. Why is that? Why do you think that is?
Paul Miller: People blame the Companies act, and yet if you look at the exclusions that are copy and pasted into every regulatory document relating to section 96 of the Companies Act, I think our advisors and lawyers in South Africa got it wrong and it’s copy and pasted from one document to the next. And it says that we can’t make this offer to the public at large. Or alternatively, if we do, they can only come in for more than a million rand each. But they don’t read it carefully enough. Because what are institutions?
Institutions are agents for the investors who place their money with that institution. And stockbrokers and financial services providers and banks are all licensed to act as agents for retail investors and they all exempt from the public offer restrictions in the Companies Act. So Utshalo is a financial services provider and we are duly licensed to offer the service that we do and we believe we’ve threaded the needle, that we can provide retail investors as their agents with access to private placements, for example, and that the restriction on offering to the public in South Africa is massively overplayed. In that accelerated book build that Sirius did, they would have gone to wealth managers, for example, who would have gone to their clients, who would have raised money from their clients. The issue is our stockbrokers, our stockbrokers don’t want to put offers for smaller companies in front of their clients. And the reason they can’t do that is they’ve actually morphed into asset managers. And asset managers have to show a process and apply skills and experience for every investment recommendation they make. So they won’t phone you to say Orion Minerals is doing a placement because they have to go and write a 40 page report and put it to a committee. And that’s expensive. And why would they do that? They far prefer to just put you in the top hundred companies. So that’s the gap we try to fill. We’re trying to reconnect real retail investors who are managing their own money with companies. And that’s what we believe is broken. And one of the things that’s broken in our market.
The Finance Ghost: Yeah, it’s fascinating. I mean, whether or not Sirius phoned wealth managers, obviously you or I will never truly know. They might have even phoned just the four or five biggest institutions and they just said, thank you very much, we’ll take it. Because to your point, there’s a real issue around the level of research around stocks on the market. And Sirius is big. Theres no shortage of understanding of that thing. And even then, you don’t really see this kind of scenario where to your point, brokers are actively taking this to clients. It’s just this broader challenge where you can’t have that infrastructure unless you have regular capital raising of size, like the environment you came from pre-global financial crisis. And yet here we are with Orion Minerals, who is working with you now, and I think we should get into that now, raising through what they call a share purchase plan, which I thought was super interesting when I saw it come up. And I’m very keen to understand, I guess, firstly, how that works from a regulatory perspective. Why are they able to do this? What is the trick here? What makes it work? And then what is your involvement as Utshalo? Because for other listed companies and advisors listening to this and wondering how they can make this work, I think it’s well worth spending the time on how you’ve done this with Orion Minerals.
Paul Miller: Yes, and what’s the difference between what Orion Minerals is doing and what Sirius chose not to do?
So, Sirius is primarily a UK company, I think, and the offer is to UK retail investors and their offer on PrimaryBid is to any retail investors. Right? So it’s to the existing shareholders and anyone else who wants to participate. And on the face of it, that looks like a public offer. So to replicate it in South Africa, it’s very easy for a conservative lawyer in Sandton to say, no, no, you can’t do a public offer without issuing a prospectus. It’s going to take six weeks to do the prospectus and get it registered with CIPC. And CIPC is not any good. And then you have to have it open for 15 days and then you can close it. So that’s what probably might well have been the advice they got. And they said, well, we couldn’t be bothered then to do it to retail investors in South Africa. Except, of course, what Orion Minerals has done is, from a South African regulatory point of view, they haven’t made an offer to the public, they’ve made an offer to the existing shareholders and the existing shareholders are not the public. It just happens that Orion uniquely has 22,000 retail investors or 22,000 investors in total. So what is allowed in Australia is when you do the equivalent of an accelerated book build to professional investors, you can then, on the same terms, extend that offer to your existing clients who perhaps didn’t have the liquidity or couldn’t do it quickly or couldn’t just tick a box on, or better still, answer on a recorded telephone line that they’d participate. And then you can take your time, two, three weeks, to raise the money from your own investors who you can take the time and you can do it slowly on the same terms. So that’s what Orion has done and it’s manifestly fairer to your existing shareholders.
And what Sirius has done, I would suggest, is unfair – I mean, the unfairness of it is obvious. They are offering shares to only the UK sub register and not to the South African sub register. Are shareholders not meant to be equal?
And I think it’s a lack of imagination of the South African advisors to Sirius who probably told them that they couldn’t do it here. And I believe you can do it here. We are leading the way with Orion because here we found a company that’s saying, well, actually we owe a responsibility to our 22,000 existing shareholders. They bought shares in us. In fact, they’ve bought 49% of the company, and most of it’s flowed over from Australia to South Africa. We owe a responsibility to those shareholders.
And let’s face it, you know that all our advisors in South Africa have signed up to the financial sector code which requires them to promote financial inclusion. How is what Sirius’ advisors suggested to them promoting financial inclusion in South Africa?
The Finance Ghost: I think the passion you’ve got for it, Paul, is clear. I mean, yeah, we’ll never really know what advice Sirius was given and it sounds like we’re picking on this one company. Unfortunately, they’re just the latest example. And maybe the difference there is that they actually thought to do, you know, a retail raise as well. They just thought to do it somewhere other than in South Africa. And maybe that’s why it really just sticks out as an exception. I suppose for Orion, it’s just wonderful to see that they are including retail investors in this because technically speaking, do they have to? There’s no way to say for sure whether or not they could raise that money from institutions. And I guess companies will look at that. That’s going to be a business decision at the end of the day. How easy is it for us to raise from instos for big property companies? It’s very easy. How easy is it to raise from institutions as a junior mining house? I guess it’s that much harder.
In a perfect world, obviously we want every company to look at this and say, hey, retail investor participation is important and worthwhile and we are going to carve out a piece for this. But the practicalities are the practicalities. So I guess that leads me to my next question, which is just how much work is it to actually add on a retail raise to an accelerated book build? As Orion Minerals has done.
Paul Miller: That’s the gap we’re trying to fill. Because there hasn’t been anyone to do that work and it’s administratively intensive and of course we’ve got to do things like, because we are a financial services provider, we’ve got to FICA people, you know, so we’ve got to build the tech to do that in a seamless and frictionless way as possible. And we’ve done that. But I think we need to take a slightly more philosophical view here. We’ve got a problem. There’s a structural issue with participation in our stock exchange. We’ve got an overwhelming dominance of the top hundred companies in all the trade and more importantly, ten institutions.
Institutional groups manage 90% of all savings in South Africa. Now, if we want the JSE to shrink down to 100 or fewer companies, very big companies, and if we want to deny that our public markets are public, in other words, we need to just admit that the institutional markets, those ten institutions, must get all the business they must continue to charge amongst the highest retail asset management charges in the world. If we are happy with that situation, then the advisory community out there must continue to deny participation to retail investors on the stock exchange, because that’s what’s happening now. The same institutions that have signed up to promote financial inclusion are actively working against financial inclusion. I think it’s a very serious question that needs to be asked to all those advisory teams, the complete lack of imagination on how to include people in the public markets rather than exclude them. And everyone says, no, no, no, we shouldn’t have to do anything. We can just raise the money from institutions. Yes. And when the market cycle turns against you and the institutions are selling out, who’s going to buy? Where’s the liquidity going to come from?
I think we collectively have a responsibility to try and fix what I believe is a structural issue on the stock exchange. And one way of fixing it is to bring in as diverse a range of investors as possible, and not leave it to the ten institutions that manage the vast majority of the funds that have a massive bias to the large and the liquid.
The Finance Ghost: Yup, those are all great points. Absolutely. So how does Utshalo do that? How do you help to solve this problem?
Paul Miller: Ghost, you’re too young. But even I can remember when you used to fill out a form in the newspaper that was appended to a prospectus. You would attach a cheque and post it to the transfer secretary. And the transfer secretary would send you your share certificate. So that’s the process. But in a digital first, low friction way, where we can directly reach the investors with digital marketing, email campaigns, WhatsApps, all the modern ways that you can do that, and they can submit their form to us. Of course, there’s extra layers of regulation these days around FICA and things, but we can do that as seamlessly as possible. And in the back-end facilitate the posting of the cheque, which is these days, electronic settlement. So that’s what we aim to do.
