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En Commandite Partnerships: A vehicle worth considering?

James Moody and Mikayla Barker
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En Commandite Partnerships: A vehicle worth considering?

Structure Overview

South Africa is often referred to as the business gateway to the African continent due to its strategic location, advanced infrastructure, diverse economy, regulatory environment and skilled workforce. Parties looking to set up an investment structure in South Africa to tap into this market generally have a choice between: (i) incorporating a limited liability private company; or (ii) setting up a partnership, with the latter rising in prominence over the past decade.

The two main categories of partnerships are general (en nom collectif) and extraordinary partnerships. Extraordinary partnerships can further be divided into anonymous and en commandite partnerships (ECPs), with both sub-categories possessing unique characteristics, and catering to different business needs and strategic goals. This article will focus on the role ECPs can play in unlocking capital in South Africa for deployment into Africa.

En Commandite Partnerships

ECPs are carried on by two or more partners, comprising (i) a general or managing partner (GP) which is the named partner, responsible for the management of the partnership; and (ii) one or more limited partners (also known as commanditarian or en commandite partners), whose name(s) is/are not disclosed (LPs). LPs are, generally, silent partners who contribute a fixed sum of money to the partnership, on condition that they receive a share of the profit (to the extent that there is a profit); but in the event of loss, they are liable to their co-partners only to the extent of the fixed amount of their agreed capital contribution.

ECPs are widely used in South Africa, due to their unique ability to combine the expertise and management skill of GPs with the capital and limited liability of LPs. Entrepreneurs can utilise ECPs to attract passive investors looking to generate returns without being actively involved in the management of the business, and who wish to remain anonymous. In return for their investment, the passive investors can leverage off the expertise of the general or managing partner to help generate economic
returns.

Considerations before creating an ECP

While offering numerous benefits, ECPs also pose some potential drawbacks. Understanding these differentiators is crucial for investors when deciding on the appropriate structure to pursue. The table below highlights some of the benefits and potential drawbacks associated with ECPs.

Typical example of an ECP structure used for an investment fund

Each of the individual parties outlined in the diagram below play an integral part in the successful implementation of an ECP structure for a fund:

1.Fund set up as a limited liability partnership (ECP), but can also be set up as a trust.
2.GP Co sets up the fund (with GP Co having potential empowerment credentials if required to benefit using flow-through principle).
3.Manco appointed by the GP Co as the investment adviser to the Fund. LP appoints an investment committee (IC) to approve investment decisions.
4.Investors are LPs to the Fund. Investors contribute capital or assets to the Fund.
5.GP Co is the GP, and the vehicle earns the carried interest (which is essentially the profit share for the GP’s performance). The carried interest is then distributed to Manco, to the extent that Manco is a shareholder in GP Co.

ECPs play a key role in corporate finance by providing a flexible structure for capital raising, profit-sharing and risk management, with a reduced administrative burden.
In practice, it has been seen that some investors have recently favoured the conversion of partnerships into permanent capital vehicles (PCVs), allowing an unlimited time horizon for investment and realisation without pressure to realise assets within a certain period.

In the current landscape, LPs continue to benefit from tax efficiency, risk mitigation, and access to specialised expertise. This makes ECPs a valuable tool for businesses
seeking capital for strategic initiatives and growth.

By leveraging the advantages of ECPs effectively, businesses can navigate the complexities and demands of the modern business environment while generating value for various stakeholders.

A trusted advisor with relevant practical experience is a crucial link in helping entrepreneurs and investors navigate the permutations of an ECP structure to ultimately maximise utility for all parties involved.

1 Comprehensive Guide To Dividends Tax (Issue 4), p 50, SARS.

James Moody and Mikayla Barker are Corporate Financiers | PSG Capital

This article first appeared in DealMakers AFRICA, the continent’s quarterly M&A publication.

DealMakers AFRICA is a quarterly M&A publication
www.dealmakersafrica.com

Sustainable development funding as a catalyst for future investments in South Africa

Thulisile Buthelezi and Ayavuya Madolo
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Sustainable development funding as a catalyst for future investments in South Africa

“The 2030 Agenda for Sustainable Development1, adopted by all United Nations (UN) Member States in 2015, provides a shared blueprint for peace and prosperity for people and the planet, now and into the future. At its heart are the 17 Sustainable Development Goals (SDGs), which are an urgent call for action by all countries – developed and developing – in a global partnership. They recognise that ending poverty and other deprivations must go hand-in-hand with strategies that improve health and education, reduce inequality, and spur economic growth – all while tackling climate change and working to preserve our oceans and forests.”

This is the opening paragraph about SDGs on the UN’s website. What captures one here is the fact that social welfare and looking after the environment can go hand in hand with economic growth, which is exactly why SDG funding might be the next frontier for merger and acquisition (M&A) financing in South Africa.

Let us look at some of the benefits of Sustainable Development Funding:

  1. Low interest rates
    Similar to an impact fund, a sustainable development fund’s mandate is to leave the world a better place; therefore, the interest asked on the capital deployed is very competitive – more than that of traditional banks and PE firms. Interest can be between five to 10 percent, with appetising incentives, such as the reduction of the interest when certain sustainable development goals are met.
  2. Longer payment holidays
    In the pursuit of reducing carbon emissions, projects usually targeted by sustainable development funds are often green energy projects. Most green energy projects are normally greenfield projects and, therefore, capital raised for these projects may enjoy longer payment holiday periods. The holiday ranges from 24 months to 60 months, depending on the project. This will assist the entity to invest their earnings back into the project, to improve the chances of success.
  3. Incentives for repaying the funds quickly
    Because sustainable development funds need to support as many projects as possible, recycling money as quickly as possible is imperative, which is why they offer an incentive to projects that can return the capital raised in a shorter period than agreed. Such incentives include reducing or removing the interest from the capital asked.

This type of funding removes the traditional capital raising barriers that banks and PE firms struggle with. With the Government of National Unity (GNU) now in place, it will be interesting to see how the Democratic Alliance (DA) will use this position to promote sustainable development goals without rattling the African National Congress (ANC)’s cage on redress policies such as Broad-Based Black Economic Empowerment (B-BBEE) and Affirmative Action. The DA has always hailed the narrative that sustainable development goals should replace redress policies, so perhaps the marriage between the two parties can produce a merged initiative to promote sustainable development goals and broad-based black economic empowerment alike.

Sustainable development funding can revolutionise the mergers and acquisitions landscape by aligning financial returns with positive social and environmental impacts. Integrating SDG funding into M&A strategies in South Africa can attract international investors seeking ethical investments, enhance corporate reputation, and foster long-term sustainability. Embracing SDG principles can drive innovation, create jobs, and build resilient communities, ultimately contributing to a more inclusive and prosperous economy.

1 https://sdgs.un.org/2030agenda

Thulisile Buthelezi serves as Secretary of the Policy & Research Committee and Provincial Chairperson (KZN) and Ayavuya Madolo is the National Deputy Chair | BMF Young Professionals.

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

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

Ghost Bites (Cashbuild | SPAR | Telkom | The Foschini Group | Woolworths)

The Finance Ghost
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Ghost Bites (Cashbuild | SPAR | Telkom | The Foschini Group | Woolworths)

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

The worst should now be over at Cashbuild – I think (JSE: CSB)

I’m keeping my long position in the hope that interest rate cuts will be a further boost

After the market recently dished out an absolute gift in the form of a sell-off in Cashbuild down to R142 per share, it has recovered to trade at R160 per share. I bought that dip and I’m obviously thrilled with how it turned out, with the decision now being whether to hold on for more. I think that an easing of local interest rates will do wonders for Cashbuild’s business, with the numbers for the year ended June hopefully reflecting the end of the bad times for the group.

It was another tough period, with HEPS down 22% despite revenue growing by 5%. The final dividend fell by 29%, so that’s a nasty year-on-year trend.

Importantly, this is a 53-week result compared to a 52-week period. If the extra week is stripped out, revenue was up just 3% and HEPS fell by 38%. That’s the best way to look at this result.

Although sales volumes were up 3%, with a small boost from inflation to take like-for-like sales growth to 4%, this is again on a 53-week basis. With that stripped out, volumes would likely be slightly positive. My thesis is that lower inflation and hopefully a drop in rates will improve sales volumes.

Gross profit margin is a concern, having dropped from 25.4% to 24.7%. That trend needs to improve, obviously. The drop in margin is why operating profit fell by 16% (excluding impairments) despite operating expenses only increasing by 4%.

This is an important lesson in comparing the growth in operating expenses to the growth in revenue. The growth rates might look similar, but major changes in gross profit margin will have a big impact on operating profit.

Looking at the balance sheet, the 37% decrease in cash and cash equivalents is largely due to a cut-off issue, with June supplier payments reflecting in this period vs. the comparable period when the suppliers were paid after year-end. In retailers, cut-off is an important point that makes working capital ratios difficult to work with.

The group helpfully highlights that stock levels increased by 5%, which seems reasonable relative to revenue.

For the first six weeks of the new financial year, sales revenue is up by 5%. Although that may sound like there’s no real improvement vs. the full year, you have to remember that the 5% growth in FY24 included an extra week of trading. I’m therefore not unhappy with the recent growth rate, although it obviously needs to move higher for this investment to work out well.

Management’s narrative is one of caution, with an expectation for trading conditions to remain challenging.

SPAR finds a buyer for SPAR Poland – but it comes at a cost (JSE: SPP)

Add this one to the list of failed international moves by local retailers

When it comes to SPAR Poland, I guess it’s fair to say that they got unlucky with COVID. Although I don’t think many people would gush over the previous SPAR management team, it’s also true that a risky international deal becomes an impossible task when an unforeseeable pandemic arrives.

Thankfully, this nightmare is always over, thanks to the incredibly named Przedsiebiorstwo Produkcyjno Handlowo Uslugowe Specja Spólka z o.o. coming in as the acquirer of SPAR Poland. If it’s ok with you, I’ll just refer to that company as the buyer.

The buyer is Polish (in case that wasn’t super obvious) and has been in operation since 1990. They will need all that experience, since SPAR Poland lost R813 million in the six months to March and has a negative net asset value.

At first blush, it looks incredible that Spar managed to secure a wonderful price of R185 million for the business, though it does have the potential to be adjusted downwards if more partner stores leave the network. Then, as you read further, you get to the bad news: Spar first needs to recapitalise the company to bring the net asset value to zero, plus they must contribute well over R1 billion to cover expected operating losses.

In other words, they aren’t just giving it away – they are actually paying someone to take it! Incredible. The maximum exposure for SPAR is nearly R3.5 billion. The final amount will vary obviously depending on all sorts of things, with the plan being to bring nearly R2.0 billion of Polish debt back to South Africa and refinance it here (!) and for R566 million to be funded from existing sources into the Polish business.

Unsurprisingly, the share price took a knock of 6.8% on the day.

What. A. Disaster.

A step forward for Telkom’s disposal of Swiftnet (JSE: TKG)

The Competition Tribunal has given the green light

In corporate dealmaking, a deal is never done until the money changes hands. When conditions precedent are still outstanding, anything is still possible – especially when it comes to regulators, who can be unpredictable.

There would therefore have been a collective sigh of relief at the news that the Competition Tribunal has approved the disposal of Swiftnet. Telkom is selling the business to a consortium of an Actis infrastructure fund and Royal Bafokeng Holdings.

Although there are further remaining conditions, this is a big milestone for the deal.

The Foschini Group is fully focused on margins (JSE: TFG)

When capital is expensive, retailers tend to avoid chasing market share at all costs

The Foschini Group has released a trading update dealing with the 21 weeks to 24 August. When the highlights section talks about gross margin as the first few points and completely ignores sales growth, you know what’s coming.

Group sales fell by 3.5%, with TFG London as the major laggard with a 12.7% decline. TFG Australia fell 5.5% and TFG Africa was down 1%. Those percentages are based on the offshore businesses measured in rands. Bash was the sales highlight, with turnover up 42.7%.

