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Ghost Bites (Anglo – BHP | Burstone | Deneb | Life Healthcare | Pick n Pay | Reunert | RFG | Spear | Southern Sun)

The Finance Ghost
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Ghost Bites (Anglo – BHP | Burstone | Deneb | Life Healthcare | Pick n Pay | Reunert | RFG | Spear | Southern Sun)

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

BHP increases its Anglo offer one more time – and Anglo says no (JSE: BHG | JSE: AGL)

The revised proposed exchange ratio is 24.8% higher than the initial proposal

The initial deadline for BHP to “put up or shut up” (that is the actual term – also called PUSU) was 22nd May. Anglo American requested an extension of the deadline, which was granted under UK law with a revised date of 29 May. This leaves a week for BHP to decide whether to put in a binding offer or not.

In the meantime, BHP keeps testing the waters with price and gets rejected every single time. The “final” exchange ratio is 0.8860 BHP shares for every Anglo share, plus the shares in Anglo Platinum and Kumba, as BHP is standing firm on a requirement for Anglo to demerge those assets. The revised ratio means that in addition to the Anglo Platinum and Kumba shares, Anglo shareholders would have 17.8% in the combined BHP and Anglo American group.

This proposal is 24.8% higher than the initial proposal put in by BHP. It represents a 47% premium to the undisturbed Anglo American share price (i.e. before the press speculation about the deal) and a much larger premium to the unlisted assets if you work out the Anglo Platinum and Kumba contributions.

BHP says that it won’t increase the offer further, unless a third party sticks in an offer or Anglo indicates that a higher price might be acceptable. In other words, they probably would increase the offer further if it gets the deal done.

Anglo has rejected this proposal once more, citing the complexities around the demergers as a major concern. I continue to enjoy the irony of this argument, as one of Anglo’s own strategic plans is to demerge Anglo Platinum!

Anglo American’s share price is up more than 21% in 30 days. If BHP walks away from this and nobody else puts up their hand, the pressure on the Anglo board to unlock value will be immense.

Burstone will look to reduce its debt (JSE: BTN)

The loan-to-value ratio is on the high side after the manco internalisation

Burstone (previously Investec Property Fund) paid a lot of money to internalise its management company. Although this has obviously saved on management fees, it required a significant capital investment that has contributed to the loan-to-value ratio moving from 42% at March 2023 to 44% at March 2024.

This is above the group’s comfortable range of 37% to 40%, so you can expect to see some recycling of assets to get it back down there. They have a disposal pipeline in South Africa and Europe and have generally managed to get the sales done at or above book value.

On the asset side of the balance sheet, the South African portfolio value was fairly stable, but the European portfolio fell by around 1% in value after valuation yields expended further. Along with some moves in derivatives, this caused the net asset value to fall 4.5% to R15.45 per share.

The share price at R7.19 (up 6.4% for the day) is a significant discount to that value.

The dividend payout ratio was 85%, down from 95% in the comparable period. This seems to be another place where the increase in debt has bitten.

Strong cost control drives earnings at Deneb (JSE: DNB)

When growth is hard to come by, you have to be disciplined

Deneb’s revenue growth of 7% makes it sound like things were quite easy for the group, yet the underlying story is that the automotive parts manufacturing business was up 26% and the rest of the group was pretty much flat. This is why diversification is important, especially in the industrials space.

Lower volumes make it difficult to maintain margins, so Deneb did pretty well to keep gross margin contraction to only 30 basis points. The magic was that costs only increased by 1% overall. Fixed costs were down 1%. This was good enough for operating profit to grow by 21%, provided we adjust for the insurance claims received in the base period.

Such an adjustment is warranted, as those claims were clearly a once-off benefit that skew the year-on-year performance if not removed.

Net finance costs were up 45%, with around half the increase coming from rate hikes and the other half from debt balances increasing. This is a perfect example of why banks do well in a combination of inflation and higher rates. The debt has come down sharply in the final quarter of the year, thanks to a 47% uptick in cash generated from operations. This will do good things for the income statement in the new financial year.

Adjusted HEPS (which is the right metric because of the insurance claim) increased by 25% to 23 cents per share. At R2.30 per share, you shouldn’t need to get the calculator out to work out that Price/Earnings multiple!

Double-digit dividend growth at Life Healthcare (JSE: LHC)

They expect a “lengthy implementation journey of NHI”

Life Healthcare has reported growth in revenue from continuing operations of 7.8%, as well as 8.4% growth in normalised earnings per share. The interim dividend is up by 11.8%, so the payout ratio has moved higher which is usually a good sign of confidence.

Paid patient days grew by 2.3%, so there was “volume” growth as well as pricing growth in the business.

Life Molecular Imaging (LMI) grew revenue by 77.5%, driven by the sales of NeuraCeq in the US. This business still makes a small loss at normalised EBITDA level as it is an early-stage operation. This loss is expected to reduce after this year.

Thanks to further growth in paid patient days as well as inflationary increases and growth in the South African imaging business, the group expects to see revenue growth of 6% to 7% for the full year. This outlook explains the higher payout ratio.

As for NHI, I’ll repeat the commentary verbatim:

“However, the approval of the Bill without addressing concerns raised during the parliamentary process, is a regrettable missed opportunity to expand sustainable access to healthcare. We, therefore, expect a lengthy implementation journey of NHI due to operational and legislative changes required, as well as the current fiscal constraints.”

Pick n Pay – or is that Pick n Pray? (JSE: PIK)

Things still look terrible there

Pick n Pay has released a sales update and trading statement for the 52 weeks ended 25 February 2024. It really only takes a visit to your local Pick n Pay grocery store to figure out what the problem is here. The numbers firmly reflect the in-store experiences and lack of consumer resonance, with sales down -0.2% for Pick n Pay in South Africa (or up +0.2% on a like-for-like basis). Internal selling price inflation for the period was 7.3%, so this means a heavy drop in volumes.

The Pick n Pay number includes Pick n Pay Clothing, which grew 17.0% or 7.7% on a like-for-like basis. This means the core grocery business is doing particularly horribly, offsetting all the good stuff in the clothing business.

Boxer continues to do incredibly well, with sales up 17.5% overall or 8.1% on a like-for-like basis. This implies some positive volumes growth along with the benefit of inflation and the ongoing store rollouts.

Although still firmly a poor cousin of Shoprite’s dominance in this space, Pick n Pay Online (which includes asap! and the Mr D partnership) grew sales by 74.4%.

Rest of Africa is in the highlights package for this period, with sales up 10.1% overall and 12.5% on a constant currency basis.

Armed with this knowledge, you won’t be surprised that Pick n Pay recognised a R2.8 billion impairment on the supermarkets. This is a non-cash charge of course, but it sends a message. It also includes another little nugget of information: loss-making company-owned stores will be closed or converted to either Pick n Pay franchises or Boxer stores. A long tail of problematic stores can be a matter of life or death for a retailer.

Other issues that hurt the numbers include once-off costs of R423 million across supply chain changes and employee restructuring, a roughly R400 million trade receivables provision (this implies that franchisees are also struggling), an additional R467 million in net debt service costs and R698 million in diesel for generators.

For the year, the headline loss per share was huge, coming in at between -228.99 cents and -177.14 cents. It’s even worse if you use comparable HEPS as their preferred metric, with a loss of -281.13 cents to -228.31 cents.

The group is working towards a rights offer of up to R4 billion, along with a separate listing of Boxer on the JSE. This is very similar to how Transaction Capital had to spin out WeBuyCars, leaving behind an ugly rump that will need a great deal of fixing.

Group net debt at the end of February was R6.1 billion, which was better than the guidance of R6.7 billion. A debt restructuring agreement has been concluded with lenders, securing funding up to 1 September 2025.

Most importantly, the strategic plan going forward will be presented by Sean Summers as part of the FY24 results presentation, expected on 27 May.

Reunert’s Electrical Engineering segment leads the way (JSE: RLO)

There are some less appealing trends elsewhere in the group

Reunert has reported results for the six months to March 2024. Revenue increased 7% and HEPS was up 8%, with the interim dividend also up 8%. This is real growth (ahead of inflation), so that’s something at least.

There were certainly some challenges in this period, like Nashua struggling with logistics challenges that led to shortfalls in products and a resultant knock to sales and operating profit. The other headache is in residential and small commercial batteries, where the market has become saturated and demand has fallen away. That situation would presumably be even worse after year-end, as there’s been no load shedding for weeks now.

The Electrical Engineering segment was the highlight, with revenue growth of 7% and operating profit growth of a meaty 12%. Both the power cable and circuit breaker sides of the business did well.

In the ICT segment, IQbusiness was successfully integrated into the ICT segment and this led to a 38% increase in revenue, yet operating profit was flat year-on-year. The Nashua issues sit in this segment.

Applied Electronics saw a 10% drop in revenue, but operating profit also remained flat year-on-year. It’s amazing to see two segments report steady profits despite revenue moving sharply in either direction!

The outlook for the full-year numbers is positive overall, with IQbusiness to be included for a full 12 months and encouraging signs in Electrical Engineering and the Defence Cluster (part of Applied Electronics).

RFG Holdings looks just peachy in these numbers (JSE: RFG)

Practically every metric has gone the right way

RFG Holdings has had to deal with a weak domestic consumer environment that led to a decline in volumes. You would never know that by looking at the numbers though, with price inflation taking revenue growth into the green and margins improving across the income statement.

Group revenue grew by 3.2%, with regional revenue up 5.8% and international volumes down 8.6%. The price vs. inflation mix was quite something, like in the regional business with price up 10.0% and volume down 5.5%. Internationally, price fell 6.5% and volumes 8.9% (port challenges in Cape Town did them no favours here), with forex benefits of 5.5% mitigating the pain. Mix effects make up the balancing numbers.

Long life foods increased revenue by 7.5% and fresh foods increased by 2.9%. Ready meals seem to have also done well. Consumers are craving convenience, a logical outcome of really busy households.

