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Ghost Bites (Anglo American | Anglo American Platinum | Growthpoint | Hyprop | Murray & Roberts | Mustek | Pan African Resources | Super Group)

The Finance Ghost
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Ghost Bites (Anglo American | Anglo American Platinum | Growthpoint | Hyprop | Murray & Roberts | Mustek | Pan African Resources | Super Group)

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

As expected, Anglo’s placement of Amplats shares was at a deep discount (JSE: AGL | JSE: AMS)

This seems to have hurt shareholders more than just unbundling the stake

When I first saw the announcement by Anglo American about the placement of Anglo American Platinum shares with institutional investors, my immediate thought related to the discount that would be required to get it away. Sure enough, they placed the shares at R515 per share vs. the closing price on the day of the announcement of R570. That’s a discount of nearly 10%!

The benefit? Anglo American can put R7.2 billion in cash on its balance sheet before moving forward with unbundling the rest of Anglo American Platinum to shareholders at some point in future. If they need it for any taxes or transaction costs, they aren’t explicit about that. This makes me suspicious that this was purely a last attempt to shore up the balance sheet before passing the platinum hot potato to shareholders.

This is the same management team that told us how the BHP offer to Anglo would be too painful to implement, given the requirement to carve Amplats out of the deal. Their solution feels a lot like taking the painful route anyway, without the benefit of the BHP deal.

The V&A Waterfront remains the shining star at Growthpoint (JSE: GRT)

Higher interest rates across the group impacted earnings this year

Growthpoint has released results for the year ended June. This is essentially a macro view on South African property, with significant exposure to Australia and the UK as well (offshore investments contributed 32.4% to Growthpoint’s distributable income per share). Buying Growthpoint is almost like buying a property ETF, whereas choosing one of the smaller REITs is a decision to take more focused exposure.

The V&A Waterfront is by a country mile the best part of the Growthpoint story, contributing distributable income of R775 million and growing 12%. For context, group distributable income decreased by 10.3% to R4.8 billion. On a per-share basis, it fell by 10.0%, which is within the guidance for the year of a drop of 10% to 12%.

One of the pressure points for earnings was the negative rent reversion percentage in South Africa. Although it has improved from -12.9% to -6.0% this year, the reality is that the average lease is being concluded at a discount to the expired lease. Growthpoint’s substantial office exposure continues to be a headache here.

Interest rates were a major issue, as was expected. The total cost of funding jumped by 16.2%, which is even higher than the growth rather that the V&A Waterfront could achieve, let alone the rest of the group. Group loan-to-value has increased from 40.1% to 42.3% and investors will want to watch this carefully.

Net asset value (NAV) per share decreased by 6.1% to R20.20, with negative valuation trends in Australia. Growthpoint’s share price trades at around R14.50 at the moment, so there’s a discount to NAV of nearly 30%. Broad exposure to the property market and investments in other tradeable entities (like Capital & Regional) inevitably lead to a discount at top level.

Based on the full-year dividend of 117.1 cents, Growthpoint is trading on a yield of roughly 8.1%. This shows the disconnect between NAV and distributable income per share. The discount to NAV looks juicy, yet the yield does not.

Looking ahead, major redevelopment work at the V&A Waterfront is planned for 2025. This is the right decision long-term, but it will have an impact on earnings in the near-term.

In my view, Growthpoint would do well in this environment to increase the relative South African exposure by reducing offshore exposure. It simplifies the group and the balance sheet and would probably be helpful in reducing the discount to NAV per share.

There’s a lot of activity around Capital & Regional and potential buyers sniffing around the asset, with news hot off the press that Praxis is pulling out of the process. This leaves one potential buyer at the moment and a great example of why speculating on a bidding war is dangerous.

Hyprop is down this year, but by less than they thought (JSE: HYP)

And there will even be a dividend!

Hyprop definitely won the First Panicker award when it came to Pick n Pay. At a time when other property funds were merely highlighting the risk, Hyprop went all out in getting rid of the dividend. Given the risky acquisition of Table Bay Mall, there was a school of thought in the market that Pick n Pay was just a convenient excuse to buy Hyprop more time for balance sheet flexibility. Either way, the market wasn’t pleased.

In a trading statement for the year ended June, we now know that distributable income per share has fallen by 8.7%, which is a lot better than the guidance of a drop of 15% to 20%. Behold, Pick n Pay hasn’t quite disintegrated away into nothingness!

This means that there will be a dividend, as there really is no justification whatsoever not to pay a final dividend. They expect to pay 280 cents, which implies a yield for the year of a paltry 6.8% on the current share price. They only pay 75% of distributable income as a dividend, which explains why that yield is much lower than the typical income yield achieved on these funds.

Murray & Roberts is still loss-making, but looks much better (JSE: MUR)

The order book has also moved higher

Murray & Roberts is busy with a tough recovery story. They have to claw themselves back from a really difficult position, which they are managing to do slowly but surely. The headline loss per share from continuing operations has reduced from -71 cents to -24 cents for the year ended June 2024. A long way to go, but the direction of travel is good.

Speaking of a positive trajectory, the order book has increased from R15.4 billion to R17.2 billion. This bodes well for what should be a vastly improved FY25, with the balance sheet also on a much strong footing in a net cash position of R0.4 billion vs. net debt of R0.3 billion a year ago.

This net cash position does include advance payments, so they aren’t out of the woods just yet and still have work to do on the balance sheet. Currently, there is a term sheet in place to extend the banking facilities to January 2026, giving them time to settle the debt. Until the term sheet is a binding agreement, there’s risk.

Mustek had a really tough year (JSE: MST)

The end of load shedding helped most businesses – but not Mustek

The abrupt and unexpected end to load shedding caused havoc for those plucky entrepreneurs who had built businesses around trying to provide South Africans with energy solutions. They were suddenly left with expensive overheads and tons of stock lying around, as the vast majority of people wanted solar and energy solutions because they missed watching TV, not because they actually care enough about the environment to spend the same amount as an overseas trip on a solar solution.

Mustek was one of the casualties in this story, with HEPS for the year ended June expected to drop by between 70% and 80%. It wasn’t just because the income from energy products dried up. They also had to deal with the uncertain environment leading up to elections and the impact this had on demand.

This means that HEPS will only be between 75 cents and 112.50 cents vs. the share price of R13.49. It’s amazing how a low Price/Earnings ratio can quickly unravel into something that looks expensive.

Pan African Resources had a strong year (JSE: PAN)

Here’s a gold mining group that took advantage of better prices

Pan African Resources has released results for the year ended June. Gold production increased by 6.2%, so they certainly made hay (or gold?) while the sun was shining. Despite this, all-in sustaining costs came in slightly above guidance at $1,354/oz, with guidance having been given to the market of $1,325/oz – $1,350/oz. Nonetheless, revenue increased by 16.8% thanks to the combination of higher production and gold prices, with HEPS increasing by 32.2%.

Guidance for 2025 is for all-in sustaining costs of between $1,350/oz and $1,400/oz, so there’s an expectation of inflationary pressures over the next 12 months as one would expect.

In terms of major projects, steady-state production at MTR is expected by December 2024, with commissioning in progress. Another important strategic initiative has been to increase the Barberton Tailings Retreatment Plant’s life-of-mine to 7 years, an increase of 5 years. Production guidance for 2025 is 215,000oz to 225,000oz, which is way up on the current level of 186,039oz and a result of the steps taken to increase capacity at the group.

Expansion comes at a price, with net debt up considerably from $22 million to $106.4 million. Another decent year of gold prices will do wonders here.

Super Group’s profits were anything but super this year (JSE: SPG)

The automotive sector and the European supply chain exposures are weighing on results

Super Group has released results for the year ended June. It wasn’t a happy time for the group, with HEPS down by 25.9% despite revenue increasing by 4.6%. Even operating cash flow decreased by 3.4%, so there wasn’t any kind of working capital unlock to try and soften the blow.

The challenges are being felt in the European supply chain businesses and the UK-based dealership businesses. With 56% of group revenue and 54% of operating profit coming from the offshore operations (including others like in Australia and New Zealand), it’s tough for South Africa to offset a difficult performance across the various ponds – especially when things aren’t smooth sailing here as well, with profits down in Dealerships SA and Supply Chain Africa.

The group outlook has some worries in it, like the impact of poor port performance in South Africa on the volumes in the Supply Chain Africa business. Irritatingly, Transnet’s general levels of uselessness have led to certain supply opportunities being lost for the foreseeable future, like copper exports that are now going through Dar es Salaam and Walvis Bay. Supply Chain Europe is facing its own issues, particularly due to the automotive sector in Germany being under immense pressure at the moment.