That sounds poor of course, with the saving grace being that group gross margin expanded by over 100 basis points, with a 200 basis points expansion in TFG Africa and record gross profit in that business, up 4% on the prior period. Despite the sales pressure in TFG London and TFG Australia, they even managed to grow gross margin there.

To further explain the trend, the announcement notes that the base period included a major inventory clearance initiative. That would’ve boosted sales and impacted gross margin, so that explains some of the move in this financial year on both those lines.

We will have to wait until 8 November to get the detailed interim results. Given the gross profit performance and some of the expense control we’ve seen at other retailers, it probably won’t be a shocker at profit level. Still, this isn’t what shareholders want to see, as lack of sales growth is always a worry.

Woolworths Food is carrying the team (JSE: WHL)

After much initial progress, the rest of the business has stalled

The Woolworths share price is down more than 15% this year, a particularly unfortunate performance compared to how “SA Inc.” has performed in the new political landscape. Sentiment is great and everything, but a company needs to deliver growth in order to see the share price go the right way. With HEPS from continuing operations on a 52-week basis down by 16.8% and the dividend down 15.2%, growth isn’t the theme here. The increase in net debt from R2.5 billion to R5.6 billion isn’t good news either.

Ironically, more positive sentiment towards South Africa over the past decade or so might have saved Woolworths a lot of heartache in Australia and New Zealand. Just when investors thought the worst was over with David Jones out of the system once and for all, things have gotten bad for Country Road Group. This is the business that Woolworths deliberately held onto in the region, yet sales have dropped 8% for the year on a comparable 52-week basis. In comparable stores, sales fell by 13.1%. They point to the high base to help explain this, but the two-year growth stack is disappointing anyway. And on top of this, gross margin deteriorated by 230 basis points to 60.3%. Despite best efforts to control expenses, operating profit margin collapsed from 12.4% to 4.6% and profits were down 66%. Ouch.

Focusing now on the local businesses, it was Woolworths Food that tried to save the day. When you’re looking at the 11.2% growth in sales for Woolworths Food, remember that this includes the 53rd week of trading as well as the acquisition of Absolute Pets in the second half. On a 52-week basis, sales grew 9% overall and 6.9% in comparable stores. Price inflation was 7.9%, suggesting that volumes remained a struggle for the full year. Woolworths goes on to confirm that the volumes trend turned positive in the second half, so that’s encouraging at least. Another encouraging element is that Woolworths Dash grew 71.2%, so they are clawing back some lost ground in on-demand shopping. Perhaps more importantly, gross margin increased by 30 basis points to 24.7%, which I think is impressive given how much more competitive they have needed to become on price. Operating profit margin increased from 6.9% to 7.1% and adjusted operating profit grew by 12.3%.

We now arrive at Fashion, Beauty and Home (FBH), the part of the business that showed great promise under new leadership. Things have gone wrong with that recovery, with sales down 0.4% for the 52 weeks and 1.3% on a comparable store basis. With price inflation of 8.9%, this means that volumes were firmly in the red. They managed to maintain gross margin at 48.5% at least. They also kept expense growth to just 2.6%, but the reality is that a business cannot succeed through efficiencies alone. The lack of top line performance meant a 9.9% drop in adjusted operating profit, with operating profit down from 13.2% to 12.0%.

It’s a bit sad when one of the major highlights is Woolworths Financial Services, where profit after tax jumped by 69.3%. Although the book was a bit smaller, there was an improvement in the impairment rate.

Unfortunately, the outlook section of the announcement doesn’t suggest that a quick recovery is around the corner. By afternoon trade, Woolworths was down 4.7%.

Little Bites:

  • Director dealings:
    • Michael Georgiou of Accelerate Property Fund (JSE: APF) sold shares worth nearly R81 million in an off-market trade that was part of a lending arrangement. I suspect that hurts.
  • Titan Premier Investments (of the Christo Wiese stable) has unwound its collateral arrangement on certain funding positions and now has 5.34% in Pepkor (JSE: PPH) once more.

Ghost Wrap #79 (CA Sales Holdings | RCL Foods + Rainbow | Motus | Bidvest)

The Finance Ghost
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Ghost Wrap #79 (CA Sales Holdings | RCL Foods + Rainbow | Motus | Bidvest)

Listen to the show here:

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

This episode covers:

  • CA Sales Holdings has a great business model that is still working beautifully.
  • RCL Foods and Rainbow Chicken have reported numbers together for the last time, which gives us an opportunity to reflect on exactly why the unbundling made sense.
  • Motus is struggling at the moment and the market doesn’t seem to be punishing the share price, presumably because of the expectation of interest rate cuts.
  • Bidvest reminds us of the value of diversification, with five out of seven divisions in the green and a reasonable overall result at group level.

Ghost Bites (AfroCentric | Ascendis | Aspen | Motus | Pepkor | Shoprite)

The Finance Ghost
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Ghost Bites (AfroCentric | Ascendis | Aspen | Motus | Pepkor | Shoprite)

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

AfroCentric didn’t escape the red day on the JSE despite growing earnings (JSE: ACT)

Earnings may be up, but revenue growth is modest

AfroCentric has released its earnings for the year ended June 2024. Revenue only increased by 0.4%, with this mainly due to the discontinuation of the surgical business. Still, headline earnings increased by 54.1%, so there’s an unusually shaped income statement for you. On a HEPS basis, the increase of just 11%, as the number of shares in issue has increased substantially after the deal with Sanlam.

The synergies from the Sanlam deal will be felt mainly in the Corporate Solutions Cluster, where AfroCentric has made progress in selling into Sanlam channels. Lovely as that is, it’s still small in the group context. The biggest operation is the Services Cluster, where you’ll find the medical scheme administration businesses and a revenue growth rate of 6% in the past year. The Pharmaceutical Cluster is also important and is facing challenges in profitability, with operating profit growth of 7.3% but some major underperformers within the cluster that are stopping this from being better.

Hopefully, the synergies with Sanlam will start to pick up steam.

Ascendis is finally profitable – well, mostly (JSE: ASC)

With the delisting off the table for now, it’s unclear what the future will hold

Ascendis has been the topic of quite the regulatory tussle this year, with the Takeover Regulation Panel at the centre of the debate. The potential delisting seems to be dead for now, so there’s no offer left to fight over. Instead, investors have to focus on the underlying business and whether they want to own it.

Despite a decrease in revenue, Ascendis managed to swing from losses to an operating profit of R46.4 million. Although HEPS from total operations came in at 1.1 cents, HEPS from continuing operations was a loss of 1.4 cents (admittedly a much better situation than a loss of 41.5 cents in the comparable period).

The company is now switching to an investment holding company structure, with ACN Capital (the Carl Neethling entity) appointed as the investment manager. The tangible net asset value per share of 91 cents is likely to be the important metric going forward, with the share price currently at 71 cents.

Apart from some strong words aimed at the regulators and activist shareholders, the announcement also raises a concern around group cash flow. Although they have no external debt, the cash position of the group deteriorated during the year.

The market hated the Aspen numbers (JSE: APN)

Watching a >R100bn market cap company take a 13% bath is quite something

The year-to-date Aspen share price now looks like the elevation profile of someone jumping off the side of a mountain:

As they say, the bulls take the stairs up and the bears take the elevator down. That’s a huge one-day move of 13%, with this large cap being thrown around like a rag doll on the market.

The market didn’t care much about Aspen’s news of its highest-ever normalised EBITDA for H2 in the second half of the year. The market also didn’t focus on the cash conversion ratio of over 100%, or the news of manufacturing contracts exceeding guidance.

No, the market was only interested in normalised HEPS being flat for the year, with HEPS down 3% without those adjustments. Even the dividend increasing by 5% couldn’t save the story, as investors panicked about lack of growth in earnings.

Pressure on gross profit margin didn’t help, with revenue up by 10% and gross profit up by just 4%, impacted by sales mix with more focus on manufacturing revenue. This was enough to help Aspen tread water based on growth in expenses and a flat move in net financing costs, but the market wanted more than that.

Investors do seem to have glossed over the impact on margin of the Heparin inventory being cleared. They unlocked a lot of operating cash flow through this process (up 13%) and managed to do so without causing a negative year-on-year move in earnings. The manufacturing segment saw gross margin decrease from 11.4% to 9.2% and this will clearly be a focal point for the market going forward.

On normalised HEPS of 1,492.1 cents, the share price of R206 is a Price/Earnings multiple of 13.8x. It feels like this drop might have been overdone, so keep an eye on this for short-term long opportunities to play the closing of the gap.

Motus is a tale of thin margins and expensive debt costs (JSE: MTH)

The combination isn’t going well at the moment

Motus has released its financials for the year ended June 2024. With revenue up 7%, you would hope that the rest of the income statement looks decent. Alas, operating profit fell 4% and HEPS was down by a rather ugly 28%, leading to the dividend for the year dropping from 710 cents in 2023 to 520 cents in 2024.

The Retail and Rental division is over 80% of group revenue before eliminations and that business saw operating margin decline from 3.0% to 2.8%. A 20 basis points move on such tiny margins is material. Import and Distribution is the next largest division in terms of revenue and margins there fell from 5.8% to 4.0%. The 20 basis points improvement in Aftermarket Parts from 8.4% to 8.6% wasn’t enough to offset this.

Sadly, operating profit is only one part of the story in a business that runs with structurally high levels of debt. Finance costs jumped significantly from R1.4 billion to R2.3 billion, which is a very large number when operating profit was R5.5 billion. More importantly, operating profit dipped from R5.7 billion to R5.5 billion, so finance costs increased substantially at a time when operating profit fell.

The impact was most severe in Import and Distribution, which saw profit before tax plummet spectacularly from R1.14 billion to just R95 million.

Automotive groups are pretty desperate for interest rates to drop. Not only does it improve customer affordability and thus put less pressure on gross margins, but it helps reduce the costs of their own debt.

I genuinely don’t know how the share price has managed to behave like this despite the negative move in the cycle:

Pepkor: less building materials, more furniture (JSE: PPH)

The group clearly sees value in Shoprite’s furniture business

Pepkor has taken a couple of major steps in changing the shape of its group.

One of them we’ve known about for a while, which is the disposal of The Building Company to Capitalworks and the company’s management in a deal worth R1.2 billion. This is a classic management buyout structure in which a private equity player puts in the balance sheet for the deal.

The other is hot off the press, with further details below.

Before we get to the new deal, the news on the disposal of The Building Company is that the Competition Tribunal has approved the transaction, so the closing date is 30 September and Pepkor can get its hands on the money.

That’s just as well, because Pepkor is buying the furniture business out of Shoprite. As I cover further down in the Shoprite section, the business isn’t exactly a fast growing operation. With sales growth of 2.3%, Pepkor will need to really sweat this furniture asset to get real benefits for shareholders. The good news is that they are buying it for its net asset value, so Shoprite is happy to pass the baton to Pepkor without asking for any goodwill on top.

The deal will be settled in cash and represents around 4% of Pepkor’s market cap, so they aren’t exactly betting the farm. That’s just as well, because I don’t think this is the most lucrative deal around. Pepkor reckons that they can integrate the business with other Pepkor businesses focused on complementary categories.

With a 2.6% drop in the Pepkor share price, the market didn’t exactly pop the champagne at this news.

A strong top-line result at Shoprite didn’t quite convert this time (JSE: SHP)

And on a red day for the broad market, Shoprite’s share price was punished

A 5.9% decline in Shoprite’s share price is a big move, especially in one day. Although the JSE was down 1.6% for the day (and this is important context), it still tells us that the market didn’t love the results from Shoprite.

The problem wasn’t in sales growth, with group sales up by 12%. Supermarkets RSA grew 12.3%, Supermarkets non-RSA managed 6.1% and other operating segments grew by a significant 21.1%. Furniture could only achieve 2.3%, with more on that later.

We need to look deeper into Supermarkets RSA, with Checkers and Checkers Hyper up by 12.3%, Shoprite by 10.3% and Usave by 13.2%. Once again, the group has done a lovely job of resonating with customers of all income levels. This is yet another warning to those who are bullish on the Pick n Pay turnaround: it’s going to be really tough when you’re in the same market as Shoprite’s businesses.