Operating profit margin expanded by 100 basis points to 10.2% despite these challenges, with operating profit growth of 15.2%. Reduced diesel costs vs. the prior year helped. Margins in the regional segment were up from 8.9% to 10.0%, with the international segment managing to increase from 10.4% to 11.5%.

Group EBITDA margin was up 140 basis points, with EBITDA growing 14.6%. Combined with a reduction in the net interest expense, this drove a 20.7% increase in headline earnings per share.

The group is focusing on working capital management, with a lower outflow for this period than in the prior year. Seasonality is important here. The bulk of the capital expenditure at the moment is at the Tulbagh fruit products factory and the group is achieving a return on equity of 15.7% at the moment, so shareholders shouldn’t feel upset about reinvestment of profits.

The cost of debt has blunted Spear’s growth (JSE: SEA)

Still, the fund is in the green at a time when many others aren’t

Spear REIT is respected on the JSE as one of the most focused, well-run property funds on the market. They can control a bunch of things, but not the prevailing level of interest rates. Property funds make extensive use of debt and this leaves them vulnerable to higher rates.

For the year ended February 2024, distributable income per share increased by 1%. The distribution per share is up 3.80%, which means the payout ratio has moved to over 95%. A payout ratio that high tells you a lot about the quality of the business.

The average reversion for the year was -0.37%, which is a pretty solid outcome in this environment. This speaks to demand in the Western Cape.

The loan-to-value has decreased from 36.30% to 31.60%, so the balance sheet is in a good place. The reduction in debt helped limit the impact of higher rates on distributable earnings.

The net asset value per share is up 2.8% to R11.80. The share price is trading at R7.90, which implies a trailing yield just under 10%. Next time you consider a buy-to-let property, remember that you can buy a solid REIT with instant liquidity, some underlying growth and a yield of 10% without you having any headaches with tenants.

Southern Sun shines brightly (JSE: SSU)

A record year of profitability

Southern Sun has a lovely story to tell for the year ended March 2024. 19% growth in income and 32% growth in EBITDAR (not a typo – this is a standard metric in the hotel game) drove a massive 77% increase in adjusted HEPS.

And yet, HEPS without the adjustment only grew by 7%. Should we be worried?

Not in this case, as the base period included once-off income from Tsogo Sun in the form of a separation payment of R399 million. Excluding that from the base is a much better way to view underlying performance, so adjusted HEPS is the right approach.

One of the encouraging signs in these results is the increase in average room rate of 9%. If your hotels aren’t well positioned and appealing, you can’t increase pricing. Food and beverage revenue is up 15%, so they are doing a great job on share of wallet as well.

It’s interesting to see how they allocated funds. Free cash flow of R970 million went towards share buybacks (R670 million), expansion capex (R180 million) and the reduction of net debt, with a comfortable net debt to EBITDA range being enjoyed.

The group’s exposure to Cape Town has been a major benefit here, with a strong year for tourism, business travel and events. Group occupancy levels came in at 58.6% for the year, which is 710 basis points up on 2023 but still below 59.3% achieved before the pandemic.

Given the improved outlook and level of performance, the final dividend is 12.50 cents. There was no final dividend in 2023.

Little Bites:

  • Director dealings:
    • Des de Beer has acquired shares in Lighthouse (JSE: LTE) worth R7.7 million.
    • One of the highly experienced directors of Santova (JSE: SNV) has sold shares worth R3m. Given the recent concerns around where we are in the shipping cycle, I would look at that quite carefully if I held shares here.
    • An associate of a executive director at Calgro M3 (JSE: CGR) has sold shares worth just under R2 million.
  • Harmony Gold (JSE: HAR) has reported yet another loss-of-life incident this month, this time at Phakisa mine in a blasting incident. All blasting operations have been temporarily suspended.

Ghost Bites (Alexander Forbes | Collins Property | Coronation | Finbond | HCI | Salungano | Tharisa | Transaction Capital)

The Finance Ghost
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Ghost Bites (Alexander Forbes | Collins Property | Coronation | Finbond | HCI | Salungano | Tharisa | Transaction Capital)

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

Double-digit growth in earnings at Alexander Forbes (JSE: ADR)

The strategic focus in recent years is paying off

Alexander Forbes has released a trading statement for the year ended March 2024. It has happy news for shareholders, with HEPS from continuing operations up by between 10% and 20%. In this environment, double-digit growth is admirable.

Including discontinued operations i.e. if we look at total operations, HEPS is up by between 23% and 33%. Although that’s no indication of the go-forward position, it’s always better when discontinued operations were a positive contributor rather than a mess as we so often see in large corporates.

In this case, the discontinued operations reflect the impact of the close-out of insurance liabilities and assets relating to the sale of the AF Life business to Sanlam, with remaining reserves released as well.

Detailed results are due on 10th June and the market will watch them closely, especially with the share price having been stuck in a stubborn range this year:

Collins Property Group now reports as a REIT (JSE: CPP)

And the distribution per share is much higher

Collins Property Group (previously Tradehold) was granted REIT status in February 2024 and has adopted distribution per share as its key performance metric for trading statement purposes. In other words, when that metric will differ by the prescribed percentage in the JSE rules, the company must give the market advanced warning with a trading statement.

There’s a nuance here in the rules. For a property entity using distribution per share as the metric, the percentage difference that triggers a trading statement is 15%. For all other entities, the percentage is 20% and they would typically apply this to HEPS.

At Collins, the distribution per share is now ramping up by between 33.33% and 53.33% to between 80 and 92 cents per share. It looks like the company waited for REIT status to be granted before pushing the payout ratio higher, so this likely isn’t a reflection of the growth rate in underlying earnings.

Detailed results are due on 24 May.

Coronation is back to paying an interim dividend (JSE: CML)

This doesn’t change my concerns about the recent trend

Before we dig into the latest numbers, I’m going to remind you of Coronation’s fund management earnings per share trend (excluding the impact of the dispute with SARS):

  • March 2022: 214.8 cents
  • March 2023: 191.5 cents
  • March 2024: 194.7 cents

Although the number has at least moved higher in the latest period, you can see that they are treading water here. This is exactly why Coronation trades on a modest valuation that assumes all or most of the return will come from the dividend rather than growth in the share price.

Digging into the numbers, revenue increased by 4.3% for the six months to March and assets under management (AUM) were flat over 12 months. Net outflows for the period came in at 4% of average AUM, which Coronation blames on the South African savings industry. I think it’s more to do with lack of distribution, as the likes of PSG Financial Services are bringing in plenty of assets.

With total operating expenses up 5% for the period (excluding the tax issue), operating margins have moved the wrong way. They will need to look for efficiencies here.

The all-important tax matter was heard by the Constitutional Court on 13 February 2024 and the judgment is pending. It will obviously do wonderful things for the Coronation share price if they get a court victory here.

In the meantime, Coronation has declared an interim dividend of 185 cents per share.

If you do look at the detailed financials, just remember that the impact of the tax assessment was severe in the comparable period, crushing profitability and making the year-on-year movements look silly without adjusting for that impact.

Finbond might have positive full-year HEPS (JSE: FGL)

The mid-point of the guided range does suggest a small loss, though

Finbond is on the up, with share price growth of around 48% in the past year and now the potential for plenty of action on the market this week after the release of full-year numbers after the close of trade on Tuesday.

The big news is that HEPS might be positive, with a trading statement suggesting a range of a -2.4 cents loss to a profit of 1.5 cents. The mid-point of that is still a loss, so they might not be in the green just yet. Either way, it’s a whole lot better than the restated loss of -19.1 cents for the comparable year.

Investors will want to pay attention to results when they are released on 31 May, including some significant accounting changes in how they are accounting for Americash Group and Cashback Group, moving from being consolidated to being equity accounted as joint ventures.

HCI takes a knock in oil and gas and casinos (JSE: HCI)

For investment holding companies, valuations of the portfolio companies make all the difference

After we saw positive news from HCI group companies Deneb and Frontier Transport, the trading statement from the mothership is less enjoyable to read. HEPS is down between 24.1% and 34.1% and basic earnings per share has dropped by between 74.7% and 84.7%.

It’s far more useful to understand where the pressure points are in the portfolio, as investment holding companies can report wild swings in profitability that are no reflection whatsoever of underlying cash movements. This is the case here, with the big movers being fair value adjustments and impairments.

Africa Energy Corp reported $135 million in negative fair value adjustments on the investment in the Block 11B/12B prospect based on a change to the valuation model. This flowed all the way up, first to Impact Oil and Gas and then to HCI. Equity losses of R528 million were recognised in relation to Impact Oil and Gas.

In the gaming business, HCI has impaired casino licences by a substantial R2.7 billion, with property and equipment impairments taking the total closer to R2.8 billion. This is because of higher interest rates and slower than previously forecasted income growth.

Salungano releases a truly horrible set of numbers (JSE: SLG)

And they are well over a year late

I debated whether to put this in the Little Bites section or not, as the latest numbers from Salungano are for the year ended March 2023. They are a full year behind, which is why the share is suspended from trading. Upon seeing how awful the numbers were, I decided to include them here.

With the group currently dealing with the Elandspruit and Khanyisa operations in care and maintenance, as well as Keaton Mining in court processes around a business rescue vs. liquidation issue, things really are tough there. These numbers show how they got into this mess.

In the 2023 financial year, revenue fell by 6.8% to R4.79 billion and there was a hideous operating loss of R745 million vs. operating profit of R138 million in the prior year. The headline loss per share was 58.64 cents. With the share price currently at 50 cents, Salungano is looking more like an ongoing concern than a going concern. Although it was still solvent as at March 2023, that was a long time ago.