We are a fully licensed financial services provider, so there are opportunities for us, for example, to allow our members of Utshalo, because people sign up to become a member, to participate in private placings, for example, at less than a million rand each. This is possible. We’ve threaded the needle also to provide issuers with a one-stop shop where they can go and get that full service in one place. You don’t have to go and see all 30 or 40 stockbrokers on the stock exchange. Just come to us, we’ll handle it and handle the settlement. And the shares go into the investors stockbroking account and they can continue to trade in the secondary market as they always have. We’re not a stockbroker. We don’t have any interest in secondary trade.
So that’s the gap we fill. I don’t claim it to be entirely novel. It exists in other markets as well. But it’s a first for here in South Africa. And what’s interesting is we launched this Orion thing just this week, right. And the number of people who signing up on our website has actually been quite surprising. So there’s definitely interest out there.
The Finance Ghost: Yeah, I think there’s a ton of interest out there. I mean, South Africans are always looking for ways to move forward. I think that’s true for us as a nation, genuinely. And that’s part of why I’m so passionate about what I do. And I can see the amount of passion you have for what you do. It’s the startup founder’s curse. We both have it; we each feel very passionately about the things that we’re trying to bring to the market at the end of the day, because the markets are just this wonderful way for a country to move forward.
I mean, we are obviously both dyed in the wool capitalists. And if you can connect money to opportunities, you grow an economy, you create jobs, and you drive wealth. And that is desperately what South Africa needs above all else. I think the work you’re doing is fantastic. And I think for advisors and issuers, that is, listed companies that are listening to this, you know, reach out to Paul, it costs you nothing. It doesn’t hurt you at all. You know, just have the conversation and consider how to actually bring your retail base into your next capital raise or into your thinking at least, and help to drive a vibrant market, which is, at the end of the day, what we all desperately want to see, right?
Paul Miller: No, absolutely. But I think we also need to appreciate South Africa’s mineral endowment and its highly developed capital markets are two of our most fundamental advantages. And junior mining has two sides to its coin. On one side the mineral endowment. On the other side is access to capital. And we need to bring those two things together. Now, Utshalo is not exclusively about junior mining. It’s just that junior mining happens to be the sort of capital-intensive industry that most often needs to raise money. We are open to all companies.
And just by way of background, by the way, the term is a Zulu or Xhosa term to sow a seed. And it’s used in the context of “utshalo imali”, which is to, to invest money. And it’s the root of the modern word for investment. And I think that’s a wonderful reference back to what primary capital raising is about. It’s where you take money from investors and actually put it in the ground.
You invest it in projects or infrastructure or mines and grow something from it. And that’s the reference, of course, also helps that it’s entirely unique, so the search engines will always find it. So we like that too.
The Finance Ghost: Yeah, that does help. Right? That never hurts to make your SEO a little bit easier. But I love it. I love the sentiment.
Paul Miller: So that’s where people can reach us, right? Ghost, they can just search Utshalo and they will come up on our website. They can sign up there as an investor or contact us as an issuer. And we, I mean, this is a passion project for me. I’ve been at it for three years. We’ve got the regulatory approval. This is our first transaction. People are beginning to sign up and I’m really looking forward to the sentiment changing, bringing more IPOs, new listings, book builds, liquidity placements. There’s a whole range of things that we can give to issuers. And I think the final point from my side is just to say that we are paid by the issuer and there’s no cost to the investors.
The Finance Ghost: I think that is a fantastic place for us to finish it. So Paul, thank you. This has been a really great discussion. As I say, I think the passion that you have for this thing just really comes through clearly. And to those listening, I would encourage you go check out that Utshalo website. Reach out to Paul. And Paul, I really hope that the Orion raise will be a great success. Obviously I’ll see the results of that on SENS at some point. And I hope to see more and more of this coming through so that South Africans can participate in their economy to a much greater extent. So thank you for what you are doing and good luck. It’ll be really great to see it work.
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At Acsion, the market continues to ignore the NAV (JSE: ACS)
You won’t see a discount to NAV of this size very often
In the property sector, a discount to net asset value (NAV) is nothing new. Most funds trade below the NAV per share for various reasons. At Acsion, the discount is just particularly huge. The share price closed at R5.61 on Friday and the NAV per share is R26.62.
The portfolio is a difficult thing to understand, as it includes complications like an hospitality model where Acsion is owner and operator of the hotel rather than just the landlord. This makes it difficult for the market to predict the cash flows. Another complication is that Acsion isn’t a REIT, so investors can’t value it based on the net operating income and the knowledge that most of it will pop out as dividends.
Case in point: the dividend per share for FY24 is 33 cents, but HEPS was 98 cents. That’s a low payout ratio. Speaking of HEPS, it fell by 18% for the year.
Another interesting angle to Acsion is that the loan-to-value ratio is only 10%, but current liabilities exceed current assets as at the reporting date because of when loans are maturing. Acsion is confident that this won’t be an issue, as banks have approved new facilities at more favourable terms. Still, the market doesn’t like uncertainty.
There really is no reason for this company to pay dividends. Acsion should only be executing buybacks at this discount to NAV. They executed repurchases worth R357 million in FY24 and declared dividends worth R132 million. I suspect that the share price would respond positively to dividends being dropped completely in favour of buybacks.
Altron shows one of the better ways to do a B-BBEE deal (JSE: AEL)
Avoiding bank debt makes sense and a genuinely broad-based approachis a noble one
Altron has announced a new B-BBEE transaction. There have been many ways to do these over the years, with the initial years of B-BBEE deals leading to highly leveraged transactions funded by banks and supported by corporate guarantees. Time showed us that those deals often end in tears, with only the banks actually making any money. These days, there are better ways to do things.
Altron’s new deal uses a sustainable funding structure in the form of a preference share that effectively takes the ordinary equity of the empowered entity down to zero. Instead of going to the banks and asking for a big loan to buy ordinary shares, this approach captures the current value of the entity in a preference share and allows the B-BBEE partner to buy ordinary shares at a nominal value, thereby participating in future value creation.
The B-BBEE partner is structured as a broad-based trust, with objectives around addressing scarce ICT skills within South Africa. Instead of empowering one person or even a handful of people, Altron is aiming to make a broader difference to the skills crisis in South Africa and the lack of employment opportunities. Altron will contribute R5 million to the trust in FY25 to get these initiatives off the ground.
The trust will acquire a 20% interest in Altron South Africa Holdings, which in turn will hold 100% in Altron TMT SA Group.
In this case, the preference share is priced at a spread to the official prime lending rate – in other words, a rate higher than prime. Current Altron shareholders therefore continue to earn that return from the empowered entity, as well as 80% of the equity value going forward.
Although it wasn’t strictly necessary for the deal, Altron obtained a fairness opinion for the transaction from BDO Corporate Finance. They opined that the terms are fair to Altron shareholders.
Generally speaking, the B-BBEE partner is no worse-off in this structure than in a deal funded with external bank debt. The current shareholders in Altron are materially better off than in a traditional structure that gives a guarantee to an external bank. With the trust structured with a long-term approach in mind, another benefit is that this isn’t a deal that will need to be restructured after 7 – 10 years, the typical holding period in private equity structures.
AVI’s most important businesses are doing well (JSE: AVI)
But I&J remains a worry
AVI has released a trading update for the year ended June 2024. Group revenue is up by 6.3%, but that is an over-simplification of what’s going on at AVI. Before we dive into the segments, the important point to note is that HEPS will be up by between 21% and 25% vs. the prior year, so AVI has managed to turn a modest revenue performance into a great performance at HEPS level.
The biggest part of the business is the Food & Beverage segment, which grew revenue by 9.0%. This consists of Entyce Beverages – the star of the show with 18.2% growth – as well as Snackworks (up 6.4%) and I&J (down 1.1%). I&J is thankfully the smallest part of the segment and contributes 15.5% of group revenue, so it’s important but not critical to the group result. Still, it would be a lot better to see the fishery heading in the right direction.
The Fashion Brands segment fell by 4.8%. Within that, Footwear & Apparel put in an asthmatic performance of 3.6% growth. Personal Care was down 16.4% but there was a change to the underlying business in this period which contributed to the drop. The Coty distribution agreement ended in July 2023, leading to only a marginal decline in profit despite a negative impact on revenue.
As has been the case for a while, AVI’s food and beverage businesses are the best part of the group. When both volumes and price head in the right direction, revenue does well and margins tend to be protected (or even expanded) as well.