And in case you’re curious, which you probably are, the turquoise scooter army delivered sales growth of 58.1% in Sixty60.

Despite the great sales growth, Shoprite’s full-year dividend only increased by 7.4%. This is in line with the increase in diluted HEPS from continuing operations, which excludes losses in various underlying African businesses that were recognised as discontinued operations in this period. On such a demanding Price/Earnings multiple, this wasn’t enough for the market and the share price took a knock as growth expectations were moderated.

There’s a much more important discontinued operation coming, with Shoprite finally making the decision to sell the furniture business. I think this is absolutely the right decision, as this is a slow-growth business in an industry that is all about credit sales rather than pushing high volumes, so it’s a poor strategic fit with the rest of the Shoprite group. OK Furniture and House & Home will be sold to Pepkor at a price equal to net asset value. I’ve covered this in more detail in the Pepkor section in this edition of Ghost Bites.

Back to the broader Shoprite group, the store footprint increased by 343 stores to 3,639 stores. This intensive expansion programme is another reason why the furniture business had to go, as they need the capital elsewhere to earn better returns. As mentioned earlier, the furniture division grew sales by just 2.3% in this period, so Shoprite shareholders won’t be sad to see it go.

Due to the mix effect of underlying divisional growth, gross margin decreased by 10 basis points to 24.0%. Importantly, Supermarkets RSA achieved a small increase in gross margin.

Trading profit increased by 12.4% and trading profit margin moved slightly higher from 5.5% to 5.6%. At this point, you’re probably wondering where the catch was that saw such subdued growth in the dividend vs. trading profits.

The problem is that in their infinite wisdom, IFRS accounting standard setters decided that lease costs should be in net finance costs rather than operating costs. With an increase of 17.3% in this metric (and 17.7% in finance charges on borrowings), this is what went wrong between trading profit and HEPS:

What this really shows is the inflationary pressure in the cost base, as well as how expensive money is at the moment. A drop in interest rates will help here, as will an even slicker group that allocates capital into the best opportunities.

HEPS for the period was 1,250.2 cents, so the share price after the sell-off reflects a Price/Earnings multiple of 23.6x. Shoprite is a terrific business, but at some point this multiple is simply too high for the realities of growth in South Africa.

Little Bites:

  • Director dealings:
    • An associate of a director of Afrimat (JSE: AFT) sold shares worth R6.7 million.
    • Two directors of different associates of Blue Label Telecoms (JSE: BLU) sold shares in the company worth a total of R330k.
    • An associate of the CEO of Sirius Real Estate (JSE: SRE) bought shares in the company worth £7.9k.
    • It feels like it’s been a while, but Des de Beer is buying more shares in Lighthouse Properties (JSE: LTE) – this time it’s a small purchase though (by his standards), coming in at R74k.
  • There’s a buzz in the market around potential corporate activity at Caxton (JSE: CAT), with Peregrine announcing that it has acquired shares and now has a 9.61% stake in the company.
  • Orion Minerals (JSE: ORN) has completed the confirming drilling programme at Okiep Copper Project, confirming the quality of the drilling database that was inherited from Newmont and Gold Fields. The next step is to update the Mineral Resource estimate.
  • Coronation (JSE: CML) has received SARB approval for the special dividend, with a payment date of Monday 16th September to shareholders who are on the register as at Friday 13th September. It’s quite funny that Friday the 13th effectively brings the entire SARS fight to a close, with the missed dividend being paid.
  • Shareholders in NEPI Rockcastle (JSE: NRP) should note that the circular for the scrip distribution alternative has been made available at this link.
  • Omnia (JSE: OMN) announced that Global Credit Rating Company has affirmed the long-term issuer rating of A+(ZA) and short-term issuer rating at A1(ZA). Importantly, there is a stable outlook as well.
  • Insimbi Industrial Holdings (JSE: ISB) announced that the clever reverse asset-for-sale transaction has now been completed. Basically, they sold off businesses and executed share buybacks to help the buyers pay for them.
  • Oando PLC (JSE: OAO) released some very angry SENS announcements presumably aimed at the Nigerian press and speculation around various allegations related to the company. I don’t think I’ve ever seen such a strongly worded statement, so there’s either a genuine smear campaign out there against the company or there really is something to worry about. Given the wording of the announcement, I lean towards the former.

Ghost Bites (Bidvest | Burstone | CA Sales Holdings | MAS | RCL Foods + Rainbow | Sanlam + ARC | Sibanye-Stillwater | Sun International | Trellidor )

The Finance Ghost
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Ghost Bites (Bidvest | Burstone | CA Sales Holdings | MAS | RCL Foods + Rainbow | Sanlam + ARC | Sibanye-Stillwater | Sun International | Trellidor )

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

Some challenges at Bidvest, but earnings are still up (JSE: BVT)

Five of the seven divisions reported profit growth

For the year ended June 2024, Bidvest achieved revenue growth of 6.7%, trading profit growth of 8.5% and HEPS growth of 6.6%. That’s not going to go down as their best period in history, but the direction of travel remains the right one. Note that normalised HEPS was only up by 4.3%, so this was a rare example of Bidvest not delivering an inflation-beating return for the year. The total dividend for the year was also up by 4.3%.

At least cash generated from operations has a double-digit story to tell, up 15.3%. With Return on Funds Employed of 37.3%, you can still feel pretty good about Bidvest management allocating that cash into the business.

With five out of seven divisions reporting profit growth and four of them achieving double digits, the immediate thought is of course where the problems were. Commercial Products faced a high base effect in the renewables market and Automotive dealt with a declining vehicle market.

This gives you an idea of the level of diversification in the group, both geographically and in terms of segments:

Burstone moves ahead with the Blackstone deal (JSE: BTN)

The partnership is focused on the European logistics portfolio

Burstone has announced a rather interesting deal related to the Pan-European Logistics portfolio. At a price that implies a 5.6% net initial yield, global investment group Blackstone will take an 80% stake in the portfolio. The key here is that Burstone will continue to manage the portfolio, so this flicks them neatly into more of a capital-light strategy.

Blackstone is getting it at a good price, representing an 11.7% discount to the FY24 net asset value. In return, Burstone shareholders will see the loan-to-value of the fund drop to 33.5% thanks to immediate cash proceeds to be received by Burstone. With the balance sheet in better shape, the dividend payout ratio will increase from 75% to between 85% and 90%.

This approach of managing portfolios with co-investors is now the focus at Burstone, with initiatives underway to do much the same thing in Australia and South Africa. They are also looking at another opportunity in Germany, so it doesn’t look like Blackstone has exclusivity over that region with Burstone.

Combining balance sheet exposure and management fees is a way to juice up the return on equity over time for Burstone shareholders. You also see this strategy playing out at Stor-Age, another JSE-listed REIT, as well as hotel groups internationally.

The market seemed to like it, with the share price closing 5.5% higher.

CA Sales Holdings marches on (JSE: CAA)

The business model is working

CA Sales Holdings is up 27% this year and 63% in the past year, with the market paying an increasing amount of attention to this story. Through a combination of organic growth strategies and bolt-on acquisitions, CA Sales Holdings is doing a great job of participating in the African growth story across various markets.

For the six months to June, revenue increased by 9.2% and HEPS was up by 19.2%, so that’s a great outcome. Although operating profit fell by 21.1%, a closer read reveals that this was due to a bargain purchase gain in the previous year (the opposite of goodwill – i.e. buying a business at a price below its net identifiable assets) that didn’t repeat in this year. If you strip that out, operating profit growth was roughly in line with HEPS growth.

The key demographic trend here is not just urbanisation of populations in Africa, but also growth in rural areas and demand for FMCG products. CA Sales specialises in taking brands to people and they do it well, with no other business on the JSE playing in this space.

The company only pays an annual dividend, so there’s no interim dividend.

MAS still has work to do on the balance sheet, but underlying retail exposure is helping (JSE: MSP)

Central and Eastern Europe remains a hotbed of activity for retail property landlords

MAS has released results for the year ended June. If you adjust for the impairments in the DJV joint venture, then they came in at 9.19 euro cents per share of adjusted distributable earnings. That’s within the guidance that was provided in March 2024.

These earnings are being supported by strong footfall and tenant sales growth metrics in Central and Eastern Europe (CEE), where retail property owners have been thoroughly enjoying themselves in recent years. The same can’t be said for MAS’ exposure to the residential market through DJV, with a net loss for the period.

The big story at MAS in the past couple of years has been one of balance sheet challenges, with the company taking a highly proactive approach to managing the debt maturities in coming years. MAS cut their dividend to retain cash for balance sheet flexibility, with the worry being around capital availability and costs of debt for a sub-investment grade property fund. Recent progress has been encouraging though, particularly as they have found way to raise further debt funding from an existing noteholder.

The net asset value per share at MAS is 157.9 euro cents, or roughly R31.20 per share. The current share price is R17.15, with the discount reflecting the local market’s distaste for property companies that aren’t paying dividends. With the tangible net asset value at MAS growing by 8.1% between December 2023 and June 2024, that’s a pity.

Nampak makes more progress on its restructuring (JSE: NPK)

These deals are part of the broader asset disposal plan

Nampak has been busy with deals to try and save its balance sheet. One of them is the disposal of Liquid Cartons, a deal which has now closed – and that means that Nampak has received the selling price.

On the Bevcan Nigeria disposal, the merger application has gone to the competition authorities in Nigeria. At this stage they can’t give any guidance on the timing.

In further transactions, Nampak has sold the drums business and liquid business, as part of the broader asset disposal plan that was announced in August 2023. These are small deals, so no further details have been announced.

RCL Foods has released results – and Rainbow Chicken shareholders also need to read them (JSE: RCL | JSE: RBO)

Rainbow is separately listed now, but the results came out together one last time

RCL Foods has released results for the year ended June 2024. As Rainbow Chicken was only unbundled on 1 July (and this is no coincidence relative to year-end), the results for RCL include results for Rainbow. We therefore have an unusual situation in which the results for two listed companies are in one set of numbers.

In this case, the term “continuing operations” is doing the heavy lifting. It excludes Vector (sold in August 2023) and Rainbow, so isolating the RCL Foods result is made possible by looking at earnings from continuing operations. On that basis, revenue was up 6.8% and underlying EBITDA was up 15.5%, with HEPS up 8.3%.

RCL Foods is therefore doing decently at the moment, although there are input cost pressures that need to be passed through to consumers in the form of pricing increases. In a group this size, there will always be positive and negative stories as you dig deeper. For example, the pet food business enjoyed better operating conditions this year with less load shedding, yet the baking business had a tough time in bread where there was intense competition. Notably, the sugar business performed well.

Moving on to Rainbow, they describe the turnaround as being “well advanced” with “every component of the process yielding positive results” – great news indeed. Load shedding was an absolute catastrophe for the chicken business, so it’s great to see improvement there. You have to dig a bit to find the Rainbow numbers, with this table showing just how strong the turnaround has been:

Note that a 7.9% revenue increase is all that was needed for Rainbow to swing from losses to profits. The EBITDA margin is only 4.3% for the period, with these incredibly thin margins driving highly volatile earnings. It also helped the net profit story that net finance costs were far less severe than in the prior year. There’s still a long way to go for Rainbow to be considered lucrative, as Return on Invested Capital was only 8.6% in this period.

When there are lots of corporate actions, there is money to be made for advisors. Advisory costs were R58.8 million in the current year for the Rainbow and Vector deals and R25.6 million in the prior year for Vector.

Sanlam gets even closer to African Rainbow Capital (JSE: SLM)

Sanlam wants a bigger slice of the action in the ARC portfolio – especially Tyme Bank

The relationship between Sanlam and African Rainbow Capital is already incredibly close, as it was a B-BBEE investment in Sanlam that provided the capital base off which ARC was ultimately started. Key executives at ARC are ex-Sanlam senior management, so the parties are very familiar with each other. They are about to get even more familiar, as Sanlam is looking to take a 25% stake in African Rainbow Capital Financial Services Holdings (ARC FSH), which means a cash subscription for shares as well as a restructuring of Sanlam’s existing investment in the ARC stable.