In SG Fleet, which has had two strong years in a row, the expectation is for a dip in earnings as new vehicle availability improves and used car prices come under pressure. With an interest rate swap set to mature, they also expect higher interest costs on corporate debt.

Dealerships SA and Dealerships UK are both dealing with disruption in the automotive sector from changing consumer preferences and the strength of Chinese brands, although the Super Group commentary seems to gloss over this issue in the prospects section. I’m worried about that sector and I will be interested to see how things play out there.

The most positive narrative is in Fleet Africa, with a focus on the private sector and increased activity in general. This business is nowhere near big enough to move the dial at group level. For context, it generated profit before tax of R265 million in FY24 vs. a loss before tax of R1.51 billion in Supply Chain Europe.

Little Bites:

  • Director dealings:
    • A senior executive of Investec (JSE: INP | JSE: INL) sold shares worth R18.3 million.
  • Lighthouse Properties (JSE: LTE) has now closed the deal for the acquisition of a mall in Portugal. The deal was previously announced in July. A 7-year loan at a cost of 4.48% over the period has been secured. They are buying the property on a net initial yield of 7.2%, so the deal is cash positive from the start.
  • If you have a position in Mr Price (JSE: MRP), keep in mind that the company is hosting its capital markets day during the end of this week. Depending on what comes out there, we might see a reaction in the share price.
  • The proposed Richemont (JSE: CFR) dividend of CHF 2.75 per share has been approved. It works out to around R34.75 per share net of withholding tax. The payment date is 30 September.
  • Inexplicably, Sable Exploration and Mining (JSE: SXM) now needs to pursue a voluntary disclosure process with SARS as PAYE was not previously withheld from director salaries. The market cap of this company is only R12 million and I couldn’t even get the website to work.

Ghost Bites (Anglo American | Anglo American Platinum | AngloGold | Attacq | Bowler Metcalf | Caxton | Libstar | Old Mutual | Texton | Vukile | WBHO)

The Finance Ghost
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2
Ghost Bites (Anglo American | Anglo American Platinum | AngloGold | Attacq | Bowler Metcalf | Caxton | Libstar | Old Mutual | Texton | Vukile | WBHO)

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

Anglo American is calling all pockets for its Anglo American Platinum stake (JSE: AGL | JSE: AMS)

Instead of just unbundling the full stake, they are selling some of it first

The latest trend on the JSE seems to be a placement of shares in a subsidiary, following by an unbundling of the remaining shares. The rationale varies from group to group, but this is proving to be a powerful way for a group to unlock some cash and then release the rest of the stake to shareholders.

Anglo American is taking this route with its 78.56% stake in Anglo American Platinum. Amplats is already listed of course, so getting institutional investors to take a piece of that stake before an unbundling is going to require some incentivisation in the form of price. Anglo American wants to sell approximately a 5% in Amplats through an institutional placement, with the rest due to be unbundled to shareholders at some point in the future.

They’ve appointed three major banking groups, both locally and abroad, to try and get this placement done. The PGM sector is in disarray at the moment, so it’s going to be really interesting to see what the market demand looks like – and especially at what price. Naturally, unless you’re an important institutional investor, your phone won’t be ringing with a call from the banks.

AngloGold looks for riches in Egypt (JSE: ANG)

The group is acquiring Egypt’s largest and first modern gold mine

AngloGold has announced that it is acquiring Centamin, a gold producer whose flagship asset is the Sukari gold mine in Egypt. If the deal goes ahead, Centamin shareholders will be paid a combination of AngloGold shares and cash, giving them a premium of 36.7% to the closing price on 9 September. Centamin shareholders will also be eligible to receive the dividend due to be paid on 27 September.

To give an idea of just how large this deal is, Centamin shareholders will hold 16.4% in the enlarged AngloGold group after the deal. In return for allowing this dilution, AngloGold shareholders will be invested in a high quality gold mine that will reduce group costs per unit of gold produced. The deal will also be free cash flow per share accretive from the very first year.

For the deal to go ahead, Centamin shareholders will need to vote in favour of it. The Centamin directors have unanimously recommended that Centamin shareholders do exactly that. The directors have also given irrevocable undertakings to vote in favour, but their ownership stake is immaterial in the group context.

As usual, there are also regulatory hurdles to overcome. These deals aren’t simple and they don’t happen overnight.

If you’re interested in learning more, you’ll find the corporate presentation on the deal here.

Attacq achieved great growth in this financial year (JSE: ATT)

Nobody can be upset about 19% growth in the full-year dividend

Property fund Attacq has released results for the year ended June 2024. The TL;DR is that distributable income per share increased by 19.9% and the full-year dividend was up 19.0%. With that kind of growth in the key metric for a property fund, it feels like we barely need to read any further.

One thing that always needs to be checked is the balance sheet, particularly the loan-to-value ratio. Thankfully, that has improved from 36.8% to 25.3%.

In terms of capital allocation, the focus has been on the acquisition of 20% in Mall of Africa as well as further additions to investment property. On the disposals side, the notable move was to sell the remaining 6.45% investment in MAS for R773.1 million.

The share price return over the past 12 months of around 60% is a pretty great summary of the recent momentum not just in the sector, but in Attacq itself.

Bowler Metcalf had a spectacular year (JSE: BCF)

And no, this isn’t just a year-on-year fluke thanks to a soft base

Bowler Metcalf is one of the better small caps on the JSE, although they’ve certainly had a tough couple of years in the build-up to this excellent result. Still, the 57% increase in HEPS for the year ended June 2024 isn’t just because 2023 was a weaker year than the preceding few years. At 161.38 cents in HEPS, they are running well above even the 2021 level of 127.31 cents.

This result was driven by a 10% increase in revenue, with the group also managing to become more efficient over time and increase its return on equity to 13.4%. That’s the highest level in any of the recent years, indicating that the group is going from strength to strength. After substantial capital expenditure in 2024 and a decent pipeline into 2025, it seems there’s a strong chance that they could beat the record cash generation achieved this year.

The share price has limited liquidity, so caution is needed around the bid-offer spread and position sizing. The share price is up around 60% in the past 12 months, so those who decided to stomach the small cap risk have been well rewarded.

Caxton gets a rap over the knuckles from the JSE (JSE: CAT)

The exchange is unhappy with announcements released by Caxton in 2022

Those who have followed Caxton and Mpact closely over the past couple of years will know that the relationship between the companies is less than friendly, despite Caxton being heavily invested in Mpact.

Among many rather colourful things that happened along the way, Caxton released announcements on 12 August 2022 and 6 October 2022 that included all kinds of statements related to Caxton’s views on Mpact’s alleged behaviour and how the packaging market works. There were all sorts of allegations and pseudo-allegations that were made, which the JSE feels were not in line with the requirements for the use of the SENS platform. Caxton had no direct obligation or legal duty to make the statements about another listed company, with the JSE clearly wanting to put a stuff to fights like these over SENS.

Caxton got away with a public censure rather than a fine as well. The company has also been forced to retract the specific statements made over SENS.

Despite negative volumes, Libstar grew revenue and improved its margins (JSE: LBR)

This is the power of being able to put through pricing increases

Libstar has released results for the six months to June 2024. The revenue growth of 5.2% won’t set your pants on fire, but it’s worth digging deeper into that number to note that selling price inflation and mix contributed 5.4%, with volumes down 0.2%. That’s an interesting outcome.

The ability to put through pricing increases helped grow gross margin from 21.2% to 21.5%, assisted by cost management as well. That’s just as well, as operating expenses increased by 8.2% with insurance costs as a major pressure point, along with the usual suspects like salaries and wages. This means that the gross margin improvement was largely offset by expense growth, leading to normalised operating profit only growing by 5.3% and showing negligible improvement in margin.

Normalised EBITDA has increased by 13.4% and that margin increased from 7.2% to 7.7%. This tells us that depreciation was higher in this period than the prior period.

Another good news story is that net finance costs have decreased by 11.1%, thanks to lower average borrowings during the period. The debt to EBITDA ratio improved from 2.1x to 1.6x, way below lender covenants of 2.5x.

This decrease in finance costs helped drive an improvement in normalised HEPS of 11.4%. HEPS calculated without the normalisation adjustments was 32.4% higher, but this is affected by foreign currency and other moves.

