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Ghost Stories #38: Chasing Returns from the Sun

9 May 2024

Ghost Stories #38: Chasing Returns from the Sun

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Tivon Loubser is all about chasing the sun – and generating investment returns from solar projects. Thanks to South Africa’s ongoing need for renewable energy projects of every size, there are tax benefits available to investors for doing this. We unpack the opportunity in this podcast.

The podcast is brought to you by Twelve B Fund Managers, a private equity fund entitling tax payers to invest in a portfolio of renewable energy generating assets and benefit from the recently gazetted 125% 12BA wear and tear allowance. After successfully closing Fund I, and deploying all the raised capital in the previous financial year, Twelve B Fund II is open for investment. The fund will close at the earlier of R100m or 30 June 2024.

Please do your own research, discuss this with your independent financial advisor, and if you would like to set up a meeting with the Twelve B team, or would like more information, visit the Twelve B or Grovest websites.

Twelve B Fund Managers (Pty) Ltd is an approved juristic representative of Volantis Capital Proprietary Limited, an Authorised Financial Services Provider FSP No 49836.

Full transcript:

Intro: This podcast is brought to you by Twelve B fund managers, a private equity fund entitling taxpayers to invest in a portfolio of renewable energy generating assets and benefit from the recently gazetted 125% twelve BA wear and tear allowance. After successfully closing Fund One and deploying all the raised capital in the previous financial year, Twelve B Fund Two is open for investment. The fund will close at the earlier of R100 million or the 30 June 2024.

The Finance Ghost: Welcome to this episode of the Ghost Stories podcast. It’s going to be an interesting one. Today we are talking about the sun; chasing the sun. Not the Springbok variety, but rather some solar panels. And who better to do it with than with Tivon Loubser, who is a fund manager at Grovest, specifically focusing on the Twelve B side of things. So Grovest is a name that is familiar to Ghost Mail readers and podcast listeners. Chances are that you’ve heard it before. Tivon, welcome to the show. I’m really looking forward to chatting to you about this stuff and I think let’s kick it off with maybe just a two-minute overview of Grovest and your role there. Just for those who aren’t necessarily familiar with the group and what you guys get up to.

Tivon Loubser: Thanks so much for having me on, Ghost, really appreciate it. So as you mentioned, I’m the fund manager for Twelve B Green Energy Fund. It is a product which has been pioneered by Grovest, the largest small cap fund administrator in the country. We accumulated a lot of that under the section 12J universe and are now expanding into the Section Twelve B universe.

The Finance Ghost: Fantastic. And so you focus on the Twelve B side, which means you spend a lot of time doing solar projects. It’s pretty much just solar, right? There’s no other renewables in there or is there other stuff as well?

Tivon Loubser: No, our investment mandate is pretty narrow towards solar investments. It’s pretty much because we know it, we’ve been involved with it. We got involved through section 12J. So we really understand the fundamentals, all the assumptions and the underlying to solar. So while you can expand into other renewables through section twelve BA, we’ve taken a focus on solar installations.

The Finance Ghost: Yeah, look, on a personal note, it’s always nice to see people focusing on what they are good at and understand. I think that’s probably a sound strategy. I don’t know a huge amount about renewables, but I do know that wind is a bit more variable than sun. Unless you live in Milnerton, where I do, in which case you can bank on both being there pretty much all the time. So, speaking of things that just magically disappear or come and go – load shedding, I don’t know what happened to it, but I’m certain it’s going to come back after the elections. It’s not like that’s been magically solved, let’s be honest. And obviously for you guys, it’s kind of a catch 22, because when that Eskom se Push notification arrives on your phone, you probably go, ah, fantastic demand for solar it is here. So I guess you have a kind of an odd relationship with load shedding. But before we get into some of the projects you guys have done and everything else, I think we can all agree that load shedding can’t have just been magically solved overnight. So I think there’s a good chance that this is more politics than anything else. And I guess with that in mind, why do you believe that supporting investment in solar is such a good thing to be doing in South Africa?

Tivon Loubser: Well, I think you share similar sentiments to Julius Malema, who said, we’ll probably be on stage six, midnight, 29 May.