ARC FSH is an important holding company in the ARC group but is not the listed company, so Sanlam will hold further down in the structure than the listed shares. They currently have a 25% stake in ARC Financial Services Investments (ARC FSI) which they will exchange for exposure in ARC FSH. That share swap covers R1.492 billion of the investment. That’s only part of it, with a cash subscription worth R2.413 billion to make up the rest.

The net effect here is that Sanlam is pumping cash into ARC’s financial services portfolio and moving further up in the structure, which means they like the look of investments like TymeBank, which will be held entirely by ARC FSH as part of the implementation of the transaction.

Speaking of that asset, it’s interesting to note the outperformance fee structure that will see Sanlam Life pay ARC an outperformance fee based on the extent to which the investment in Tyme Investments Asia as at 30 June 2028 exceeds an annual hurdle rate of 14.64%. That’s not a very demanding hurdle rate for what is essentially a startup, so ARC has a good chance here of earning the fee. It will be capped at R70 million.

Sibanye-Stillwater is now barely profitable (JSE: SSW)

Welcome to new all-time lows since the company relisted in 2020

There really doesn’t seem to be much relief on the horizon for battered Sibanye-Stillwater investors. In a trading statement for the six months to June, HEPS has dropped down to almost nothing. A decrease of between 97% and 98% takes them to between 4.6 cents and 5.0 cents per share vs. 208 cents in the comparable period, which is horrific.

The results were ruined by not just the decline in PGM prices, but also production issues in both the platinum and especially gold businesses. The increase in the gold price got nowhere close to making up for this. Although production for PGMs overall was higher, it would’ve been better if not for production challenges and related pressure on unit costs. As for gold, production was down 21%.

The rats and mice stuff in the group, like Reldan in the US, zinc in Australia and nickel from the Sandouville refinery are just noise compared to how critical the PGM performance is to the group.

This is not pretty:

Sun International continues to grow (JSE: SUI)

By no means a rocketship, but the trajectory is up

Sun International has released a trading statement dealing with the six months to June. Adjusted HEPS is their preferred metric and is up by between 4.5% and 11.6% to between 206 and 220 cents. If you want to stick to HEPS, that metric is up by between 5.4% to 12.4%, with a range of 182 to 194 cents. The differences between the two related to the SunWest put option liabilities and the transaction costs for the Peermont acquisition.

Looking at the underlying businesses, it sounds like Sunbet is the most exciting story at the moment, exceeding its targets with an “exceptional” growth trajectory – and that’s what investors like to hear. Casinos are focused on protecting margins right now and urban hotels and resorts achieved growth in the EBITDA margin. A word that is less exciting is “resilience” which is how they describe Sun Slots, so there’s clearly pressure there.

Despite paying a dividend and executing share buybacks, debt in South Africa (excluding IFRS 16 – i.e. on the right basis for our purposes here) is down from R5.7 billion to R5.4 billion. They are firmly on the right side of debt covenants and generating cash.

Trellidor locks in a strong earnings recovery (JSE: TRL)

To understand these numbers, we need to look further back

Trellidor has been through a pretty torrid time recently, with the share price having shed half its value over 3 years. They initially bounced back strongly in the pandemic as everyone took “stay home and stay safe” very literally, but then there were labour problems and other challenges that ruined the party.

In a trading statement dealing with the year ended June, Trellidor can happily say that HEPS has jumped from 4.2 cents in the comparable period to at least 22.4 cents for this period. The percentage increase isn’t relevant when you’re talking about a 5x increase. Far more relevant is to work backwards and see what the earnings used to be, as FY23 isn’t exactly a demanding base.

It won’t help us to go back to FY22, which was even more awful at just 0.4 cents in HEPS. Like I said, times have been tougher than the doors themselves.

In FY21, HEPS was 40.8 cents. Now we are getting somewhere. Sadly, this means that the recovery in FY24 has only taken them back to around half of FY21 levels. With the share price down over 50% since those levels, it feels like this recovery was largely priced into the stock already.

Hopefully, things will only improve for Trellidor from here.

Little Bites:

  • Director dealings:
    • A prescribed officer of Standard Bank (JSE: SBK) has sold shares worth R5 million. There’s been quite a bit of selling from Standard Bank directors and prescribed officers recently and I wouldn’t ignore this.
    • Two directors of a major subsidiary of Stefanutti Stocks (JSE: SSK) bought shares worth R278k.
    • Directors of Astoria (JSE: ARA) entered into CFDs over the shares worth nearly R83k.
    • I’m not going to pretend to be close to the details on what is going on at Quantum Foods (JSE: QFH), where there’s a major fight between different groups of shareholders and the board. An unusual director dealings announcement came out that shows a transaction by various directors with a third party related to call options over their shares. There’s still plenty of stuff going on there.
  • Harmony Gold (JSE: HAR) released a further trading statement for the year ended June 2024. They are able to almost pinpoint HEPS now, coming in at between 1,852.0 and 1,852.4 cents vs. 800 cents in the comparable period, a jump of around 131.5%.
  • Anglo American (JSE: AGL) seems to be putting the steps in place for the potential demerger of the stake in Anglo American Platinum (JSE: AMS). Although Anglo American still holds 78.56% in Amplats for now, they’ve restructured that stake through a couple of steps into a new subsidiary within the group. This is typical of the preparation steps required for a major corporate action, so watch out for this in the near future.
  • Renergen (JSE: REN) has appointed Standard Bank as Joint Underwriter for the Nasdaq IPO and has secured a funding facility with the bank ahead of the IPO. Key directors are having to take on risk here, with associates Stefano Marani and Nick Mitchell pledging their shares in Renergen as security for the loan. This is an unusual situation, as minority shareholders benefit from the loan but aren’t exposed to the security for it.
  • Trustco (JSE: TTO) announced that Meya Mining (in which Trustco holds 19.5%) has released a technical report prepared at a Preliminary Economic Assessment level. It evaluates the viability of underground mining for the diamonds and suggests a post-tax net present value of $95.1 million discounted at 10% over seven years life of mine. A 10% discount rate is woefully inadequate in my view, so I went digging to see what the post-tax IRR was. The report suggests 65%, which is a much more respectable return for the risk. I have no idea why they bothered showing the NPV based on a 10% discount rate.
  • If you are a shareholder in MTN Zakhele Futhi (JSE: MTNZF), then be aware that the financial statements for the scheme have been released. Due to the underperformance of MTN’s share price, they are having to extend the structure to 2027 to avoid it expiring underwater i.e. with no value for the B-BBEE shreholders.
  • Salungano (JSE: SLG) is suspended from trading and thus has to release a quarterly update on the state of affairs. Due to delays in the handover process from KPMG to SNG Grant Thornton, the results for the six months to September 2023 will only be published by 31 October, not 31 July as previously advised. They still need to get the FY24 results done thereafter. At best, the board expects the suspension to be lifted by 31 January 2025.

Ghost Stories #44: Mastering your portfolio – ETFs and single stock investing

The Finance Ghost
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Ghost Stories #44: Mastering your portfolio – ETFs and single stock investing

Listen to the show using this podcast player:

With a strong belief that both ETFs and single stocks are relevant to any long-term portfolio strategy, The Finance Ghost hosted Siyabulela Nomoyi of Satrix to talk about why ETFs are so helpful – especially in the context of Tax-Free Savings Accounts (TFSA).

Siya didn’t waste the opportunity to ask questions about single stock research as part of the discussion, showing just how different the process is for choosing ETFs vs. single stocks.

For those willing to put in the effort to expand their investment knowledge and build wealth, this is a fantastic podcast. This podcast was first published here.

Satrix Investments Pty Limited and Satrix Managers RF Pty Limited are authorised financial services providers. Nothing you have heard in this podcast should be construed as advice. Please do your own research and visit the Satrix website for more information on all their ETF products.

Indexation: Anything but Passive.Take control of what you're investing in by incorporating indexation into your portfolio. Satrix - Own the market

Full transcript:

Introduction: This episode of Ghost Stories is brought to you by Satrix, the leading provider of index tracking solutions in South Africa and a proud partner of Ghost Mail. With no minimums and easy, low-cost access to local and global products via the SatrixNow online investment platform, everyone can own the market. Visit satrix.co.za for more information.

The Finance Ghost: Welcome to this episode of the Ghost Stories podcast, and it’s another one with the team from Satrix, so you know you’re definitely going to learn something great on the show – as has been the case on all of the Satrix podcasts we’ve done with various members of the team. And Siya, you’re certainly no stranger to regular listeners of Ghost Stories, and you’re no stranger either to followers of local FinTwit or I suppose, FinX as it is today.

You make it no secret that ETFs are a major interest of yours, of course, and certainly that’s why you are at Satrix. So, Siya, thank you so much for doing another podcast with me. I think we are going to do some really cool stuff today across ETFs, but also a little bit around some single stock research as well.

Siyabulela Nomoyi: Hi Ghost, thanks for having me again on your podcast. Always great to chat to you. Great topic today, lots of people have moved to being their own portfolio manager, so absorbing as much info as possible out there. I hope our session will also help in their knowledge as well.

The Finance Ghost: Yeah, absolutely. I mean, that’s the thing, right? When you’re doing your own investing, you are basically acting as a portfolio manager. The difference is that your only client is yourself, right? You are responsible only to yourself in that moment. So that means that you need to do all the thinking yourself around top-down stuff like where are you going to invest, as well as all the bottom-up stuff in terms of which instruments, which ETFs. You know, we’ve talked many times on the show before across the various Satrix guests, that yes, an ETF might be a “passive instrument” but the decision of which one to buy and in what quantity and everything else is very much an active decision. And this is the fun of portfolio management and managing your own portfolio. So, it’s really good to have you here because we’re going to talk about topics like how ETFs will fit into a strategy alongside stuff like single stocks for those who are interested in that, and maybe other investors as well. But I think for those who are maybe not as familiar with ETFs or just need a quick refresher on why they are useful instruments, let’s start there. They really are well loved by investors, me included. Do you think that ETFs belong in basically every portfolio strategy? And why is that?

Siyabulela Nomoyi: Yeah, absolutely. Investors definitely have a big interest in ETFs in South Africa as well. I mean in South Africa, Satrix launched the first ETF on the JSE back in 2000 and that had about 2 billion in assets.

And fast forward to today, you have around 100 ETFs listed on the JSE. There’s over 170 billion in those ETFs and almost seven issuers or so. I think people really like them. But why do they like them? I think the answer is quite simple. In answering your question on why it belongs in everyone’s portfolio strategy, it’s really the flexibility that comes with trading ETFs. You really have to appreciate the liquidity advantage that comes with ETFs. Because for instance, let’s say you have R65. Do you think you can actually take that R65, move it into a USD brokerage account and go buy 1600 stocks?

You can’t. But if you can log into our SatrixNow account and deposit R65, you can actually get exposure, like literally on the spot of the Satrix MSCI world ETF in just one go with that R65, which gives you instant exposure to those 1600 stocks. You can apply that logic to different ETFs that are listed on the JSE. Whether you’re looking at the S&P500 or you’re looking at the JSE Top 40 Index, that’s quite important when it comes to someone who’s starting out, who doesn’t have a big lump sum or they just want to start their journey of investing. So that’s a big advantage. But look, apart from flexibility, I think investors appreciate the fact that ETFs really do belong in their investment strategy because they offer portfolio diversification.

Everyone who listens to your podcast, they probably would have heard this word diversification so many times. And it’s very important, because you quickly get exposure to different sectors, countries and different currencies as well in just buying different ETFs.

And you can also manage risk as well. That also speaks to the diversification part, which I’ve mentioned. And lastly, I think everyone’s favorite topic when it comes to investing is the low-cost fees. It’s very important while you’re getting exposure to all these different markets and sectors quite easily. You also do this on low-cost structures as well, which is very, very important because remember, your positive long-term returns on your investments, they compound positively in your strategy, but fees compound in the opposite direction. So the lower these fees, the better for you.