Tharisa takes a knock from lower PGM prices (JSE: THA)

A trading statement for the six months to March reflects a drop in earnings

Mining houses, especially those with little or no diversification, are firmly at the mercy of commodity prices. In the six months to March 2024, Tharisa notes that there was nearly a 40% drop in PGM prices received. On top of this, there were inflationary cost pressures for the mining activities. The combination is clearly a problem.

Against that backdrop, it’s pretty impressive that HEPS only fell by between 23.3% and 29.0% to US 12.5 cents to US 13.5 cents. Take careful note of the currency there.

Still plenty of uncertainty at Transaction Capital (JSE: TCP)

It would make a lot of sense to shift this to an investment holding company structure now

With WeBuyCars now out of the group, it’s a bit simpler to understand what’s going on at Transaction Capital. There is still great uncertainty around the SA Taxi business, now restructured and renamed as the Mobalyz division. At least Nutun is a relatively stable thing, giving the group something to anchor itself to.

With a net cash position at holding company level and two completely unrelated investments in the group (100% in Nutun and 75% in Mobalyz), this group is itching for a shift to investment holding company accounting. The reduction in head office size is a further step in this direction.

Instead, we are still in a place where the headline loss per share from continuing operations is the favoured metric, with the loss decreasing from 224.6 cents to 164.9 cents. That’s obviously still a hideous number, especially on a share price of R2.60.

Mobalyz remains a huge problem, with a core loss of R1.8 billion in the first half of the year. There was a once-off net loss of R966 million from a reduction of cover in the insurance business. The group has now achieved a sustainable insurance business, so that pain has been taken. More importantly, a detailed business plan has been presented to funders. If they accept it, then the group can keep originating loans and reduce the losses on the existing loan portfolio. Obviously, if the lenders don’t accept it, then all bets are off around the future of this business. They cannot continue at the current low levels of origination, so at some point there needs to be confidence in the rebuilding of this business in order for it to survive.

Over at Nutun, the Australian business has been sold and Nutun Transact is in a sales process. They are busy with a major restructure to streamline the remainder of Nutun into two distinct businesses, a process that comes with short-term costs. It feels like they are trying to just get the worst of the mess out of the way. Although revenue increased by 2% for the period in Nutun, core earnings from continuing operations fell by 22%.

The holding company balance sheet has cash of R521 million against the debt programme of R451 million due in two tranches in February 2025 and February 2027. Most importantly, there are no debt covenants at holding company level after the removal of the WeBuyCars put option liability and the SANTACO obligation. This puts them in a net cash position at head office level.

With the heavy-hitting founding team highly involved now, the battle is underway to clutch the best possible outcome from the jaws of defeat. There has clearly been severe, permanent value destruction here. The question is around what might emerge from the flames, if anything worthwhile.

Little Bites:

  • Director dealings:
    • Michael Georgiou has sold nearly R57 million worth of shares in Accelerate Property Fund (JSE: APF) pursuant to a lending arrangement.
    • A director of Motus (JSE: MTH) has sold shares in the company worth R1.78 million.
    • A director of Altron (JSE: AEL) has bought shares in the company worth R1.64 million.
    • The spouse of a prescribed officer of Attacq (JSE: ATT) has bought shares worth R1.2 million.
    • The rather odd day trading by a director of Italtile (JSE: ITE) continues. We saw sales on the 15th, 16th and 17th of May, then a purchase and sale both on the 20th of May. It’s really not encouraging that the numbers in the announcement don’t seem to add up. A sale of 1,090 shares at R9.38 per share is not a value of R12,973! I can’t recall seeing anything quite like this before.
  • 4Sight Holdings (JSE: 4SI) has released a trading statement dealing with the 14 months ended February 2024. That isn’t a typo; the financial year-end was changed from December. Naturally, this ruins comparability with the prior period. Still, an increase in HEPS of 141.4% to 157.6% is huge even with the extra two months of trading considered. Keep an eye out for results on 24 May.
  • Lighthouse (JSE: LTE) is in the process of disposing of up to 634,479,018 Hammerson shares in on-market trades. This was approved by Lighthouse shareholders earlier in May. Since then, Lighthouse has disposed of 168,240,252 shares in Hammerson to the value of R1.1 billion.
  • Kibo Energy (JSE: KBO) has released a business update from subsidiary Mast Energy Developments. When you’re trading at R0.01 per share, I guess any attempt to give the share price some love through regular SENS updates makes sense. The announcement goes into a lot of detail on the Pyebridge project, with news that is little more than an update on an advance from RiverFort under the debt structure that was then paid to the site contractor. The more interesting part of the announcement is the fight with Proventure after it breached the joint venture agreement and never paid the agreed money across to Mast. They are taking legal advice on how they can pursue the money and perhaps damages. They barely have enough spare money to pay attention, so I’m not sure a protracted legal process is a realistic course of action here.

Why are Silicon Valley valuations higher?

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Why are Silicon Valley valuations higher?

“Are you a tech startup based in the US, preferably Silicon Valley?”

If yes, then all bets are off for the business valuation you can achieve. Even in this environment of higher interest rates and more conservatism in general, the culture of Silicon Valley and the resultant deals mean that business valuations can be eye-wateringly high. There are good reasons for this, which we will touch on in this article.

Beyond Silicon Valley, things are somewhat less crazy. Valuations of fast-growing companies can still be difficult to understand, but there are sensible methodologies that can demonstrate why today’s numbers aren’t the best indication of value. Like in the Silicon Valley example, there are good reasons for this.

Clearly, the right way to answer the question of how to value a startup will start with “where is your startup based?”

Business value is mostly derived from growth

The difference between fixed income investments (like government bonds) and equity investments (like stocks listed on a stock exchange) is that investors in the latter are seeking growth in the underlying cash flows. If this growth rate is higher than inflation, this is called “real growth” and it means that there is genuine wealth creation over time. The extent to which the returns must exceed inflation in order to attract investors will depend on the riskiness of the investment. The risk drives the required returns, not the other way around.

In startups, the risk factors are through the roof. Most of them are still making losses, so the economic viability hasn’t been proven yet. There are endless risks of possible disruption to the plan, or key staff members leaving. If funding dries up at a critical stage, then it can all go to zero even if the founders did everything right along the way.

Long story short: for startups to be valuable, they need to be able to grow at great pace. The environment in which they operate will be one of the biggest determinants of that growth rate. No matter how great the founders are, swimming downstream is so much easier than swimming upstream. Any business valuation calculator for a startup will make this a primary input.

Valley of dreams

Despite efforts by many local and national governments to set up startup hubs beyond the coffee shops of Silicon Valley, nothing has yet matched the level of activity in the home of technology.

This has an immense flywheel effect on growth:

  • Businesses are built on opportunity sets and the connections made that turn ideas into operations. If there are more entrepreneurs in a specific area, then this breeds not just heightened competition, but also the potential for value-adding collaborations.
  • The network of funders and mentors in startup hotbeds cannot be matched by more outlying areas, with founders able to build alongside people rather than in isolation from them.
  • Potential acquirers are more likely to search for technology acquisitions in areas that are hives of activity, maximising the chance of an exit down the line.
  • Highly talented potential staff members looking for work in startups will be naturally drawn to areas where the chance of getting a job is higher, so founders in these areas can add excellent resources to their businesses without much effort.

Of course, this isn’t to say that Silicon Valley is the only place where a founder can be successful. Far from it, actually. This isn’t an on/off switch. Think of it more as a spectrum, with Silicon Valley at one end and completely unknown jurisdictions at the other. Along that spectrum, there are various other well-respected cities and regions that can attract investment in startups, including the likes of London or Berlin.

The startup valuations in different regions will reflect this spectrum. Investors are far more likely to pay up for a business that is operating in the perfect ecosystem vs. one that comes with compromises. This isn’t snobbery; it’s simple the maths of the growth potential and what this means for the valuation today.

Of course, founders shouldn’t forget that this wonderful ecosystem comes with costs. A top developer in Silicon Valley will demand a much higher salary than a developer in Cape Town. The cost of living is much higher for all involved. This makes every cost in the business more onerous, ranging from rent through to accounting services.

Although the startup valuation multiple for a startup in Silicon Valley will almost certainly be higher than a similar business in other regions, that doesn’t mean that the cash burn along the way will be easier to manage. If anything, it’s probably harder.

This is why the startup funding cycles drive exaggerated outcomes in Silicon Valley and other hotspots. When money is available, founders must be eternal optimists and must scale at all costs to compete for funding. When the belts are tightened, layoffs are the only outcome as founders cut back the fat to show funders that there’s a cash flow positive business in there somewhere.

Where funding is less easily available, founders follow more of a bootstrap mentality. This leads to more measured responses to economic cycles, which is typical of what you’ll see among founders outside of Silicon Valley.

A big fish must find a bigger pond

Thankfully, startups don’t need to only earn revenue from the city in which they were founded. In the global village, it is possible (and practically a prerequisite) for startups to expand into new markets and offer their services or products.

This is the best way for a startup in a more unusual region to create a great deal of value. By operating outside the main hotbeds, they can get away with a much lower cost structure. Although the surrounding ecosystem may not be as conducive to growth, there’s also less competition for talent and for funding. To truly take advantage of this, the low cost base needs to be used to deliver products to a global audience.

There are plenty of examples of startups that were built outside of Silicon Valley – and even the US. Xero accounting is probably a brand that you recognise. What you might not know is that the company was founded in 2006 in Wellington, New Zealand.

Canva is a brand that is loved by founders, allowing just about anyone to put together decent-looking graphics. It was founded in Perth, Australia in January 2013.

There are of course numerous other startups that have made it from places that are nowhere near Silicon Valley. It’s just helpful to use Australian and New Zealand examples as extreme distances from Silicon Valley.

In closing

  • You can build from just about anywhere, but make sure you’re building something that can scale to a global audience if you hope to achieve a large startup valuation.
  • Positioning yourself in a startup friendly ecosystem is likely to give your startup valuation a boost – plus you’ll have a stronger chance of meeting the right people.
  • Think about the pros and cons of each potential home for your startup carefully, as a more popular environment might mean that finding the right team members is easier, but you’ll probably need to pay more.