The Finance Ghost: Look, I don’t have a helluva lot of things in common with Julius Malema, but I think on that one, I’ll take it.

Tivon Loubser: You’d be naive to think load shedding is a thing of the past. I think it’s definitely a bit of a political ploy, or very much so, a political ploy. And, you know, I pride myself on trying to find the silver linings. And with load shedding, I think it’s been quite challenging. You know, it has an immense drag on our economy. It hampers our day to day lives. And I think it’s been the source of 90% of South Africa’s frustrations in the past couple of years.

What I would say and where I take the silver lining is that it’s definitely in a roundabout way aided South Africa’s transition to a carbon neutral future, or at least a low carbon economy. And interestingly, I was listening to a Blackrock webinar recently where they were talking about key mega forces and where they see the investment landscape playing out. Obviously the classics like AI came up and geopolitical instability, but their major focus was on the transition to carbon neutrality and a low carbon economy. And I think we’ve seen that in South Africa. So these stats might be outdated, but I believe we’ve got eight gigawatts installed capacity in South Africa. It counts for more than half of Africa’s installed capacity and three gigawatts of that came online last year. So it’s definitely been or aided South Africa’s transition to a low carbon environment. And then we have to give some kudos to treasury for coming out with these incentives and obviously to South Africans for being resilient and for being innovative in their approach.

The Finance Ghost: I mean, there’s the feel-good factor. It’s obviously slightly funny to hear Blackrock talking about a coal transition, for obvious reasons based on their name, but there’s clearly the carbon story. There’s also a cost story, which I think is something that’s becoming more and more prevalent. Eskom’s increases are substantial and to my knowledge, and you can confirm this, the cost of solar panels, et cetera, has come down over the years. So I guess at some point you reach parity, right? As the technology improves, as Eskom becomes an increasingly inefficient, ugly thing, at some point solar becomes just a spreadsheet decision, more than a feel good carbon decision. You know, that stuff almost becomes the bonus, which unfortunately, I think for a lot of people is the reality. Most people will make the numbers decision first and if they can feel good about it, that’s a bonus.

Tivon Loubser: No, 100%. I mean, we’re seeing solar panel costs coming down drastically. And as Eskom’s customer base dwindles, as the mines shift to renewable energy sources, they’re going to have to pump up those prices drastically. If we look globally, our energy costs are relatively low. So Eskom and NERSA don’t have that ceiling or that upward pressure where they say we can’t increase the prices anymore because if you look to Italy, you’re probably paying 18 rand per kilowatt hour. So Eskom aren’t experiencing that upside pressure yet. Their supply base is dwindling and they obviously need a lot of money for repairs and maintenance. So if we are installing just a PV system, so not a hybrid system with battery, we can significantly undercut the Eskom rate. Obviously once you start incorporating battery storage and hybrid inverters, et cetera, et cetera, it does push the price up. But we generally seeing a four year break even because we escalating at CPI plus one. Whereas NERSA one year 15, one year 18, then twelve. But I’m sure it will always be double digit numbers going forward.

The Finance Ghost: Yeah, I think you’re right. I can’t see a world in which they’re not doing double digit increases. So the case for solar is strong in South Africa. Our sun also shines a lot, obviously and so that gives further support to what you guys are doing. So speaking of what you are doing, I think let’s talk a little bit about this Twelve B fund. This is Twelve B fund two, which implies that there’s a fund one obviously. So I think let’s start there. Let’s talk about fund one and how that’s been going when it was launched, how many projects you’ve done, what sort of properties – open the floor to you to actually talk about what you’ve done in fund one and Grovest’s track record in the space?