If there’s a downer in this result, it’s on the cash generated from operations line which showed very little growth despite the uptick in earnings. This is because of the higher stock levels in the group and shipment delays that are making this difficult.

The group has been through a major strategic rethink and the results are clearly showing here. They’ve made a number of changes to the internal structure and reporting lines. The earnings announcement was also accompanied by the news that Libstar sold its interest in Chet Chemicals, which is part of the Household and Personal Care category. The buyer is a company called Mithratech, which is a subsidiary of Morvest Group.

With Libstar generating over 94% of its revenue from perishable and ambient products, this business just isn’t a great strategic fit within Libstar and doesn’t sit well with a strategy to simplify things. As the deal is so small, they haven’t disclosed the selling price.

Uninspiring numbers at Old Mutual, despite what we’ve seen at financial services peers (JSE: OMU)

There are no Sanlam growth rates happening here

Old Mutual has released a trading statement for the six months to June. At a time when other financial services groups are releasing exceptional numbers, I’m afraid that there’s no excitement here. It seems as though the Personal Finance segment was the problem, specifically in the life business. Group overheads also played a role here, with those challenges offsetting the performance in Old Mutual Insure, Old Mutual Corporate and the Mass and Foundation Cluster.

Old Mutual’s preferred performance metric is adjusted headline earnings, which put in a move of between -2% and 8% for the interim period. The midpoint of that is positive at least, so it’s a disappointing period rather than a poor period. Adjusted HEPS is up by between 2% and 12%. Although it’s potentially an inflation-beating performance, it doesn’t look good relative to what we’ve seen elsewhere in the sector.

Sanlam’s share price is up 25% in the past 12 months and Old Mutual is down 0.4%.

Texton sells a UK property below book value (JSE: TEX)

They plan to recycle the capital – but into what?

Here’s the funny thing about Texton: with the share price at R3.90 and the net asset value (NAV) per share sitting much higher at R7.12, they could sell off all their assets at a pretty significant discount to book and still create value for shareholders – provided they return the capital to those shareholders.

Sadly, I don’t think we will see that happen. When Texton talks about recycling capital, they inevitably mean investing it in US-based property funds. This is why the discount to NAV probably isn’t going anywhere.

Perhaps they will shock me with the proceeds from the sale of the Heapham Road Industrial Estate in Gainsborough in the UK. The disposal price is £7.3 million and the value of the asset was disclosed as £8.25 million as at June 2023, so although they’ve sold it at a discount to NAV, they’ve technically sold it at a premium to what the share price is implying.

Let’s see what happens next with this capital.

The market is supporting the Vukile story (JSE: VKE)

My bullishness on property in this market cycle continues

Something that makes me happy as a holder of the REIT sector in general: market support for capital raising initiatives, like we’ve just seen at Vukile.

Something that irritates me as a holder of the REIT sector in general: the fact that institutions will always participate in these capital raisings at a discount, which means retail investors are diluted by more than they should be.

I understand why companies do it though, especially when they are looking to quickly raise the capital and get on with things. If you’re going to include retail investors as well, you can’t raise R1.5 billion overnight. Just consider that for a moment: R1.5 billion raised in the time that it took people to have dinner and then breakfast.

Vukile initially wanted to raise around 5% of its market cap, but increased that to 7.7% based on demand in the market. The placement is at R17 per share, a discount of 4.6% to the pre-launch closing share price. Without the discount, it’s a lot harder to get institutions to bite at the cherry, which is why the challenge of dilution in capital raisings isn’t about to disappear.

At least in the case of Vukile, the discount is manageable because there is solid demand for the shares. When we get near the top of the cycle, even the less successful funds will be able to raise capital at minor discounts. When that starts happening, it’s time to take profit on the REITs and move on to something else.

For now, I’m still strongly invested in the property sector in my tax-free savings account and I’m quite happy with that situation.

WBHO has grown earnings and declared a dividend (JSE: WBO)

This is why the share price is up 85% in the past year

If you’re looking for a feel-good story about SA Inc, this one just might do it. Construction group WBHO has grown revenue from continuing operations by 16% for the year ended June 2024. That’s a good start to the income statement, leading to a great outcome like HEPS from continuing operations jumping by 18.7%.

There’s a final cash dividend of 230 cents per share, which is a whole lot better than nil cents per share in the comparable period. This tells you just how much things have improved in the industry, although I must point out that the order book has decreased from R32.6 billion at June 2023 to R30.6 billion at June 2024.

It’s not every day that a share price marches with this enthusiasm towards the top right-hand side of the page:

Little Bites:

  • Director dealings:
    • A director of a major subsidiary of Tiger Brands (JSE: TBS) received shares worth R1.43 million and appears to have sold the entire lot, as no mention is made in the announcement of this being only the taxable portion.
  • NEPI Rockcastle (JSE: NRP) has released the details of the scrip dividend alternative. The default option is a capital repayment rather than a cash dividend or scrip issue, with both those alternatives available as well. The decision will mainly come down to the different tax consequences.

A responsible investing roadmap

The Finance Ghost
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A responsible investing roadmap

Listen to the podcast here:

Given the lack of global ESG standardisation and its politicisation, how should investors approach responsible investing and measure its impact?

Investec Wealth & Investment International has launched a comprehensive guidebook on the topic. In the latest episode of the No Ordinary Wednesday, Jeremy Maggs speaks to the authors, Boipelo Rabothata, ESG Specialist and Co-Fund Manager of the Investec Global Sustainable Equity Fund and Maxine Gray, Business Strategist at Investec Wealth & Investment International.

Also on Spotify, Apple Podcasts and YouTube:

Ghost Bites (AVI | Bell | Capitec | Sun International | Trematon | Vukile | Wesizwe Platinum)

The Finance Ghost
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0
Ghost Bites (AVI | Bell | Capitec | Sun International | Trematon | Vukile | Wesizwe Platinum)

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

AVI loves offering coffee and biscuits (JSE: AVI)

You won’t find a more attractively shaped income statement move than this one – but do they need all those divisions?

In investing, what you really want to see is a company that can turn a modest revenue result into an excellent profit result. In other words, a shape on the income statement that sees a small percentage revenue increase leveraged up into a much larger percentage move in profits. This leverage comes with risk of course, as it tends to work just as effectively in reverse, which means things can get tough when revenue drops.

There’s no reward without risk. That’s how finance works.

In the year ended June, there was plenty of reward at AVI. From revenue growth of just 6.3%, they grew gross profit by 13.5% (hence margins went up) and HEPS by 24.1%. Considering the challenges still being faced in the I&J business, that’s really good. Cash quality of earnings is also clearly there, with the dividend up 22.4%.

We need to look deeper to really understand the results, starting with the food and beverage brands. Entyce Beverages and Snackworks both grew revenue, up by 18.2% and 6.4% respectively. They achieved profit increases of 41.3% and 22.4%, with a combined jump of a wonderful 31%. This helped make up for I&J, where revenue was down slightly and profit increased by 1.5%.

Over at Personal Care, a focus on margins rather than revenue means that although revenue fell by R200 million year-on-year, profit was down by just R10 million. That’s a far more efficient business, with the Coty business now out of the system and unlikely to be missed.

The Footwear & Apparel segment could only manage revenue growth of 3.6%, while profits fell by 3.9%.

So in reality, Entyce Beverages and Snackworks are pretty much carrying the team right now. AVI includes a great chart in the earnings report that makes this point loud and clear:

In summary, the coffee, creamers and biscuits are doing very well, thank you. The fish catch rates are a challenge at 20-year lows, with further pressure on I&J from the abalone market and its supply and demand dynamics. As for Personal Care as well as Footwear & Apparel, one can only dream of a world in which AVI gets great offers for those businesses and simplifies its group accordingly.

Diversification is a thing, but so is diworsification.

Unimpressive numbers at Bell – and just as shareholders need to weigh up the buyout offer (JSE: BEL)

There’s food for thought here for those who believe the offer price should be higher

From what I’ve seen on X, the scheme of arrangement at Bell is by no means a guaranteed success. Because of the shape of the shareholder register, there are a couple of shareholders who can swing the vote. The deal is a game of cat-and-mouse, yet the new earnings information looks like somebody moved the cheese entirely.

After releasing generally strong results in the past couple of years, Bell could only manage revenue growth of 6% for the six months to June. Even worse, operating profit was down 2% and HEPS fell by 6%. None of that is good news. There’s no dividend per share due to the potential corporate action.

