It’s easy to be despondent when looking at the historic M&A data in SA to ascertain a trend – its interpretation is not pretty. M&A activity has been on the decline since 2008, for a variety of reasons, most of which are of our own making. Initially triggered by the financial crisis, the further decline in investor confidence was driven by state capture and the revelations of the extent and reach of the malaise throughout the organs of government, the COVID pandemic, together with uncertainties created by the war in Ukraine, higher inflation and interest rates globally, a low domestic growth rate accompanied by a weakening exchange rate, ‘grey listing’, and foreign policy blunders, all of which have had investors running scared.
And while still with us are the problems of failing infrastructure, dysfunctional SOEs, looming water shedding and skills shortages, to name but a few, there are – for the first time in a while – reasons to take a positive view.
South Africa has a government of national unity, inflation data shows the Reserve Bank’s strict interest rate policy is working, the domestic exchange rate has recently found support, and the private sector is willing to partner with government. These positives offer an opportunity to address the challenges that could alter SA’s economic and financial market trajectories. Although not reflected in the H1 M&A numbers captured for the period, the dealmaking pipelines are (according to industry advisers) healthy, also witnessed in the past few weeks by the increased number of deals announced by SA exchange-listed companies. The local equity market presents an opportunity for investors – supported by attractive valuations and reasonably priced – and the country’s diversified economy offers opportunities to invest in strong sectors able to withstand global economic storms. The trick will be for SA Inc to stay the course on this new path, take advantage of opportunities presented, and make the necessary changes to regulations that impede investment flows. If ever there was a right time, this is it.
The most active sectors during H1 were Real Estate (38% of the quarter’s deals) followed by the Retail sector. Deal size fell typically in the R50m to R200m bracket reflecting 41% of deals recorded for the period. SA-domiciled companies were involved in 16 cross border transactions, notably within Africa (8) followed by the UK (3).
As is the norm, share issues and repurchases characterised general corporate finance activity for the first six months of 2024, with R21,5 billion raised from the issue of shares and R104 billion the value of shares repurchased. The repurchase programmes of Prosus, Naspers and British American Tobacco account for most of this value.
All data used in this H1 2024 analysis sourced from DealMakers Online
DealMakers H1 2024 League Table – M&A activity by the top South African advisory firms (in relation to exchange-listed companies).
DealMakers H1 2024 League Table – General Corporate Finance activity by the top South African advisory firms (in relation to exchange-listed companies).
The latest magazine can be accessed as a free-to-read publication at www.dealmakersdigital.co.za or on the DealMakers’ website.
Commercial Cold Holdings (CCH), a cold storage and logistics provider established in 2023 with funds managed by African Infrastructure Investment Managers (Old Mutual) has announced the acquisition of iDube Cold Storage based in KZN. The addition of the iDube facility to CCH’s warehousing network will provide 9,000 pallets of refrigerated capacity in Durban. Financial details were undisclosed.
In a trading update Stor-Age Property REIT disclosed the acquisition in July of Extra Attic, a single-story self-storage property in Airport Industria, Cape Town for R73 million. Its proximity to national roads and the airport will complement the existing portfolio in the Cape.
In a deal valued at R1,5 billion, Bid Corp has acquired a 100% interest in Turner and Price (TP), a food wholesaler in the UK. TP will join the Caterfood Buying Group, which includes independent businesses such as Thomas Ridley, Nichol Hughes, Elite Fine Foods, Harvest Fine Foods and Cimandis among others. TP is anticipated to contribute revenue of R2,3 billion and trading profit of R185 million to the group results for F2025.
King Loan Finance, a subsidiary of Finbond, is to acquire the businesses Kitsismart and KWT Finance for a purchase consideration of R25,75 million. The businesses operate via their five branches in the Eastern Cape, offering short-term consumer loans with terms from one to three months. The deal will not only expand Finbond’s South African store network to 416 but will also increase the profitability of its local operations.
Pick n Pay has released the circular setting out further details relating to the Boxer IPO (expected in the latter half of 2024) and the share capital reductions intended. Although the targeted amount to be raised from the listing is not finalised, the company expects to generate R8 billion in proceeds. The funds will be used to settle the Group’s outstanding debt and for considered re-investment to secure the turnaround of the Group’s Pick n Pay Supermarket business. In preparation for the IPO the group is in the process of undertaking an intra-group restructuring and as part of the restructure, a new company Boxer Retail Group has been incorporated and will serve as the listing vehicle of the Boxer business. Pick n Pay, through its wholly owned subsidiary Pick n Pay Retailers will retain an indirect minimum shareholding in Boxer Retail of at least 50% plus one share.
Some good news released by MC Mining this week is that it has secured potential investment of US$90 million to fund its Makado, Vele and the Greater Soutpansberg Projects. The investor, HKSE-listed Kinetic Development Group will invest via two tranches for a controlling 51% in the exploration, development and mining company. The initial tranche of 13.04% for an aggregate consideration of $12,97 million will see the issue of 62,1 million shares at an implied $0,21 cents per share (R3,72 per share). The second tranche is conditional on the fulfilment of a number of conditions precedent. Should this not occur, the investor has the right to request that MC Mining buy-back the shares issued for the first tranche.
In July Kore Potash announced it had conditionally raised c.US$1,28 million through the proposed issue of 91,802,637 new ordinary shares at a price of US$0.014 per share. 87,5 million shares were placed with new and existing shareholders. The placing of the remaining 4,3 million shares ($60,000) with the company’s existing chairman was conditional on shareholder approval. Shareholder approval has now been granted. The proceeds of the fundraise will be used to progress the Kola Potash Project.
Lighthouse Properties has, on the open market, disposed of an additional tranche of 224,093,712 Hammerson plc shares for an aggregate cash consideration of R1,45 billion.
Italtile will use cash reserves in excess of operational requirements to pay shareholders a special cash dividend of 78 cents per share.
PPC will use a portion of the cash received from the disposal of its 51% interest in CIMERWA in July to pay shareholders a special cash dividend of 33,5 cents per share amounting to R521 million.
Suspended since July 2022, Chrometco is to change its name to Sail Mining Group. The mining and exploration group is expected to trade under the new name from 23 October 2024.
Buka Investments (previously known as Imbalie Beauty which listed in 2007), has walked a troubled road, and the cancellation of its R140 million acquisition of Caralli Leather Works and Socrati Footwear from B&B Media and Moltera Group announced in July 2022 was the beginning of the end for the ‘house of brands’. As a cash shell, Buka Investments was required, within six months of classification, to enter into an agreement and acquire viable assets to satisfy the conditions for listing in terms of the JSE Listing requirements. Having failed to do so, its listing was suspended in February 2023. Since its suspension continued failure to comply with listing requirements will see Buka’s listing removed from the JSE on 4 September 2024. Shareholders will remain invested in an unlisted company.
Several companies announced the repurchase of shares:
In line with its share buyback programme announced in March, British American Tobacco this week repurchased a further 266,841 shares at an average price of £27.82 per share for an aggregate £7,42 million.
In terms of its US$5 million general share repurchase programme announced in March 2024, Tharisa has repurchased a further 27,191 ordinary shares on the JSE at an average price of R19.19 per share and 294,456 ordinary shares on the LSE at an average price of 81.63 pence. The shares were repurchased during the period 19 – 23 August 2024.
Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 19 – 23 August 2024, a further 2,287,039 Prosus shares were repurchased for an aggregate €76,25 million and a further 198,299 Naspers shares for a total consideration of R728,65 million.
Five companies issued profit warnings this week: Putprop, African Rainbow Minerals, Insimbi Industrial, Murray & Roberts and Metrofile.
Five companies issued cautionary notices this week: Burstone, Chrometco, Salungano, Vunani and Sasfin.
When change of control clauses hinder the tango of M&A.
A company’s memorandum of incorporation may limit or restrict its board of directors’ authority by stipulating that it may not enter into agreements of a certain nature or above a certain monetary value without the approval of its shareholders. However, this requirement (or one similar to it), while not uncommon, may not be contained in every company’s memorandum of incorporation. In fact, quite often, material agreements which include onerous provisions are concluded by companies without their shareholders having any oversight.