I&J has been the exception, with the fishing industry notoriously difficult to predict and understand. Catch rates and global selling prices lead to volatile earnings, with I&J struggling with reduced demand in key abalone markets in the latest period. Thankfully, I&J’s margins were in line with the previous year despite the revenue pressures, with the business putting a lot of effort into expense management.
Net finance costs were marginally lower than the previous year, with the benefit of lower debt being mostly offset by higher interest rates.
BHP and Vale will share any payments related to Samarco class action suits (JSE: BHG)
This confirmation was made necessary by proceedings filed outside of Brazil
The Samarco dam disaster has been going on for years, with extensive legal proceedings and rehabilitation work in Brazil. The issue has gone broader than that recently, with proceedings filed in English as well as Dutch courts.
As BHP and Vale each held 50% of Samarco, they previously entered into a framework agreement stipulating a 50-50 share of amounts payable to claimants in court proceedings. Oddly, BHP is the only defendant in the English court proceedings and Vale is the only defendant in the Dutch proceedings, so this agreement ensures that if liability will be established in either of those proceedings, BHP will only be on the hook for 50% of the payments.
Burstone could sell its Pan-European Logistics portfolio (JSE: BTN)
There’s no guarantee of a deal at this stage
Burstone has released a cautionary announcement regarding a potential transaction related to the Pan-European Logistics portfolio. Burstone is considering a disposal of the majority of its stake in that portfolio, with the purchaser being funds of Blackstone Europe.
They are calling this “exclusive negotiations regarding the potential formation of a strategic partnership” with those funds. A strategic partnership is different to a typical disposal, as it implies a working relationship going forward.
At this stage, there’s no guarantee of a transaction being concluded, hence why the cautionary has been released. There’s also no indication of price or deal structure at this stage.
Capitec flags a very strong period (JSE: CPI)
The six months to August were fantastic
Capitec released a trading statement for the interim period and the jump in headline earnings per share (HEPS) is something to behold. This all-important metric is up by between 25% and 35%, benefitting from a combination of strong operating conditions for the bank and a weak base period.
Let’s start with the base period, where HEPS only increased by single digits. This was driven by an increase in impairments and a generally tough economic climate. They’ve effectively now lapped a period of high rates and the economy is looking better, so the credit impairment charge and credit loss ratios are having a less negative benefit than a year ago. Essentially, the momentum from the second half of the previous financial year has continued, as the second half of FY24 saw an increase of 22% in HEPS.
They also got a boost from the acquisition of Avafin, an international online lending group. Capitec previously had a 40.66% stake in this company and accounted for it as an associate. Since 1 May 2024, Capitec has held a 97.075% stake and thus almost all the profits are attributable to shareholders of Capitec.
The Capitec share price has had a terrific time of things in 2024:
And over five years, it looks even more impressive. It took a while to regain the highs of 2022, but the share price has now pushed strongly through those levels:
Ninety One’s assets under management have ticked higher (JSE: NY1 | JSE: N91)
This is always good news for an asset manager
In the past couple of years, asset managers have had a tough time. For one thing, higher interest rates and inflation have put people under pressure and ensured that more of their capital is sucked into debt repayments and the cost of living. For another, most equity markets haven’t had a great run of things in recent times.
As asset managers earn their fees based on the quantum of assets under management (AUM), this has been a difficult time for many of the companies in this sector – particularly the ones that don’t have an army of wealth managers out there doing distribution.
The good news at Ninety One is that AUM has continued to tick higher. It was £124.8 million a year ago (June 2023). By March 2024, the end of the previous quarter, it had moved up to £126 million. As at June 2024, the end of the latest quarter, this had ticked up to £128.6 million.
Sirius announced the results of the UK retail investor raise (JSE: SRE)
Sadly, South African retail investors weren’t given a chance to participate here
As part of the latest capital raise activities at Sirius, the goal was to raise £150 million through a placement with qualifying institutional investors, as well as £2.5 million through a retail offering in the UK market. Whilst I absolutely love seeing retail investors being given a chance to invest, it’s a pity that South African retail investors weren’t included here.
Sirius had no problem raising the money from either group of investors, with the latest announcement being that the retail offer has closed and the full amount has been raised.
Spear REIT sells the legacy assets at the DoubleTree (JSE: SEA)
These are non-core sectional title units and parking spaces
Back in February 2022, Spear sold the Upper East Side Hotel, which is run as the DoubleTree by Hilton Hotel in Cape Town. I’ve been there and it’s a pretty cool place, not that this matters.
As part of the deal, Spear retained some sectional title units and parking bays. These units and bays have now been sold as well, with the hotel as the purchaser. The selling price is R11.8 million, which is higher than the net asset value of R9.5 million on the Spear balance sheet as at February 2024. It’s still tiny in the overall Spear portfolio, so this was a distraction more than anything else. Spear can take this capital and redeploy it into the opportunities that investors want to see, like retail and industrial properties in the greater Cape Town Metropole.
A couple of shareholders of the purchaser are associates of non-executive directors of Spear, so this is a small related party deal. This is why a fairness opinion needed to be obtained for the transaction, with PSG Capital opining that the terms are fair to Spear shareholders.
As part of the transaction, Spear has given rental income guarantees to the purchaser for a limited period.
Little Bites:
Director dealings:
Pay close attention to this one: Dr Christo Wiese’s personal investment vehicle, Titan Premier Investments, has increased its stake in Brait (JSE: BAT) from 28.66% to 34.26%. He’s therefore just below the threshold for a mandatory offer. This comes through as a director dealing because Wiese is a director of Brait.
In addition to sales by various directors and prescribed officers to cover the tax on vested shares, two prescribed officers of Telkom (JSE: TKG) sold shares in the company worth R1.3 million.
Sebata Holdings (JSE: SEB) announced a further delay to the results for the year ended March 2024. They will be published by no later than 31 July – hopefully.
When it comes to discoveries and inventions that changed the world, people like to applaud and commemorate the geniuses responsible. But how many times are we actually celebrating the right person?
As an artist and writer, I loathe the idea of someone taking credit for my work. This isn’t something that makes me unique – in fact, I think all humans care about attribution to some degree (even those who swear high and low that they don’t). When we do something or create something that we are proud of, we automatically want that something to continue to be linked to our name.
Not to get too philosophical too early in this article, but isn’t it true that while our bodies are mortal, our ideas live forever?
A Stigler for a good idea
A little while ago, I learned about something called Stigler’s Law of Eponymy. This concept was first introduced by a University of Chicago statistics professor named Stephen Stigler in his 1980 publication of the same name. In short, Stigler’s Law suggests that no scientific discovery is ever named after its original discoverer. To prove his point, Stigler provided quite a few real-world examples.
Arabic numerals. Most people associate them with, well, Arabs, but they were actually first used in India around the 7th century.
Another famous example is the Pythagorean theorem. Although it’s named after the ancient Greek mathematician Pythagoras, evidence suggests that Babylonian mathematicians understood this principle long before his time.
Venn diagrams are named after John Venn, who popularised them in the 1880s, but Leonhard Euler had already introduced them in 1768.
Then there’s Halley’s Comet. Although Edmond Halley correctly predicted its return, this celestial phenomenon had been observed by astronomers since at least 240 BC. Halley’s contribution was in the mathematical prediction, not the initial discovery, yet the comet bears his name.
What’s amuses me the most about Stigler’s law is that Stigler credited its discovery to sociologist Robert K. Merton. Yes, you understood that correctly – even Stigler’s Law itself is named after the wrong person. Stigler claims to have done this on purpose as a playful way of illustrating his point, thus further highlighting the ubiquitous nature of this phenomenon.
The issue with originality
Now, I understand why hearing about something like Stigler’s Law might demotivate those who like to think of themselves as pioneers. While that spirit of invention is often found in the origin stories of great businesses, it is actually a bit of an illusion. And seeing an illusion revealed can be a somewhat jarring experience.
I remember a particular lecturer at art school who upset me deeply one day when she quoted Mark Twain: “There is no such thing as an original idea” (although, now that we know about Stigler’s Law, I should probably go check if it really was Mark Twain that said that first). To this already crushing phrase she then added her own little epilogue: “Every original idea is just unintentional plagiarism”.