The Finance Ghost is a co-founder of bizval, where the team is dedicated to making valuation services accessible and affordable for smaller businesses and startups. Visit the bizval website to learn more.

This article was first published on the bizval website here.

Navigating your investments during elections

Satrix
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Navigating your investments during elections

With elections around the corner, many may feel tense as the nation waits to see what’s next. In an environment of uncertainty, behavioural biases can creep in, with the temptation to make ‘knee-jerk’ investment decisions in reaction to the current climate and perceived market swings. Kingsley Williams, Chief Investment Officer of Satrix, suggests investing steadily and sticking to one’s long-term plan.

Timing the Markets: A Cautionary Quote

Williams says Satrix’s philosophy is to focus on longer-term drivers of performance. This aligns with Warren Buffett’s famous cautionary quote on the dangers of timing the market, which ends with this:

“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.”

This extract is often seen as potentially endorsing timing the market, but the full quote encourages the exact opposite. Buffett claims investors have had every opportunity to earn ‘juicy returns’ by ‘piggybacking Corporate America in a diversified, low-expense way’ through an untouched index fund. Instead, they jeopardised their returns by trading excessively or overspending on fund management, making portfolio decisions based on fads and tips, or adopting a start-stop approach to the market through untimely entries and exits. In short, Buffett suggests investors focus on steadily building long-term market exposure, and not timing entry and exits into and out of the market.

In a year where half the world’s population is going to the polls, investors would do well to heed Buffett’s words. Williams cautions people to be wary of being victims of their emotions and behavioural biases. He suggests staying the course and keeping costs low. Additionally, he advocates:

  • Much like constantly changing lanes in traffic, one’s best efforts may scupper one’s long-term goals;
  • Past performance is no guarantee of future returns;
  • The biggest risk to growing long-term wealth is not taking any risk at all.

Longer Horizons and the Magic of Compounding

Williams says that elections bring the potential for heightened volatility, however, this isn’t necessarily an issue if an investor’s investment horizon is for the long term. “Investors who combine strategies with payoff structures that are not too highly correlated, and add time for compounding to work its magic, are stacking the odds firmly in their favour over the longer term.”

He adds that Satrix focuses on offering a wide range of asset class and investment strategy building blocks to enable clients to express their investment views. “These range from defensive asset classes in the interest-bearing space to a wide range of equity strategies more suitable for longer-term growth. Our preference is always to provide an appropriate investment strategy to match the investment horizon of a client and to meet a variety of different investment requirements.

“Research suggests that short-term tactical calls tend to detract more value than they add as they require consistently timing the entry and exit points correctly, as per Buffett’s quote. Being ahead of the market is not a trivial thing to get consistently right.”

Defensive Strategies

However, Williams says that if clients do want more defensive fund strategies should they be concerned with short-term volatility and reducing short-term drawdowns, they could consider investing in money market funds, bond index funds or ETFs, low equity balanced index funds, or low volatility equity ETFs.

The recently launched Satrix JSE Global Equity ETF, tracking the FTSE/JSE Global Investor Index is another option, which provides investors with domestic equity exposure that weights inward- or dual-listed companies on the JSE according to their global free float. This provides a rand hedge equity strategy relative to broad market local indices, which could be an attractive proposition for investors who are concerned the rand may weaken. 

ETFs and index funds can be an excellent diversifier due to the broad basket of securities they offer.  However, understanding the index and investment strategy of an ETF or index fund and how this complements the rest of your portfolio is key to achieving true diversification.

Stay the Course and Match Your Portfolio to Your Risk Tolerance and Time Horizon

Williams adds that it’s impossible to forecast how the elections may move the markets. “Forecasting these binary or probability outcome events is not how we approach investing. Even if we predicted the election result correctly, how the market may subsequently respond is still unclear. We structure portfolios to provide a through-the-cycle, well diversified mix of asset classes to match a particular client’s risk profile.

“Every asset class has its own risks, which is why a multi-asset class mix of both local and offshore assets is often the best solution. This can diversify foreseen and unforeseen risks and provides a smoother growth path to achieving above-inflation returns over the medium- to long-term. It’s always important to match a portfolio to a client’s risk tolerance and investment horizon.”

The bottom-line? Align your portfolio with your risk tolerance and personal investment horizon. Stay the course, diversify your asset classes, and make the most of the magic of compounding. Be wary of tactically trying to time the market. In periods of uncertainty, a long-term outlook is likely to serve you well.

Disclaimer

Satrix Investments (Pty) Ltd is an approved financial service provider in terms of the Financial Advisory and Intermediary Services Act, No 37 of 2002 (“FAIS”). The information above does not constitute financial advice in terms of FAIS. Consult your financial adviser before making an investment decision. While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSP, its shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaim all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information.  Satrix Managers (RF) (Pty) Ltd (Satrix) is a registered and approved Manager in Collective Investment Schemes in Securities. Collective investment schemes are generally medium- to long-term investments. With Unit Trusts and ETFs, the investor essentially owns a “proportionate share” (in proportion to the participatory interest held in the fund) of the underlying investments held by the fund. With Unit Trusts, the investor holds participatory units issued by the fund while in the case of an ETF, the participatory interest, while issued by the fund, comprises a listed security traded on the stock exchange. ETFs are index tracking funds, registered as a Collective Investment and can be traded by any stockbroker on the stock exchange or via Investment Plans and online trading platforms. ETFs may incur additional costs due to being listed on the JSE. Past performance is not necessarily a guide to future performance and the value of investments / units may go up or down. A schedule of fees and charges, and maximum commissions are available on the Minimum Disclosure Document or upon request from the Manager. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Should the respective portfolio engage in scrip lending, the utility percentage and related counterparties can be viewed on the ETF Minimum Disclosure Document.  For more information, visit https://satrix.co.za/products
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SatrixNOW is a no-minimum online investing platform from Satrix that allows you to buy and sell ETFs directly.

This article first appeared here on the Satrix website.

Ghost Bites (Adcorp | Altron | Astral Foods | Balwin | Deneb | Famous Brands | Frontier Transport | Impala Platinum | Netcare)

The Finance Ghost
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Ghost Bites (Adcorp | Altron | Astral Foods | Balwin | Deneb | Famous Brands | Frontier Transport | Impala Platinum | Netcare)

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

Adcorp’s South African professional service division is struggling (JSE: ADR)

HEPS from continuing operations has taken a significant knock

Adcorp has released a trading statement dealing with the year ended February 2024. Revenue is up by between 5.2% and 10.2% and that’s largely where the highlights stop.

Gross profit is down between 1.0% and 3.0%, so there’s margin pressure right at the top of the income statement.

HEPS from total operations is up by between 27.0% and 47.0%, but this has to be viewed against HEPS from continuing operations which has fallen by between 38.4% and 48.4%. Seeing the core businesses going the wrong way is far from ideal.

The pressure is being felt to the greatest extent in the professional services division in South Africa, which focuses on placing professional staff in roles. This tells you a great deal about how South African businesses have sat on their hands in the past year, with a combination of load shedding (perhaps behind us now) and the run-up to elections. Interestingly, the equivalent business in Australia has had some challenges, but obviously not for quite the same reasons as South Africa.

On the plus side, the contingent staffing businesses in South Africa and Australia are doing well, so the benefit of diversification is showing here. Other good news is that the group has no debt and sits on a cash balance of R204.2 million. That’s not insignificant on a market cap of R420 million!

HEPS from continuing operations will be between 76.3 cents and 91.1 cents. The share price is only R4.00. Once you adjust for the extent of cash on the balance sheet, this business is trading at an exceptionally low Price/Earnings multiple. For the most part, it’s been a value trap for investors though, with limited liquidity and a negative share price trend over the past couple of years (even if you take into account the large special distribution in 2023).

Altron’s continuing operations are growing strongly (JSE: AEL)

But the group numbers reflect a loss

Altron has at times taken adjustments to the financials a bit far. When we start talking about adjusting for credit losses in the public sector, then I get worried. After all, that’s a pretty well understood business risk in South Africa.

But when the adjustments are because a business was sold during the year, that’s clearly a reason to accept the adjusted numbers. Altron’s ATM business was only included for four months of the year ended February 2024, so that really skews the annual revenue growth vs. the comparable period that included it for a full year.

If we focus only on continuing operations and exclude the ATM business, then revenue grew 8% and EBITDA was up 27%. Operating profit increased by 33%. This is the most rose-tinted way to look at Altron’s numbers.

Before you pop the champagne, we need to consider the impact of discontinued operations on the group. There’s more to this story than just the ATM business. If you include both the ATM business and the discontinued operations, Altron swung from HEPS of 29 cents to a headline loss of 25 cents per share.

It helps in this case to dig into the more detailed segmental numbers. The Own Platforms segment grew revenue 9% and EBITDA 23%. Netstar is the largest part of this segment and grew revenue by 12%, while expanding its EBITDA margin and finding some rather interesting ways to scale into new markets and products through partnerships with the likes of Toyota. The FinTech platform is the second largest in this segment, growing revenue by 5% and EBITDA by 22%. HealthTech is the smallest platform and grew revenue by 7% and EBITDA by 3%.

For context, Own Platforms contributes EBITDA of R1.2 billion.

The Digital Transformation segment is good for EBITDA of R243 million, up 60% thanks primarily to profit improvement strategies at Altron Systems Integration. There are various other operations within that segment.

Within discontinued operations, we find Altron Document Solutions with revenue growth of 13%. That sounds good until you consider the operating loss of R65 million in the first half of the year, which was turned around quite spectacularly into an operating profit of R53 million in the second half. Long may that continue.