If the board of directors’ authority is not limited or restricted in this regard, section 66(1) of the Companies Act, No 71 of 2008 (Companies Act) – which provides that “the business and affairs of a company must be managed by or under the direction of its board, which has the authority to exercise all of the powers and perform any of the functions of the company” – will be applicable. Therefore, in many cases, the board of directors will have the authority to transact in the company’s name without shareholder approval being obtained.
At any given time, shareholders (who may include institutional investors) may make the decision to dispose of all or a part of their shares to another shareholder or third party. During the course of a due diligence investigation conducted by a purchaser, or negotiations in relation to a sale agreement, it may come to light that the target company (TargetCo), in the ordinary course of business, entered into material agreements which contain terms that could potentially hinder the implementation of a sale by a shareholder of its shares in TargetCo. A change of control clause requiring prior consent is one of these provisions that a seller and a purchaser should look out for when negotiating the sale agreement.
Change of Control Clauses
Many agreements may align their definition of control to that of section 2 of the Companies Act, which sets out the definition of control for companies, close corporations and trusts. In respect of companies, a person controls the company or its business if it is (i) a subsidiary of that first person as determined in accordance with section 3(1)(a) of the Companies Act; or (ii) that first person together with any related or inter-related person, is (a) directly or indirectly able to exercise or control the exercise of a majority of the voting rights associated with the company’s securities, whether pursuant to a shareholder agreement or otherwise; or (b) has the right to appoint or elect, or control the appointment or election of directors of that company who control a majority of the votes at a meeting of the board. A similar definition of control exists for close corporations and trusts. In addition, an overarching definition is contained in section 2, which provides that a person controls a juristic person or its business if that first person has the ability to materially influence the policy of the juristic person in a manner comparable to a person who, in ordinary commercial practice, would be able to exercise an element of control referred to above.
Including a change of control clause in a material agreement is not uncommon. Typically, change of control clauses are included in agreements where there is an interest in understanding the “controlling mind” of a counterparty, either in light of the long-term duration thereof or the nature of the relationship being established. The concern may be that when the “controlling mind” of such counterparty has changed, the contractual relationship between the parties may not be as viable. Change of control clauses usually include language requiring the written consent of the counterparty prior to implementing such change of control, or stipulating that the implementation of a change of control would constitute an event of default, triggering termination of such agreement or some other negative consequence.
Examples of agreements which could contain change of control clauses, unbeknownst to a shareholder, are agreements concluded by companies with material suppliers, contractors, or even key employees.
When conducting a due diligence investigation, it would be important for a purchaser (or a seller in the event of it conducting a vendor due diligence investigation for a bid process) to (i) determine the material agreements concluded by TargetCo; (ii) consider whether these material agreements contain change of control clauses which require prior written consent of the counterparty or may give rise to a termination event; and (iii) determine the likelihood of obtaining such consent and the anticipated time required to do so.
Triggering a Change of Control Clause
A change of control clause contained in a material agreement would usually set out the process to be followed if the clause is triggered. A common process would be that, prior to a change of control being implemented, TargetCo would be required to initiate discussions with and obtain the written consent of the counterparty. Failure to obtain this consent may result in TargetCo being in breach of the agreement, which would entitle the counterparty to remedies under the relevant agreement, such as termination or a claim for damages.
From a purchaser’s perspective, when acquiring a controlling shareholding in a company, one would prefer that the material agreements remain of force and effect, so that TargetCo may continue its operations on the same basis post-implementation of a transaction. For example, a material supplier ceasing to provide an essential component required for TargetCo’s operations may be detrimental to its revenue.
Companies should take caution when entering into agreements with change of control clauses. Further, to mitigate the potential risks surrounding change of control clauses, the following should be considered:
• Shareholders may want to consider including an obligation on the board of a company in the memorandum of incorporation that shareholder consent is required prior to concluding agreements which contain onerous provisions, such as change of control clauses.
• In preparing for a sale, a seller may wish to conduct a vendor due diligence investigation to assess whether there are material agreements which include change of control clauses. Similarly, a purchaser should conduct a due diligence investigation to assess the need to maintain any material agreements which may contain change of control clauses.
• Where change of control clauses are contained in material agreements, the parties should determine the likelihood of obtaining consent from a counterparty, and the time period (if any) in the agreement to obtain such consent.
Roxanna Valayathum is a Director and Storm Arends an Associate in Corporate and Commercial | Cliffe Dekker Hofmeyr.
This article first appeared in DealMakers, SA’s quarterly M&A publication.
Mergers and Acquisitions (M&A) activity is a key indicator of economic health, and we believe that the M&A climate in Africa could be influenced by five major mega-trends in the coming years.
The first of these mega-trends is the increasingly important role that technology, including Generative Artificial Intelligence and digital transformation, will play. Supported by rapidly accelerating smartphone penetration, these new tools will facilitate a faster exchange of ideas and business opportunities.
This segues into the second trend, which is known as “Generation Alpha” – people born after 2010 – and speaks to the fact that Africa has a young population and a growing middle-class. For organisations looking for growth markets, the African continent will largely fuel the global population growth in the coming decades, representing a huge opportunity for corporate development.
The rise of the green economy and the just energy transition is a third driver of transactions. There is currently a US$214 billion annual investment gap to meet Africa’s climate funding needs, and this will provide a range of opportunities for energy infrastructure from solar, wind, hydrogen and gas.
The fourth trend is geopolitics, as the world shifts from a Western-dominated economy to one where the likes of China and India play increasingly more important roles in the global political and economic spheres. Blessed with natural resources, Africa has been a focal point for countries looking for access to key minerals – including those involved in the fields of electric vehicles and battery storage businesses.
Further, we can expect the relocalisation trend to continue to gather pace as global supply chains are adapted to meet the demand for these new industries and trade routes.
On top of this, Africa has also sought to take its destiny into its own hands through the conclusion of a variety of trade deals, including the African Continental Free Trade Area (AfCFTA), which aims to stimulate regional trade. By shifting from an extractive economy, to one which focuses on value-adding activities, we can expect to see sectors like pharmaceuticals and agri-processing attract investment.
The fifth trend is the rise of public-private partnerships (PPPs) on the back of a rapidly evolving global debt environment, which has been influenced by elevated interest rates and inflation. African countries are struggling to pursue their investment agenda and deal with their public debt. These countries are now exploring PPPs for funding infrastructure initiatives. Examples of these include railway projects connecting East Africa and the development of ports in East and Southern Africa.
To better understand the level of M&A activity, one of the exciting new innovations introduced by Boston Consulting Group (BCG) is the M&A Sentiment Index* which provides a valuable snapshot into deal activity across the globe.
The M&A Sentiment Index provides a monthly update on dealmakers’ willingness to engage in mergers, acquisitions and divestitures over roughly the next six months. Based on current data, it indicates a mixed outlook for dealmaking activity through the end of 2024. The current index value of 78 is below the ten year average of 100, but the market has recovered significantly from the low point of 62 in November 2023.
North America remains the centre of attention for dealmaking activity with 61% of transactions, while Europe has reported a healthy 23% increase, compared with the first 6 months of 2023; the UK, Sweden, Spain and the Czech Republic are all enjoying a robust 2024.
While the African market has faced numerous challenges, there are signs that activity is starting to pick up again, with some large transactions capturing the imagination and signifying a shift in confidence.
In South Africa, Canal+ France SA has made a $2,6 billion bid for broadcast operator MultiChoice, while Nigeria has seen Renaissance invest in the Shell Petroleum Development assets in a deal worth $2,4 billion.
While smaller in scale, other interesting deals include the Carlyle Group bidding for the Energean Egyptian portfolio, the Saham Group investing in the Société Générale Marocaine de Banques SA business in Morocco, and Hennessy Capital investing in Namib Minerals.
As investment confidence returns, this is resulting in further commitments to exploration activity, which may unlock more transaction opportunities.
The recent $49 billion bid from BHP for Anglo American highlights that there is appetite for big deals, and the provision for Anglo American to divest from its South African assets was an interesting element to the transaction.