As a young artist, utterly convinced that my brain was brimming with original and important ideas, this was not something that I wanted to be true. Yet the quote stuck with me, irritating me like a grain of sand inside an oyster until it delivered a pearl of wisdom.
In truth, the step away from the pressure to produce something completely new was much more freeing than I expected it to be. And from that freedom flowed a different type of creativity: the creativity of the remix.
To illustrate my point, consider the full version of that Mark Twain quote:
“There is no such thing as a new idea. It is impossible. We simply take a lot of old ideas and put them into a sort of mental kaleidoscope. We give them a turn and they make new and curious combinations. We keep on turning and making new combinations indefinitely; but they are the same old pieces of coloured glass that have been in use through all the ages.”
Is there anything wrong with a refined idea? I don’t particularly think so. Any business that was built on the idea of a competitor will tell you the same – think of the likes of Facebook after MySpace or Netflix after Blockbuster+. There are definite benefits to improving instead of inventing. Inventing something from nothing is a messy game that often results in blind spots and missed opportunities. Assessing an existing idea from the outside often provides the ideal vantage point, a view from which to see the steps towards perfection.
Every idea worth having has already been had. So now what?
Ask any person on the street who invented the first automobile, and you are almost certain to receive Henry Ford as the answer. However, the story of the automobile actually started with Nicolas-Joseph Cugnot, a French military engineer who built a steam-powered tricycle in 1769 to haul artillery. Because it was steam-powered, not everyone considers Cugnot’s invention the first true automobile.
The title of the first real car often goes to Karl Friedrich Benz and Gottlieb Daimler, two German inventors who, working independently in different cities, both created their own gasoline-powered vehicles in 1886. Benz actually drove his three-wheeled car in 1885, making it the first practical modern automobile and the first commercially available car in history.
In 1908 came Henry Ford, the name now synonymous with the automobile. Ford of course is famous for the Model T, which he mass-produced using a revolutionary moving assembly line. This innovation made cars affordable for middle-class Americans and changed the landscape of auto manufacturing forever – perhaps part of the reason why his name has been permanently affixed to the idea of those early era cars.
In one of my recent articles, which covered the history of the 24 Hours of Le Mans, I discussed the fact that a hydrogen-powered supercar was tested on the track for the first time this year. This is a massive technological leap from the first petrol-powered cars that put-putted their way out of the Ford factory. While their work is certainly innovative, the inventors of the hydrogen supercar cannot claim to have to have invented the automobile.
Perhaps they understand something of the mental kaleidoscope that Mark Twain referenced in that famous and irritating quote: the fact that invention in the 21st century relies on the combination of existing ideas and materials in new and useful ways.
The invention of the automobile – by Cugnot, Benz, Daimler and Ford – may have changed the trajectory of mankind, but the constant innovation of the automobile is what will drive us into the next century.
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.
Andri Joubert of Investec Structured Products joined me on this podcast to explain the opportunities and risks related to two new products that give interesting exposure to global indices.
If you’re interested in investing in Japanese (Nikkei 225) or European (Euro Stoxx 50) exposure, then the benefits of these structured products are well worth researching and considering as part of your portfolio.
The closing date for both products is 8 August 2024, so don’t delay if you’re interested in investing.
To assist with your research, listen to the podcast below or read the transcript further down. And remember: you should always discuss an investment like this with your financial advisor.
The Finance Ghost: Structured products have come a long way. From a specialised, exotic investment tool, they are now mainstream and financial advisors are more comfortable about investing in them on behalf of clients. In this fifth podcast with the Investec structured products team, Andri Joubert lends his voice to Ghost Stories to unpack two exciting new products with an offshore equity flavour. If you are considering exposure to the Nikkei225 or the EURO STOXX 50, then Investec’s latest offerings have a risk-reward profile for those investments that is worth considering.
Welcome to this episode of the Ghost Stories podcast, and it’s another one featuring the Investec Structured Products team. Now, if you’ve been listening closely to Ghost Stories over the past year or so, you would have learned about some pretty interesting structured products coming out of Investec. And certainly this show, well, I was going to say will be no different, but actually it is a little bit different because today, firstly, we have a new voice on the podcast.
That is Andri Joubert, who is an investment specialist in the Structured Products team. But secondly, we’re also doing two products in one. You’re going to have to concentrate for this one. But obviously we’ll try and make it as simple as we can. And Andri, I think part of what we’ll talk about, obviously, is why you are effectively marketing these two products at the same time and what the similarities are. But before we dive into all of that, welcome to the show. Thank you for doing this. And as I say, it’s great to have yet another voice from Investec on the platform.
Andri Joubert: Thank you and thanks for having me and the team. It’s a good question. We recently had two products maturing. Earlier this week, on Monday, actually, both products did tremendously well. So we had one product paying investors 17.1% in rands and one product paying investors 11.05% in US dollars. And they were structured in a similar way that these two products are structured that we’ll discuss today. It was an autocall structure. Initial term would have been five years. But we did give investors the opportunity for it to be up after one year or two year, or three year, or four year, or at the end of five years. The whole idea was bring something out based on research, and if the client is interested in the research and the index that we’re tracking, we give them five bites at the cherry.
So fast forward to Monday this week, the products did both mature so effectively, investors were invested for one year and they got their returns. The two new products work exactly the same. So ideally we looked at opportunities in the market. We looked at indices that will diversify global portfolio risk and we identified the Nikkei225 that we have marketed earlier this year as well, and we identified Europe. What is unique is that we are targeting a rand return for the Nikkei225 and a dollar return for the EURO STOXX 50 product. That is what we’re bringing out. Ideally we’re going to go to investors that just received a return, get them to reinvest, because they would have been in for five years in any case, and then of course get new investors on board, as we do believe there are unique opportunities in these two indices.
The Finance Ghost: I mean, the best outcome for investors is actually that the autocall does its magic after one year, right? You get that full return basically after twelve months, and now you have your money back and you have the flexibility to do it again. Would that be an accurate statement?
Andri Joubert: Yeah, exactly. That’s a very good point. The reality is if we look at where markets are at the moment, all-time highs, everyone is nervous, no one knows, are we going to be in for a five-year bull run? Are we misjudging inflation, rising debt levels in the US, uncertainty in Europe? There’s just a lot of uncertainty in the world in general. And with markets hitting all-time highs, people want to be in the market because they’ve tasted recent returns, but also they don’t want to necessarily go into the market and then experience a correction. So I think that’s where these products are very well-positioned in a portfolio and it forms part of an alternative asset class.
So it’s not for all your money, but it is very, very much important to have an allocation to such an asset class. And the idea is that if equities do well, you will participate in the upside with a defined return that we’ll discuss today. And if for some reason there’s volatility or instability or market correction, there’s a lever of market capital protection in these products and that’s also why we structured over a five-year term. If we see a short-term bull run, the product will pay out after one year. But if we don’t, you can wait for year two or three or four or five. I think it’s well-positioned in very uncertain times.
The Finance Ghost: Yeah, it is incredibly interesting. I mean, on a personal level I’ve really enjoyed learning about these structured products that we’ve covered on the various podcasts. And this is not the first time that we’ve seen the Nikkei225 come up in one of your structured products. I’ve done a podcast with Investec before on a product that was linked to the Nikkei225. And obviously Japan is all over the headlines these days.
You’ve mentioned the general level of markets, and we don’t necessarily want to go into the details of whether or not Japan itself is a great investment and the Investec house view on that, because obviously that’s something that investors – or would it be accurate to say that’s something investors need to believe going into this? It’s like, I want exposure to Japan, but I’m worried about where the index might be. Hang on, this is a cool way to get exposure to that index with the benefits of a structured product, ultimately. Is that the decision? And then ditto, obviously, on the EURO STOXX. Is that the mindset with which investors need to enter this product?
Andri Joubert: Yeah, 100%. So if you look at a typical South African investor, they are overweight emerging markets from a risk profile. They earn their money in South Africa, their property in South Africa. They probably own SA Inc. Their retirement annuities have an allocation to South Africa, so they typically invest in global markets and specifically the US. Now, most of them are overweight US. And we all know the US has seen a tremendous run recently, specifically driven by seven very big companies. And that, of course reduces diversification. Even though they think they are diversified, they’re not really, because there’s concentration risk in that allocation.