The Finance Ghost: Yeah, that’s a really great overview of ETFs. I know you love them and it’s always great to see someone who just understands the topic completely just being able to spend a couple of minutes covering basically everything which I think you’ve done there, which is great. It was a show that I think it was with Kingsley from Satrix where we talked about diversification is the only free lunch in investing. It’s such a great point and I think that really is the core strength of ETFs. You hit the nail on the head there to say you can take a small amount of money and go and buy a vast amount of exposure or diversification within the markets, go and buy a whole lot of stocks with just one trade for such a modest amount. It’s such a powerful tool and I just wish more and more people would understand what a great way it is to actually get that market exposure.

For me, it should be the starting point for anyone coming into the markets. Don’t go and do the hot tip you heard at a braai, go and actually understand ETFs and understand how that exposure works. Linked to that is the power of a Tax-Free Savings Account. It really warms my heart that some of the recent content we’ve put out on Ghost Mail with you guys as the Satrix team has been around Tax-Free Savings Accounts and it’s been super popular, which I think is great apart from the name which I hate because it should be called a tax-free investing account. Tax-free savings gives the wrong message in my opinion. I think it was Duma from Satrix who wrote on that in Ghost Mail recently and I agree completely.

But TFSA should for me, be in every single individual investor’s plans. The government is literally giving you a way to build a pocket of money that you are never going to pay tax on. It basically turns yourself into a unit trust. The only limitation is that you need to go and buy ETFs. Are there any limitations on the types of ETFs that you can have in this account? Or can you pretty much go and buy any locally listed ETF in your Tax-Free Savings Account?

Siyabulela Nomoyi: Sure. Yeah. Firstly, I totally agree with the naming conversation. I mean, we also trying to push education in terms of savings versus investing so that people actually differentiate between these two. I definitely agree. But when it comes to Tax-Free Savings Accounts, I’ll stick to the name. I don’t have a choice. So they should really be the base of everyone’s investment strategy. As in, you first allocate to that and try and maximize it. And then anything you want to add on your investments can be through your direct investment account.

So, the TFSA, they’re quite important because you are literally investing tax free. Why that is important? In your investment account outside the TFSA, you get taxed on all of the income you get from your coupons or your dividends that you get from your stocks or ETFs. When you get capital gains on your positions, you also get taxed on that position, on the gains that you get. But if you are investing through a TFSA, you actually avoid all of that. And that’s something quite big to consider in your investment because you are avoiding quite a lot of money that you need to pay to your tax based on the fact that you’re getting income and all these dividends, and on positions that you’ve held that have done very well. Whether you get a fat dividend or you get 70% return on your position, that won’t get taxed on your TFSA.

People really should not ignore that. On the SatrixNow platform, once you register, you have all these accounts that you deposit your money into, whether it’s your retirement annuity and all of that. But there’s also the TFSA as well.

Obviously, there are regulations around it. Regulation actually bars you from depositing more than R36,000 per tax year. That’s really important. Otherwise, you’re going to get penalised. You really need to watch that. And I think the other part people need to understand is that you can have as many TFSAs as you want, as long as the combined deposit is under R36,000 on all of those TFSAs per year, you won’t get penalised. And the other part is if you deposit and maximise to R36,000 and then you later in the year decide actually, I want to spend my R6,000 of that. You spend it and in the same tax year you’re like, oh, I’ve got R6,000 extra, I want to put it back. It doesn’t work that way. You’re going to go over that R36,000 deposit limit if you put back that R6,000. So, you need to watch all of those things. It’s quite important to watch that cost.

The Finance Ghost: Yeah, I agree with all of that. I like to keep it quite simple and just have all my TFSA stuff in one place. And my goal, the first day of the tax year – basically never quite that perfect – but if I can max that thing straight away, and a lot of people are not able to do that, then just do it monthly, just get a monthly bit of discipline in where you pay yourself first, right? Get your savings plan. Once your savings plan is sorted, as you start investing, get that monthly amount into your TFSA. It works out to R3,000 a month basically, and you can max it out in a tax year. And that works just extremely, extremely well, hey?

Siyabulela Nomoyi: Yeah, indeed. And lastly, sorry, this part of your question in terms of restrictions. A really very short answer to your question is as long as the ETF is listed on the JSE, you can buy it under your TFSA. Anything outside that, let’s say if you want to go direct USD or you want to buy iShares ETFs or Vanguard ETFs, you can’t buy that. It needs to be listed on the JSE. And the only ETFs that you can’t buy on your TFSAs currently are commodity ETFs. Your gold, palladium, silver ETFs and what-not, you can’t hold that in your TFSA.

The Finance Ghost: Interesting. I actually didn’t know that, so thank you. There’s something new that I’ve learned today. I didn’t know that you can’t go do the commodity ETFs. I burnt my fingers on gold miners and I think that was good enough for me. That’s good to know, that you actually cannot do the commodity ETFs in a TFSA. Thank you.

So, moving on from gold and palladium and all those things and maybe talking about how we actually max out our TFSA, I mean, I’ve touched on it already, which is that you can kind of do a monthly amount in. But there’s a broader concept here. It’s this concept of dollar cost averaging. Should be rand cost averaging, obviously, for South Africans, but you know how it is. Americans are always in charge and so everyone just calls it dollar cost averaging.

In your view, Siya, why is it quite important, just briefly, to actually do the consistent investing in the market rather than trying to time it with these big lump sums and then doing nothing for a while?

Siyabulela Nomoyi: Yeah. We all love a good story, right? If you go to the braai and you talk about investment, if you happen to actually get to that topic, I mean, telling your friends that you invested R100,000 in a stock like Harmony last year, end of September, and now you have R250,000 in just that stock. But look, these are tough calls, in fact, riskier than the upside. And we can check through that. But it is not a bad thing to actually invest in a one-time lump sum. You can use that as a start and then regularly invest over time. But I think with lump sums, people tend to get excited sometimes and concentrate their portfolio based on their views at that time. And then panic actually comes in when there’s underperformance in that concentrated part of your investment. Then you start selling and realising your losses or you’re locking in your losses. You tend to actually have a lot of turnover because of the panic that you have. And then investing regularly reduces that concentration risk, firstly, that you actually might fall into. And also, as you mentioned, it’s a dollar cost average or rand cost average. You sort of spread your risk through different investment times.

I think that’s very, very important – through this journey of investing in a stock or an ETF or whatever, the strategies that you have, you’re actually spreading that risk through that different investment times. But as you can imagine, this method actually reduces the downside or drawdown risk, but it also limits some of the upside.

I mean, if you go back to that Harmony example that I spoke of. Instead of getting R100,000 to R250,000, you’re probably still up, but you don’t get the maximum R250,000 in your investment on the Harmony stock. You also know and have seen how volatile the markets can be. Everyone watching the market quite recently, August was crazy. But I always say that volatility brings about opportunities as well. Some ETFs and individual counters went through some drawdowns now, mid-August or so, and they actually bounced back quite a lot. And dollar cost averaging investors would have actually definitely taken advantage of that, which tends to actually work out quite well over the long term.

The Finance Ghost: Okay, so let’s move on from how we actually go and put stuff into the market to what we are actually buying. For investors coming into the market, the sheer number of ETFs can be a little bit overwhelming. There really are a lot, and obviously some are more popular than others for a variety of reasons. There’s still no JSE retail ETF. I will lament on every podcast we ever do until the JSE makes this index. But anyway, Siya, what I wanted to ask you was around the actual research process into ETFs for listeners to the show who want to understand, okay, how do I actually go and pick one? Because it is quite overwhelming, genuinely, and I get this from people, especially sort of market newbies or people who are really early in the journey, they kind of understand what the JSE Top 40 is and they’ve heard of the S&P 500 and they default to those two things, but then they don’t really understand what’s in there or how to understand it, the constituents, which is always the first thing I go to, followed closely by the fees.

I think let’s talk to where you get this information, which is a fact sheet, of course. You know, where do you find this? What is a fact sheet and what are the things that people should be looking out for in your view?

Siyabulela Nomoyi: Sure. So, quite right. I think before I get to the fact sheet, I think it’s quite important that the person who wants to invest actually understands that. Where do they want to purchase these ETFs, for instance? Is it on your TFSA or is it your direct investment account or USD account, etc? Once you understand that, then that means you can filter through the ETFs that you can actually invest in.

Then you need to identify two things. It’s very important to actually know this when it comes to investing.

On your end will be your risk tolerance. So in other words, are you prepared to stomach short term volatility for long term gains? Or would you rather have a much smoother profile because your term of investment is quite short? And also the term actually comes in as well, your investment term. Are you investing for only the next two years or seven years and more? And believe it or not, these fact sheets or what we call minimum disclosure documents or MDD for short, they give you this information right away. They will tell you the risk measurement of an ETF or whatever fund you want to invest in. And some of them actually recommend the investor investment term. They’ll speak to you. They’ll tell you that if you are an investor who’s looking to invest for the next seven years, and you also can tolerate some short term volatility and what-not. You can actually invest in this fund.

But what fact sheets will also help you with is actually avoiding buying two ETFs of the same thing. And I think this is very, very important. In South Africa, you’ve got almost 100 ETFs listed on the JSE. You’ve got seven issuers or so. The other part is that these issuers actually sometimes issue the same ETF. So, you’ll get different issuers having a Top 40 for instance. And I think one mistake people did at the beginning and still do, is that they will have two of the same thing in their portfolio, whether it’s through local ETFs or offshore ETFs as well, or whether the issuer is South African or the issuer is on the broad market.

I’ve seen people saying they are investing in the Satrix Nasdaq-100 ETF, for instance, and then they’ll have exposure to the Invesco QQQ ETF. And you’re thinking, why? So that’s the understanding and where you can actually differentiate between these ETFs when you’re looking at MDDs or fact sheets. The top ten table usually gives it away that those two ETFs actually give you the same exposure, but the tracked benchmark as well. When you’re looking at the information on the fact sheet, what you want to look at when it comes to looking at the difference between two or three ETFs. Definitely agree with you. A good starting point is the fact sheet. They can tell you all about an ETF in a very, very short time by giving you important information. What the fund is tracking, its risk profile, how much it costs, whether it pays dividends or not, and past performance as well.

The Finance Ghost: Yeah, absolutely. And that’s the point around ETFs, there might be passive trackers of something, but it’s not an active decision of which one you want to buy. And that talks to the active decision. You’ve got to actually go and do the research, which sounds a bit like single stocks, doesn’t it?

Siyabulela Nomoyi: Yeah, that’s a good point, and I know this is something that you do on your side, so I’m quite interested to actually have your comment on this. People might start their investment journey through buying ETFs, but I mean, FOMO kicks in and they also want to add single stock exposure into their investment or they’ve seen market movements on different stocks. So, firstly, do you think adding single stock exposure is a good idea or a smart strategy, adding them alongside your ETFs? And if anyone is doing this, why would they want to actually add single stock exposure into their portfolio?

The Finance Ghost: So look, I love single stocks, as you know, as listeners would surely know. I certainly have ETFs and the ETFs give me the broad market exposure in my portfolio. It means that I know that I’m sitting with broad exposure. If the markets go up, my portfolio goes up – great. But I also love single stocks. Single stocks are kind of interesting because obviously there’s the pure financial piece, which is to say, if you get it right and you pick a stock that materially beats the index, you are helping your own portfolio beat the index. If we go back to the original point around being your own portfolio manager, you know, if your benchmark is “I’ll just use the JSE Top 40” and you go and you just buy a JSE Top 40 ETF. Well, guess what? You’re going to – well, you’re not quite going to beat the index because of fees – but you’re going to get pretty close. If you go and you start adding on single stocks and you can pick stocks that are beating the index, then over time you are actually not just making up for the fees, but also generating proper returns in excess of what the market giving.

And that, of course, is what portfolio managers really get paid for, at least what they should certainly be getting paid for.

So, single stock exposure is about saying, okay, I’m happy to own the market, but I also want to be overweight say big tech. I’m happy to own the S&P 500 and it’s already got a lot of tech in it. But I love Microsoft. I really want to own Microsoft on top of my Microsoft exposure inside my broad market ETF. Hence, I’ll go and add on some more Microsoft as a single stock exposure. And now I am more weighted towards Microsoft than the broad market index. If Microsoft outperforms, then I feel good about myself because I’ve probably beaten the index. Of course, if you go and pick stocks that underperform the index, well, guess what? You are then going to underperform effectively the broad market and then you were actually better off just buying ETFs.