The recovery in valuations is bringing buyers and sellers closer together. Large transactions, such as the MultiChoice deal and the BHP bid for Anglo, showcase that executives are getting around the table and discussing opportunities. For bourse operators such as the JSE – the most advanced of the stock markets in Africa – this is encouraging, as they have a number of businesses trading on un-demanding price to earnings multiples. There are numerous world-class assets across a variety of sectors, including financial services, telecommunications and resources which are all trading at discounts to their developed market peers, but these assets will attract investor interest as confidence returns.
Despite the risks and opportunities in a fast-changing environment, we believe that the aforementioned factors, combined with a more favourable interest rate environment and growing business confidence, could drive increased investor interest in the African continent.
Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:
Bidcorp goes from strength to strength (JSE: BID)
Double-digit growth is always good news
Bidcorp is one of the best businesses on the local market. Through a combination of organic and inorganic growth, they’ve built an exceptional global food service empire. As offshore exposure goes, this is one of the best choices on the JSE in my opinion.
The share price has been erratic though. This is a function of the rand, the COVID disruptions to the restaurant and hospitality industries, as well as Bidcorp’s demanding valuation that recognises the quality of the business:
The management team is in control of the earnings, not the share price. They are doing a great job with those earnings, with the latest numbers from Bidcorp reflecting revenue growth of 15.1% for the year ended June. That translates beautifully to cash and profits, with EBITDA up by 14.4% and a cash conversion ratio of 102% of EBITDA. That’s hard to fault.
HEPS is up by 15.5%, so there are no weird once-offs driving that EBITDA performance. Thanks to the cash quality of earnings, the dividend is up 16%.
The segmental view gives a great idea of not just the diversification, but also the level of performance in Europe in particular in the latest period:
If ever you wanted to do a deep dive into the power of bolt-on acquisition strategies, Bidcorp would be a great place to do it.
Finbond makes two acquisitions in South Africa (JSE: FGL)
Buying short-term consumer lenders based in the Eastern Cape seems rather brave
Finbond is taking the rather interesting step of making acquisitions in two short-term consumer loan businesses that operate through a total of five branches in the Eastern Cape. The region is not exactly a hotbed of activity and has really struggled during the tough times in South Africa, so this is a big bet on the success of the GNU.
These businesses made a net profit before tax of R3.93 million for the year ended February 2024. This includes expenses of R4.85 million which apparently won’t be applicable after the acquisition, which isn’t uncommon for small businesses. The net asset value of the businesses is R6.75 million, so they generate a lot of profit off a small net asset base – typical of a short-term lender with constant churn in loans.
Finbond is paying R25.75 million for the deal, which seems like quite a lot even after that adjustment for expenses. Finbond’s market cap is worth R336 million, so it’s not an insignificant transaction.
Murray & Roberts is fighting hard, but there are still losses (JSE: MUR)
This has been an extremely rewarding speculative punt for those who were brave enough
The Murray & Roberts share price is up by a rather ridiculous 114% year-to-date, reflecting renewed enthusiasm around South African investment prospects and how much of this should hopefully flow into the construction industry.
For now, the share price is a much better story than the earnings. As a trading statement tells us, Murray & Roberts has certainly made improvements but is still loss-making.
Many of those improvements have come from cost-cutting exercises, with annualised savings of R100 million just in corporate costs. The full effect of those cost savings will be felt in the 2025 financial year.
The other good news is on the balance sheet, where South African debt has been reduced from R2 billion in April 2023 to R409 million as at the end of June 2024. Negotiations are underway to refinance the remaining debt. Importantly, at group level, they are now in a net cash position rather than a net debt position.
There’s still a lot of noise in the numbers, particularly due to deconsolidation of the Australian businesses. The best approach is to look at continuing operations, where the headline loss per share improved from -71 cents to a loss of between -19 cents and -29 cents.
Looking ahead, FY25 will be the first year where Murray & Roberts can really show us what the new and improved version of the group looks like. The recovery still has some way to go though, with a recovery to pre-pandemic levels of earnings only expected from 2027.
MC Mining has found itself a major investor (JSE: MCZ)
Kinetic Development Group will take a 51% stake in MC Mining
Here’s a big piece of news for MC Mining: the company has agreed that Hong Kong-listed Kinetic Development Group will subscribe for enough shares to take it to a 51% post-money stake. This will happen in two tranches.
Kinetic is a coal mining and trading group, so MC Mining’s Makhado steelmaking, hard coking coal project is of interest here and the capital will take that asset into production. There’s also enough capital on the table to help MC Mining develop other assets.
The first tranche is for a subscription of 13.04% in MC Mining for $12.97 million. It works out to around R3.72 per share, which is more than double the current share price. The second tranche for $77 million will come in after the various conditions precedent are met, which will include shareholder and regulator approvals. That is going to take a while. The parties have allowed for up to 270 days to achieve this. If it goes beyond that, Kinetic has the right to require the first tranche shares to be repurchased.
Let’s call this what this is: a great example of foreign direct investment flowing into our country. The winds of change are blowing for South Africa!
A special dividend at PPC (JSE: PPC)
PPC is paying out most of the proceeds from the sale of CIMERWA
Special dividends are interesting things. They are often rooted in disposals of major businesses, with the company’s management team showing the maturity to return the capital to shareholders rather than invest it in marginal products.
This is what is happening at PPC, with the group electing to pay a special dividend of 33.5 cents per share. Although the wording of the SENS is a bit confusing at first, this represents 66% of the cash that was obtained from the sale of CIMERWA in Rwanda.
Transpaco’s earnings and margins have dipped (JSE: TPC)
Both the plastic and paper divisions saw a drop in operating profit
Transpaco has released results for the 12 months to June and there aren’t really any highlights. There was plenty of load shedding for most of that period and very little of the GNU-inspired good stuff. For those reasons, a 4% drop in revenue and an unpleasant 15.7% decrease in operating profit isn’t the biggest shock around.
The group’s two major divisions, plastic products and paper and board products, are similarly sized – or at least, they are now. Operating profit in plastic products fell sharply from R134 million to R99 million, while paper and board products fell from R99 million to R87 million.
Group operating margin fell from 9.7% to 8.6%. A 110 basis points deterioration on what is already a fairly tight margin is significant.
By the time we reach HEPS level, the impact is slightly less severe. HEPS fell by 8.3% and the total dividend was down 7.7% as the payout ratio moved up slightly. The group is in a net cash positive position rather than a net debt position, which does wonders when earnings move lower. Share buybacks also helped improve the HEPS result relative to operating profit.
The group doesn’t exactly give the market much to hang onto in the results, with little or no commentary on the outlook. Transpaco is an illiquid counter with a wide bid-offer spread. Some additional management commentary might help address that over time, as investors would be armed with more information to help them make decisions.
Little Bites:
Director dealings:
There’s more selling of Investec (JSE: INL | JSE: INP) shares by Stephen Koseff, this time to the value of £1.2 million.
An associate of a director of Brait (JSE: BAT) – not Christo Wiese – bought shares worth R2.3 million. This is a follow up to another recent purchase by that director.
A director of Afrimat (JSE: AFT) has sold shares worth R535k.
There’s yet more selling by a director of a major subsidiary of RFG Foods (JSE: RFG), this time to the value of R453k.
For those interested in Powerfleet (JSE: PWR), the full 10Q report is now available to supplement the press release that recently came out. You can dig in here if you want all the details on the company. The US reporting style is very different and is worth checking out.
I have no idea why they are bothering, since the company is suspended from trading, but Chrometco (JSE: CMO) is going through the process of changing its name to Sail Mining Group.
The Trader’s Handbook is brought to you by IG Markets South Africa in collaboration with The Finance Ghost. This podcast series is designed to help you take your first step from investing into trading. Open a demo account at this link to start learning how the IG platform works.
Listen to the podcast using the podcast player below, or read the full transcript:
Note: examples used in this podcast should not be interpreted as advice. They are for informational purposes only.
Intro: Welcome to The Trader’s Handbook, a limited podcast series brought to you by IG in partnership with your host, the Finance Ghost. Over the course of our upcoming episodes, we are delving deep into the world of trading, helping both novice and seasoned traders alike navigate this exciting field. Join us as we unravel the intricate strategies and insights that define this dynamic landscape and the beautiful puzzle that is the markets. IG Markets South Africa is an authorized financial services and over the counter derivatives product provider CFD. Losses can exceed your deposits.