So by looking at Europe and by looking at Japan, it gives two unique opportunities that are not very correlated to the US, so it brings in diversification to that South African portfolio and it’s something the investor can buy – for instance, the Nikkei, which is a rand product that’s listed on the JSE – it’s something the investor can buy on their JSE stock broking account. It’s like having international equities in their SA Inc portfolio. And if he’s got an offshore custodian account, they can purchase the EURO STOXX 50 product, which is Dublin listed, which is 100% priced in dollars and offshore.
But we have seen a strong Nikkei rally recently. We still believe there’s value. Japan is expected to maintain a moderate recovery. Remember, it’s coming off a low base. There was many years of flat returns, negative returns, that’s coming off a low base. But there’s still measures to improve capital efficiency and the sector composition is focused more on heavy industry, manufacturing, strong semiconductor industries. So it’s more the hardware than the software the clients would have exposure to in the US allocation.
And the same with Europe. The European Central bank was the first bank to the first developed market bank to cut rates as inflation is starting to decline and that gives an opportunity. Relatively undervalued. If you look at US markets, they appear to be 15% to 20% overvalued. The eurozone definitely stands out as one of the few regions where valuations are below fair value. And the reality is, when you look at this product, you don’t need the market to run. So the product is structured in such a way that you only need this index to be at the same level on the day we trade, at the next observation date or higher. We’re not asking for a bull run. That’s why those two indices.
The Finance Ghost: Europe is interesting. I mean, you make some great points there about Japan and what’s in that index versus some of the US exposure. I always have a small laugh at the Magnificent Seven in the US – it’s basically six plus Tesla. I’m quite the Tesla bear as people know. But I still think it’s criminal that Netflix was kicked out of the Magnificent Seven, really in the place of Tesla.
But moving right on from that, because that’s not what we’re talking about today. What we are talking about is these indices. And I think in Europe, just an observation from my side that’s quite interesting from my recent travels to London. You speak to professionals operating in London and then you go and do some research on the London Stock Exchange and the number of listings. And they have got a lot of the same problems as the JSE, actually, which is quite interesting. And Brexit has really caused them some big issues in terms of attracting new listings. There’s kind of been this general shift in interest from the London exchange, I think, towards the European markets and therefore the European indices. It’s just quite an interesting underpin for the EURO STOXX index in general.
And something to keep in mind, because as we talked about earlier, investors need to go into this wanting to own that index and then effectively using the Investec product as a way to get some downside protection and potentially a nice kicker on your upside return. But you need to understand that you’re buying the EURO STOXX and you need to do the research to say, hey, that is what I want to own. Or the Nikkei225, that is what I want to own. And then go into a product like this.
Andri Joubert: You make a very good point. And also, it’s not just about owning the EURO STOXX or owning or having exposure to the Nikkei225. It’s about how do I diversify my concentration risk to what I have. And when you build a portfolio, ideally what you want is you want many different structured products within the alternative asset class that you invest in. Smaller chunk. When I say small, so let’s say an investor’s got R500,000 to invest on day one. Ideally you don’t want to put R500,000 – that is your only investable income – you don’t want to put all that into one product. I’d rather say, okay, let’s identify three products over the next year and you have the opportunity to diversify your indices, your currency, whatever the product tracks, the level of the market, just a different part of the cycle.
You want to build a portfolio with many different structured products within that asset class, giving you exposure to different indices and all those points just listed. And if you look at the general portfolio at the moment, as I mentioned earlier, overweight US for a typical South African. And that’s why these two indices offer great pricing opportunities and diversification and lower correlation to the rest of the portfolio, as opposed to just looking at a unique opportunity in the index. It’s more about how do I structure my portfolio better.
The Finance Ghost: Yeah, absolutely. These things are always part of a broader portfolio decision. I mean that is absolutely the right way to understand it. And actually, before we get into the mechanics of how the autocall works, etcetera, any portfolio decision always needs to take into account whether or not your money is being locked up for a period and what the liquidity looks like. Now, in this case we’ve got I think what’s called a Flexible Investment Note. And I’m keen to understand more about how that works. I mean, you referenced earlier that the Nikkei product would be listed, you can confirm if the EURO STOXX one is as well, but what does that actually mean for investors?
Because obviously when something is listed, people immediately think, oh, okay, not only would I be able to buy some down the line – and you can comment on that as well – but would I be able to sell early if life gets in the way, which life sometimes does. Despite everyone’s best laid plans, you can go through things like illness or divorce and then suddenly you need to free up money. I think let’s talk through the liquidity and then let’s get into the specifics on how these products actually pay out to an investor.
Andri Joubert: 100%. Both products provide daily liquidity. The JSE listed note, the Nikkei225, is structured as a flexible investment note. Investors would see in the term sheet there’s a 20-year term. But don’t be alarmed, it’s not a 20-year product. I almost want to say it’s a structure that allows investors that holds the note, or that buys the note, to, at the point of maturity, allocate capital quicker to the next issuance and reduce the time lag between the product expiring and reinvesting in a new product.
What happened at the moment or previously before we launched this flexible investment note is the product will pay out, cash will settle, trade plus five days in the client’s account. We would bring out a new product, show to the client, the cash will lie idle in the client stockbroking account, earning a money market interest rate, and then the capital will be reinvested. So how it’s going to work now is we’d go to investors and say, you invested in, let’s use the product that paid out on Monday, that example, you invested in an index, the product is up, it’s going to pay you 17%. It’s likely going to call in a week’s time or two weeks’ time. Would you like to reinvest the proceeds in capital or do you want to exit?
Then the client can elect and that money will automatically be reinvested in a new product, which greatly reduces the time in between maturity and reinvestment. And you can do that for 20 years. You will have five or six or depending how many times these products pay out and whether they run a five-year term or a one-year term, you can have many different variations of product within this 20-year note. If you decide to exit, you can exit at any time still. Still daily liquidity, Investec is the market maker. If you want to sell the product, if you want to sell your share today, we’ll give you a price, we’ll buy it back from you. And we have an active secondary market that we sell these shares in.
You asked about the offshore listed one. The EURO STOXX 50 product is also listed. It’s listed on the Dublin Exchange and that is also daily liquid. We provide investors with daily liquidity and daily pricing, so they’ll see a value of that product in the share trading accounts daily.
The Finance Ghost: Okay, fantastic. So it might be listed in Dublin, but your money can’t be doublin’, unfortunately, but it can go up. And I think the payout ratio is something that we should be talking to now. And I think the payout ratio is super interesting. You mentioned a little bit about it, now we’ll dig into it.
For those who have kind of been waiting for the “drumroll please” moment, it’s here. I won’t give you a drumroll. It’ll just be embarrassing. But what I will do is hand over to Andri to talk through, I guess, just how these payouts work. We need to cover the autocall tests and then what you actually get paid out. And I think maybe let’s bank that and then get into the capital protection and then the extent to which you can’t get capital protection, because obviously, with all the clever structuring in the world by the good people at Investec, they also can’t work a complete economic miracle. There’s no way that you can have upside and zero downside risk. This doesn’t exist in markets. It just doesn’t. I think let’s start with the upside and then maybe let’s talk through the capital protection and then the potential for losing money if things do go really badly.
Andri Joubert: We have two products, both five year terms. I’ll first talk about the rand product. So, the rand product, JSE listed, it tracks Nikkei225. Investors invest rands, they buy a share in rands and the product will pay out in rands. It tracks the Nikkei225 index from a point perspective. It doesn’t track it re: price to a certain currency. What happens is we trade. We’ll close this product on the 7th of August, we can touch on that now. We trade the product as an initial public offering on the 15th of August, and we look at the level of the market on that day. Let’s say the Nikkei, the index, on a point basis, is pricing at 40,075 points, which we saw yesterday.
That is the only observation for the client. You’ll look at that level of the market, you’ll log into Bloomberg or Google, type in Nikkei225, and you’ll see 40,075 points on the day that we trade. In a year’s time, if that index is pricing at the same level – 40,075 points or higher – the product will automatically call. And that’s why it’s called an autocall.
And there’s a defined return. That defined return is 17% at the moment. And I say at the moment because prior to trade date, there’s still different market dynamics that come into play. But conservatively, we can say clients can expect 17% traded per annum payout if the market is flat or positive. But let’s say the market is not flat or positive, and in a year’s time, the index is pricing at 39,000 points. Then instead of the product exiting, or the client incurring a loss or client getting their money back, you can wait for the following year.