If you’re wondering where the group result really broke, then look no further than Altron Nexus and a 35% drop in revenue, with an operating loss of a whopping R433 million. The business was not awarded phase 3 of the Gauteng Broadband Network project, leading to a full business review and a winding down of parts of it. They are trying to sell this business.

And yet, despite the overall group loss, the final dividend was 74% higher at 33 cents vs. 19 cents in the comparable period. Talk about a confusing set of numbers. If you keep digging, you’ll find that there was a significant working capital release in this period (including from discontinued operations), along with a reduction of debt.

This certainly isn’t an easy set of numbers to work through, but those who have believed in the turnaround in the past year have been rewarded with a 50% share price rally over 12 months.

Astral Foods and a casual 441% increase in HEPS (JSE: ARL)

Welcome to the poultry rollercoaster

Businesses with structurally low margins can experience absolutely wild swings in profitability. Astral Foods is the latest example, with a 4% revenue increase and a 461% jump in operating profit from just R98 million to R550 million. Things are certainly looking a lot better in the poultry industry and if the load shedding and avian flu can just stay away, they will get even better.

HEPS for the six months to March came in at R8.84, which is a magnificent improvement from R1.63 in the comparable period. The second half of the previous financial year (i.e. April to September 2023) was an absolute disaster, with a headline loss for the full year of -R13.24 as Astral literally had to subsidise the cost of producing chicken. Investors in this sector will be hoping that the horrors aren’t repeated, allowing Astral to conclude a solid recovery year.

Perhaps even the weather will play ball, with the outlook section noting that El Niño is weakening, which could mean La Niña and thus improved conditions for the local planting season. This matters because of maize prices, a key cost input in farming of chickens.

The balance sheet certainly looks much better, with gearing down to 10.1% – much lower than 25.6% at September 2023.

My bearishness on Balwin continues to be proven correct (JSE: BWN)

This business is firmly on the wrong side of South African trends

Balwin has released results for the year ended February 2024 and they aren’t pretty. Revenue is down 29% and HEPS has plummeted by 48%. When you see extensive promotions for developments (like I witnessed at Montecasino on trip to Joburg towards the end of 2023), you know that the apartments aren’t exactly flying off the shelves. There was a 32% reduction in the number of apartments sold year-on-year.

They’ve worked hard at building the annuity business portfolio and it’s now up to 5.6% of group revenue, with an operating profit margin of 41%. That’s a cute contribution, but nowhere near enough to protect shareholders from a year like this.

To make it worse, the sales incentives to try and boost revenue from apartments led to a dilution in gross margin from 27% to 24%. That’s certainly not what you want to see when volumes are under pressure. At least they managed to bring operating expenditure down by 11% year-on-year to try and limit some of the pain.

Against this backdrop, it’s perhaps not surprising that there’s no dividend to shareholders. They paid 24 cents per share last year and the share price is trading at around R2, so this is a harsh lesson in buying something on a high trailing dividend yield without considering how resilient that dividend is.

The loan-to-value ratio reduced slightly from 40.7% to 40.5%. I’m just not sure that this is the best metric for the group, as the net asset value (NAV) also happened to increase by 4% to 858.49 cents per share despite the drop in profits. In a development company, I feel like profitability metrics are more important than balance sheet metrics like NAV.

The share price at a 73% discount to NAV suggests that the market agrees with my view.

At Deneb, looking at adjusted earnings is justified (JSE: DNB)

HEPS isn’t always the right measure of performance

Deneb has released a trading statement dealing with the year ended March 2024. Looking at HEPS is misleading for once, as it shows a drop of between 10% and 30% which sounds like a poor outcome.

If you read further, you’ll see that the base period included insurance proceeds for business interruption and flood damage. This is obviously a non-recurring source of income, hence why earnings have dropped so much if that is included in the base for comparison.

A better way to view these numbers is by excluding the insurance claims, in which case HEPS on an adjusted basis would be up by between 15% and 35%. That’s more like it!

Operating margin pressure at Famous Brands (JSE: FBR)

On an adjusted basis, earnings have inched higher in the past year

Famous Brands has released results for the year ended February 2024. They aren’t very exciting unfortunately, despite revenue growth of 8%. The business is far more diversified than a group like Spur, boasting 16 restaurant brands and a presence in 18 countries. Here’s the thing though: diversification isn’t always beneficial.

The year-on-year movements need to take into account the once-off Gourmet Burger Kitchen liquidation dividend of R75 million that was received in August 2022 (part of the base period). Excluding this, operating profit increased 3.3%, which reflects a decline in operating margin from 10.6% to 10.1%. Adjusted basic earnings per share would be 2% higher after this adjustment.

HEPS fell by 5% and I must highlight that the headline earnings calculation takes out the liquidation dividend in the base, so that’s the best way to view this result in my view. It hasn’t been a great period for Famous Brands, with pressure on consumer spending on one end and production costs on the other.

If we look at the segments, Leading Brands (the more affordable restaurants) grew revenue by 5.6%, while Signature Brands (the fancier eat-in formats) grew revenue 2.3%. Even within Leading Brands though, we need to distinguish between classic quick-service restaurants – the takeaway joints – and casual dining restaurants, which are generally found in shopping centres. The casual restaurants did better, with load shedding as a factor there due to landlords providing backup power. Remember, we are looking at full-year numbers here where load shedding was prevalent throughout.

The operations outside of South Africa range from simpler (like SADC countries with operating profit of R55 million) through to complex, particularly in Northern Africa and Middle Eastern (AME) markets. An operating loss of R14 million was suffered in AME, which is at least a lot better than a loss of R26 million in the prior year.

Wimpy UK saw a slightly decline in operating profit from R19 million to R18 million. They don’t have the Joburg – Durban roadtrip on that side of the pond to help justify Wimpy trips.

At heart, Famous Brands is a manufacturing and logistics play, with those segments contributing operating profit of R297 million and R94 million respectively. In both segments, profits were down year-on-year due to pressure from operating costs and load shedding.

In the retail segment (the sauces on the shelves), revenue was R368 million but operating profit was only R6 million. Talk about a marginal way to make any money. Hopefully, a significant portion of further revenue growth will drop straight to the bottom line.

In case you struggled to follow all that, here’s an overview of the segments for context:

Looking ahead, the group has flagged improvements that need to be made to the logistics and manufacturing footprints. This suggests a period of increased capex, which will be staggered over several years. Money isn’t cheap at the moment and they will need to think about returns carefully, particularly as interest on borrowings jumped from R89 million in the prior year to R125 million in this year.

Frontier Transport still has great momentum (JSE: FTH)

Helping people get from A to B can be lucrative

Frontier Transport is a perfect example of the benefit of excellent execution in a sector that is anything but sexy. The group operates a number of commuter bus services, with Golden Arrow as its most well-known business. It’s not exactly AI and cloud computing, yet HEPS is up by between 35.3% and 39.5% for the year ended March 2024.

This implies a range of 130 cents to 134 cents, which means the share price at R6.58 is still on a modest multiple.

There was only a slight reduction in the number of shares outstanding, so this growth was driven by higher earnings, not extensive share buybacks. That speaks to the quality of the business.

Impala executes a B-BBEE deal (JSE: IMP)

With equity values under pressure, this is expensive timing for existing shareholders

Impala Platinum’s acquisition of Royal Bafokeng Platinum included a merger approval condition related to a need to increase B-BBEE ownership in the group. These types of deals are usually costly to existing shareholders and even more so when equity values are depressed.

This is a significant deal, resulting in 13% B-BBEE ownership in each of Impala and the newly renamed Impala Bafokeng Resources, with a combined transaction value of R9 billion. It includes a 4% community share ownership trust, a 4% employee share ownership trust and a 5% holding by a strategic consortium, led by Siyanda Resources. This will be called the Bokamoso consortium.

Siyanda is seen as a preferred partner in the PGM space based on its track record, leadership and reputation in the broader Rustenburg community.

The investment by the community share ownership trust will be facilitated by an interest-free vendor loan from Impala and Impala Bafokeng. 65% of its annual dividends will go to beneficiaries and 35% will service the debt. Much the same approach is being followed for the employee share ownership trust.

The Bokamoso consortium will subscribe for shares with a R100 million equity tranche and vendor funding for the rest in the form of preference shares that will be subscribed for by Impala and Impala Bafokeng. The commercial terms haven’t been announced yet. Aside from covering operational costs, 30% of dividends can be distributed to equity funders and the rest will go towards servicing the preference shares.

With all said and done, Impala Holdings will have 87% in each of Impala and Impala Bafokeng. The interest-free vendor loans are obviously costly to the group but are necessary to ensure the commitment of the community and staff. The cost of the strategic consortium element of the deal will depend on the rate on the preference shares, which Impala shareholders will hope is on the higher side, particularly given the timing of this deal at a depressed point in the cycle.

HEPS up at Netcare, but a flat dividend (JSE: NTC)

A more conservative payout ratio probably makes sense here

Hospital groups are a grind, if we are honest. They achieve modest revenue growth and if they are lucky, EBITDA margin goes the right way. In the six months to March 2024, Netcare grew revenue 4.3% and EBITDA 7.0%, so that’s in line with the best possible shape that this kind of business can really hope for.

Profit was up 6.3%, with higher finance costs biting. Net debt is 16.4% higher and the cost of debt is of course still elevated, so the combination puts pressure on the income statement. Thanks to share buybacks though, HEPS is up 9.2%.

The interim dividend has stayed at 30 cents despite HEPS moving up to 48.9 cents. This is a more conservative payout ratio than in the comparable period, which is a reflection of (1) the levels of debt and (2) the share buyback programme that the company has been following, which gives it more flexibility and boosts HEPS – unlike a dividend.