The Finance Ghost: Welcome to Episode five of The Trader’s Handbook and what an awesome podcast series this is turning out to be. Really, really enjoying it, and so are you, it seems. We’re happy with the numbers. It looks like people are opening demo accounts and making their first trades in accounts where it’s not monopoly money anymore. So, well done to you if you’re one of those people! And if you aren’t, go and check out the demo accounts and start putting some of the stuff into practice, because of course that is what makes it so fun. And we are recording this week amidst an environment of all-time highs on the JSE. We’ve had a strong rebound for stocks in general. We’ve had the rand below R18 to the dollar. Things are good in South Africa right now. Sentiment is strong. Most local stocks are rallying. The sun is kind of starting to shine. Not so much in Cape Town. More on that to come.
But let me first welcome Shaun Murison from IG Markets South Africa, our regular source of knowledge on the world of CFD trading. Shaun, thanks so much as always for doing this with me.
Shaun Murison: Great to be here again. Exciting times in the market. Like you correctly said, rand at its best levels in more than a year, we’ve had the JSE Top 40 Index trading to new all-time highs. We’re on the cusp of this easing cycle in interest rates. So, things are cautiously optimistic. Well, actually not so cautiously – more like aggressively optimistic at this stage, but markets don’t move in a straight line. So exciting times ahead, expecting a little bit of volatility.
The Finance Ghost: They are quite aggressively optimistic. You see these South African mid-caps now trading at like low- to mid-teen P/Es, where they were languishing previously at like sevens and eights. It’s quite interesting.
I’m sitting with quite a lot of listed property exposure in my investment portfolio, hoping for these rates to come down and for all of this good stuff to flow into these property owners, ultimately, especially on the retail side. It’s going to be pretty interesting to see how the next year pans out.
But of course, as I’ve learned in some cases the hard way, trading and investing are quite different animals. Now, listeners who have been following the shows thus far will know that one of the positions that I tried out in my demo account was to be short Mr Price.
Now this was very much based on my view that, well, I don’t think Mr Price is as strong as some of its competitors in that space. I think the valuation had gotten a little bit overcooked, and we’re going to reflect on that trade today and what I’ve learned from it, as well as perhaps a smarter way to actually go about things. But I think before we do that, for those who have perhaps made this their first podcast in the series, or still aren’t quite familiar with these terms, I think it’s always worth just spending literally a minute recapping the difference between long and short positions on a stock. The beauty of CFD trading is that you can go short. You can’t do that in your traditional brokerage account. You can only go long. So, Shaan, I’ll let you do the honours on a brief relook of long versus short.
Shaun Murison: Okay, so long, very simply, it’s the same as what you do if you’re investing. You want to buy low and sell high, obviously simplifying things. There’s a use of leverage in trading, and so we talked about the profits and losses being magnified. But when you talk about the short side of things, it’s taking a trade with a view that you expect that market to fall. When you’re going long, you want to buy low and sell high to make money. When you’re going short, you want to sell high and buy low, if that makes any sense. So essentially, in both scenarios, you need to pay less to buy something than you sell it for to make money. It’s just when you’re going short, you can do it the other way. If you think that market’s expensive, you can take a short position, you can sell it, basically borrowing shares if you’re looking at shares, you’re selling it and you’re hoping if it does come down, you can buy it back cheaper.
The Finance Ghost: So, back to the Mr Price trade. Now, I had what would best be described as a naked short – in some ways I lost my shorts, but we’ll talk about that now! And in other words, this is basically an unprotected position of being short Mr Price. I’m not long any other clothing retailers or South African general mid- to large-caps in case there’s a big rally in local stocks. I’m just sitting there short Mr Price, because I believe so strongly in that trade.
Easy with monopoly money, and that’s why I did it.
Now, it looked promising initially. Actually, I was in the green. I think we spoke about that on probably episode two, I can’t recall exactly. And at that point I should have said, thank you very much, I’ll take the profits and run. However, I didn’t. And on a naked short, I think you need to be in it pretty much for a good time rather than a long time. You can’t be too greedy because you are betting against a whole lot of things, like inflation, for example. I mean, this is such an important concept in long versus short, right? Shares are generally expected to go up over a long enough time horizon, so there’s actually no limit to how much you can lose on a short.
Whereas on a long position and if it goes wrong initially, you can kind of wait it out. But this is monopoly money in my demo account and I wanted to see how this trade would play out. Instead, as that share price moved higher and my short lost money, I added to the short and hoped that, okay, you know, I’ll get the right level, the thing will fall over and the trades will be in the money. That turned out to be a really bad call.
If you are naked short and it starts moving against you, I think you need to be very careful of fighting that momentum. The long positions, as I said, they sort themselves out over time, provided the stock is at least going up over the long term. But an ugly short that is going wrong has no limit to how much it can hurt you. So eventually I got out of the way of it. I locked in a loss in the process. So, a nice lesson learned there. I think the lessons I took from it were if you’re going to be contrarian, as I was, and as you pointed out at the time, one, you have to be nimble, which is exactly what you said. And two, don’t be stubborn and turn a small loss into a bigger loss. If you’re going to do something like that and it goes against you, then rather get out of the way. And I would definitely refer our listeners to the episode we did just before this. That would have been episode four in which we talked about what it means to have these different trading strategies to let your winners run, cut your losses, or not, as the case may be.
There may well be a smarter way to actually play these valuation dislocations. Because instead of a naked short, I could have done a pairs trade, which is quite an interesting way to play the market. And in one of your very recent newsletters, Shaun, you put out an idea for Mr Price vs. Truworths as a pairs trade. And I think before we get into the details of that exact trade, can you just explain for us what a pairs trade is? And then I think, yeah, maybe go into how that trade would actually work.
Shaun Murison: Just on the short side of what you were saying earlier on before going to the pairs stuff. You’re right. If you are short, there is no ceiling as to, you know, how far share can go up. So we have a saying, here we go: it’s better to be long and wrong than short and caught. And I think in your trade, you’re short and caught.
The Finance Ghost: Definitely short and caught. Definitely. That is precisely what happened.
Shaun Murison: Because, I mean, on the long side, a share can go to zero, but that means that if you’re on the wrong side of that, if you were long, your loss would be capped. But a way of protecting yourself in the market is basically a hedging strategy.
When we talk about pairs trading, we’re looking at taking two positions instead of one. We’re looking at taking a long position and a short position. And generally, we’ll do it with shares that are quite highly correlated. Shares within the same sector, like gold shares or platinum shares, banking counters etc. And looking at one that’s underperformed a little bit, and one that’s outperformed. The one that’s underperformed, you might look at a long position and then the one that’s outperformed, you look at a short position and you view the profit and loss from both those positions together. You’re trading one share against the other, rather than just the general macro market environment.
In my opinion, it’s a bit of a safer way to trade. You are essentially hedged in the market, and where the markets are going up or down, there’s an opportunity to make money in that pair. So, when we refer to that Mr Price trade, something that I was looking at in a Technical Tuesday newsletter which put out every Tuesday, and it is free for your subscribers if anyone is interested in that. The basic analysis there was saying that it looks like since the election time, we’ve seen quite an outperformance of Mr Price relative to Truworths. Now, they’ve both been positive, there’s been positive sentiment around both companies, both have rallied.
But perhaps, you know, the gains on Mr Price have gone a little bit too far relative to the gains in Truworths. We use a little technical indicator – yes, I’m using a technical analysis version for approach to the pairs trade – called the relative strength comparison. And all it is, is a ratio. It takes the share price of Truworths and it divides it by the share price of Mr Price.
And what that was telling me is that, well, Truworths has underperformed Mr Price a little bit too much over the short term. And maybe going forward, we can see now Truworths start to outperform Mr Price. It’s not saying that I think Mr Price has to come down and Truworths has to go up. It’s just saying their relationship needs to normalize, and if it does, then you’ll be making money. At the moment, that suggestion was maybe there was an underperformance of about 8% there. So, looking to make about 8% on that trade and it has started moving in the right direction, hasn’t hit the target just yet. That’s the basic premise of it.