And then on the 15th of August, in two years’ time, we look at the level of the market. If the market is 40,075 points or higher, the product will pay out 17% times two, because they were in for two years. Fast forward for five years. So they will have, in a five year term, five opportunities on the 15th of August for the market to be either flat or positive, for it to pay out. They cannot elect to stay. If the market is flat or positive, it pays out and we’ll bring them another solution. Or they can take their cash.
The Finance Ghost: Okay, that is super interesting. So before we jump onto the EURO STOXX one, earlier I said, well, maybe the best case scenario is you get your money back in a year and you get 17%. I guess it’s kind of debatable, right? Because actually, if you had a crystal ball, you’d say, well, give me my money back in five years and make me 17% a year for five years. That will be lovely, thank you. It’s not about which is the exact right outcome. It’s going to be different per investor and portfolio and what they’re looking for.
Basically, the upside here is in a given year, we wouldn’t expect the Japanese exchange to return 17%. That would be a very, very strong equity return. I mean, we can only dream of these levels in the JSE over any kind of extended period, let alone in a lower risk market like Japan. So there is a potential upside here that is better than you would typically see over the long term out of the Nikkei, right?
Andri Joubert: Correct. And you don’t need the market to run. The market can give you 2%, you’ll get 17, it can give you five, you’ll get 17, it can give you 0.01, you’ll get 17.
The Finance Ghost: And obviously, to qualify that statement, I guess, 17% in rands. I understand the test is in points on the index, but obviously, the payout – you effectively put in rands, you’re getting back rands. The Nikkei return that you would historically look at would be in yen, which historically has been a very nice, steady, stable thing. Not so much anymore. So that’s also an interesting thing to take into account. But from a rand perspective, you can compare that effectively to “what would you be able to get on local opportunities” and then take into account that Japan, well I would see it as a lower risk destination. Yes, there’ll be lots of debate right now around the macroeconomic trend in Japan, maybe, versus South Africa, actually. But on the whole, I think you just have to speak to someone who’s travelled to Japan, and I think we can all agree that the country is probably a little bit more stable than South Africa.
So that 17% in rand, then, does become appealing, especially when you consider that you do have capital protection on the downside, which is something you wouldn’t get if you just bought the index without any of the structuring. So maybe let’s chat through, what is that downside protection on the Nikkei product?
Andri Joubert: We provide capital protection in case of a market correction. If there’s a market correction and the index falls more than 30%, 40%, 50% within the five-year term, nothing happens. The client remains invested because the defined term is five years. So the market can drop 50% in year two, it can come back 20%, drop another 10%, come back 40. It doesn’t affect the product at that point in time.
The price the client will see in their stockbroking account will show the market is down or up, but it doesn’t force them to exit. They are only forced to exit once the product matures and pays out at one of the five observation dates or at the end. If on the last day the market is down 10%, the client will get their capital back. If it’s down 20%, they’ll get their capital back.
There’s a 30% barrier, so if the market is down more than 30%, the client is live in the market. So it’s as if they owned the market and they did not receive any dividends. So you go to a client, you say you can invest in the Nikkei today. You’ll have five opportunities for the Nikkei to pay you 17% per annum until the first date it pays out. If something goes wrong, you’ll have capital protection. If something goes wrong on the last observation date, and when I say wrong, more than 30% wrong, you will be live in the market. How does that sound?
Most clients would like that. There’s a level of capital protection, the market does not have to run, and you get a defined outcome. Clients need to be comfortable with the fact that there is capital at risk on the last day. But also having that barrier there allows us to give a better return. If you do not have a barrier and you provide a client with 100% capital protection, that 17% simple interest will be lower, and then it’s not as attractive. And it’s a risk that we’ve back tested and looked at, and it’s a risk that we think is justifiable for that additional upside.
The Finance Ghost: Yeah, and the point here is that if you’re going to go in and buy the Nikkei blind effectively, or live in the market, as you say – that’s quite a nice term, that’s a better term than mine, for sure – you’re going to own the index, and if it tanks, it tanks, you’re going to wear that. If it drops by up to 30%, you’re going to wear that too. And if it does its normal sort of upside, you’ve then got to ask yourself, well, what am I really giving up by being in the structured product? Because the structured product doesn’t just give you the downside protection, it also gives you potentially a nice leveraged upside.
I think it would be quite brave to say that from these levels, if you just go and buy a Nikkei ETF, that you reckon you are going to do materially better than 17% a year in rands over potentially up to five years. I mean, that is a very big call. And you’d have to look at it on a risk-weighted basis, right? I would never personally – and obviously, each investor would have to make their own decision – I would never look at the index and say, okay, I think I can beat that kind of return, risk-weighted, I don’t want the capital protection, I’m just worried about not giving up the upside. Give me the ETF. That sounds like a big call. Obviously, each investor must make their own decision, of course. But I do think that the profile of this instrument is interesting, it’s appealing.
Andri Joubert: It is very unique. And also it’s proven. We just had a product paying out, as I mentioned earlier, and that index didn’t give investors 17% or the dollar index didn’t give investors 11% in US dollars. It was quite a bit lower. You’re 100% right. With the EURO STOXX 50 product, there’s slight differences. The one difference is it’s not structured as a Flexible Investment Note. At the end of the product, when the product matures, at the end of the term, the product will cash settle in the client’s securities account or custody account. It’s 100% in US dollars. The capital protection is in US dollars and the potential payout is in US dollars. But it does offer a very attractive 10.25% US dollar return per annum until the first call date.
The difference here is the first call date is only after three years, not after one year. The EURO STOXX is not a typical index that will rally massively and correct quickly and rapidly. It’s a very mature market that includes value stocks, that pays high divvies, it includes your very well-priced banking and industrial sector companies. For that reason we’ve elected to have the first potential payout after three years rather, to give it time, also with the ECB that only recently cut rates, so we should start seeing that positive effect over time. But the clients will still be compensated per annum. If the product pays out after three years, if the index is up after three years, the client will get 10.25% in US dollars per year. It solves to 30.75% after three years.
And then if for some reason the index is flat after three years, or down, sorry, not flat, down, then the investor will have another opportunity, another observation date in year four and again in year five. With the EURO STOXX 50 dollar product, you have three bites at the cherry over a five year term, where with the Nikkei225 rand product you have five bites of the cherry.
The Finance Ghost: And just with that one being in dollars, so does that mean you need to already have your money offshore? This would be part of your investment allowance, your foreign investment allowance as an individual. Whereas the Nikkei product, I think you said it’s listed on the JSE and it’s rand. So there, it’s no issue, you’re not actually using up your allowance.
Andri Joubert: You can asset swap through your local securities account, you can chat to your financial advisor to assist you with that, or you can go direct and use that asset allowance. You have two options. You either asset swap, then the money has to come back, or you can just send the money offshore directly to that offshore custodian account, or with money already sitting offshore.
The Finance Ghost: Let’s get into some of the plumbing then, in the last few minutes of the podcast. Investment minimums, that’s always important. And I think to what extent can it be individuals, companies, trusts, just for people listening to this, if this has piqued their interest and they’re thinking about where they put this in their structures, what does that look like?
Andri Joubert: For the Nikkei225 rand product, the minimum investment is R100,000 and increments of R1,000 over that. And then for the US dollar product, the minimum is $6,000. Those are the two minimums. The closing dates are the 8th August. So it gives us just a bit more than a month. The way you can purchase it is on your stockbroking account. So any entity or person that holds a stockbroking account could purchase the share, because it’s a listed share. So if a trust has a stockbroking account, it can purchase the share for individual or company, it can purchase the share. It’s not limited to individuals.
The Finance Ghost: Okay, so I could go into my Easy Equities account – well, I’m sure it’s not quite as easy as going into my Easy Equities account because the – is the instrument listed already? I mean, would I be able to find the ticker on my brokerage app or whoever I trade with, I mean, with Investec or whatever the case may be. Is it there already? Or is it a case of contacting the broker?
Andri Joubert: You need to contact the broker because the structures are listed as an initial public offering, an IPO, so you won’t see it on your stockbroking account as a share that’s available to buy.