Tivon Loubser: So we launched fund one on the 14th of Feb last year. We were the pioneers in the section Twelve B space. We were the first Twelve B fund to market. We actually went to market before they announced the 12BA allowance which is the enhanced 12B 125% as opposed to 100%. And so we raised money. We closed our raise at the end of November last year and maybe this is a good time to bring in one of the caveats to 12BA and that is that all the money that is raised has to be deployed into renewable energy generating assets. So that’s been our big focus. We had to make sure that all the money we raised was deployed and the projects came online in the last year. We’re very proud that we did get that across the line. So we deployed capital into eleven different projects with a nice geographic spread, nice sector spread. We actually took a stance where we quite like dealing with body corporates. So high LSM sectional title units and the reason we took that stance, and it was quite a contrarian stance, lots of people didn’t like dealing with them, they would focus more on your commercial and industrial projects. We found it mitigated key-man risk. Firstly, you know, if you’re dealing with a commercial industrial project with one business owner and something happens to happen to them and they don’t have a solid contingency plan in place, you know, that is a big risk. And then you’re also spreading your collections risk. So instead of collecting from one business owner you’ve got a high LSM group of 30 to 60 units. So we really took a stance where we like dealing with the body corporates of the world. Not to say that we didn’t deploy into commercial and industrial projects. And I think it’s another nice thing with this investment is that it’s a very tangible investment. So our investors in Fund One can say that they’ve contributed to moving ten different installations, you know, moving their reliance from Eskom and onto a more renewable energy source. And a very nice anecdotal story. I actually did a site visit last week to one of our printing factories in the northern suburbs of Johannesburg. And just listening to the business owner talking about how he’s reduced his work days from six to five, how he’s reduced his lost production events, I mean, it really is brilliant to hear. And, yeah, again, I really think that’s the beauty of the product, is if you invest R100,000, you can say you’ve acquired R100,000 worth of solar panels which are generating energy for either business or for body corporates.

The Finance Ghost: Yeah. Literally keeping the lights on in the economy. I mean, that’s what this stuff is doing. I think the focus on body corporates is kind of cool and makes a lot of sense, because obviously, part of the problem with solar is for people who live in apartments, you can’t just decide yourself to go and do solar, set up your rig on your balcony and hope for the best. It kind of needs a body corporate led decision. And a lot of these apartment blocks and those sort of places do have a nice big roof, obviously, especially big, tall apartment blocks. You can imagine the size there. So it’s quite nice to see you operating in that space, because it creates a solar opportunity for people who otherwise would definitely not be able to do it. It’s not like having your own standalone house with your roof, where you make the decision 100%. So I think let’s move on to some of the numbers, which is obviously why Grovest ultimately has a business here, is because people can invest in the fund, and in turn, you go and put in place solar projects and attract a stream of cash flows, like any great investment. So with those solar assets now done in Fund One, and several projects out there in the wild, would you say that they are performing in line with your original investment expectations? So, in terms of what was said to investors at the time the money was raised.

Tivon Loubser: Yeah. So what I mean, the other beauty of this product is it’s backed by contractual cash flows. So the underlying mechanism is that we enter into what are called power purchase agreements with these off-takers, and in these power purchase agreements, they’ll stipulate a tariff. So let’s say R1.40, they’ll stipulate a fixed cost. If there’s a battery component and that’s a fixed monthly cost, they’ll stipulate an escalation, which, as I’ve mentioned, we peg it to CPI plus one, or one and a half. So it’s also a nice real money investment and protects your money against inflation. There aren’t these variabilities or they aren’t these huge assumptions like you would see in venture capital. It’s all fairly easy to model the returns. You also have downside caps on consumption. So you have minimum offtake guarantees where in your PPA you’ll say you have to consume 85%. If you don’t, you’ll still be charged for 85%. That’s just to protect the downside. So we are seeing, we’re tracking nicely to our modelled returns. What’s quite interesting, especially with body corporates, is that you see in summer months, their consumption is about 50% of what it is in winter months. So you actually have to track it with that sort of distribution in mind. And that’s what we have been doing to date. The projects have, or the majority of the projects have probably been in the money now for, I would say probably four months. So we’re still tracking nicely to returns. It’ll be nice to see what happens in winter and what the consumption looks like there. We’re still tracking to our an average of 14% return or cash yield and 18% IRR.

The Finance Ghost: Yeah, so let’s talk about the IRR versus cash yield quickly, just because it’s a good place to do it. So of the returns, basically there’s a cash flow stream over the years. Are there any assumptions towards the back end of the period about what happens to the stuff or any kind of exit for you guys? Because that’s where the forecast can obviously get a bit more difficult. I can certainly believe that just forecasting the actual earnings from selling electricity. Eskom may struggle to sell electricity efficiently, but I can understand that you can get that right with a solar project. So where is the forecasting risk? Is there something going on at the back end and after how many years?