The Finance Ghost: Yeah. And that’s very different to sitting naked short, right? Because if I think that there’s a company in the sector that is expensive, well, if the whole sector goes up, then that short can still lose money. Expensive things can get more expensive. But one of the ways to protect against that would be to go long one of the low valuation stocks in the same sector. So that if the sector gets the upswing, you would hope that the low valuation stock would get more of an upswing than the one that you’re sitting short and net net, you come out with a profit.
Would you say it’s also quite contrarian then, because you’re actually going short the winner and long the relative loser in the sector? It’s actually quite contrarian, which must be why I like it, right?
Shaun Murison: Maybe it is, it’s a bit of a mean reversion type strategy in technical analysis, there’s a lot of talk about trend following, and this is actually just deviating away from the trend following approach in trading. A mean reversion type strategy expects relationships to normalise over time. But yes, if we say there is a contrarian aspect to the type of trade, but we are still market neutral, we’re not worried about whether the shares are both going up or down. We’re trading the relationship between the two companies.
The Finance Ghost: For someone like me, who believes quite strongly in stuff like mean reversion in multiples and how important valuations are, I think pairs trading becomes really, really interesting and is a superior strategy, I think, to sitting naked short. The other mistake, of course, with that short was to just be naked short into immense South African sentiment.
And that was a good lesson learned as well: when you’re investing, which is my background and it’s long only and it’s longer term stuff, you are often rewarded by being against what the typical sentiment is. You’re buying the beaten down thing because you believe there are catalysts for it to improve at some point in the future. And then you look three, four years down the line and you’ve achieved a compound annual growth rate of 20% and you’ve beaten the market because you bought something at the right time when no one else wanted the thing.
Trading is just so different to that and it’s a lesson that you’ve got to learn by doing, which is why I’m so in favour of these demo accounts, because you’ve got to rather go and make these mistakes in a demo account than making them with real money. And a pairs trade would be a different outcome potentially for me.
I think, Shaun, let’s go into the costs of a pairs trade because this is obviously really, really important, right? You’ve got to look at your net return after costs because otherwise you might not be making any money at all. So, what are the costs of a pairs trade? There are actually two legs to this trade. Presumably it costs roughly double what it would cost you to just go with one leg of the trade. I think let’s run through that.
Shaun Murison: Yeah, so the costs don’t change in terms of how IG prices things. Entry level cost, commission on a position, you’re looking at 0.2% or R50 on a trade, and that’s each leg. Like you correctly said, when you start looking at a pair trade, you are essentially insuring yourself a little bit in the market and you’re doubling up on your position. Your cost does increase, which is, I suppose, the premium for, I would say, reducing your risk within the market, but so you’d pay that 0.2% on both legs. Let’s go back to that Truworths – Mr Price position. You’d be paying 0.2%, so on a R50,000 position you’d be paying R100 for the trade. But if you’ve got two of those, so now you’ve got two R50,000 positions, that’s another 0.2% and that would be another R100. And obviously you pay that when you enter the trade, and you’re going to pay that when you exit the trade. That’s your barrier to making a profit.
The Finance Ghost: Look, we definitely shouldn’t create the impression that a pairs trade is guaranteed to work, because of course, this is a trade with two legs. And that means technically, if you get both wrong, you can lose money twice as quickly if your short goes against you and your long goes against you.
In other words, if you believe that one share is expensive and one share is cheap, and that gap should close, but instead it opens – the winner keeps winning and the loser keeps losing – and you’ve now gotten the wrong way around, that gap can just keep widening. A great example on the international market would be something like Costco versus Walmart. I can imagine there were many times where someone looked at this and said, sure, Costco is crazy expensive, Walmart is looking cheap in relative terms, let me go long Walmart, short Costco. If you had been sitting short Costco at any point in that journey, you have been absolutely killed. That gap has just opened and opened and opened between the two. It’s actually now the biggest I think it’s ever really been in terms of the gap in valuation multiples.
That’s a very tempting one to say, okay, great, do the pairs trade, but it can just keep going. You just don’t know. So that’s obviously a challenge.
One of the ways to mitigate risk that we’ve talked about a lot in these podcasts is the use of stop losses. They’re probably a little bit more complicated in a pairs trade than they are in a normal trade. I think let’s just work through how stop losses work in the context of a pairs trade. Do they work? And is it something that you have to think about differently?
Shaun Murison: Okay, so when you’re trading, you’ve got to manage your downside risk. We’ve talked about that at length. And when we talk about a stop loss, it’s really about admitting when you’re wrong. We’re not going to get it right every time, especially when you’re trying to tell the future. That’s essentially what we’re doing with trading, aren’t we? We’re trying to tell the future. In a conventional trade, what you’re going to do is you’re going to have a look at what I want to buy here if it hopefully it moves in my favour and I’ll look to take profit there. But you know, if it goes against me, where am I prepared to accept that I’m wrong and take my loss? And that’s obviously what we refer to as a stop loss. Now when you’re trading on the IG platform, essentially you have the feature of being able to put in a stop loss into the system to automate that process. You don’t have to be in front of your computer the whole time. And if the market, you know, you’re at work and the market moves against you, it would pre-determine your loss and would kick you out of the trade. Now when you do look at something like a pairs trade, that does change a little bit. It does become a little bit more complicated because you don’t know how things are going to correlate. If you are taking two positions, you’ve got a long and a short in the market, in a perfect world, you want your long to go up and your short to come down. So you’re making money on the long and you’re making money on the short is what we call double alpha positive.
But quite often that’s not the case. It’s quite often you’ll find that both shares, because they are correlated and you know what’s happening in the macro environment, you might find that they both go up. And in that situation you want the position that you are long to go up quicker than the position that you’re short so that you make more money from the long than you’re losing from the short. And remember, we net those two positions off. Or alternatively you could have both share prices falling. In that situation to make money, you want the short to fall quicker than your long. So you make money on the short, you’d be losing money on the long, but when you net those positions together, hopefully you’d be profitable.
Now when we talk about a stop loss, we don’t know in pairs trading how that market’s going to correlate. For the example of Truworths vs. Mr Price, now that has started to work and has started to move in the right direction, but both of those shares have gone up. So, you’re losing a little bit on the Mr Price short, but you’re making on the Truworths long because you don’t know how that’s going to correlate. It’s hard to just put a stop loss in the system to try protect your risk.
You should still manage your risk, but I think in a pairs trade, you manually exit the trade. You might say to yourself, well, I’m prepared to lose, let’s say 3% in that trade, and then you just need to monitor that position and then say, okay, well, it’s breached my levels. And then you’d exit both trades at the same time. So still need to manage your risk, still need to manage that downside risk. And because if they do revert back to the mean, we don’t know how that’s going to happen. So, yeah, it’s a manual exercise of stop loss in that situation.
The Finance Ghost: And of course, position size is the other great risk management tool, right? It’s one thing to have stop losses, but if you go and put in this big position relative to not just your portfolio, but also your own ability to potentially lose money, and I think that’s maybe a concept that we don’t talk about enough. It’s not just relative to the size of your portfolio, it’s your value at risk. And you talked on the previous podcast about looking at stuff like the volatility in each stock, the average moves that it can make. It’s a very nice way to go and assess the risk. Look at those two charts and say to yourself, okay, how much do they typically each move? What is my risk in this trade? And then get the sizing right. I mean, that’s got to be another important risk mitigation tool here?
Shaun Murison: Yeah, so exactly what you’re saying. Position size is a function of stop loss. So, you always look at how much we’re going to risk per share, but you also need to determine the total risk of your account that you prepare to risk in any one trade. General guidelines, you know, between 1% and 5% of your account size in any one trade, but it really is up to you. You have to predetermine that, obviously, if you’re going too big into the market, your position sizes are too big, then you don’t give yourself that much breathing room. Now, when you’re looking at peer trades, you look at more or less equal position size. You’ve got a 100,000 position on the long, 100,000 position on the short. And I think if you are getting started out there, I always suggest taking smaller positions and having maybe slightly wider stops just so that we can actually give those trades a little bit of breathing room. Because quite often they don’t move immediately in the right direction. Sometimes they go against you before they move in the right direction, if they do move in the right direction, which is obviously the goal.