There are a number of important underlying initiatives underway, like the growth in manufacturing capabilities at the German factory and the launch of the new motor grader product. As great as that sounds, it needs to be balanced against the softer commodity and construction cycles, with Bell always exposed to the level of investment by players in those sectors.

Despite inventory levels remaining elevated across the industry, Bell did at least generate net cash of R80.5 million for the period. That’s a vast improvement on the nearly R400 million in cash that was absorbed in the comparable period.

Capitec just doesn’t stop growing (JSE: CPI)

These are seriously impressive numbers

Capitec has released a trading statement for the interim period to 31 August. This is an update to the previous announcement in July that suggested earnings growth of between 25% and 35% for this period.

It’s even better than that, with the updated earnings giving a much tighter range of 35% to 37% – which means they had an even stronger finish to the period than they anticipated.

Detailed results are due on 1 October. These are great numbers that the market will dig into in detail, with Capitec’s share price up more than 4% for the day and nearly 50% this year!

Sunbet is the growth highlight at Sun International (JSE: SUI)

The group result isn’t too shabby either

Sun International has released results for the six months to June. With adjusted HEPS up by 9.1% and the interim dividend up 8.8%, this is a decent if not spectacular result.

There are slow growing parts of the group, like gaming income up just 3.4%. As this contributed 77.4% of group income, it explains why the overall growth in income was just 5%. Urban casinos grew just 2.2% and smaller regional casinos couldn’t even match that number. The highlight, by far, was Sunbet: 71.8% growth and running ahead of targets.

A decent runners-up trophy goes to hospitality income, which was up 12.3%. People seem to want to stay at the casinos but aren’t so keen on actually gambling!

The wooden spoon? Sun Slots, where income fell by 4.3%. For context, Sun Slots contributed income of R686 million vs. R512 million at fast-growing Sunbet.

Despite the underlying mix effect, group adjusted EBITDA margin was consistent at 27.3%. This helped decrease debt (excluding IFRS 16) from R5.7 billion at December 2023 to R5.4 billion at June 2024. Despite the drop in debt, the interest charge increased by 2.7% due to higher rates.

The acquisition of Peermont Holdings is still underway, with regulatory approvals still being obtained. Credit approved funding has been received from lenders. The casino businesses aren’t achieving much growth right now, but they remain great cash cows that are capable of servicing debt.

Trematon is selling Aria (JSE: TMT)

Now we know why the company was trading under cautionary

Trematon has turned an investment into cash, with the 60% stake in property group Aria being sold for R293 million. The deal is being structured as a share repurchase, so the other shareholders in Aria are effectively taking Trematon out of the picture.

Trematon’s net interest in Aria’s assets as at 29 February 2024 was R274.2 million, so this deal is at a premium to that number. Admittedly, that number is now 5 months old, so one would hope that there was growth over that period.

Aria holds a portfolio of 13 properties, almost exclusively in the Western Cape. They include commercial, retail and industrial properties.

I think this is a good move, Trematon’s net asset value per share as at the end of February was R3.39 and the current share price is R2.44. If the cash from this disposal is used for share buybacks, it should help close the gap.

Vukile gets more exposure to Iberia through the Portuguese market and looks to raise equity capital (JSE: VKE)

Iberia seems to be the new Poland for locally listed property funds

It’s funny how things seem to happen in waves when it comes to JSE-listed property funds. At one point, all we could hear about was the UK. Then, Eastern Europe was in vogue, a push which turned out far better than most of the UK acquisitions. These days, Iberia is in fashion, with Lighthouse Properties putting its focus in the region and Vukile deepening its exposure there.

To be fair to Vukile, they’ve already been in Spain as their international growth story for a long time. 99.5% held subsidiary Castellana Properties is now venturing into Portugal, announcing the acquisition of three properties in the country on a initial net income yield of 9%.

This is a deal with one seller across the three properties. To facilitate it, Castellana will set up a new subsidiary that will be 80% held by Castellana and 20% held by an RMB entity. Our local bankers are smart enough to see the opportunity in Iberia and participate in it.

The three properties are all shopping centres, with two in Lisbon and one just outside of Porto. Interestingly, a retailer named Continente Hypermarket is the anchor tenant in all three, so hopefully they won’t be having any Pick n Pay experiences over there.

The purchase price is EUR176.5 million and acquisition costs are EUR4.4 million. Existing lenders will refinance an in-country asset-based debt package of EUR72.5 million and the remaining EUR104 million will be funded by equity, with 80% coming from Castellana and 20% from RMB. It’s interesting to see the bank playing in the equity section of the capital stack in this deal.

This is a category 2 deal, so there will not be a circular issued to shareholders.

Late in the day, Vukile also announced an accelerated bookbuild to raise equity representing approximately 5% of the company’s market cap. This implies a raise of over R1 billion, with the right to increase the raise if there is strong demand. As usual for funds this size, selected institutions will be able to buy shares (probably at a discount) and retail investors will watch from the sidelines.

Although the announced acquisitions in Portugal are fully funded, Vukile is looking to raise a warchest for further acquisitions. This is typical behaviour of a property fund that really has the wind in its sails, so just be cautious of how this share price behaves and the valuation that it gets to.

I found it incredibly interesting that although Vukile is investing alongside RMB in Portugal and has Java Capital as its sponsor, it has appointed Investec as the bookrunner for the capital raise. Welcome the The Corporate Bachelor, with the zebra getting the rose this time!

Wesizwe Platinum’s operational update has unusual stuff in it (JSE: WEZ)

Aside from concentrator plant issues, there’s also an odd outcome for the retrenchment process

Let’s start with Weziwe Platinum’s concentrator plant, which has some problems. During hot commissioning, defects were identified and experts needed to be appointed to fix it. This won’t be a quick problem, with the plan only commencing in the fourth quarter.

Another major bit of operational news is that the s189 retrenchment process at Bakubung Platinum Mine has been concluded. It’s an unusual outcome, with 345 redundant positions and only 13 employees actually being retrenched. The rest left under natural attrition or voluntary separation packages, or transferred to in-house vacancies. And of the 13 employees, 7 are being absorbed by the company’s training services provided. It’s not common to see so few retrenchments vs. the number of redundant positions.

Speaking of Bakubung, the production ramp-up will commence in Q1 2025. The concentrator ramp up will commence in Q4 2025, with the rectification work needing to be completed first. Mining is a complicated beast.

Little Bites:

  • Director dealings:
    • Titan Premier Investments, one of Christo Wiese’s main investment companies, acquired shares in Brait (JSE: BAT) for R332k.
    • To help with cash preservation at Orion Minerals (JSE: ORN), the non-executive directors are taking a portion of their director fees in shares rather than cash. 1,625,000 new shares have been issued in that regard, worth just over R300k at the current market price.
  • Grand Parade Investments (JSE: GPL) released a trading statement for the year ended June. HEPS is up by between 640% and 660%, with that rather daft percentage being due to the costs of the restructuring transactions in the base period. Less important than the percentage move is the range for HEPS of 18.94 cents to 19.46 cents for the year. The mid-point implies a Price/Earnings multiple of 17.7x, which tells you that the group is trading based on the value of underlying investments rather than the current earnings.
  • DRA Global (JSE: DRA) has been in a legal dispute over the ironically named Mount Pleasant Project. There’s nothing pleasant or cheap about fighting in court, with DRA ordered to pay Mach Energy Australia a total of $96 million in three tranches over two years. This is in full and final settlement of the claims. After existing provisions and insurance, DRA will have to recognise additional expenses of A$30 million to A$40 million in the 2024 numbers. At least it finally brings an unpleasant situation to a close.
  • The scrip dividend alternative at Lighthouse Properties (JSE: LTE) was strongly supported, with take-up of roughly 73% of the total number of shares that were available to be issued as an alternative to cash dividends. It’s always worth remembering that these scrip dividends are like miniature rights issues, so they preserve cash for the group but put pressure on per-share metrics like dividends per share going forward.

Ghost Bites (African Rainbow Minerals | Calgro | Caxton | City Lodge | Clientele | Momentum)

The Finance Ghost
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Ghost Bites (African Rainbow Minerals | Calgro | Caxton | City Lodge | Clientele | Momentum)

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

African Rainbow Minerals has released full details on a difficult year (JSE: ARI)

The cycle hasn’t been kind here

When assessing the performance of a mining group, the most important thing is to understand the underlying commodity exposures. This table does a great job of showing not just the different segmental contributions at African Rainbow Minerals, but also the impact of a terrible year for the PGM industry:

With that level of exposure to PGMs, it’s little wonder that HEPS fell by 43% to R25.91 per share. The dividend is also down 43%, but at least there is still a dividend despite the challenges. This is thanks to the health of the balance sheet, with a net cash position of R7.2 billion, admittedly a fair bit down from R9.8 billion 12 months ago.