Yes, it can be a smart strategy. Absolutely. It’s a hobby that pays for itself if you get it right. But yeah, it’s not for everyone. I think it’s for people who really want to kind of take it to the next level of saying, okay, I really want to learn more about investing and I’m willing to do the research.

Siyabulela Nomoyi: Yeah, that’s quite interesting, Ghost. I mean, because as you would imagine, single stock exposure also introduces another risk dynamic as well into the overall strategy. I would imagine anyone who wants to actually do this, they have to go through a lot of research and not just read a tweet.

Especially if you’re a beginner on researching stocks, what do you look out for?

The Finance Ghost: Yeah, so look, the thing is you’ve got to read and read and read and read and read everywhere. I think that’s really important. You’ve got to read what the company is releasing. You’ve got to read the stuff that’s going on in the market. You’ve got to look at the narrative. You’ve got to look at the outlook. You’ve got to look at what’s happening to their revenue, for example. And you’ve got to understand why, and you can find all of this in their actual financials, right? You can go and read their SENS announcements etc.

Don’t just go and say, okay, what did headline earnings per share do? Go and have a look at what revenue did, for example, and why. Go and have a look at how they discuss the different segmental performance and then go and figure that out. Very interesting. Go and have a look at their margins. So go and understand, okay, what happened to operational expenses relative to revenue, for example, and why? Where are these pressure points actually coming from? Are margins going up? Are margins going down? What’s happening to debt on the balance sheet? That’s another really big one, and it’s been a big topic over the past couple of years, you know, is debt going up? Is debt coming down? Unfortunately for a lot of businesses, debt has actually gone up in the past couple of years and it’s done so at a time when interest rates are really high, so often operational profit is doing well. But you’ve got a very big interest expense and then that’s kind of ruining the story at headline earnings per share level. What you’ve got to do is you’ve got to go and read the actual management commentary that already teaches you actually quite a lot. And then over time, as you start to get used to these things, you can then learn, okay, how do I read an income statement? What does it really mean and what are some of the key things to look out for?

It’s very overwhelming when you look at a set of financials because they really are enormous. You know, if you think an ETF fact sheet is big, you should try a set of financials. It’s scary. But the truth of it is that actually 95% of it is not necessary, whereas it’s really just 5% of it is actually where you’re going to probably make a decision, or not, as the case may be. And it’s about learning to understand what those key pressure points are and then going, and as I say, just reading, I can’t stress that enough. You’ve just got to read and read and also just apply common sense. Just look at the world around you. If you’re investing in a retailer, is that retailer doing well or not doing well? It’s very, very important. So, yeah, there’s a lot to do when you’re doing single stocks, but I think it’s quite rewarding. And you certainly learn a lot along the way, which is great.

Siyabulela Nomoyi: Yeah, it definitely sounds quite interesting in terms of what you have to go through on your research. But just the last one from my side, just out of interest. In the investment world, when you’re looking at portfolio managers, they always measured against an index. And I think you touched on this the way you get broad exposure from an index and then you want to tilt towards, like, a certain sector or a stock, maybe. But when it comes to individual stock picking and adding that to ETFs, is it a thing of you measuring yourself against an index? You want to outperform that? Or as an individual investor, I’m more interested in the absolute returns of my portfolio. What’s your take on that?

The Finance Ghost: My take is, when I look at single stock exposure, I always ask myself, is this stock good enough that I think it could beat the index by a substantial margin? Because if you think about it on a risk-weighted basis, it really doesn’t help if you go and buy a single stock and let’s say the index is going to give you 10%, and you reckon this stock can give you 10%, well, why are you buying the stock? Just go buy the index. Because 10% from one stock is not a good risk-weighted return, as opposed to 10% from the broad market index. That, for me, is always the measure. I don’t personally measure myself against oh, you know, how did the index do? It’s obviously relevant, but it’s broader than that because I had other options, like going and just putting my money in the bank, for example, going and earning fixed income, something we’ve covered before Siya. It doesn’t help if the equity index did 5% and I did 6%. I’m not going to feel very clever if I could have put my money in the bank and got 8%. I kind of look at it a lot more broadly than that.

But yeah, for me, that’s the really important thing to remember: any single stock you add to your portfolio, your expectation needs to be that this thing can really beat the index and do so strongly, and then you can consider adding it. It might be worth it on a risk-weighted basis. If it’s not likely to beat it by a significant margin, it’s probably not worth including. The risk weighted returns are not good.

Siyabulela Nomoyi: Great. Thanks, Ghost. It was nice to actually just turn the tables, ask you the question, but that’s quite…

The Finance Ghost: Yeah, on the Siya podcast! I love it. Fantastic.

Well, Siya, this has been a really fun discussion and thank you for throwing some questions my way as well. It’s been really good. And as always, thank you for making time to be on the show and to the listeners, as always, you know, you’ll find the links to go and check out Satrix’s offering to go and learn more about ETFs, go and follow Siya on Twitter now on X or find him on LinkedIn. And Siya, it’s really been a pleasure. I’ll include all the links to your social handles, obviously, in the show notes. I look forward to doing another one of these with you sooner rather than later. Thank you for your time.

Siyabulela Nomoyi: Awesome Ghost. Thank you so much. Cheers.

Satrix Investments Pty Limited and Satrix managers RF Pty Limited are authorized financial services providers. Nothing you have heard in this podcast should be construed as advice. Please do your own research and visit the Satrix website for more information on all their ETF products.

Ghost Bites (Finbond | KAP | Murray & Roberts | Northam Platinum | Truworths)

The Finance Ghost
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Ghost Bites (Finbond | KAP | Murray & Roberts | Northam Platinum | Truworths)

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

Something is brewing at Finbond (JSE: FGL)

There’s an interesting cautionary announcement

Usually, a cautionary announcement relates to a company either looking at an acquisition or discussing a potential disposal of its assets. Occasionally, we see something else, like the latest announcement at Finbond.

In this case, the company is in discussions with a shareholder regarding a potential corporate action, with no further information given. Of course, the immediate speculation would be that this involves Riskowitz in some kind of take-private deal, but we really have no idea at this stage and that’s exactly why treating this with caution is the right approach.

KAP’s earnings are down – and it would’ve been worse without tax incentives (JSE: KAP)

It’s unusual to see such a large move in the tax rate, but always keep an eye out for this

KAP has been having a tough time of things. With such diverse businesses in the group, it always feels like some are doing well and others are really struggling. Diversification is great and all, but even better is to own a portfolio of businesses that perform well on average. Despite the share price being 30% higher over the past 12 months, it’s down 30% over three years.

For the year ended June, KAP’s HEPS fell by 4%. It made a huge difference that the effective tax rate fell from 37% in the comparable period to 15% in this period, driven by investment incentives related to the PG Bison Mkhondo project. That is quite the swing and clearly not reflective of a normal year-on-year move.

Speaking of PG Bison, that’s a good place to start for the segmental view. Revenue increased by 8% and operating profit by 7%, with operating margin of 17.4% still coming in below the long-term guidance of 18% to 20%. The MDF project was commissioned in June 2024, a month ahead of schedule and close to the original budgeted cost. This should be a boost for earnings in the coming year.

At Safripol, we find a very different story. This is where the major issue has been lately, with revenue down 10% and operating profit down 62%. The operating margin of 3.8% is way below the targeted level of 7% to 9%. One of the non-recurring contributing factors to the year-on-year move was a correction to the prior period accounts based on a supplier erroneously overcharging the business by R163 million. There was also R20 million of overcharged amounts in this financial year. On operating profit of just R352 million in this year, that makes a difference to the percentage movements.

Unitrans has a great story to tell at operating profit level, up 32% to R508 million despite a drop in revenue of 4%. They focused on margin, which meant walking away from lower margin business. Despite this, the margin of 5.2% remains below the long-term guidance of 8% to 10%.

Over at Feltex, revenue increased by 14% and operating profit by 17% as the business felt the benefit of improved South African vehicle assembly volumes. Interestingly, the aftermarket business took a knock though, mainly due to lower light commercial vehicle and SUV sales. Operating margin of 9.9% is close to the guidance of 10% to 12%.

At Restonic, we find another division with a focus on operating profit. Revenue was up 8% and operating profit jumped by 89%, leading to a much better operating margin of 7.3%. This is still way below the guidance of 13% to 15%.

And finally, Optix was breakeven after delivering revenue growth of 14% to R595 million. It’s not clear to me why KAP has what is effectively a startup in and amongst this portfolio of businesses that already struggle from lack of coherence.

Other than PG Bison, KAP’s businesses are generally not performing at the required levels. A bull case can be made that there is plenty of room for improvement in a GNU environment. Perhaps that will prove to be the case, although the broader polymer market (which affects Safripol) has nothing to do with the GNU and everything to do with global supply and demand dynamics.

Murray & Roberts kicks the bank debt down the road (JSE: MUR)

The focus now must be on refinancing the debt package, not just agreeing a repayment date

Murray & Roberts has been on a mission to fix its balance sheet, with efforts to reduce debt having been successful thus far. The debt with the banking consortium is down from R2 billion in April 2023 to R409 million as at June 2024. That’s good going, but they need to do more.

To buy some time, the banks have agreed that the remaining debt can be repaid by 31 January 2026. Although this helps, it means that Murray & Roberts would still need to sell non-core assets to meet the obligations. Independent valuation processes have estimated that the value of the assets “significantly exceeds” the outstanding debt. Paper valuations and signed deals aren’t always the same thing.

First prize would be to take the pressure off by refinancing the debt, which would then mean that Murray & Roberts may not need to dispose of any assets. To get that right, they will need plenty of positive momentum in the underlying business.

Northam Platinum has created more balance sheet headroom (JSE: NPH)

And not for the happiest of reasons

The current environment for platinum group metals (PGMs) is depressing to say the least. We’ve already seen Sibanye-Stillwater take the approach of trying to prepare its balance sheet for a situation in which these depressed prices persist for a long time. Northam Platinum arguably acted first in this space, having pulled out of the Royal Bafokeng Platinum acquisition that Impala Platinum happily went along with. Ultimately, we will only know a couple of years from now who was right about the cycle.

For now, it looks like Northam Platinum probably made the right decision. Things haven’t improved and they don’t seem to be improving anytime soon, which is why the group has increased its revolving credit facility from R10 billion to R11.335 billion. This facility matures in August 2027 and all other terms are unchanged. This takes total banking facilities to R12.335 billion.

Along with the current cash balance of R7.5 billion, this gives Northam the flexibility to settle its Domestic Medium Term Notes as and when they mature. For example, R4.2 billion worth of these notes will mature in the financial year ending June 2025.

It’s all about managing not just the current net debt balance of R3.1 billion, but also the maturity profile – especially when there is this much uncertainty in an industry.

Along with this news about the outlook and the approach being taken, Northam Platinum released results for the year ended June 2024. Revenue fell 22.2%, operating profit was down 68.8% and operating margin plummeted from 39.1% to 15.7%. By the time we reach HEPS, the decrease is 81.6%. The total dividend per share is down 71.7% for the year.

The dividend policy is to pay a minimum of 25% of headline earnings, so they will pay a dividend even if the outlook is negative. In a crisis situation it might be different, but that’s not the current position. Earnings may be down dramatically, but they are still positive.

Truworths has released very poor numbers (JSE: TRU)

“Cheap” stocks sometimes remind us why they are cheap

Truworths is generally seen as the value pick in the retail sector, which means it trades on low multiples relative to peers. In a “rising tide that lifts all boats” situations like we’ve seen on the JSE recently, the companies on lower multiples tend to get particularly strong uplifts. Truworths is up more than 30% year-to-date, yet the latest numbers really aren’t good at all. I’m a little surprised that the Truworths share price was only down 3% on the day after this update.