What I suggest is contact your financial advisor, tell them that you’ve heard about this product, you would like to invest. And if your advisor can’t help you or he doesn’t have access to these kind of investments, you can contact any one of our team that will put you in contact with an advisor. Typically the advisors have the experience to look at the portfolio as a whole, position it from a risk-return perspective, and just give realistic financial advice and also give their opinion on allocation, size, etcetera. We suggest working through an advisor to invest in these kind of products.
The Finance Ghost: Okay, fair enough. Yeah, look, that’s always the advice is go through an advisor. Not everyone has one, but it’s certainly always the advised route. If you’re going to go it without an advisor, then just understand the risks you are taking.
Last couple of questions. One is about risk. It’s always important to understand the credit risk that sits underneath these structures because they have derivatives and other kind of cool things in them. So where does the credit risk sit in this particular structure?
Andri Joubert: The products are issued by banks or by a bank. This product is issued by Investec Bank Limited.
Your absolute risk is Investec Bank Limited from a credit perspective. If you are not comfortable with Investec Bank or having your money invested with Investec bank, you shouldn’t invest in the product, because if Investec bank falls over, your capital is at risk, right. So no one, I mean, you have capital protection against market corrections, but the nature of these products and the risk inherent to it is credit risk.
To explain what level of risk that is, the articles represent general unsecured senior contractual obligations of Investec Bank Limited. The Nikkei225 only references Investec Bank Limited, and the EURO STOXX 50 references Investec Bank Limited and also Bank of America Corp. Bank of America being one of the biggest banks in the world, it is additional risk, but it’s not more risky in absolute terms. And we felt comfortable extending the risk to Bank of America Corp to enable us to enhance the return slightly.
Clients need to be comfortable with both of those institutions or both of those banks. Because if there’s a massive market – well, not market correction, but if there’s a run on a bank or, and it has happened before, but very low probability in our mind, capital can be at risk.
The Finance Ghost: Yeah, I don’t like to downplay risk, I think people who listen to me know that. But I think that if Investec and Bank of America go down, I think the least of your problems realistically will be your R100,000 sitting in a Nikkei product, because it means that the world has literally caught fire. That’s the way I think about these things.
Last question from my side, Andri. Just the fees involved in the products. We’ve talked about the returns, are those net of the money that Investec is making from this, bluntly? Obviously you guys don’t do this for charity and everyone knows that. So are those returns net of fees?
Andri Joubert: Correct. Yhe capital protection and the returns quoted today, 100% capital protection or being live in the market, or getting 17% after year one, or getting 10.25% US dollars after year one, is net of fees, right? Yhe way a structured product is structured, we provision for the fees in the structure. The financial advisor that sells the product receives a fee and the structuring house i.e. Investec Bank Limited will receive a fee, but it doesn’t affect the payout that the client will get. For financial advisors, with the Nikkei225 having its first potential call date after one year, we will pay them a 2% distribution fee in year one. If the product runs for five years, then there’s no fees in year two, three, four, or five. So effectively, it’s a 40bps per annum fee again, built in. And then with the EURO STOXX 50 autocall, the first call being after three years, we structure it paying 1.25% in year one, 0.75% in year two, and 0.75% in year three for the distributor, and then no fees in year four and five.
So very competitive from a fee perspective, you alluded to it being net fees. And there might be a stock broking account fee that your stockbroker might charge. Typically that’s R60 or R80 a month for the stock broking account. But that that’s not an investing charge.
The Finance Ghost: No. And you’re probably paying that anyway, because you probably have an account already if you’re listening to this. So I think, Andri, that basically brings us to a close. It’s been a great discussion. Some really interesting stuff, as usual. I’m super tempted, particularly on the Nikkei one, so I’ll go and do some more thinking around that. But thank you very much for your time. And I think as a closing comment, where do listeners go and find more information about these products?
Andri Joubert: Clients can go onto our website, it’ll be listed there. We will send out the official launch documents to all our distributors – most of the financial institutions that provide financial advice and that distribute these kind of products. I’d say best is just to contact your financial advisor or just go onto the Investec website and the product will be listed there.
The Finance Ghost: Fantastic. Andri, thank you so very much, and to Investec, and good luck with the product. I have no doubt that it will close successfully like the zillions of products you’ve done before. And I look forward to doing the next structured product discussion with you and the team.
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The global nickel market is a mess – and BHP is being affected (JSE: BHG)
Western Australia Nickel’s operations are being temporarily suspended
The global nickel market is struggling with major levels of oversupply. Welcome to capital cycles and the pain they can inflict when too much capital flows into a particular service or product before demand has been fully established. When prices fall, supply must decrease as nickel miners choose to rather suspend operations than continue making losses.
This is exactly the case for BHP at Western Australia Nickel, where operations are being suspended from October 2024. BHP will review the suspension by February 2027, so they expect the oversupply to remain a problem for a while.
The transition period (i.e. the period of suspension) will cost BHP $300 million per year, so there’s no enjoyable way to deal with this problem. They have to follow a care and maintenance program and they are choosing to continue investing in exploration. They also plan to support the affected communities.
This pales in comparison to the $3 billion that BHP has sunk into Western Australia Nickel since 2020. Despite that capital investment, the expected EBITDA for the year to June 2024 is negative $300 million. Presumably they expect the losses to worsen, as that sounds a lot like the annual cost they’ve put forward for the transition period.
Every affected frontline employee will be offered an alternative role at BHP, so they are doing their best here to look after the staff.
The market hated the Bytes update at the AGM (JSE: BYI)
A 6.3% drop on the day wasn’t pretty
If you enjoy putting on a speculative long trade based on the share price that has dropped all the way down to a support level, I present you with a chart of Bytes:
The damage of a 6.3% drop in a single day was done by an announcement with just a few relevant sentences in it. At the AGM, the company gave an update on trading in the first four months of the year. Perhaps the worry is around the mix effect, with lower margin software revenue delivering much of the growth.
This is the challenge when a company is trading at a high multiple: any concerns are punished severely by the market.
Whatever the reason, the facts are that both Gross Invoiced Income and Adjusted Operating Profit grew by double digits, with Gross Profit growth in the high single digits. So yes, there is margin pressure in the revenue mix, but they still achieved double-digit growth in operating profit which is actually what counts.
It’s also important to note that Bytes makes its money offshore, so this is a rand hedge. A strong rand has a negative impact on the Bytes share price.
Insimbi releases the circular for the recently announced disposals and share repurchases (JSE: ISB)
This is basically the opposite of an asset-for-share transaction
Insimbi has released a circular that does just about everything except solve world peace. In one circular, they’ve covered the repurchase of shares from various associated shareholders representing 11.41% of shares in issue, as well as the disposal of two businesses.
But if you read closely, you’ll see that the deals are linked. This is because they are executing a deal that is the reverse of the usual asset-for-share acquisition. In those deals, a listed company usually buys assets and pays for them by issuing shares. In this case, the company is selling assets and helping the buyers pay for them by repurchasing shares from those buyers for cash.
It’s not quite that simple, as only a portion of the repurchase proceeds will be used for the acquisitions. Insimbi will part with R43 million for the repurchases and will receive R30 million back for the disposals.
The transaction cost for the deals comes to R2 million. It’s expensive as a percentage of the deal value, but perhaps not unreasonable for the level of complexity.
Showtime for the Pick n Pay rights offer (JSE: PIK)
Unsurprisingly, the underwriters really don’t want the shares
In a rights offer, you can tell a great deal about the capital raising strategy from the way that the deal is structured.
For example, in a rights offer where there’s a strategic shareholder who wants to mop up more shares at a discounted price, you’ll typically see a fairly modest discount on the shares and an inability to apply for excess applications. This encourages a situation where the demand for the rights offer is limited, so the underwriter can step in and buy a significant number of shares. In an illiquid stock where buying up a meaningful stake is difficult, this is a very effective way to build a large strategic position.
At Pick n Pay, the underwriters are the banks. They are basically there under duress, as they need to make sure that this systemically important company lives to fight another day. The banks have no interest in owning Pick n Pay shares over the long-term though, or even the near-term. Instead, they are hoping that the market will take up the shares.
How do you achieve this? Well, a rights offer price of R15.86 per share is a good place to start. This is a 32.48% discount to the theoretical ex-rights price per share as at 30 July. Perhaps the better way to think about this price is that Pick n Pay was trading at R40 a year ago. Before things started to go severely wrong, it was at R60. Today, the share price is a sad and sorry R27.50 at market close, with a 52-week low of R16.62 before the disappearance of load shedding and the GNU-phoria took over.