The PGM sector troubles continue, with the group taking steps like putting the Two Rivers Merensky project into care and maintenance from July 2024. Unsurprisingly, this comes with a substantial impairment of over R1 billion that is excluded from HEPS. Bokoni Mine is a cautious ramp-up strategy, with the board having now approved the construction of a chrome recovery plant.

There’s a lot of corporate activity around copper at the moment, with African Rainbow Minerals also getting in on the action. They took a 15% stake in Surge Copper Corp on 31 May. This is a Canadian group with resources of copper, molybdenum, gold and silver. 15% doesn’t exactly give them much influence there, but it’s a start.

Sudden management changes at Calgro (JSE: CGR)

The share price was surprisingly unresponsive to this

Calgro released a shock announcement that Wikus Lategan and Waldi Joubert will be leaving the group to pursue other interests. Wikus was the CEO and Waldi was very much his right-hand man and ex-CFO, running the Memorial Parks business. Thankfully, current CFO Sayuri Naicker isn’t going anywhere.

The change is with effect from 31 December 2024, so there isn’t a lot of time here for a handover. Ex-CEO Ben Malherbe will return to the CEO role. As one of the co-founders of Calgro, he certainly knows the business. The other change to the board is that Allistair Langson, Calgro M3 Developments Limited Managing Director, will be appointed to the group board as an executive director.

Caxton is on a treadmill at the moment (JSE: CAT)

Publishing and printing isn’t exactly a land of milk and honey at the moment

Caxton and CTP Publishers and Printers, or just Caxton for short, released results for the year ended June. Revenue fell 47% and operating profit after depreciation was down 11.4%, with the company buckling under the pressure of reduced printing throughputs and a decline in media advertising revenue from national retailers.

I still find it amazing that such a big piece of Caxton’s business is based on retailers being willing to print their specials for inclusion in community newspapers. That doesn’t sound sustainable to me. This division saw operating profit after depreciation fall by over 18%. It contributed 37% of group operating profit, down from 40% the year before.

In the packaging business, revenue at least managed to grow. Operating profit can’t say the same thing, dropping roughly 15% year-on-year. I’m not sure what’s worse: the revenue trajectory in the printing business or the margin trajectory in packaging!

Although Caxton did its best in containing costs like salaries, the reality is that this isn’t known as a bloated operation and they can’t just keep shrinking costs forever to try and address the revenue problem. These are band-aid strategies that don’t fix the underlying wound.

The drop in operating profits was largely offset by insurance proceeds received in this period as well as a sharp jump in net finance income thanks to the size of the group’s cash balance (R2.5 billion vs. R1.9 billion at the end of the comparable period).

These offsetting factors helped HEPS increase by 4% despite the rough operating performance. The dividend was flat at 60 cents per share. The lack of growth in the dividend tells us quite a bit about the underlying concerns in the business.

And yet, the market seems to think that something big is about to happen at Caxton, with a massive rally being driven by speculation that a major corporate action could be on the table. The source of that speculation? A SENS announcement on 3rd September that Peregrine Capital now holds 9.6% in the company. For the market, that’s enough to believe that a buyout offer could be coming, with the share price now looking like this:

City Lodge had a tougher second half (JSE: CLH)

The market didn’t like it, with a 5.5% drop on the day

The City Lodge share price is a volatile thing, with sharp moves that can make paupers and kings out of traders:

As you’ll see on the far right there, the correction after the release of annual earnings was significant. For the year ended June, City Lodge managed revenue growth of 13% and HEPS growth of 10% as reported or 37% on an adjusted basis. Those don’t exactly sound like bad numbers, do they?

Average group occupancy moved 200 basis points higher to 58%, so that’s also encouraging news. We can’t even say that the cash quality of earnings was poor, as the dividend increased by 15%.

Other important data points include the lack of debt on the balance sheet (and that’s a big deal), as well as the growth in food and beverage revenue of 22%. That revenue line now contributes 19% of total revenue, which is an impressive part of the investment case. It’s also great to see that gross margin in the food and beverage business moved 200 basis points higher to 60%.

Excluding foreign currency moves, adjusted EBITDAR margin improved from 30.1% to 30.4%. City Lodge increased room rates by 8%, helping to offset some major inflationary pressures in the cost base.

So, what didn’t the market like? The likeliest culprit seems to be the second half performance, which took the shine off a really good first half where occupancy was up around 800 basis points. Between November and June 2024, occupancy fell by 100 basis points, with the lack of consumer and business confidence in the run-up to elections no doubt playing a role.

The 2025 financial year hasn’t gotten off to a good start, with occupancy down by a most unfortunate 500 basis points year-on-year in July. The August drop was 600 basis points. Although the first week of September was thankfully in the green, that’s not really a long enough period to make a call.

Logically, in an environment with improved business confidence and activity, City Lodge should be a beneficiary. The company has been through so much and is now on the strongest footing I’ve seen, with a clean balance sheet and plenty of evidence that the food and beverage strategy is working. The valuation is a challenge though, with the Price/Earnings multiple at around 14.6x based on adjusted HEPS.

I’ve seen arguments in the market that the group should be valued based on the replacement cost of the hotels. I don’t agree with that approach. If the hotels can’t generate sufficient economic returns, they wouldn’t be built as hotels in the first place and won’t change hands at replacement cost. This is why I believe that it should always come back to earnings, with City Lodge’s current valuation looking a bit demanding for now.

IFRS17 contributes to a notable decline in earnings at Clientele (JSE: CLI)

Shareholders will have to be patient for all the details

Clientele has released a trading statement for the year ended June. It’s not good, with HEPS expected to drop by between 33% and 53%. Although they note that the application of IFRS 17 has a substantial impact, they go on to say that earnings on a like-for-like IFRS 17 restated basis will differ by at least 20% – but they don’t specify up or down vs. the comparative period! As HEPS was down by 35% for the interim period, I suspect that earnings are down regardless of how you apply the IFRS 17 lens.

Oddly, because of the way that IFRS 17 works, the group’s net asset value has actually moved higher to between R1.8 billion and R2.4 billion!

Full details will only become available when results are released on 18 September. The share price has had pretty serious volatility, with a 52-week low of R9.50 and a 52-week high of R12.98. At the current level of R11.77, the share price is practically flat over 12 months despite the volatility.

Momentum also has a great financial services story to tell (JSE: MTM)

As we’ve seen elsewhere in the sector, earnings growth looks strong

Momentum Group has released a trading statement for the year ended June. HEPS is up by between 41% and 46%, so there’s nothing wrong with that. Normalised HEPS is up by between 33% and 38%, which is still great. The normalisation adjustments mainly relate to the iSabelo Trust B-BBEE scheme.

Looking at the underlying drivers of this performance, there’s a positive story almost across the board. In both the long-term and short-term insurance operations, things have gone in the right direction. The higher interest rate environment was also good for investment income.

The downer was in the venture capital portfolio, where fair value losses were experienced. I’m really not sure that dabbling in that asset class is the right move for a group like Momentum.

Little Bites:

  • Director dealings:
    • A2 Investment Partners, which has board representation at Nampak (JSE: NPK) in the form of Andre van der Veen, bought another R39.3 million worth of shares. That’s a pretty big show of faith in the progress of that turnaround story.
    • The CEO of RCL Foods (JSE: RCL) bought shares in the company worth R3.34 million. There’s no stronger signal out there than an on-market purchase!
    • Speaking of on-market purchases, Des de Beer bought another R2 million worth of shares in Lighthouse Properties (JSE: LTE).
    • A director of a subsidiary of Capital Appreciation Limited (JSE: CTA) sold vested shares worth R1.11 million. It doesn’t specifically say that this was only the taxable portion, so I assume that it wasn’t.
    • Similarly, directors of Sasol (JSE: SOL) sold share awards worth R1.3 million. The announcement isn’t explicit on whether this is only the taxable portion.
    • A non-executive director of South32 (JSE: S32) bought shares worth roughly R870k.
    • A director of a major subsidiary of RFG Foods (JSE: RFG) sold shares worth R535k. Separately, associates of a different director of the subsidiary sold shares worth around R1.87 million.
    • A director of a major subsidiary of Sappi (JSE: SAP) bought shares worth R91k.
  • There’s yet more activity on the Quantum Foods (JSE: QFH) shareholder register. This time, Capitalworks Private Equity and Crown Chickens have taken an interest of 11.44% in Quantum. For a R1.5 billion group based in the little town of Wellington, there really is a lot going on.
  • Lesaka Technologies (JSE: LSK) has announced leadership changes, with current CFO Naeem Kola moving into the COO role, with particular focus on driving synergies across the fintech businesses. Dan Smith moves from investment director at Value Capital Partners (the largest shareholder in Lesaka) into the CFO role. He has loads of M&A experience. This makes a world of sense for an acquisition-focused strategy in fintech.