HEPS for the 52 weeks to 30 June will be down by between -5% and -9%, or -2% and 2% on an adjusted basis. Either way, it’s not appealing. Group sales were up just 3.6% and that really doesn’t tell the full story. We need to look deeper, as Truworths Africa (which includes SA) was down 3.2% and Office UK was up 10.8% in pounds and 21.8% in rand. Although the group sales performance was in the green overall, the local performance is a serious concern.

Of even more concern is the trajectory, with Truworths Africa sales down 6.9% for the second half of the year vs. a dip of 0.3% in the first half. That’s not the kind of momentum that any investor wants to see.

Truworths tries to put the blame on a high base, as growth in 2023 in Truworths Africa was 9.1% year-on-year. After a 3.2% drop, the two-year growth story really isn’t high enough, even if they have every excuse in the book from the macro environment to the late onset of winter this year.

Account sales fell 2.5% and cash sales fell 4.7%, so there isn’t even a silver lining there of any kind.

Like-for-like sales at Truworths Africa fell 6.1% in this year vs. a 4.4% increase in the prior year, so that’s a further concern around underlying volumes. With selling price inflation of 6.4% this year, it seems that volumes fell by over 12% for the year (as you would compare this inflation number to like-for-like sales).

Office UK therefore prevented this result from being a disaster rather than just a disappointment. Watch the momentum here though, as first half sales growth was 15.6% and the second half was 5.3%. Admittedly, there genuinely was a very high base here of 27.1% in the second half of the comparable year, so the two-year growth stack still looks good. Office UK is expanding into this strength, with trading space up 11.4%.

It’s going to be very interesting to see how the rest of the year plays out in this sector.

  • Ascendis Health (JSE: ASC) released a trading statement for the year ended June 2024. For continuing operations, there is still a headline loss – albeit a small one of between -1.3 cents and -1.6 cents. That’s a lot better than a loss of 41.5 cents for the comparable period. For total operations, they are now profitable, with HEPS of between 0.9 and 1.2 cents vs. a loss of -39.7 cents in the comparable period.
  • AfroCentric (JSE: ACT) released a trading statement for the year ended June 2024. HEPS will be up by between 6.4% and 16.4%. That’s not enough to trigger a trading statement (the minimum move is 20%), but EPS (which includes a number of items that HEPS takes out) will be down by a large percentage due to impairments that’s what triggered this disclosure. The acquisitions of Activo Health, Forrester Pharma and Pharmacy Direct aren’t working out as well as planned, leading to the impairments. At least the medical scheme administration cluster has been stable.
  • DRA Global (JSE: DRA) has reported results for the first half of the year, reflecting flat revenue and 29% growth in underlying EBIT (a metric that includes adjustments that management feels are more reflective of performance). Encouragingly, all bank debt was repaid and they are in a strong net cash position. Their pipeline is strong.
  • Property group Putprop (JSE: PPR) released results for the year ended June 2024. The loan to value ratio is down from 41.6% to 36.9% and the net asset value (NAV) per share has increased from R15.74 to R16.68. The total dividend for the year came in at 14.50 cents. The share price is R3.20, so you can see that the market cares a lot more about the dividend than the NAV per share.
  • Standard Bank (JSE: SBK) announced several changes to the executive management structure, including the appointment of Kenny Fihla as Deputy Chief Executive of the group and Chief Executive of SBSA. He was running the Corporate and Investment Banking business, a role that will now be filled by Luvuyo Masinda. It looks like the changes are generally internal in nature and part of broader succession planning, as you would expect to see in a group of this size. In terms of Standard Bank’s relationship with ICBC in China, which has come squarely into focus recently as a pressure point, ICBC has appointed Fenglin Tian as senior deputy chairman of the Standard Bank board. ICBC is entitled to make this appointment and is replacing their previous candidate who resigned from the Standard Bank board.
  • There are a few changes to the board at Remgro (JSE: REM), but the particularly noteworthy one is that ex-CEO and current chairman Jannie Durand is not standing for re-election. This allows Remgro to appoint an independent chairman and they have done exactly that in the form of George Steyn, currently the lead independent director.
  • Kibo Energy (JSE: KBO) announced that subsidiary MAST Energy Developments released its interim results. The business is still an early-stage, high risk play with various ventures. The funding is coming from Riverfort in various debt and mezzanine structures. Kibo’s share price has been stuck on R0.01 for quite a while now.
  • Not only did Acsion Limited (JSE: ACS) miss deadlines for its financial reporting and thus earn itself a reportable irregularity that the auditors had to report to the Independent Board for Auditors, but there were also errors in the financials for the year ended February 2024 related to deferred tax and lease asset disclosures. IFRS is highly complex but it never looks good when this stuff happens, especially to one of the smaller names on the JSE that already isn’t well known by investors.
  • Coronation (JSE: CML) is still waiting for approval from the SARB for its special dividend, so they will announce revised dates for the dividend in due course.
  • Randgold & Exploration Company (JSE: RNG) is illiquid and tiny, so I’ll just give their results for the six months to June 2024 a passing mention. The headline loss was 11.60 cents (an improvement from 16.61 cents in the prior period) and the net asset value per share fell by 24.9% to 79.19 cents. The current share price is 70 cents.
  • Conduit Capital (JSE: CND) is slowly catching up with its financial reporting, releasing results for the year ended June 2022. With the group suspended from trading and dealing with many issues that are a matter of corporate life and death, I don’t think there’s much point delving into them unless you are deeply involved here.

Cartels, cement and crocodiles – yes, crocodiles

Dominique Olivier
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Cartels, cement and crocodiles – yes, crocodiles

I’m willing to bet that when you read the words “conflict mineral”, you envisioned illegal coal mines or smuggled diamonds – not the stuff you shake off your shoes before entering your house. And sometimes, nature likes to bite back.

Every so often, I imagine what it would be like to have read so much that nothing has the ability to surprise me anymore. Fortunately, I am always saved from this dire nightmare by some or other piece of trivia that I stumble across in the nick of time. This week’s column is based on one such satisfyingly surprising fact: according to a 2022 United Nations report, sand is the second-most consumed resource on Earth (surpassed only by water). And we’re running out of it, fast.

“So what?”, you might ask. Less sandboxes in the playground, and less sand to be cleaned off your feet after visiting the beach. Well, it’s not quite that simple. The massive demand for sand is not solely fuelled by its use as a playground material. In fact, sand features in many products that we all use every day, such as smartphone screens, microchips and every kind of glass, from windows and mirrors to drink bottles. Its primary use, however, is in the construction industry, where it forms the basis of what holds everything we know together: cement.

Not quite limitless

If you’ve visited a beach recently or flown over the vast expanses of deserts in Africa and the Middle East, you might question how a sand shortage is even a remote possibility. While it is true that our planet is covered in massive amounts of naturally-occurring sand, not all of it is suitable for use as a construction material.

Beach sand, for instance, contains too much salt, which naturally attracts water and therefore makes it terrible for the durability of a structure. It can be used, but it isn’t preferred. Desert sand, on the other hand, has been windblown smooth over the course of millennia of exposure, meaning its grains don’t have enough grip to be useful. The stuff we need for building is dry, rocky and angular – the kind of sand found in the beds, banks, and floodplains of rivers, as well as in lakes.

The problem is not just that we’re using a lot of sand; it’s that we’re expecting to use a lot more in the future. At present, an estimated 50 billion tonnes of construction-grade sand is being extracted worldwide every year. China alone has used more construction sand in the last few years than the United States used in the entire 20th century. A 2022 study conducted by Leiden University in the Netherlands projected that the demand for sand will rise by 45% over the next four decades.

As with all naturally-occurring resources, apparent abundance does not guarantee never-ending supply. Some experts have projected that, if we continue to extract it at our current rate, there is a very good chance the world might run out of construction sand as early as 2050.

The cartels and the crocs

If you’re a long-time column reader, you probably already know where this story is going. I covered the Italian olive oil agromafia in this article and the avocado cartels of Mexico here. Though the locations and the goods differ, the lesson stays the same: where there is massive demand and little supply, crime tends to flourish.

Unsurprisingly, sand-related crime is currently out of control. Illegal sand and gravel mining is associated with organised crime syndicates, coercion and violence, and many other related social impacts. The most recent figures from American think tank Global Financial Integrity show that illegal sand trade is the third-biggest global crime after drugs and counterfeiting.

Read that again: there are more sand gangs than diamond gangs in the world right now.

Controls around sand extraction have always been a little too lax, which not only opened the door for organised crime, but allowed a seed of overconsumption to take root. Even non-criminal sand miners are often unregulated, which is a problem, since their activities can destroy local ecosystems, contaminate potable water for nearby communities and destroy entire agricultural sectors – at best. At worst, they can start altering geography such as the shape of coastlines, the flow of riverbeds and the presence of small islands. Perhaps the biggest irony of this whole story is that we can’t seem to continue building without destroying the very foundation we stand on.

In the Mekong River, Southeast Asia’s longest waterway, the extensive extraction of sand has set off a troubling chain of events. This practice has accelerated the sinking of the Mekong Delta, a critical agricultural region. As the delta subsides, seawater encroaches further inland, leading to the salinisation of once-fertile farmlands. This incoming salt not only degrades soil quality but also severely undermines agricultural productivity, posing a serious threat to the livelihoods of millions who depend on the delta for food and income.

Similarly, in the Nilwala river in Sri Lanka, the removal of sand has significantly disrupted the natural water flow, leading to a reversal in the river’s direction. This change has allowed ocean water to push inland, altering the river’s ecosystem in unexpected ways. Among the most striking consequences is the migration of saltwater crocodiles, which were once confined to coastal areas. Now, these formidable predators are venturing further into the river and toward civilisation, creating new challenges for local communities and wildlife alike.

Stopping the flow of the hourglass

A 2022 United Nations Environment Programme (UNEP) report outlined ten key recommendations for governing and managing sand resources in a responsible, sustainable, and equitable manner. The report emphasises the urgent need to prioritise the reduction of natural sand extraction and its associated environmental impacts to avert a looming crisis.

Among its recommendations, the report calls for the elimination of unnecessary construction projects and speculative building, particularly in developed countries with extensive infrastructure. Instead, it advocates for the recycling of existing materials. Germany is highlighted as a leading example (no surprises there), recycling 87% of its waste aggregate materials. Additionally, the report suggests using recycled ash from incinerated solid waste as an alternative to sand, further promoting sustainable practices in construction. “Our sand resources are not infinite, and we need to use them wisely. If we can get a grip on how to manage the most extracted solid material in the world, we can avert a crisis and move toward a circular economy”, writes Pascal Peduzzi, one of the contributors to the UNEP report.

The jury is still out on whether we will be able to convince those crocodiles to swim the other way, though.

About the author: Dominique Olivier

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

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

Dominique can be reached on LinkedIn here.

Ghost Bites (Blue Label | Dipula | Equites | Fortress | Impala Platinum | Libstar | Metrofile | Pick n Pay | Sanlam | Santam | South32)

The Finance Ghost
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Ghost Bites (Blue Label | Dipula | Equites | Fortress | Impala Platinum | Libstar | Metrofile | Pick n Pay | Sanlam | Santam | South32)

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

Blue Label Telecoms: for IFRS professors only (JSE: BLU)

Here comes the most complicated financial update on the JSE

Even my most sadistic university lecturers would’ve struggled to dream up a case study like Blue Label Telecoms. The financials are so complicated that most people put it in the “too hard” bucket and walk away from something they don’t understand. As an investor, that’s always been my approach.

For traders who are often following the momentum rather than the deep fundamentals, this chart has delivered:

Well, it’s delivered over the past year at least. Here’s the chart that shows you why I’m not exactly fighting to get to the front of the queue to buy shares in something that has complex financial information and this track record:

Here are some highlights:

  • Revenue fell by 23%, except it actually didn’t because of the gross profit on certain value-added services, so in fact it grew by 16%.
  • Gross profit fell by 5% but gross margin increased from 18.41% to 22.57%, partially because of the value-added services and partially…well, who knows?
  • EBITDA fell by 18%, provided we ignore the recapitalisation of Cell C, with Comm Equipment Company down R368 million and therefore responsible for the negative EBITDA move of R258 million.
  • Core HEPS jumped from 45.55 cents to 76.08 cents, except it’s not really core HEPS because it still has the Cell C recapitalisation in there. If we split that out, core HEPS fell by 34% to 68.66 cents. That pesky Comm Equipment Company contributed R188 million of the decrease and all the other entities were down R124 million, even though it seemed like the rest of the group was going the right way on EBITDA.
  • In many cases, the challenge in earnings is because of fewer discounts and rebates from Cell C, the very company that Blue Label has plowed a fortune into trying to save.