Tivon Loubser: Yeah, so very interesting question. This investment operates a lot like a fixed income instrument. So we’ve got biannual cash distributions. That’s where you’re hitting that 14% average yield. It does ramp up over time. So initially we’re probably looking at about 10.2% scaling up over the years. The investment term is ten years. However, a number of the underlying cash flows are pegged to 20 year power purchase agreements, which seems to be the industry norm. We are diversifying our paper a bit, so we’ll have some 20 years, some 15/10/7.5, just to spread our cash flows and our returns quite nicely. So the question is, how do we exit this investment? What we do is we model to sell the underlying paper to a third party, whether it be another finance house or another EPC, and we model it. What we do is essentially a discounted cash flows from year 20 to the end of year 10, and we use a 13.5% discount. Now, that might sound very wishy washy, and, you know, how do you actually come up with those figures, and where does it all come from? So it’s quite common practice in finance to sell paper at a discount, because the off-taker or the purchaser would be buying cash, buying money at a discount. Interestingly enough, it happened with fibre. So initially there were a bunch of microfibre installers, and then there was a Remgro company, if I’m not mistaken, called Dark Fibre Africa, and they came along and accumulated all the paper. And you’re essentially buying into these cash books at a discount. So I mentioned we discount the cash flows at 13.5%. I also mentioned earlier that we’ve been involved in solar for a long time, so we’ve exited two R200 million rand solar portfolios on the same basis, and we ended up selling them off at about a 12.2% discount. So we think 13.5% is a fair assumption. We also have the discretion, you know, if market conditions are really favorable at year eight, if we get an offer at a 12% discount, we are never going to turn that away if we’ve modelled it at a 13.5% discount. So we can use our discretion, you know, analyzing macro factors, analyzing the economy, we will come maybe exit early, maybe exit one year later. But, yeah, that’s the exit mechanism. So much like a fixed income instrument, biannual cash distributions, and then a large capital windfall in year ten.

The Finance Ghost: You can almost think of this as a different way of investing in property. Actually, it’s kind of a reasonably similar way of thinking. CPI linked, there’s a cash flow yield, there’s a CPI protection to it.

Tivon Loubser: Exactly.

The Finance Ghost: So the difference here being that you have a tenant, effectively for 20 years, unless something drastically goes wrong.

Tivon Loubser: So, I mean, while it’s marketed as a private equity investment, it actually mimics very much so private infrastructure, and it’s also highly collateralized, which is really nice. As I mentioned earlier, you invest R100,000, you own R100,000’s worth of the underlying and worst case scenario, if the offtaker does default, we’ve done loss-given default analysis, and we’re able to uplift 70% to 75% of the underlying equipment. So while that’s a worst case scenario, it’s not the worst, worst case scenario, if that makes sense.

The Finance Ghost: And I’m sure the stuff is all fully insured. If there’s any kind of geological event or fire or anything like that, I mean, your asset is protected.

Tivon Loubser: Yeah, we have all-risks insurance on our hardware and then we also have business interruption insurance for four months. And I think ensuring solar panels at the moment is quite an ordeal because insurers are turning around and they’re seeing fires breaking out at solar plants. So they’re becoming more stringent with their requirements. So we vet all our EPCs that we deal with very closely, engineering, procurement and construction companies. The installers make sure they have their PV green cards in place, make sure they’re part of some industry standard, that they’ve got wireman’s licenses, because that’s really what you have to do. You have to make sure that the installer is doing a really good job and that they’re ticking all the boxes, you know, CoC, etcetera. And then also the equipment we use, tier one equipment, they all come with lengthy warranties. And tier one suppliers are a list of suppliers that Bloomberg have posted. And it essentially just means that they will be around in the future to, you know, to fulfill those warranties.

The Finance Ghost: So in terms of biggest learnings from fund one, I mean, it is always so important when someone has track record rather than just hopes and dreams. I guess there were probably some positive surprises, negative surprises. Anything that really stands out for you versus expectations?