Know your worth: Julius Caesar and the Veblen Effect

Dominique Olivier
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Know your worth: Julius Caesar and the Veblen Effect

Most of us associate the Veblen Effect with luxury goods such as diamonds, premium alcohol and collectible watches. But as Julius Caesar proved during ransom negotiations with Cilician pirates in 75 BC, the effect is just as potent when applied to people. 

Here’s a little economic refresher before we dig into the history books: a Veblen good is something that people want more of as its price goes up. Named after Thorstein Veblen, a Norwegian-American economist who introduced the idea of “conspicuous consumption” (i.e. showing off wealth to boost social status), these goods behave differently from most things we buy. The law of demand dictates that when prices rise, demand drops. Veblen goods directly contradict this law. Higher prices make them more desirable because they signal status, which is what’s known as the Veblen Effect. On the flip side, if the price drops, these goods lose their luxury appeal and might still be out of reach for the average buyer.

You’ll typically find Veblen goods in the luxury market – think high-end designer brands, luxury cars, yachts, private jets, expensive jewellery, and top-tier fashion. These aren’t exactly the kinds of items you’d pick up at your average store (remember that article about Hermes and the Birkin bag?), and the back-room, preferred-customers-only approach 100% feeds into the appeal. The more expensive and unattainable Veblen goods are made, the more desirable they become – a concept that flies in the face of the ease of accessibility that is required to sell almost everything else. 

Now that we’re all clear on how to spot a Veblen good, see if some of the elements of the following story don’t sound a little familiar.

Julius who?

In the 1st century BCE, the Mediterranean Sea was plagued by pirates – and not the harmless-mischief-Jack-Sparrow sort either. These pirates were a serious problem that particularly affected the region of Cilicia Trachea, or Rough Cilicia, in southern Anatolia. This area soon became notorious for harbouring (wink wink) seafaring bandits who terrorised the Romans and disrupted trade across the sea.

One of the most famous encounters with these pirates occurred in 75 BCE, when a group of Cilician pirates captured a 25-year-old Roman nobleman en route to study oratory at Rhodes. To them, he was just another young lawyer whose family would no doubt pay a handsome ransom for his return. The name Julius Caesar meant nothing to them – nor would it, as the young Julius was decades away from becoming the Dictator Perpetuo who would be recognised and feared across the vast Roman empire. 

According to the historian Plutarch’s writings, this incident was merely a hiccup for Caesar, but turned out to be a catastrophic mistake for the pirates. From the outset, Caesar plainly refused to act like a captive. When the pirates demanded a ransom of 20 talents for his release, Caesar laughed and told them they had grossly underestimated his worth. He suggested they demand 50 talents instead, which they bemusedly agreed to. Caesar then sent his entourage to gather the money while he remained with the pirates, displaying an audacious level of confidence.

You can imagine how baffled these pirates must have been. Who ever heard of a hostage volunteering to increase his own ransom?

If Plutarch’s writings are to be believed, I can imagine that the pirates were soon ready to give him away for 10 talents, nevermind 20. For almost 40 days of his captivity, Caesar treated the situation as if he were an important guest rather than a prisoner. He ordered the pirates around their own ship and demanded silence when he wanted to sleep. He even sat them down to listen to speeches and poems he composed, brazenly berating them as uncultured when they didn’t respond with satisfactory levels of enthusiasm. He participated in the pirates’ games, but always as if he were the leader and they were his subordinates. Occasionally, he would nonchalantly mention that he would have them all crucified upon his release. The pirates found this amusing, assuming it was just a joke from their overconfident, eccentric captive.

But Caesar wasn’t joking. After 38 days the ransom was paid, and Caesar was released. Despite holding no public or military office, he almost immediately managed to gather a naval force in Miletus and set out to hunt down his captors. So sure were they that he was a nobody who couldn’t pose a threat to them, that he found them still camped at the same island where they had held him captive. He then went on to capture them without much resistance. When the governor of Asia hesitated to punish them, Caesar took matters into his own hands. He personally went to the prison where they were being held and ordered them all to be crucified, fulfilling the promise he had made during his captivity.

The art of self-promotion

Are you starting to see how the story of Caesar and the pirates relates to the Veblen Effect? Instead of panicking or trying to bargain his way out of a sticky situation at a lower price, Caesar did the exact opposite – he argued for the ransom to be raised. By doing so, he essentially turned himself into a Veblen good, not only in the eyes of the pirates, but in the consciousness of the broader Roman senate, through which he would later rise to the very top rank. 

We could argue that Caesar’s higher “price tag”, combined with his haughty attitude, made him seem more prestigious and powerful than he really was at that stage, which ultimately led to the pirates treating him with a mix of respect and bemusement. Just as with Veblen goods, where the allure lies in their exclusivity and high price, Caesar used the same principle to his advantage, turning what could have been a humiliating capture into a demonstration of dominance.

Editor’s note: there seem to be a lot of Caesar types on LinkedIn, which is why this ghost actively avoids that platform.

About the author: Dominique Olivier

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

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

Dominique can be reached on LinkedIn here.

Focus on the Future: SARB’s Annual Report on Organisational Resilience

Jatin Kasan, Partner - Audit: Financial Services & Julian Davids, Director – Banking Risk & Regulation in Forvis Mazars in South Africa
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Focus on the Future: SARB’s Annual Report on Organisational Resilience

Within the banking sector, organisational resilience is becoming increasingly critical in South Africa, as highlighted in the SARB’s Annual Report.

The concept of organisational resilience encompasses a bank’s ability to withstand and adapt to internal and external disruptions while maintaining essential functions and safeguarding its reputation and long-term sustainability.

Moreover, the resilience of banks in South Africa is also being tested by regulatory changes, technological advancements, and shifts in consumer expectations towards ethical and transparent banking practices. As such, integrating organisational resilience into risk management frameworks becomes crucial for maintaining stability and competitiveness in the market. Banks that effectively navigate these challenges are better positioned to attract responsible investors, meet regulatory requirements, and build long-term value for shareholders and society.

These key trends align with the recently released report of the South African Reserve Bank (SARB) which highlighted focus areas for the coming year. As in previous years, the report issued by the Prudential Authority, the supervisory division of SARB, offers critical insights into the regulatory landscape.

It is crucial to dissect and understand this particular focus area, not only from the regulator’s perspective but also through the lens of our clients’ experiences.

From our interactions with clients, it is evident that many banks have been “thrown into the deep end” when dealing with sudden changes. These institutions often require substantial support to navigate these turbulent waters. The SARB’s feedback serves as both a warning and a guide, urging banks to adhere and to be ready for regulatory changes, to prioritise resilience and be prepared.

Our viewpoint aligns with this stance. We have observed that larger banks tend to have more sophisticated resilience mechanisms, while small to medium-sized banks often struggle with resource constraints. It is imperative for these smaller institutions to leverage technology and strategic partnerships to build their resilience. The role of foreign banks also cannot be ignored, although more reliance is placed at a group level, as they bring diverse perspectives and practices that can enhance local resilience strategies.

Our Banking team has been actively working with clients to navigate these complexities. We have found that banks that are forward looking proactively adopt organisational resilience practices often see long-term benefits, including improved risk management strategies, adherence to regulatory policies and procedures and enhanced reputation. However, the journey towards resilience is fraught with challenges, including the need for accurate, relevant and quality data, robust risk assessment models, and clear reporting standards.

While larger banks have well defined oversight structures, covering certain aspects of risk within the organisation, the challenge however remains to enhance organisational reliance by adequately mapping the interconnectedness and interdependencies with third party service providers. It is imperative that banks partner with service providers that have the capabilities and resources to assist with gathering quality and relative data used to inform principles, policies and procedures around organisational resilience.