Believe me, it gets a lot more complicated. That’s just the highlights reel.

I like buying things that (1) I understand and (2) are growing group earnings. In this case, neither test is met.

Dipula Income Fund released a pre-close update (JSE: DIB)

There’s a useful presentation as well

A pre-close update is used to give the market an update just before the company heads into closed period – the time between the end of the financial year and the release of financial information. Year-end at Dipula is 31 August.

The full presentation is available here. As expected, they are seeing better trading conditions than in the past five years, but they do raise higher utility costs as a risk to valuations. Importantly, Pick n Pay’s troubles are not affecting their business.

What is affecting the business is the exposure to government tenants. The portfolio reversion rate is -15% with government exposure included and just -0.3% with exposure excluded. The worst of that impact is being felt in the office portfolio.

They expect the final distribution per share to be in line with the prior 6 months.

Equites Property Fund also delivered a pre-close update (JSE: EQU)

They are having to use words like being “committed to our investment in the UK”

Equites hasn’t had the easiest time recently. The UK exposure has been under the microscope, with some tough questions being asked around shareholder returns. Equites expects interest rates to fall over the next year, which will certainly help relieve some of the pressure in that market. Some of the other fundamentals look positive as well. Despite this, the approach at Equites has been to reduce exposure to the UK and bring that capital home to South Africa, hence why they have to make statements like being committed to the UK. In other words, committed despite the recent strategy.

In South Africa, there’s an interesting comment that I’ve seen in logistics funds abroad as well: a decision to hold strategic land and only develop it to meet tenant demand. Logistics supply is restricted by the very nature of those properties, as large distribution centres are specialised, enormous things that need the right road access to make sense.

On the balance sheet, Equites expects the loan-to-value ratio to fall from 39.6% at February 2024 to 38.2% at February 2025.

To get all the details, you can refer to the pre-close update here.

Fortress performed ahead of its guidance (JSE: FFB)

With underlying property demand improving, valuation uplifts will hopefully follow

Fortress Real Estate Investments had a decent year, although you wouldn’t say so just by looking at the 2% increase in the value of local assets on a like-for-like basis. You have to look at other metrics, like a 6.4% increase in trading density in the retail portfolio and the 19.2% premium to book value that was achieved on property disposals.

Fortress also has a meaningful minority stake (16.3%) in NEPI Rockcastle, one of the best REITs on the local market. That sure does help. It used to be a lot higher, but they had to use the NEPI shares to help sort out the dual share class structure at Fortress that caused so many headaches.

The final distribution for the year of 70.19 cents is well ahead of Fortress’ expectation of 62.64 cents. The total distribution for the year was 151.63 cents, so the share price of R19.10 is a trailing yield of 7.9%. Fortress is no longer a REIT, so this distribution is taxed as a dividend rather than income. That makes a substantial difference to the net yield and means that the yield isn’t directly comparable to other REITs.

There’s a rather cute additional trick, with shareholders being given the option to receive NEPI Rockcastle shares from Fortress in lieu of a cash dividend. Based on the ratio for that dividend alternative, the NEPI Rockcastle election represents 25% to 30% more value over the default cash dividend. As dividend alternatives go, this one is worth considering.

A production increase couldn’t save the Impala Platinum numbers (JSE: IMP)

When commodity prices are under this much pressure, there isn’t much that anyone can do

Impala Platinum’s production numbers were boosted by the inclusion of Impala Bafokeng (previously Royal Bafokeng, which Impala acquired recently), so keep that in mind when reading about an increase of 13% in group 6E production. To show you how significant the impact of the acquisition is, production on a like-for-like basis was down 1%! Refined 6E production was up 14% overall and 2% on a like-for-like basis.

With rand revenue per 6E ounce down by 30%, even the acquisition of Impala Bafokeng and associated production uplift couldn’t do much to save these numbers. Revenue was down 19% and the EBITDA margin was just 14%, which isn’t nearly high enough in the mining industry.

HEPS fell by a nasty 88%, with the IFRS 2 B-BBEE charge of 215 cents adding to the pain, as HEPS was only 269 cents for this period. The issuance of nearly 38 million new shares as part of the acquisition of Impala Bafokeng also didn’t do any favours for HEPS.

Much as it’s tempting to think that at least HEPS was positive and thus it could’ve been worse, the free cash outflow was R4 billion. They have net cash of R6.9 billion but they still need things to improve in the PGM market.

Libstar has reported a useful increase in earnings (JSE: LBR)

A better trading performance has led to improved earnings

Libstar has released a trading statement for the six months to June. The best metric to look at is normalised HEPS from continuing operations, which increased by between 6.5% and 16.3%. This excludes unrealised foreign currency gains, hence it’s the cleanest view on the business.

This decent increase in earnings was driven by the trading performance in key categories, better group gross profit margins (up by 70 basis points to 21.7%) and a reduction in net finance costs thanks to lower levels of debt. Detailed results are due on 10th September.

Metrofile has never appealed to me (JSE: MFL)

The latest results will do nothing to change that

I’ve written about Metrofile many times before in Ghost Mail and I’ve always ended up with the same view: it’s not for me. This is one of the biggest value traps around, having attracted many investors who enjoy low multiples. Sometimes, a multiple is low for a reason.

For the year ended June, Metrofile’s HEPS will drop by between 41% and 52%. That’s a terrible outcome that results in a very different P/E multiple once you use these numbers rather than the numbers from the previous year.

I just cannot see the appeal of a physical storage and filing model. It’s a race to zero if ever I’ve seen one, with margin pressure in their operations in the Middle East as well.

High interest rates haven’t helped either, despite a 6% to 10% reduction in net debt over the period. They expect further debt reductions in the coming year.

That’s all good and well, but the underlying business actually needs to grow.

They expect to pay a full-year dividend of 14 cents, down from 18 cents last year. That’s a 6.4% dividend yield on the current price. There are far better places to find that yield in companies that are actually growing.

Pick n Pay takes the next step in the turnaround plan (JSE: PIK)

Yes, this means the IPO of Boxer

As Pick n Pay’s recent trading update told us, Boxer is still doing really well and Pick n Pay certainly isn’t. This means that they need to get cracking on the Boxer IPO, as the market will be receptive to the Boxer story and this will help Pick n Pay maximise the value that it gets from reducing its stake in that excellent business.

To execute the plan, they need to start getting the shareholder approvals in place. There is some restructuring required, including of the group’s share capital.

They are still aiming for the Boxer IPO to take place towards the end of the year, with the price determined through a bookrunning process. This means that institutional investors will be asked to put down a price at which they are happy to take shares.

Pick n Pay is aiming for roughly R8 billion to be raised through the sale of shares in Boxer, but this amount is subject to change.

The circular for the shareholder approval is available here. Along with tons of other information on Boxer and the restructuring, it confirms that Pick n Pay will retain a controlling stake in Boxer of at least 50% plus 1 share. If you’ve ever wanted to really dig into Boxer, the circular now makes that possible.

A strong period for Sanlam (JSE: SLM)

Strong operational results plus positive returns on shareholder capital did the job here

Sanlam has released a trading statement for the six months ended June and it looks strong to say the least, with an increase of between 15% to 25% in their key metric: net result from financial services (NRFFS). This is the basis on which they pay dividends.

Ironically, HEPS still has once-offs that Sanlam doesn’t like to use to measure performance. For what it’s worth, HEPS increased by between 35% and 45%.

The results was driven by good news in various parts of the group, including the core insurance operations and other bright spots like credit and structuring in the operations in India. There were also positive returns on the shareholder capital portfolio, but to a lower extent than in 2023. For insurance businesses, a combination of strong operational performance and attractive returns available in the market is the holy grail.

Santam delivered a juicy earnings uplift (JSE: SNT)

The net underwriting margin is within the target range – but could still be better

Santam has released results for the six months to June. Insurance revenue increased by 10% and HEPS was up by an impressive 35%, so this was a great period.

The major improvement is in the net underwriting margin, which has jumped from 3.8% to 6.5%. The target range is 5% to 10%, so they are now within range. This means that the risk of the book is now in line with how it is being priced, clearly a key ingredient for success in insurance.

The positive narrative around India is interesting at the moment, with Santam highlighting strong growth from Shriram General Insurance in India. Growth in the book and the claims ratio were positive, with a lower return on insurance funds stopping it from being a perfect outcome.

The interim dividend is up by 8% to 535 cents, so the payout ratio has come down sharply from 42.3% to 34.1%.

South32 released results and other important updates (JSE: S32)

As we’ve seen elsewhere in the industry, there’s a major drop in earnings

As regular readers of Ghost Mail will know, mining companies can have really volatile earnings. It all depends on where we are in the cycle for each underlying commodity, with profits able to halve or double year-on-year without blinking an eye.

At the moment, many of the mining houses are on the wrong end of the cycle, so we are seeing substantial drops in profit. South32 is just one such example, with HEPS for the year ended June down by a most unfortunate 71%. Amazingly, this precipitous drop was driven by a decrease in revenue of just 3% and a decrease in EBITDA of 29%. This shows you how the impact filters through the income statement

The moves at underlying commodity level are not for those with weak stomachs. For example, zinc saw underlying EBITDA increase by $76 million, yet the nickel business suffered a $150 million negative move. That’s still tame compared to Australia Manganese, where underlying EBITDA fell by $187 million thanks to Tropical Cyclone Megan.

South32’s payout ratio is in the 40% – 45% range, so the dividend moves up and down with earnings. This means that the dividend is also volatile, so always be very cautious when looking at valuation metrics for mining groups. The trailing dividend yield is a poor choice of metric to use.

Aside from releasing an ore reserve declaration for the Sierra Gorda copper mine that won’t mean much to anyone who isn’t a geological expert, the company also released a third announcement for the day and one that is far simpler to understand: the sale of Illawarra Metallurgical Coal has been completed.

Little Bites:

  • Director dealings:
    • There’s a massive sale of Dis-Chem (JSE: DCP) shares by a prescribed officer, coming in at R178 million worth of shares.
    • A prescribed officer of Standard Bank (JSE: SBK) sold shares worth R5.28 million.
    • There’s more selling at RFG Foods (JSE: RFG), this time by a different director of a major subsidiary. These sales are worth R914k.
    • A director of Orion Minerals (JSE: ORN) bought shares in the company worth $3,000.
  • Kumba Iron Ore (JSE: KIO) is investing in new processing technology at the Sishen mine that is expected to treble the premium quality production volume at the mine from 18% to 55%. The investment is expected to generate an internal rate of return of 30%, which is a strong investment case. The total capital investment is R11.2 billion, with R3.6 previously approved and thus R7.6 billion in new investment. They’ve spent R1.8 billion thus far. Of course, it would really help if Transnet also got their act together, since this is a strong show of faith by Kumba in our country.
  • Orion Minerals (JSE: ORN) announced that it has been granted the key water use licence for the Okiep Copper Project, representing the final permitting milestone in progressing the project to construction and production. Given how water sensitive the Nama-Khoi district is, this is a really important step.
  • Stefanutti Stocks (JSE: SSK) updated the market that the disposal of SS-Construções (Moçambique) Limitada is taking longer than planned, with the fulfilment date for conditions precedent extended to 30 September.
  • Workforce Holdings (JSE: WKF) has limited liquidity, so it falls into Little Bites on such a busy day. The company has released results for the six months to June and they reflect 10% growth in revenue, an 82% jump in EBITDA and a massive jump in HEPS from 1.7 cents to 12.6 cents. The share price is R1.35, so the annualised earnings multiple isn’t exactly demanding. If only there was decent liquidity in the stock.
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