The Finance Ghost: Speaking of the sort of mistakes that can be made, and me getting it wrong in my Mr Price short, here’s another fun mistake. Always good to learn. So, I wanted to do a pairs trade in the last week of short Italtile, long Cashbuild, going and picking the downtrodden one. Italtile and Cashbuild, there are a lot of good reasons why they should move together as South African consumer discretionary spending improves, etc. I’m actually long Cashbuild in my vanilla equities account for what it’s worth. But obviously to do pairs you need CFDs, but also you need both of those instruments to be available. So instead of checking that they are both there, I just assumed they both would be. I put on the short for Italtile and then I was rather horrified to find that Cashbuild was not available on the system. This left me, guess what, naked short Italtile! Yay, me! The joy of a demo account and practicing.
So why is that the case sometimes, where you actually just don’t have a stock on the system? Obviously a pairs trade kind of requires two, as the name suggests. The lesson here being to check both legs of a trade before pulling the trigger. But I think it’s good to understand why sometimes there just isn’t availability on the platform.
Shaun Murison: Okay, so when you start trading leverage instruments, you want shares to have high levels of liquidity. And so generally shares that have lower level of liquidity, we won’t offer, just because they become a lot more volatile when you’re crossing the spread. You can see sharp sudden movements and it’s just a higher risk to the client and obviously higher risk to our books.
We offer the most liquid stocks. I don’t have the exact figure here, but it’s at least 200 of the more liquid stocks on the JSE, if you’re looking at the local market, ones that we think are suitable for short-term trading, and it’s gauged by risk and liquidity. There are some securities that won’t be available and they would be those smaller cap shares.
The Finance Ghost: Yeah, that does make sense. The lesson in this is always check, especially if you’re going to do a pairs trade. Don’t go and do one instrument and then potentially not the other.
I think, Shaun, this brings us to the end of episode five. I think it’s been another goodie in what is really a great series. I think pairs trading is just a great way to go and express your views on relative valuations and to actually look for the opportunities out there. And you can’t do it without being able to go short. And that, of course, means CFDs. So, the only way to see this for yourself, honestly, is to get that demo account open. You might think, oh, you know, I don’t want to try it or I’m going to go straight into the real deal. Just look at some of the silly mistakes I’ve made in my demo account. I can almost guarantee you’ll make other silly mistakes or different ones. You know, maybe you won’t, in which case you’re lucky. But why take the risk? Go and try it out. Go and get used to the system. Go and make those mistakes without real money. And then you’ll know for sure if this is something you want to dabble in, and then you can do it with the stuff that actually counts.
I would also put out there that if you are listening to this series and you’ve got questions that come up or you wish we covered something, send it through to us. You can contact me on X, which used to be Twitter, or you can contact me through Ghost Mail. You can reach out to Shaun on the various social platforms or the team at IG. Let us know what you’d love us to cover. There are still several podcasts in this series, and we would love to be responsive to your questions and sort of build them into what we’re going to cover.
Thank you for listening. We look forward to having you here on the next one, Shaun. And to the listeners, we look forward to welcoming you back for episode six when that launches. This has been episode five. Go check out the others that we have. Thank you.
Shaun Murison: Awesome. Thanks.
Outro: CFD losses can exceed your deposits. In our gorgeously diverse country, there really is a new reason to trade every day. Current affairs to political news can make the markets move and cause volatility, which can be advantageous to a trader. Diversify your portfolio by opening a trading account with IG and explore the possibilities of CFD trading or practice your trading skills on an IG demo account.
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:
Italtile had a better second half as expected, but new risks have emerged.
ADvTECH and STADIO have shown us that private education can be lucrative, provided the business model is right.
Harmony got its gold production sorted at exactly the right time.
Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:
BHP is such a good example of how mining cycles play out (JSE: BHG)
The bumper profits of 2022 are now a distant memory
Mining cycles are wild things. We can see this quite clearly at BHP, where diluted headline earnings fell from $22.2 billion in 2022 to $13 billion in 2023 and then $9.9 billion in 2024. That’s quite the drop, which is why mining cycles are only for those with strong stomachs.
The shape for EBITDA is similar other than in the latest year, with underlying EBITDA decreasing from $40.6 billion to $28 billion and then up to $29 billion in the latest period. You can see that the EBITDA vs. headline earnings disconnect happened in 2024. One of the reasons for the gap is that net debt has increased from $333 million in 2022 to $9.1 billion in 2024, at a time when interest rates are much higher. Remember, EBITDA is a measure of earnings before interest costs – in fact, that’s where the first part of the acronym comes from!
Looking at free cash flow for total operations, this dropped from $25 billion in 2022 to $5.6 billion in 2023 and then increased to $11.9 billion in 2024. In a capex-heavy business model, free cash flow tends to have far more volatility than earnings.
In a group as diversified as BHP, we need to look deeper to see what’s really going on in the major commodities produced by the group.
In the copper operations, we find a promising story of EBITDA up by 29% and underlying return on capital employed of 13%. They expect to deliver 4% growth in production in the coming year after two years of 9% growth.
In iron ore, EBITDA was up 13% and return on capital employed was a meaty 61%. This is the joy of owning the lowest cost major iron ore producer globally in the form of Western Australia Iron Ore.
Coal EBITDA was down 54% but is thankfully a smaller part of the group. Return on capital employed was 19%, which is still decent.
In terms of outlook, BHP flags major uncertainty around China – no surprise there. They also note India as a bright spot for commodities, with significant growth there.
Brimstone’s intrinsic NAV has gone backwards since December (JSE: BRT)
In an investment holding company, this is the key metric
Investment holding companies tend to recognise some investments as associates and others as subsidiaries, leading to all kinds of weirdness in the accounting. I prefer to look past all of that and focus on net asset value (NAV) per share, as this tells you whether the investment portfolio went up or down in value.
Looking on a per share basis is also important as it takes into account any share repurchasing activity, which is value accretive when the share price trades below NAV – as it literally always does. It’s therefore good to see that Brimstone reduced debt and executed share repurchases in this period.
Still, the intrinsic NAV per share fell 5.7% from December 2023 to June 2024, coming in at R11.436 per share. Brimstone trades at R5.70, so there’s the discount I was talking about. The biggest problem has been Sea Harvest, where the share price has been under pressure. You’ll find the results from that company further down, as Sea Harvest is also listed.
Master Drilling has flat profits – but watch those impairments (JSE: MDI)
You can’t always ignore the stuff in EPS rather than HEPS
The most common difference between Earnings Per Share (EPS) and Headline Earnings Per Share (HEPS) is that EPS is net of impairments and HEPS is not. An impairment is based on an assessment of the value that can still be derived from an asset. If that value is lower than the carrying amount on the balance sheet, an impairment or write-down must be recognised.
Sometimes, impairments aren’t very important. They often relate to assets that probably should’ve already been impaired a while ago. At Master Drilling though, the impairments in this period caught my eye as they relate to reverse circulation and mobile tunnelboring equipment – assets that are important sources of revenue. Due to uncertainty in the broader market, they’ve recognised a vast impairment in this period of $13.3 million.
Above all else, this is a reminder of the technological and market risks facing Master Drilling. If these impairments become a regular feature at the company, then it negatively impacts the business case. With 55% of capex on expansion and 45% on sustaining the existing fleet, they are constantly adding to the equipment and taking a view on what the demand for it might be.
The company reports in US dollars and revenue is up 17.3% in that currency, so it was a strong period aside from the impairments. Alas, increases in operating expenses ate up pretty much all the uplift in gross profit, with higher finance costs adding to the pain. Measured in US dollars, HEPS fell by 3.2%. Measured in rand, HEPS fell only 0.5%.
To add to the difficulties in interpreting this result, net cash from operating activities more than doubled from $12.2 million to $27.7 million. Master Drilling doesn’t pay an interim dividend, so we will have to wait for the full year results to see how the cash picture translates into distributions to shareholders.
Some signs of life at Pick n Pay (JSE: PIK)
Oddly, the franchise stores are now underperforming corporate-owned stores
Pick n Pay has raised capital from the market and now needs to deliver the turnaround strategy. They have their work cut out for them, especially with a gorilla like Shoprite in the room. Still, there are some signs of improvement coming through.