Vulnerability of mutual banks

The Report highlights several critical concerns regarding mutual banks. It notes that many of these institutions fail to address organisational resilience in a comprehensive manner, leaving them vulnerable in various aspects of their operations. A significant issue identified is the inadequate management of third parties and supply chain risks. The resilience capabilities of these external partners are often not sufficiently integrated into their contractual agreements, leading to potential vulnerabilities.

Additionally, the report points out that mutual banks are lacking in their coverage of concentration risk, which could expose them to significant financial instability if not properly managed.

Market insight emphasised the need for continuous support and guidance. They noted that while the SARB’s report provides strategic direction, banks often require more detailed, practical advice to implement these strategies effectively. This underscores the importance of collaboration between regulators, banks, and advisory firms like ourselves.

As we move forward, commitment should be to helping banks interpret and implement the SARB’s recommendations.

The SARB’s 2023/24 report on organisational resilience provides a roadmap for banks to navigate the evolving regulatory landscape. By integrating resilience into their core operations, banks can better manage risks and contribute to a more resilient future. We are not only here to support our clients but we also challenge them every step of the way, helping them turn regulatory challenges into opportunities for growth and improvement.

Connect with Jatin Kasan on LinkedIn

Connect with Julian Davids on LinkedIn

Ghost Bites (Harmony Gold | Metair | Omnia | OUTsurance | Pan African Resources | Sanlam)

The Finance Ghost
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Ghost Bites (Harmony Gold | Metair | Omnia | OUTsurance | Pan African Resources | Sanlam)

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

Harmony Gold had a great year – but watch that guidance (JSE: HAR)

The next financial year may not be as delightful as this one

Harmony Gold has released results for the year to June 2024. It was a goodie, thanks to a higher gold price and a rough period for the company from which to recover. HEPS increased by 132% to R18.52, which means the share price is currently trading on a Price/Earnings multiple of 8.6x.

This period also saw record operating free cash flow of R12.7 billion, up by 111%. By all accounts, it was a strong year for Harmony and they took advantage of the gold price.

The concern (and perhaps the reason for a 3.5% drop in the share price) is actually around the guidance, with an expectation for FY25 of production of between 1,400,000 ounces and 1,500,000 ounces. They produced 1,561,815 ounces in FY24, so that’s an expected decrease. Then we get to All-In Sustaining Costs (AISC) of between R1,020,000/kg and R1,100,000/kg, which is well above R901,550 for this period. The drop in production would be a factor here in terms of efficiencies.

The group highlights that the FY24 performance benefitted from performance at certain mines that was well ahead of expectations in terms of recovered grades. This is the reason for what seems like conservative guidance. Either way, share prices are forward looking and the market didn’t love this guidance.

Metair’s balance sheet still needs loads of work (JSE: MTA)

I’m not convinced by the share price rally over the past three months

Metair is an incredibly unlucky company. Over the past couple of years, this group really has been through the most in both South Africa and Turkey. The market has jumped in recently, with the share price up by 38% in the past 90 days (but still down roughly 15% for the year). Based on the latest operational update, I’m not sure the GNU-phoria upswing is warranted for Metair.

For example, one of Metair’s key businesses is to supply the South African OEM vehicle production sector. Volumes for the first half of the year fell by 8%, with an expectation for volumes to only normalise in the final quarter of the year. That would be less of a big deal if Metair had a strong balance sheet, but alas the situation on the ground couldn’t be further from that. At the moment, Metair is focusing on bank covenants and a debt restructure plan, so there’s no room for error.

At least in the energy storage vertical, volumes in both Turkey and Romania improved considerably. The South African battery business experienced a dip in volumes, in line with the other businesses in the automotive components vertical.

Yes, there are green shoots, but goodness knows they need them. They need to refinance the South African balance sheet and “ensure a sustainable capital structure” – a process that is rarely painless for shareholders. The debt restructure programme is anticipated to launch in the fourth quarter and progress has already been made with raising bridging loans.

And if that isn’t enough of an overhang for you, Metair is also dealing with the European Commission and concerns around potential anti-trust violations by the Romanian business between 2004 and 2017.

Detailed results are due on 26 September, which will of course include an updated balance sheet and information on what earnings looked like for this period. That could lead to share price volatility, as there really is so much uncertainty here.

Omnia’s capital markets day shows the focus on the mining sector (JSE: OMN)

The contribution to group profits from this sector has increased drastically

A capital markets day is a great opportunity to learn about a listed company, especially when the full presentation has been made available -as is the case at Omnia. You’ll find it here.

It obviously goes into loads of detail about the broader group, with a key takeout being that the investment in the mining segment has been a huge focus area. The contribution to group earnings before interest and taxes (EBIT) from that segment increased from 30% to over 50% between FY18 and FY24.

As interesting as that is, I see we’ve now reached the point where local companies are again feeling brave enough to make reference to the traded multiples of global peers. There are many good reasons, theoretical and otherwise, why South African companies trade at a discount to global peers. And yet, here’s the slide:

It is completely correct by the way that the chart on the right shows that larger companies also trade at larger multiples. A size discount is a real thing, as smaller players are seen as risker and less resilient – and therefore less valuable per unit of profit generated. Omnia cannot make the argument that they should be trading at the same multiple as much larger global companies.

Still, the wind is clearly in the sails of South African management teams once more. That’s a good thing!

Solid double-digit growth at OUTsurance (JSE: OUT)

And the local businesses are where you’ll find the magic

OUTsurance Group is one of those companies that doesn’t seem to get much attention. I don’t think I’ve ever seen it mentioned as a stock pick, yet this is a R76 billion company that has delivered a 16% share price return this year. Not bad at all.

An interesting element of the group is that OUTsurance Group holds 90.5% in OUTsurance Holdings, with regular transactions to flip those minority shareholders up to the group company. It’s probably not a bad thing to have this structure though, as it incentivises those minority shareholders in the right place.

The local performance looks strong, assisted by a favourable claims experience in South Africa and macroeconomic elements like higher interest rates that boosted investment income. OUTsurance SA grew earnings by between 12% and 22%, coming in at nearly R1.9 billion. OUTsurance Life jumped by a lovely 38% to 58%, admittedly off a small base. That business generated R142 million in earnings.

Looking abroad, Youi Group (the Australian business) grew by between 8% and 18%, contributing R1.4 billion in earnings. This is a rare example of success in that market for a South African corporate, with the difference being that OUTsurance grew Youi Group organically from the ground up. This is a vastly better (but slower) approach than buying an existing business in that market and hoping for the best.

OUTsurance is doing it again, this time in Ireland. They are incurring startup losses at the moment, with a loss of R56 million for the period. A successful group like OUTsurance can easily incubate initiatives like these. Again, I far prefer seeing startup losses vs. large, risky transactions.

At overall group level, normalised earnings per share grew by between 15% and 25%. HEPS was up between 14% and 24%, so no concerns there in terms of the extent of normalisation adjustments. Detailed results are due on 17 September.

Pan African Resources has enjoyed the gold price (JSE: PAN)

This mining group has taken advantage of better commodity prices

If there’s one thing we’ve certainly learnt this year, it’s that gold miners don’t always do well when the gold price is up. Sadly, they inevitably all do badly when the price is down. This return profile is why some investors prefer buying the yellow stuff itself vs. the underlying miners.

Thankfully, with a year-to-date share price performance of around 68%, Pan African Resources sits on the right side of that analysis. HEPS will be up by between 27% and 37%, measured in dollars as the group’s presentation currency.

This was driven by a 16.8% increase in revenue, with volumes of gold sold up by 4.9% and the gold price up by 11.3%.

Sanlam signs off on an excellent interim period (JSE: SLM)

HEPS growth of 40% will do nicely

Sanlam has released results for the six months to June. The numbers look really strong, with the net result from financial services (the key measure) up by 14%. This is the best way to gauge performance at Sanlam, as it talks to the underlying businesses like insurance, investment management and structuring. There are a lot of encouraging signs in the numbers, like impressive new business volumes in life insurance and a significant jump in net client cash flows.

The next important measure on the income statement is net operational earnings, with the major difference being the inclusion of investment returns on shareholder capital. This is largely outside of the control of management, as this is where the macro factors like interest rates and equity markets start to affect the returns for financial services groups. The growth rate of 8% in net operational earnings reflects the lower (but still positive) investment returns this year vs. last year.

There are a lot of other complexities in the numbers, including the elements that are captured between net operational earnings and headline earnings. Thanks to higher underlying earnings and fewer shares in issue, HEPS increased by 40%.