There are a couple of other strategies at play here, like the ability for shareholders to trade their letters of allocation. Even if they don’t want to take up the shares, they can sell the letters at a price that should reflect the difference between the rights offer price and the market price. This helps mitigate the damage from the dilution for shareholders who won’t follow their rights.
And as referenced earlier, excess applications are also part of this rights offer. Shareholders can apply for excess applications and hope that they get a decent allocation, which means buying up shares in excess of what their pro-rata amount would imply.
Like I said, the underwriters really don’t want these shares. As for the Ackerman family, they will follow their rights up to R1.01 billion. That’s a pretty big cheque to write, but I can’t see how they would’ve gotten any support at all to save Pick n Pay if they weren’t prepared to put more money in.
This process to raise R4 billion in equity capital is officially underway, with the circular to be sent to shareholders on Monday 15 July. If you are a Pick n Pay shareholder and you don’t want to follow your rights, then at least make sure you sell your letters of allocation. You also need to check how your broker operates in terms of the rights offer and how to go about following your rights – or not, as the case may be.
Either way, you cannot ignore this as a Pick n Pay shareholder. Make a note to read the circular on Monday.
In a separate announcement, Pick n Pay announced that CEO Sean Summers has been awarded shares worth R108 million based on the deemed award price of R27. He doesn’t get them all straight away and he might not even receive all of them. Here are the vesting conditions:
There’s almost nothing fluffier than a target like “an effective leadership and operational structure” – what does that actually mean? Sadly, Pick n Pay wasn’t exactly in a strong negotiating position here, so I’m not surprised that Summers managed to attach only 25% of the award to financial targets. To make 75% of the award, all he has to do is hire people and find a new CEO.
Sigh.
Schroder’s property valuations seem to have bottomed (JSE: SCD)
This supports my thesis that the property sector is a good place to play right now
Schroder European Real Estate Investment Trust has been struggling for a while now with property valuations moving the wrong way. This is what happens when yields in the market have kept rising. When the yield is higher, the value of the underlying asset is lower, all else being equal. This is why property is an appealing place to be when rates start to come down.
At Schroder, the great news is that values may well have bottomed. In the latest quarter, the direct portfolio was valued 0.1% higher. Although the office portfolio continues to be under pressure, the valuation increase in the industrial and retail sectors more than offset this impact.
It always come down to the individual property details of course, but the overall point I’m taking from this is that European values are starting to tick higher.
Schroder’s loan-to-value is 33% based on gross asset value and 24% net of cash.
Sirius had no trouble getting the capital raise away (JSE: SRE)
Raising £150 million in a day’s work is why being listed is powerful
As covered on the previous day when Sirius announced the capital raise, the fund has identified a further pipeline of acquisition opportunities in the UK and Germany and has gone to the market to raise the required funds. This, right here, is why companies like being listed on a stock exchange. Providing exit capital for shareholders is one thing, but the ability to raise a fortune from the public (or a select group of institutional shareholders – even better) is the real highlight.
In literally one day, Sirius’ advisors made a few phone calls and raised £150 million for the fund. They get this done at a discount of 3.5% to the closing share price on 10 July. A small discount is common, as you need to give the investors an incentive to support the capital raise. The discount is only 2.1% to the 30-day VWAP prior to 10 July.
The capital raise was supported by existing and new investors, which is also a sign of a healthy shareholder register.
Distinct from the private placement, UK-based shareholders are still able to participate in the subscription of shares via PrimaryBid, with a minimum subscription of £250 per investor. It’s a pity that Sirius opted not to make this offer available to South African investors.
After raising equity in November 2023 debt in May 2024, this is another sign of not just the appeal of Sirius to large investors, but the improving health of the property sector at large.
Little Bites:
Director dealings:
A director of Newpark REIT (JSE: NRL) bought shares in the company worth R576k.
It’s not worth delving into all the details, but be aware that several directors (including the CEO) of Sirius Real Estate (JSE: SRE) participated in the accelerated bookbuild.
Vukile (JSE: VKE) announced that Encha Properties sold its entire stake in Vukile, representing 4.6% of the company’s shares. They were sold at R15.50 per share in a placement run by Investec, representing a 0.8% discount to the 30-day VWAP before the placement was launched. The total value of the sale was R820 million and the sales were required to settle loan financing from Investec. In other words, the bank helped make sure its debts were paid by running the placement!
Sibanye-Stillwater (JSE: SSW) must have angered the ancestors. Having dealt with floods and a terrible market for PGMs, the company is now suffering a cyberattack. Presumably the locusts are next. I would love to include the link to the website, but it doesn’t work because of the attack!
Trustco (JSE: TTO) has noted that the circular for the various transactions underway will be issued to shareholders in due course. Vunani Capital has been appointed to provide the fairness opinion. For this reason, the cautionary announcement related to the transactions has been lifted. I will now revert to my standard approach regarding Trustco: caution regarding everything.
The business rescue practitioners of Rebosis (JSE: REA | JSE: REB) have been appointed to the board of the company as non-executive directors.
Rex Trueform will increase its stake in Telemedia to 88.71% by acquiring a further 25% interest, for R14,15 million in cash, from the company’s remaining minority shareholders (excluding African and Overseas Enterprises). Rex Trueform, together with its controlling shareholder AOE initially acquired an interest in Telemedia in 2020 through the acquisitions of a 63.71% and 11.29% stake respectively. The initial investment provided the company with an opportunity to diversify its investment portfolio to include a media and broadcasting segment.
Zeder Investments continued with its strategic review of its various portfolio assets as it seeks to maximise wealth for shareholders. Following the disposal of Theewaterskloof Farm in June, Zeder will now sell Applethwaite Farm (APL) to Vredenhof Beleggings, the beneficial owners of whom are the beneficiaries of the Sass and Emma Trust. The Farm is one of three primary farming production units that comprises CS Agri. The disposal consideration is R190 million plus the value of the agricultural inputs on hand and the 2025 seasonal costs already incurred. The value of the net assets comprising APL Farming Business as at 31 December 2023 (CS Agri’s last audit) was R255,6 million. The disposal constitutes a category 2 transaction and as such does not require shareholder approval.
Discussions between TeleMasters’ two largest shareholders and an undisclosed BEE company to acquire their shares in TeleMasters are ongoing. An offer is still to be made but if accepted the result will be a change in control of the company and a mandatory offer will be made minorities. The company has also released a cautionary notice saying it was in the early stages of issuing an expression of interest for an acquisition which would be substantial if concluded, requiring shareholder and regulatory approvals.
Nutreco, a Dutch producer of animal nutrition, fish feed and processed meat products, has announced its intention to acquire Chemfit Fine Chemicals, an AECI company trading as AECI Animal Health. The disposal is in line with AECI’s strategy to streamline operations and focus on its core competencies. Financial details were undisclosed.
The disposal by Accelerate Property Fund of the Cherry Lane Shopping Centre situated in Pretoria is proving to be a headache for the property fund. The sale has been terminated three times with different buyers since the R60 million sale was first announced in December 2023. Announcing the latest termination of sale to QSPACE announced a few weeks ago, the company said it was in discussions with other potential purchasers.
Unlisted Companies
Private equity firm Sanari Capital, which is women-led and majority black- and women-owned, has announced an R80 million follow-on investment in EduLife Group, a network of independent schools offering diverse and tailor-made education across the economic spectrum. The investment will be used by EduLife to build on its foundation in the Free State and expand its offering further in the Eastern and Western Cape and potentially in Gauteng. Continued demand in existing areas of operation will see part of the funding used to expand capacity in these schools.
South African mid-market private equity Investment firm Agile Capital has acquired a significant stake in Berry Astrapak for an undisclosed sum. Berry Astrapak is a specialised manufacturer of a range of rigid moulded, and thermoformed plastic packaging products serving the African market. The group has manufacturing operations in Gauteng, the Western Cape and KZN.
HOSTAFRICA, a Cape-based online solutions provider offering a broad spectrum of online solutions including websites, e-commerce platforms and VPS services, has acquired Kenyan company deepAfrica’s hosting assets. deepAfrica will remain a holding company for its construction and web design businesses. Its hosing assets hostpoa.co.ke and jijihost.com brands will be rebranded to HOSTAFRICA. Financial details were undisclosed.
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