You won’t see much good news in the 26 weeks to 25 August unfortunately, with a trading statement noting that HEPS will be at least 20% lower for the period. The benefit to the balance sheet of the rights issue will only start to be felt in the second half of the year, as the capital was raised recently. This is why net finance charges are R180 million higher year-on-year. As expected, Boxer has grown headline earnings for the period and the troubles at Pick n Pay have more than offset that growth.
One of the problems is that gross margin is under pressure, as they’ve had to be aggressive on price to win shoppers back and compete against the likes of Shoprite. The diesel savings from lack of load shedding have been reinvested in price. I’ve written a few times this year that Eskom gave Pick n Pay a get-out-of-jail card this year. Had load shedding still been in place, I genuinely am not sure how they would save this thing.
To deliver a better full year result, they are expecting a much better performance from Pick n Pay. In the 21 weeks to 21 July 2024, they could only manage like-for-like growth in PnP SA Supermarkets of 2.0%. This excludes standalone clothing stores. Company-owned supermarkets grew 3.6% and franchise supermarkets were down 0.8%, a surprising underperformance from the franchise business. These are still really poor numbers, especially vs. a weak base. Boxer grew 13.5% overall and 9.5% on a like-for-like basis, showing us what a successful retail format can do.
In case you’re curious, standalone clothing stores grew 10.3% overall but only 0.7% on a like-for-like basis.
I think that a turnaround of Pick n Pay, if it ever really happens, will be harder and take longer than most people expect. It’s extremely tough to get this right.
Redefine has made the capital markets day presentation available (JSE: RDF)
If you’re interested in the property sector, this is a great document to work through
I always enjoy it when a listed company hosts a capital markets day and makes the presentation available to everyone. The Redefine presentation is incredibly detailed and tells the story of the evolution of the portfolio over the past few years.
It also has gems like this slide, which surely wins an honesty award (and gives great insight into the office market):
If you can make the time to just flick through the presentation, I guarantee you’ll learn something new. You’ll find it here.
Sasfin has managed to pull off the acceptances condition (JSE: SFN)
The biggest hurdle to the deal is now out the way
The offer of R30 per share to Sasfin shareholders came with an unusual condition that holders of no more than 10% of shares in Sasfin can accept the offer in order for it to be valid. In other words, holders of 90% need to agree to hold the shares into a private environment.
Sasfin managed to get it right, with irrevocable undertakings from holders of more than 90% of shares that they will not accept the offer, thereby meeting the condition and allowing the deal to continue.
The next step is that Unitas and Wipfin as the take-private partners will subscribe for shares in Sasfin Wealth. This will allow Sasfin Wealth to fund the offer being made to shareholders in Sasfin.
A circular will be distributed to shareholders in due course.
Also, the international revenue mix is considerably higher
Sea Harvest has released results for the six months to June 2024. Revenue was only 3% higher, so that’s not a great start. International revenue is now 53% of the total, up significantly from 45% in the comparable period.
Thankfully, gross profit was up 22% as gross margin moved from 24% to 29%. Operating profit was up 23%, yet earnings before interest and tax (EBIT) was only 6% higher.
We then get to the uncomfortable numbers, dragged down by higher net finance costs (up from R104 million to R128 million) and taxes (up from R48.5 million to R60.7 million). This resulted in attributable profit after tax dropping by 17% and headline earnings decreasing by 32%.
To add to the negative move for shareholders, Sea Harvest has more shares in issue than before and hence HEPS fell by 36%. Not a great outcome at all.
Looking ahead, the acquisition of 100% of Terrasan’s pelagics business and 63.07% of Terrasan’s abalone business closed on 14 May, so that should be a major contributor to the coming year provided things improve in the abalone market in particular. They need it, as catch volumes in the hake business in South Africa have been under pressure, leading to the relatively higher contribution from international sources than before.
The share price is down 15.9% over the past year.
Stor-Age still has a growth story to tell (JSE: SSS)
If only the valuation wasn’t so demanding
Stor-Age is a solid REIT and the market knows it, which is why it trades on a yield of just 8.4%. On such a fully priced yield (remember that a low yield means a higher share price), there hasn’t been much share price growth for investors. Over three years, the price is only up 2%!
There’s not much growth in the mature side of the business, but things are still in the green. In the owned portfolio, occupancies are up 2.8% year-on-year for the four months to July. Although the South African portfolio has seen occupancies fall since March i.e. a year-to-date view, this is largely due to seasonality and they expect things to pick up after winter. This is why the year-on-year view is so important. In the UK, occupancies were up 4.7% year-on-year vs. 2.3% in South Africa, so they are growing quickly in that market.
We do need to dig deeper though, as there are other important metrics. In same-store occupancy in the UK joint venture portfolio for example, occupancies are down 1.2% year-on-year. They have huge room for ongoing expansion of the footprint though, as we can see in the total growth in occupancies in the UK joint venture portfolio of 13.7%.
All of these occupancy growth rates are based on square metres i.e. actual metres occupied, not occupancy as a percentage of total space.
Of critical importance is the growth in rental rates. This is the other part of the growth algorithm along with the amount of occupied space. They have achieved 8.4% growth year-on-year in South Africa and 1.9% in the UK on the same basis. You can see how inflation has started calming down in the UK.
Another crucial part of the investment thesis is that the acquisition and development pipeline remains extensive.
In South Africa, they recently acquired Extra Attic in Airport Industria, Cape Town for R73 million. The developments of the Kramerville and Century City properties were recently completed. In Sunningdale in Cape Town, they are enjoying the explosive growth in the area and the property that was completed in 2021 has delivered a predictably strong performance. To squeeze more juice out of the area, they’ve agreed with Garden Cities to acquire another hectare of land adjacent to the existing property. Development on that land in only in the planning phase at this stage.
In the UK, there are two major developments underway with the joint venture partners. Interestingly, Stor-Age reduced its shareholding in one of the developments by selling shares and using the proceeds to fund the proportionate share of the development. In other words, they opted not to send further capital to the UK to fund the development.
In further news on the balance sheet and dividend strategy, Stor-Age has received strong shareholder support to reduce the dividend payout ratio from 100% to between 90% and 95% of distributable income.
I would love to hold shares in Stor-Age again, but not at these yields. It’s literally priced for perfection and that’s why total returns over the past three years have been underwhelming. Great company, wrong price for me.
WBHO expects an improvement in HEPS (JSE: WBO)
The trading statement is light on details, but at least earnings are up
Construction group WBHO has released a trading statement for the year ended June. The great news is that HEPS is up by between 10% and 20% for continuing operations, coming in at between R18.73 and R20.44 per share. For total operations, it’s up by between 25% and 35% at a range of R18.94 to R20.45.
They haven’t given any further details at this stage, other than confirmation that results are due on 10 September.
Little Bites:
Director dealings:
Stephen Koseff has sold more shares in Investec (JSE: INL | JSE: INP), this time to the value of £544k.
An associate of a director of Brait (JSE: BAT) bought shares in the company worth nearly R2.2 million. Separately, Titan Premier Investments (the vehicle linked to Christo Wiese) bought shares worth just over R2 million.
Andre van der Veer (not Andre van der Veen of A2X fame as I initially thought) and his wife bought shares in NEPI Rockcastle (JSE: NRP) worth R368k.
A non-executive director of Hammerson (JSE: HMN) bought shares worth £8.5k.
The family trust of a director of a major subsidiary of RFG Foods (JSE: RFG) sold shares in the company worth R37k.
Vodacom’s (JSE: VOD) court battle around the Please Call Me matter continues, with the Constitutional Court agreeing to hear the company’s application for leave to appeal in the matter in tandem with its appeal against the Supreme Court of Appeal judgment. It all comes back to the amount that should be paid to Kenneth Nkosana Makate, with the Vodacom CEO having offered R47 million and Makate fighting for more in court.
Lighthouse Properties (JSE: LTE) has confirmed that the scrip distribution reference price is a 3% discount to the spot price on 26 August, so they are providing a small incentive to shareholders who choose to receive shares rather than cash.