Here’s the chart that I don’t think many of us ever expected to see:

Little Bites:

  • Director dealings:
    • Zyda Rylands has sold more shares in Woolworths (JSE: WHL) as part of her process of retiring from the group. The latest sale is to the value of R18.75 million.
    • Associates of a director of Sea Harvest (JSE: SHG) bought shares in the company worth around R115k.
  • RMB Holdings (JSE: RMH) released a trading statement based on the movement in net asset value per share. The important thing to note is that there was a special dividend paid since the end of the comparable period, so adjusting for that means a much lower percentage move than the unadjusted number would suggest. The NAV per share as at March 2023 was 100.3 cents and a dividend of 23.5 cents was paid in January 2024. The expected NAV range for March 2024 is 71.4 cents to 87.2 cents. If we add back the dividend to that NAV, it implies a move over the year of -5.4% to 10.4%.
  • Those following Merafe (JSE: MRF) will be interested (and probably irritated) to learn that the quarterly European Ferrochrome Benchmark price will be discontinued with effect from June 2024, which means the company will no longer publish this information. There’s no guidance given on whether there is some kind of disclosure that will replace this.
  • MC Mining (JSE: MCZ) announced that with Goldway’s interest moving to 93.05% of shares in issue after the takeover offer by that party, MC Mining’s listing on the AIM will be cancelled. It’s not clear yet whether Goldway will invoke the “squeeze-out” provisions to force remaining holders to take the offer, so for now the company will continue to be listed on the ASX and JSE.
  • As part of a B-BBEE deal going back to 2024, a subsidiary of Kagiso Tiso Holdings has elected to convert preference shares in Momentum Metropolitan (JSE: MTM) into ordinary shares to the value of R258 million.
  • Salungano (JSE: SLG) released a renewed cautionary announcement regarding Wescoal Mining and Keaton Mining. The operations of Elandspruit and Khanyisa within Wescoal will be in a state of care and maintenance until the business rescue practitioners determine an alternative course of action. Over at Keaton Mining, operations at Vanggatfontein are continuing by agreement with the provisional liquidators, with a heading set for 3 July 2024 for a provisional liquidation order brought by a creditor. Discussions are underway with all major creditors to reach a compromise.

Unlock the Stock: CA Sales Holdings

The Finance Ghost
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Unlock the Stock: CA Sales Holdings

Unlock the Stock is a platform designed to let retail investors experience life as a sell-side analyst. Corporate management teams give a presentation and then we open the floor to an interactive Q&A session, facilitated by the hosts.

We are grateful to the South African team from Lumi Global, who look after the webinar technology for us.

In the 34th edition of Unlock the Stock, we welcomed CA Sales Holdings back to the platform, boasting one of the most impressive share price performances on the JSE. To understand the drivers of that performance, The Finance Ghost co-hosted this event with Mark Tobin of Coffee Microcaps and the team from Keyter Rech Investor Solutions.

Watch the recording here:

Ghost Bites (Altron | Gold Fields | ISA Holdings | Naspers – Prosus | Newpark | Richemont | Sirius Real Estate | Trematon)

The Finance Ghost
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0
Ghost Bites (Altron | Gold Fields | ISA Holdings | Naspers – Prosus | Newpark | Richemont | Sirius Real Estate | Trematon)

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

Altron has issued a revised trading statement (JSE: AEL)

We will need to pay attention when detailed numbers come out

Altron’s results presentation is scheduled for the morning of 20 May, so this trading statement has come out just ahead of the release of detailed numbers.

We will need to pay a great deal of attention to the results, as Altron’s numbers aren’t simple to understand. There’s a big difference between HEPS from continuing operations and group HEPS.

The continuing operations will no doubt be where the company wants us to focus, with an increase of between 35% and 38% in that metric. Across all group operations though, they are expecting a headline loss per share of between 24 and 26 cents, compared to positive earnings of 29 cents. The non-cash adjustments in the interim period are largely to blame here.

All eyes on the detailed results, then.

Mines have to deal with a lot – even chinchillas (JSE: GFI)

Operations at Gold Fields’ Salares Norte are unaffected

Gold Fields owns the Salares Norte project in Chile and like in all mining projects, environmental considerations are important. Rocky Area No 3 is a possible location of chinchillas on the property, which creates environmental sensitivities that need to be monitored and managed.

The dismantling of the area was commenced based on monitoring of the area that suggested only transient chinchilla moving through the area. Chile’s Superintendence of Environment has requested that Gold Fields cease the dismantling and submit further information about the night camera recordings of the area and other monitoring tools.

Operations are unaffected and Gold Fields is working with experts on the capture and relocation plan for chinchillas. Production guidance for 2024 remains at 220,000 to 240,000 gold equivalent ounces.

ISA Holdings reports a juicy jump in profits (JSE: ISA)

Here’s a small cap you may not have heard of before

ISA holdings is an ICT service provider that has been listed on the JSE since 1998. Despite being around for so long, you would be forgiven for never having heard of the company. The market cap is only R300 million.

For the year ended February 2024, the company managed to achieve HEPS of between 17.50 cents and 20.30 cents, an increase of between 25% and 45%.

Despite being such a small cap, the share price of R1.76 isn’t exactly the bargain that we are used to seeing in companies of this size. Based on the mid-point of the trading statement guidance, the earnings multiple is 9.3x.

Detailed results are due for release on 24 May.

Naspers and Prosus put a proper operator in the top job (JSE: NPN | JSE: PRX)

Fabricio Bloisi understands how to scale companies

After a lot of frustration for investors under previous management, Naspers and Prosus have chosen to appoint a proper entrepreneur into the CEO role. Fabricio Bloisi is currently the CEO of iFood, having acquired that business back in 2013 as a 20-person startup and grown it to become Brazil’s leading food delivery company. Today, iFood has 5,000 employees.

This is obviously the right sort of track record for the portfolio of businesses sitting inside this group.

With a change in strategy to have a strong operator in the top job, Ervin Tu moves from interim CEO to President and Chief Investment Officer (CIO), thereby ensuring that a capital allocation lens is applied at board level.

This feels like a major step forward for the culture of the group and the need to not just scale businesses, but scale them profitably.

Watch out for that JSE lease at Newpark (JSE: NRL)

Although it seems unlikely that they would move, always consider where the negotiating power lies

Newpark REIT only owns four properties. In Sandton, they have the JSE building and the property next door called 24 Central (I have many fond memories there). They also own a property in Linbro Business Park and one in Crown Mines.

The good news in the results for the year ended February 2024 is that the dividend is up 4.73%. The bad news is that the loan-to-value ratio has jumped considerably from 30.9% to 41.4%, with the net asset value per share down a whopping 32.47%.

The main problem is a reduction in the value of the JSE property, with the drop in the fair value of the overall portfolio taking Newpark to a loan-to-value ratio that has even breached lender requirements. For now at least, the lenders are allowing it. A further review on the loan will take place in August.

43% of leases (measured by gross lettable area) are due to expire in 2026 and 2027. The JSE lease is 31%. They are budgeting for a negative rental reversion of note on the JSE property, with an outlook for funds from operations per share for the year ending February 2025 that reflects a drop of between 25.9% and 38.4%.

A very concentrated property portfolio is a risky thing.

Richemont achieves record sales (JSE: CFR)

But group operating margin went the wrong way

Richemont has released results for the year ended March 2024. The highlight is in the sales number, which came in at an all-time high after growing 3% at actual exchange rates and 8% on a constant currency basis.

The momentum into the end of the year wasn’t great though, with Q4 sales down 1% at actual rates and down 2% at constant rates.

Despite this strong sales outcome for the full year, operating profit fell by 5% at actual exchange rates. Interestingly, it increased 11% at constant rates, so shifting margin mix across the group is having an impact here. Notably, group gross margin fell 60 basis points and operating margin contracted by 190 basis points.

At group level, this led to profit from continuing operations dropping by 2.4%. The cash tells a better story though, with cash from operating activities up by 4.6%.

Looking deeper, Jewellery Maisons increased operating profits from €4.68 billion to €4.71 billion. Specialist Watchmakers more than offset this growth, with operating profits falling from €738 million to €572 million. It’s also worth highlighting that the United States is the largest individual market in the group, with China having dropped year-on-year from €3.9 billion in sales to €3.7 billion.

The YNAP mess led to a €1.5 billion loss from discontinued operations due to the write-down of those assets. Online sales at Richemont fell by 2% for the year. I am really not surprised by this at all. Buying these luxury goods is a consumer experience and you simply don’t get that from behind a computer screen. Flagship stores and the retail network are critical.

The group also announced changes to the management team, with the most important one being Nicolas Bos (currently the CEO of Van Cleef & Arpels) taking the re-established CEO role at Richemont, reporting to Johann Rupert as Chairman

Sirius raises nearly €60 million in debt (JSE: SRE)

This follows the €165 million equity raise last year

If you enjoy seeing how corporate balance sheets work, then you’ll appreciate this update. Sirius Real Estate has used a “bond tap” to raise €59.9 million in debt as part of the bond series that was originally issued in November 2021. They are priced in line with current trading levels, but are seen as part of the existing series due in November 2028.

The entire raise was to just one institutional investor, which shows strong belief in the Sirius model.

The net loan to value will remain within Sirius’ guidance of 40% or lower.

The fund has been solidly on the acquisition train, having raised €165 million in equity in November last year. These funds will be used primarily towards the acquisition pipeline in Germany and the UK.

Trematon’s Generation Education is blossoming (JSE: TMT)

This is a great example of how operating leverage and fixed costs work

Trematon is an investment holding company that has a diverse portfolio including interests in education and property. Companies like Trematon are generally valued by the market at a discount to intrinsic net asset value (INAV) per share. The extent of the discount depends on various factors, like the valuations of the portfolio companies supporting the INAV and the level of costs at the centre.

When investment holding companies are on a mission to return capital to shareholders (thereby reducing the discount over time), any movement in INAV over a period needs to be viewed in the context of those capital distributions. If cash moves off the balance sheet and goes to shareholders, then the INAV will naturally be lower – but not because of negative moves in the underlying portfolio.