Initially, the next bit of disclosure caught me out until I was kindly corrected on X, which is by far the best finance audience you’ll find online. Sanlam disclosed that the return on group equity value per share came in at 9.3%, or 10.7% on an adjusted basis. Their hurdle rate is disclosed as 7.5%, which seemed oddly low to me. I therefore expected to see the current share price of R85.44 representing a discount to the gross equity value per share of R73.41, but instead it trades at a premium. That’s when I should’ve clicked that the return hasn’t been annualised and neither has the hurdle rate, which is highly unusual.

If we just double them for simplicity, the hurdle rate is 15% (which makes far more sense) and Sanlam is achieving a return on group equity value per share that beats most of the banking groups. That’s a lot more believable.

Still, I’m always nervous of buying a financial services group at a premium to equity value. Sanlam is a great business for sure, but the market already knows that.

Little Bites:

  • Director dealings:
    • A director of a subsidiary of KAP (JSE: KAP) – PG Bison, for what it’s worth – sold shares worth R708k.
  • Something seems to be on the boil at Transaction Capital (JSE: TCP), with a cautionary announcement noting that the group has entered into a “series of negotiations” – with no further details given at this time. It’s surely more likely to be a disposal than an acquisition, but time will tell.
  • Metrofile (JSE: MFL) announced that Pfungwa Serima, the group CEO, will be stepping down with effect from 30 September 2024. He has been in the role since February 2016. Thabo Seopa, currently an independent non-executive director, will take over in the CEO role. It’s extremely unusual to see a non-executive taking the top job. Seopa does have loads of relevant experience though, so hopefully he will inject some more life into the digitalisation and evolution of the business.
  • Gemfields (JSE: GML) usually makes quite a song and dance of auction results, but the latest auction seems to have been a less important one as it focused on by-products of the mining process in the ruby business. Auction revenue came in at $2.3 million vs. $1.5 million for the comparable auction in the prior year. All the carets were sold, consisting of sapphire, corundum and a small amount of ruby.
  • Trustco (JSE: TTO) has issued shares to a public shareholder at 36 cents per share. The total raised was nearly R1.8 million, so it’s a modest issuance. The current share price is 40 cents.

Who’s doing what this week in the South African M&A space?

Marylou Greig
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Who’s doing what this week in the South African M&A space?

Exchange-Listed Companies

In May 2022 Sanlam and Allianz announced a joint venture (SanlamAllianz) to house the merger of their African operations – Sanlam’s South African and Namibian subsidiaries were excluded. Sanlam and Allianz agreed on an initial shareholding split of 60:40, subject to post-closing adjustments and the inclusion of the Namibian operations. Sanlam has now integrated its Namibian business into SanlamAllianz, as reported in its interim results released this week, at an initial valuation of R6,2 billion. To maintain the split following the incorporation of the Namibian operations, for which it will receive a cash consideration of R2,5 billion, Sanlam will subscribe for additional shares in the joint venture. Allianz retains the option to raise its stake in SanlamAllianz to 49% within six months of the completion of the Namibian transaction.

In another corporate action Sanlam subsidiary Sanlam Life will acquire a 25% interest in African Rainbow Capital Financial Services (ARC FSH) for a cash consideration of R2,41 billion. The deal with ARC FSH, the investment holding company for all the financial services investments of the Ubuntu-Botho Investments Group and Sanlam’s strategic empowerment partner, will see Sanlam Life dispose of its 25% interest in ARC Financial Services Investments in exchange for the issue by ARC FSH of shares to the value of R1,49 billion. Sanlam will subscribe for further ARC FSH shares valued at R92 million in cash making up the 25% stake. Sanlam will pay African Rainbow Capital an outperformance fee based on the extent to which the value of ARC FSH’s investment in Tyme Investments Pte (Asia), as at 30 June 2028, exceeds an annual hurdle rate of 14.64%. This is capped at R70 million.

Pepkor has entered into an agreement with Shoprite to acquire Shoprite’s furniture business operating more than 400 stores in South Africa, Botswana, Lesotho, Namibia, Eswatini and Zambia. The stores will be combined with Pepkor Lifestyle (previously JD Group) which operates 900 stores in the same countries (except Zambia). The proposed transaction includes the Shoprite Furniture credit loan book and related insurance cell captive agreements as well as the OK Furniture and House & Home retail brands. The deal will enable key synergies and efficiencies to be unlocked within the supply chain, logistics and financial services operations. The purchase consideration which will be determined at the close date of the transaction represents c. 4% (c.R3 billion) of Pepkor’s market capitalisation and will be settled in cash.

Earlier in March this year, Takealot, Naspers’ e-commerce business in South Africa, announced it was looking to offload its fashion retailer Superbalist amid growing concerns of increased competition from Shein and Temu. This week Takealot sold the business to a consortium of retail and private equity investors led by Blank Canvas Capital for an undisclosed sum. The deal will support Suberbalist’s ongoing growth while allowing the group to focus efforts on expanding Takealot and Mr D. Takealot will however, continue to provide warehousing and logistics services to Superbalist through a multi-year service agreement.

Burstone has entered a strategic partnership in Europe with Blackstone, an American alternative investment management company which will see a scaling of the group’s international fund and investment management strategy. Blackstone will acquire, at a 3.1% discount to gross asset value (11.7% discount to NAV), an 80% stake in Burstone’s pan-European Logistics platform for a €1,02 billion (R20 billion) purchase consideration. Burstone will reduce its stake by 63% (valued at €644m/R12,69 billion), retaining a 20% stake and will continue to manage the portfolio. The balance of 17% will be acquired from unrelated parties. Together the groups will expand the portfolio, targeting industrial and logistics properties across Europe. In addition, Burstone’s Australian Irongate joint venture has announced a new industrial joint venture in Queensland with a global alternative asset management firm (the name of which was not disclosed) backed by an initial A$200 million (R2,4 billion) equity commitment. Burstone is also currently negotiating to acquire a 25% co-investment stake in a €170 million (R3,4 billion) German light industrial platform. Post the successful implementation of these transactions, Burstone’s assets under management are expected to increase 32% and its loan-to-value ratio decrease 12.5% to 33.5%. Burstone will also increase its dividend payout ratio from 75% to between 85% and 90%.

The SPAR will exit the loss-making Polish business, the assets of which include 200 retail stores, three distribution centres and one production facility. The exit will be at great expense to the company, which will recapitalise operations at a cost of R2,7billion (c.12% of Spar’s current market capitalisation), the majority of which will be for the settling of funding debt. The buyer, Specjal, a Polish retailer is, according to the company statement, better placed to turn the business around and will pay Spar R185 million for the assets.

Nampak has disposed of the businesses of manufacturing, selling and supplying of plastic drums and of HDPE and PET bottles and jars. The disposal of the Drums Business and Liquid Business is in line with the implementation of Nampak’s asset disposal plan announced in August 2023. Financial details of the transactions were not disclosed.

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

Weekly corporate finance activity by SA exchange-listed companies

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

Trustco has issued 4,936,193 shares to an unnamed public shareholder at 36 cents per share – representing the 30-day VWAP of 6 August 2024. The shares, valued at R1,78 million, were issued under the general authority granted to the company by shareholders at the 2023 Annual General Meeting. Following the listing of the new shares Trustco has 992,174,774 shares in issue.

The week was all about the repurchase of shares:

During the period January to end-June 2024, Shoprite has repurchased 215,172 shares at an average price of R229.23 per share for an aggregate R49,5 million. Since the inception of the Group’s share buy-back programme in 2021, a total of 8,6 million shares have been repurchased to the value of R1,6 billion.

In line with its share buyback programme announced in March, British American Tobacco this week repurchased a further 433,413 shares at an average price of £28.48 per share for an aggregate £12,34 million.

In terms of its US$5 million general share repurchase programme announced in March 2024, Tharisa has repurchased a further 10,000 ordinary shares on the JSE at an average price of R19.41 per share and 136,570 ordinary shares on the LSE at an average price of 80.78 pence. The shares were repurchased during the period 26 – 30 August 2024.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 26 – 30 August 2024, a further 2,246,844 Prosus shares were repurchased for an aggregate €74,56 million and a further 188,720 Naspers shares for a total consideration of R687,18 million.

Two companies issued profit warnings this week: Truworths International and Sibanye Stillwater.

During the week, five companies issued cautionary notices: Finbond, Burstone, The Spar, Conduit Capital and Transaction Capital.

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

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