Insimbi Industrial Holdings (JSE: ISB) released a trading statement noting that HEPS will be down by at least 20%. That’s the bare minimum disclosure required by the JSE, so it’s anyone’s guess how bad it could be. This is for the six months to August, so the period isn’t even over yet. Buckle up!
There’s a significant recovery at Workforce Holdings (JSE: WKF), where HEPS has jumped from 1.7 cents to between 12.43 cents and 12.77 cents for the six months to June. We don’t need to bother with noting the percentage move on a jump like that! It’s more important to go back and compare this to previous years. Sure enough, HEPS for the six months to June 2022 was 14.6 cents, so this performance is still not a full recovery to previous levels after a terrible time in 2023.
Jubilee Metals (JSE: JBL) has secured a private power purchase agreement in Zambia. The counterparty is independent solar and hydro power producer Lunsemfwa Hydro Power Company, with the deal designed to meet the total power needs of Roan and Sable. There’s also room for expansion, with discounted rates locked in for a further 10MW of solar power if Jubilee needs it. Roan has previously been impacted by power shortages, so they are taking advantage of a decision by the Zambian government to allow the private sector to provide power.
Southern Palladium (JSE: SDL) has announced that the combined UG2 and Merensky Reef Mineral Resource is now 35% up from the previous estimate. Two separate independent consultants have audited the mineral resources data. The pre-feasibility study is underway and scheduled for release in Q4 of this year.
Vunani (JSE: VUN) renewed its cautionary announcement regarding the potential disposal of a minority shareholding in a subsidiary. They haven’t indicated which subsidiary and there’s still no guarantee that a deal will go ahead.
There’s truly never a dull moment at Trustco (JSE: TTO), with the latest being the discovery of an “exceptional diamond” by Meya Mining, in which Trustco has a 19.5% interest. Long story short, they found a 391.45 carat diamond, which isn’t the biggest ever found in the region (that honour belongs to a 770-carat diamond found in 1945), but is certainly a large and very economically helpful diamond. Trustco flags that in its valuation of the asset going forward, they may look to take into account the number of exceptional finds in the area. Like I said: never a dull moment.
Reinet Investments (JSE: RNI) announced that the proposed dividend of €0.35 per share was approved by shareholders. The exchange rate to rand will be announced in due course.
Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:
ADvTECH signs off on another strong period (JSE: ADH)
These numbers look great
ADvTECH has released results for the six months to June 2024 and there’s a lot to feel good about. Revenue is up 9%, operating profit increased by 15% and HEPS put in a 16% increase. When you’re looking for your equity investments to deliver real growth i.e. ahead of inflation, these are the types of numbers you want to see.
The interim dividend of 38 cents per share is 26.7% up on the prior year, so there’s a bump in the payout ratio as well.
Perhaps best of all, operating margins have increased in each of the underlying divisions. Schools Rest of Africa is quite the story, with operating margin up 400 basis points to 28.7%. That’s higher than Tertiary at 25.8%, Schools South Africa at 20.3% and the relative ugly duckling in the group, Resourcing at 6.3%.
I think they would unlock an even better valuation multiple if they sold the Resourcing business and made themselves a pure-play education business.
Harmony expects HEPS to more than double (JSE: HAR)
Some of this is a weak base, but well done to them for improving when it mattered
The gold sector has dished up remarkable variability in earnings performance this year. If you haven’t seen it before, this has been a great time to learn that the miners and the commodity don’t always perform equally. In fact, they rarely do.
Harmony has released a trading statement for the year ended June that reflects an expected increase in HEPS of at least 100%. In other words, it will at least double!
We will only get full details when results are released on 5 September. The delay is due to auditors needing to complete their work related to an undeveloped property. In the meantime, we know that production was 6% higher and ahead of guidance, supported by higher recovered grades. All-in sustaining costs increased by 1%, so you can quickly see how margins opened up and profitability jumped.
It’s not all perfect harmony though, with an impairment of R2.8 billion at Target North based on mineral resource estimates that suggest a lower recoverable amount vs. the carrying amount in Harmony’s books.
With a market cap of R117 billion and a share price that is up nearly 150% in the past 12 months, I don’t think investors will pay too much attention to that impairment.
Italtile has flagged a dangerous competitive environment (JSE: ITE)
The market doesn’t seem to care, based on recent share price momentum
With GNU-phoria having found its way into Italtile along with many other local stocks, the share price is up 36% over 90 days. Despite Italtile releasing some tough numbers and even tougher commentary early in the morning on Monday, there was no stopping the positive momentum.
With flat system-wide turnover, trading profit down 11% and HEPS down 7%, there’s not much to feel good about here. The ordinary dividend is down 8% for the year to June as well.
The market seems to be clinging to the second half performance at Italtile, which was better than the first half but by no means good yet. Trading profit for the second half was still slightly down year-on-year.
I would be cautious here, as Italtile has noted the emergence of aggressive new competitors and a situation where manufacturing capacity far exceeds demand. Manufacturing businesses have high fixed overhead structures, so depressed volumes lead to higher overhead absorption per unit and a substantial negative impact on profitability. Although I’m now sitting long Cashbuild in my portfolio, they don’t have the same manufacturing exposure that Italtile does. Also, perhaps even more importantly, the Cashbuild share price had been sold off sharply before I climbed in, having now made a full recovery and delivered me a delightful little return.
Based on how much cash there is on the balance sheet (up 76%), Italtile has declared a special dividend of 78 cents, which works out to 6% of the current share price. The total dividend is thus 127 cents. That’s clearly not the sustainable yield though. It’s interesting to note the confidence to pay this dividend when there is still so much uncertainty in the market. On one hand they are telling the market to be careful of lost market share and essentially a price war in the local market, while on the other they are paying out excess cash.
There’s also an interesting note around the energy requirements at the Ceramic business. Currently, 70% of energy requirements are provided by Sasol as the primary supplier of imported piped natural gas. Sasol will only be able to supply this energy until June 2027, so Italtile is looking for alternatives like natural gas and coal-based synthetic gas.
STADIO’s numbers are heading the right way (JSE: SDO)
The shape of the income statement looks good as well
STADIO has released results for the six months to June and they look strong. Right at the top, we find that student numbers increased 10%, revenue was up 16% (so pricing increased were also achieved) and EBITDA grew by 12%. Although there’s a bit of EBITDA margin pressure there (as the percentage growth is lower than revenue growth), core HEPS was up 20% and there’s much to celebrate.
Within these numbers, the acquisition of an additional 15.4% in Milpark Education is relevant. The non-controlling interest there is down from 31.5% to 16.14%, so STADIO is close to owning the entire thing now.
STADIO doesn’t pay an interim dividend, so don’t be shocked to see that there isn’t one this year either. With these numbers, there is seemingly a strong probability of an annual dividend. With no external debt at all, the strength of the balance sheet would certainly support a dividend.
Interestingly, there’s a resurgence in contact learning as things have truly normalised after the pandemic. Contact learning numbers grew by 9%, having grown just 3% in the prior year.
Little Bites:
Director dealings:
The family trust of a director of a major subsidiary of RFG Foods (JSE: RFG) sold shares worth R1.33 million.
A director of a major subsidiary of Vodacom (JSE: VOD) sold shares worth R564k.
Burstone Group (JSE: BTN) has renewed its cautionary announcement around a potential strategic partnership with funds advised by Blackstone Europe. There is still no certainty at this stage that a transaction will be concluded, hence the need for caution.
Lighthouse (JSE: LTE) has disposed of another R1.45 billion worth of shares in Hammerson (JSE: HMN)
Gold Fields (JSE: GFI) announced that Phillip Murnane has been appointed as CFO. He takes over from Alex Dall, who has been interim CFO since 1 May 2024 after the departure of Paul Schmidt.
Salungano Group (JSE: SLG) renewed the cautionary announcement related to Keaton Mining, where the hearing date for the application for leave to appeal against the judgment that dismissed the business rescue application is still being awaited.
Chrometco (JSE: CMO) has renewed its cautionary announcement regarding a material subsidiary. The stock is suspended from trading, so it’s not like anyone has the temptation to trade it anyway.
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