Although Trematon’s INAV has dropped by 3% in the past year to 408 cents, the better approach is to adjust for the capital distribution of 32 cents per share in December 2023. If we add that back to the INAV at February 2024, we get a year-on-year move of 4.5% in the right direction.

Looking deeper into the portfolio, Generation Education grew revenue by 10% and operating profit by a massive 230%, a perfect example of what happens when a business that is heavy on fixed costs hits the inflection point for profitability. The margins still have a long way to go as the business scales, with revenue of R106.8 million and operating profit of R15.4 million.

ARIA Property Group is a retail-focused property fund, contributing R12.1 million to group profits for this period. Occupancy rates increased by 100 basis points to 98.4%.

Club Mykonos Langebaan contributed R3.7 million to group profits, with management ooking for ways to improve annuity income and realise the value of the remaining development land.

RESI Investment Group holds a portfolio of sectional title units and sells them off when it makes sense to do so, as they are well tenanted. They sold 24 residential units in this period.

Finally, UK-based structured finance company ASK Partners made a much lower contribution in this period (R0.4 million) than the comparable period (R30 million).

Quite correctly, Trematon has been repurchasing shares at a discount to INAV. They repurchased shares worth R4.4 million in the period.

Little Bites:

  • Director dealings:
    • Adrian Gore, CEO of Discovery (JSE: DSY), has taken out a substantial hedge over Discovery shares in the form of put options at R95.50 per share and call options at R153.37 per share. The hedge will be in place for around 19 months. The current share price is R116. The notional value of the put is R321 million and the call is R516 million.
    • Des de Beer has bought shares in Lighthouse Properties (JSE: LTE) worth R4.2 million. He also bought shares in Resilient (JSE: RES) worth R794k.
  • SAB Zenzele Kabili (JSE: SZK) declared a dividend of 31 cents per share. I still think the scheme should be focusing on reducing debt, not paying dividends. The underlying AB InBev investment isn’t exactly shooting the lights out.
  • As part of Accelerate Property Fund’s (JSE: APF) intended rights offer to raise equity capital, shareholders needed to approve a waiver of mandatory offer resolution. This is to prevent a situation where an underwriter needs to suddenly stump up the cash to buy the entire fund. Shareholders gave that approval and the TRP has therefore also granted a waiver ruling.

Hermès: Birkin mad

Dominique Olivier
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Hermès: Birkin mad

Got lots of money, and want to spend it on a Birkin bag? That’s nice. Now get in the back of the line.

I read a fantastic quote this week from self-proclaimed Hermès superfan, Alex Pardoe: “Hell hath no fury like a wealthy person told no”. Recalling the many times he has witnessed “grown men and women having five-star meltdowns” in the Hermès flagship store in Paris, Pardoe’s wit paints a vivid picture of these luxury-induced tantrums.

The outbursts, Pardoe explains, are invariably triggered by the same scenario: a wealthy individual walks into the store, confidently requests to purchase a Hermès Birkin bag – the very epitome of high-status handbags, often priced at $10,000 (~R185,000) or more – only to be informed that none are available. Cue shrieks of fury.

This scene is a common occurrence, as Birkins (according to luxury handbag lore) are far from ordinary commodities that can be picked up off the shelf. The process of acquiring a Birkin involves more than just having deep pockets. The bags are produced in limited quantities and their allocation is often at the discretion of the sales associates, who tend to reserve them for their most favoured clients. And how does one become a favoured client? By spending money on other Hermès items, of course.

In a world that demands instant gratification and customer satisfaction (and in which cash is usually king), I can understand why it might be a novel experience for people to be told that they need to be pre-selected in order to be allowed to purchase something.

How did Hermès manage to create this reality without instantly alienating its ultra-wealthy consumer base? This writer thinks it has something to do with the thrill of the chase. But before we start theorising, let’s start at the very beginning.

The supermodel and the straw basket

In 1984, a chance encounter on a flight from Paris to London led to the creation of one of the most iconic handbags in fashion history. Hermès chief executive Jean-Louis Dumas found himself seated next to actress and singer Jane Birkin. Just two days earlier, Birkin’s signature straw basket had been run over by her then-partner, Jacques Doillon, forcing her to use a different travel bag. As she attempted to stow the bag in the overhead compartment, its contents spilled out, prompting a scramble to gather her belongings.

During their conversation that followed, Birkin lamented to Dumas about the difficulty of finding a leather weekend bag that suited her needs. She wondered aloud if Hermès could produce a larger, more practical version of Hermès’ famous Kelly bag. This offhand comment sparked an idea in Dumas.

Inspired by Birkin’s plight and her suggestion, Dumas set out to design a new bag. Drawing from an earlier Hermès design, the Haut à Courroies, which dated back to around 1900, he created a supple black leather bag that combined elegance with practicality, and named it after the woman who inspired its creation.

The method behind the madness

Hermès’ Pantin workshop is one of four in France, with others in Ardennes, Lyonnais and Lorraine, but it is exclusively at Pantin where the iconic Birkin bag is crafted. Creating a Birkin takes at least 18 hours, varying by size, materials and embellishments.

Artisans train for at least five years before making a Birkin independently, ensuring mastery of traditional techniques, consistency and exceptional skill. Each Birkin is handcrafted by a single artisan using medieval leatherworking techniques and specialised tools like awls, needles, and pinces-à-coudre. They must master the saddle stitch, where two needles are pulled through the same hole in opposite directions, and finish by polishing the seams with beeswax to perfection.

Hermès produces an estimated 70,000 Birkin bags each year, yet the Birkin remains one of the most coveted luxury items. It’s hard to find reliable information online as this is such a closely guarded space, but back in 2006 the waiting list reportedly extended up to six years, highlighting its exclusivity and high demand.

That’s all well and good. We have a heritage brand, an interesting backstory and an undeniable dedication to quality. Almost every other luxury brand could claim to have the same. So what is it about Hermès in particular that renders consumers willing to participate in their buy-in games?

“The Scientology of purses”

On the subreddit r/handbags, a user named Dismal_Ad411 asks the question: “How much did you spend at Hermès before being offered the Birkin?”.

Among comments by users decrying the brand’s tactics as unfair and exclusionary, a variety of answers come to the fore. User bertie9488 admits to spending $5,000 on a smaller bag, a couple of scarves and a bangle before being given the chance to buy the Birkin. Others seem to think it takes an average spend closer to $50,000 to unlock the prize. User shinyjewels quips: “I’ve probably spent 25k and still haven’t gotten offered a quota bag. I did get a limited edition Bolide though, which is included in the price of the 25k I spent thus far. Had to jump an SA (sales associate) cuz we didn’t click, so that’s like, 4k-5k out the window”.

Indeed, the ringmasters who appear to hold up the hoops that customers must jump through are the Hermès sales associates. According to redditor Ennui, “If you have a good SA and you have a good connection they will give you a shot. I can’t remember how much I spent but my favourite SA at a smaller store gave me what I was looking for within a short period of time. But any hiatus or break from shopping with them is like a setback. It drives me nuts.”

All that hoop-jumping certainly helps the bottom line at the end of the day. In the latest financial year, Hermès reported annual sales of €13.4 billion. The current market cap is over €240 billion, dwarfing the likes of Nike despite selling a significantly smaller number of goods, but still much smaller than LVMH at €390 billion.

Not everyone wants to play the game

Jeffrey Berk is the CEO of Privé Porter, a leading Miami-based Birkin reseller. According to him, there are two distinct types of Birkin buyers. The first group consists of individuals willing to engage in the lengthy and often humbling process of securing a Birkin directly from Hermès, an endeavour that we now know involves cultivating a relationship with the brand and demonstrating loyalty through various purchases.

The second group, however, opts for a different route. These buyers turn to resellers like Privé Porter to obtain their coveted Birkins without the wait or the need to build a rapport with a Hermès sales associate. For this convenience, they are willing to pay a substantial premium – often double the original asking price of the new item – for a secondhand bag. This clientele includes high-profile figures such as Paris Hilton and Kris Jenner, who value the immediate availability and exclusivity offered by the reseller market.

Berk claims that 70% of his stock comes from Hermès VIP buyers, who often purchase bags in colours or leathers they don’t actually want, fearing that declining an offer from a sales associate might jeopardise their relationship with Hermès and stop them from getting the bags they’re holding out for. Before making such purchases, they often email Privé Porter to ensure the company is interested in trading or reselling the bags before pulling the trigger on the purchase.

What recourse is there for those who are unwilling to do the Hermès dance, but unable (or unwilling) to pay for a secondhand item? Well, there’s always the courts.

Hermès is currently facing a lawsuit in California, accused of violating antitrust laws by allegedly “tying” the sale of one item to the purchase of another. Two California residents initiated this lawsuit through a proposed federal class-action filed in March of this year. The irony of this legal action lies in its inherent weakness: not only are these allegations challenging to substantiate, but most Hermès customers are reluctant to risk being blacklisted by the brand.

Who among the Birkin hopefuls would jeopardise their relationship with Hermès by participating in a class-action lawsuit?

About the author:

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 (Afrimat | Barloworld | Karooooo | Nampak | Sanlam | Southern Sun)

The Finance Ghost
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Ghost Bites (Afrimat | Barloworld | Karooooo | Nampak | Sanlam | Southern Sun)

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

Afrimat marches on (JSE: AFT)

Construction Materials and Bulk Commodities both saw profits jump

Afrimat released numbers for the year ended February 2024 and they are well in line with the track record that the company is famous for. Revenue increased by 23.9% and HEPS was up 24.0%. That all sounds very consistent across the income statement, but it’s worth noting that operating profit was up 19.8% and hence there was some operating margin pressure.

The balance sheet is in fantastic shape and it will need to be, as the Lafarge acquisition will now be the focus.

One of the highlights was Nkomati within Bulk Commodities, with the anthracite enjoying strong local demand as a substitute for imports. Nkomati contributed 14.6% of group operating profit for the period. The iron ore business within the segment is dealing with headwinds like slower export volumes due to rail infrastructure challenges, as well as a dip in iron ore prices. Despite this, the overall segmental operating margin was slightly higher than the prior year, coming in at 31.8%.

In Construction Materials, revenue increased 22.3% and operating profit more than doubled, up 111% for the period. They attribute this to increased demand from the road and rail industries, which is encouraging for South African infrastructure.

Although there were some disappointments (like the Industrial Minerals segment), the overall trajectory is excellent and puts Afrimat on a strong platform for what needs to be done with Lafarge.

Barloworld’s profitability suffers a dip (JSE: BAW)

Continuing operations are what count here

Due to the unbundling of Zeda in December 2022 and its inclusion in the prior period numbers as a discontinued operation, the right way to look at Barloworld is to focus on continuing operations for the six months to March 2024.

On that basis, the company has suffered a drop in profitability. HEPS from continuing operations is down by between 6.2% and 9.7%. The impact of current infrastructure problems on South African mining groups hasn’t helped here, as that sector is a major customer for Barloworld.

Detailed results are due for release on 27 May.

An acceleration at Karooooo (JSE: KRO)

The rate of growth is important here

Karooooo is the owner of the Cartrack business, which is a classic recurring income model that depends on subscriber growth. Not only must subscriber growth be happening, but it should ideally be accelerating.

This is indeed the case in the fourth quarter numbers, with total subscribers up 15% and net additions (i.e. the number of new subscribers) up 65%. For the full year, total subscribers were also up 15% (as the Q4 and full-year end points are the same), with the number of net additions for the year up 33%.

Subscription revenue was up 18% for the quarter and 17% for the full year. On a constant currency basis, those numbers are 15% and 14%.

Operating profit came in at a record level for Karooooo, up 18% for the full year. I look forward to Carzuka being out the numbers, as operating losses were worse in that business as Karooooo stepped away from it. It’s also very nice to see that Karooooo Logistics achieved an operating profit of R26 million, way up on R5 million in the prior year.

For full-year 2025, Karooooo expects to have between 2.2 and 2.4 million subscribers vs. the 1.97 million at the end of 2024. Revenue should be R3.9 billion to R4.15 billion, up from R3.54 billion.

Despite the big jump in profits, cash from operating activities dipped from R1.13 billion to R998 million. In a period of rapid growth, cash tends to get tied up in telematics devices that generate revenue in years to come.

Nampak has managed to sell its Nigerian business (JSE: NPK)

This is a major step forward for the group

When a share price closes 14.5% higher on the day, you know that the market liked something. In this case, the market loved the news of Nampak finding a buyer for Bevcan Nigeria (the second-largest manufacturer of cans in that country).

Nampak will get roughly $68.5 million for the stake, with $48.5 million as the base consideration and another $10 – $12 million dependent on the level of working capital in the business on closing. Your maths isn’t letting you down here – there’s another $10 million in the form of repayments by Bevcan Nigeria of its historical debt to Nampak within 20 business days from completion of the deal.

Naturally, the net proceeds from this will be used to repay debt at Nampak. One of the challenges will be to get the proceeds out of Nigeria within a reasonable timeframe, as the foreign currency issues in Nigeria are terrible at the moment.

A circular will be sent to shareholders in due course. Nampak will no doubt hope to get this across the line as quickly as possible, including regulatory approvals.

Double-digit growth at Sanlam (JSE: SLM)

The first quarter reflects a great start to the year

Sanlam has released an operational update for the first quarter of the new financial year and it tells a great story, with 14% growth in the net result from financial services. Net operational earnings were up 16%, with improved investment returns boosting the group. Life insurance volumes and value of new business also look strong, both up double digits.

Investment management new business volumes fell 7%. In a group this size, there will always be a headache somewhere.

This is a strong set of numbers and a wonderful base off which to grow. The R6.5 billion acquisition of Assupol has been approved by Assupol shareholders, with that deal set to significantly improve Sanlam’s mass market business. In other inorganic growth news, the Absa Fund Managers platform was merged into Sanlam Collective Investments in March 2024.

You may also recall the recent news of Sanlam selling down minority stakes in India to facilitate an increase in Shriram life and general insurance entities to over 50%.

Be careful in extrapolating this growth rate for the rest of the year. Sanlam notes in the outlook section that the first quarter growth was helped greatly by investment returns, which are sensitive to global asset values. They don’t expect to see the same growth rate for the rest of the year.

Record profits at Southern Sun (JSE: SSU)

Cost efficiencies and Western Cape exposure have been the drivers here

Southern Sun has released a trading statement dealing with the year ended March 2024 and they have good news to share, calling it a record year of profitability. EBITDAR (a typical hotel industry measure) is up 31% to 34% and HEPS is up 5% to 9%.

But perhaps most importantly, adjusted HEPS (which excludes the once-off payment from Tsogo Sun in the base period) increased by a massive 87% to 90%, coming in at 56 to 57 cents per share. The share price closed nearly 7% higher at R5.55 in appreciation.

Little Bites:

  • Director dealings:
    • Des de Beer has bought R760k worth of shares in Resilient (JSE: RES).
    • An associate of a director of Astoria Investments (JSE: ARA) has bought shares worth R164k.
    • A non-executive director of Renergen (JSE: REN) has bought shares worth R116k.
    • A number of directors and prescribed officers at Hammerson (JSE: HMN) acquired shares under the dividend reinvestment plan.
  • I’m very pleased to report that Bytes Technology (JSE: BYI) didn’t mess around when it came to the undisclosed trades by disgraced ex-CEO Neil Murphy. The investigation hasn’t found any evidence that other parties were involved in this. The company has reached a settlement with Murphy in which he will forfeit entitlements under the company’s performance share plan and deferred bonus plan (i.e. no further amounts will be received by him under these schemes). What will really sting is that he will also repay his after-tax bonuses since IPO to the company.
  • Canal+ has now increased its stake in MultiChoice (JSE: MCG) to 45.2% in the company.
  • In an unusual step, Shirley Hayes will move from non-executive chairman of Copper 360 (JSE: CPR) to executive chairman, with specific focus on the capital requirements for the Rietberg mine and the move into production,
  • Those following Southern Palladium (JSE: SDL) will be interested to know that the company presented at London Platinum Week and has made the presentation available here.
  • Visual International Holdings (JSE: VIS), languishing at R0.01 per share, released a trading statement for the year ended February 2024 that reflects a swing from losses into profits (without giving a range). The group also expects to shift from negative NAV to positive NAV. This seems to be based on a property valuation rather than cash profits.

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

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

Exchange-Listed Companies

Old Mutual’s private equity arm has disposed of its majority stake in Beverages HoldCo 2, operating through Stellenbosch-based beverage company Chill Beverages and Heidelberg-based Inhle Beverages. The stake was sold to a consortium led by private equity firm Alterra Capital Partners, Rwandan-based Admaius Capital Partners and the Mineworkers Investment Company. The beverage company’s key brands include Fitch & Leeds mixers, Score Energy and Bashew’s drinks and Chateau Del Rei canned sparkling perle wine. Financial details were undisclosed.

Nampak is to dispose of the entire issued share capital of Nampak Bevcan Nigeria to Singaporean Alucan Investments. The company will also transfer shareholder loans advanced by Nampak International to Bevcan Nigeria, to the purchaser. The cash consideration to be paid to Nampak is c.US$68,5 million excluding the cash held at Bevcan Nigeria on completion. Nampak will apply the net proceeds to repaying existing debt. As the value of the disposal exceeds 30% of Nampak’s market capitalisation, the transaction is deemed a category 1 transaction as per the JSE listing requirements and will require shareholder approval.

Not only did Anglo American reject BHP’s updated buyout proposal which values the business at £34bn, maintaining that the offer significantly undervalues the company and its future prospects, it announced its own restructuring plan. Anglo will aim to streamline its business to focus on copper and iron ore with the demerging of Anglo Platinum, sale of De Beers and its nickel business likely to be placed on care and maintenance. Both proposals face execution risk. BHP’s revised proposal represents a 15% increase in the merger exchange ratio and increases Anglo American shareholders’ aggregate ownership in the combined group to 16.6% from 14.8% in BHP’s first proposal. BHP has until 22 May 2024 to make a firm offer.

Novus, through its wholly owned Print subsidiary, has announced the small related party acquisition of Bytefuse (owned by Novus CEO), which is in the business of developing machine learning and artificial intelligence technology for application in various fields. Novus will issue 2,513,558 shares at a discounted R4.30 per Novus share to Marblehead Investments and will subscribe for an additional 289 ordinary shares and 30 million Investor Preference shares for R30 million which result in Novus holding a 48.58% equity stake in Bytefuse. The company also has the option to subscribe for an additional 361 ordinary shares and 20 million investor preference shares for R20 million which if exercised will result in Novus holding 58.87% of the ordinary shares and 85.06% of the Investor Preference shares.

Mantengu is to acquire Birca Copper and Metals, from Birca Investments and SA Metals and Fossils. The purchase consideration of R29,89 million will be settled by the issue of Mantengu shares and will be issued in the ratio of 80% to Birca Investments and 20% to SA Metals and Fossils. The acquisition is a Category 2 transaction and as such does not require shareholder approval.

Delta Property Fund has disposed of two properties for an aggregate disposal of R20 million. The letting enterprise situated at 149-151 St Andrews Street, Bloemfontein has been sold to Siguroni Investments for R15 million and the property 5-7 Elliot Street in Kimberley to Candy Sun Liquor for R5 million.

Unlisted Companies

Melitta Group, a German company selling coffee, paper coffee filters, and coffee makers, has acquired a majority stake in the Caturra roastery in Cape Town. The new partnership will be managed by Melitta Europe – Coffee Division based in Bremen.

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

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