Tivon Loubser: No, definitely. I think, you know, the nature of being pioneers is it’s often a steep learning curve and you often have a number of learnings along the way. With Fund One, we have a strategic alliance with an installer, Hooray Power. And we dealt pretty much solely with them. You know, the benefit of that was we had extensive deal pipeline, I mean, in excess of R300 million. The only issue is when you’re sticking to one EPC, you do hinder your deployment capabilities. So while you have this immense deal pipeline, obviously doing the installations takes more time. So what we’ve done for Fund Two is we really casting our net wider. We’ve got numerous business development personnel who are sourcing deals. We’ve got relationships and agreements in place with various installers across the country, all who are very reputable. We are dealing with intermediaries, so we really casting our net wider so that we can deploy even more. And that means we can raise even more, because again, we’re very cognizant of the relationship between raising and deployment. We can only raise as much as we can deploy. So we aren’t hindered on the raising side, you hindered on the deployment side. And ultimately, because 12BA is going to be sunset on 28^th February, 2025, we want to get this tax benefit to as many investors as possible.

The Finance Ghost: Now that makes sense. You can always find the money, right? Finding the hard assets is actually the difficult part at the end of the day. So let’s talk about this fund too, and the tax and the sunset clause and all this kind of thing. How exactly does the tax actually work here? And I have seen lots of stuff around rules for when the projects become energy producing. I think maybe let’s spend a couple of minutes just on how this tax actually works. And then what difference does it make to the returns? There’s a tax enhanced return, and then there’s the return that the assets would give without the tax benefit. So I think running through that will be very helpful.

Tivon Loubser: I’ll start from the beginning. So section 12B has been around since 2016. What section 12 B said is that you’d be able to reduce your investment into renewable energy generating assets by 100%. Now, 12B had some caps, so it was capped at 1 Megawatt. Then last year in Feb, Treasury announced section 12BA. Section 12BA is the enhanced 12B, so you’re getting 125% as opposed to 100%. There’s also no more cap on it, so it can be in excess of 1 Megawatt. They’re really trying to stimulate this transition, I think, and also reduce the reliance on Eskom. There are a number of caveats to 12BA which weren’t present with 12B. The most important is that it needs to be new and unused and brought into use for the first time. So you can’t invest into existing projects. I can’t go and put money into an existing solar plant and get the 125% allowance. I would only be able to claim the 100% allowance. The other thing with 12BA is that you can only claim it once that money has been deployed into energy generating assets. So it’s no good we go buy R100,000’s worth of solar panels and keep them in our warehouse and just sit on them. That doesn’t qualify for the 12BA allowance. It is very important to understand that the money has to be deployed and the assets need to be generating energy. So you either need a CoC, you need an invoice for energy generated, or you have to reach beneficial use. Those are very important components and that’s why we always really urge potential investors to do your due diligence, make sure wherever you’re placing your money, they’ve got sufficient deal capacity and that they are able to deploy all this capital. Moving on to your other point about obviously the 12BA allowance is brilliant. You know, extremely lucrative. People are always looking to minimize their tax allowance. So the tax allowance I think is great for marketing, it’s brilliant for our investors and I think it’s a big reason why investors are so keen on this product.

But what I really like about this product and why I’m so passionate about it is it actually stands on its own without the 12BA allowance as well. So we’re looking at a project level return. So without the 12BA allowance of anywhere from 15% to 16%. So 15% to 16% at the project level, excluding the 12BA tax allowance, obviously the 12BA tax allowance bolsters it to around an 18% IRR. And I think the other area we’ve poised ourselves very well at Grovest is while we have it in our investment mandates to gear so we can bring in debt into the portfolio, we haven’t done it as of yet. And what that’s done for us is it’s made us push for higher returns at the project level because we can’t use gearing as a crutch, we can’t hit 12% or 11% at the project level and then bolster it up drastically with gearing. So we are really pushing hard for high returns at the project level. And then in the future, once we’ve developed a strong cash flow book, we can go acquire financing, we can gear up the projects even further and just use that geared amount to bolster the returns even further and bolster the tax benefits. So I think that’s where we really stand in good stead here.

The Finance Ghost: Let’s just talk about distributions along the way, especially with a ten year investment term, which is quite long. I mean, you’ve talked to the stream of cash flows, we’ve compared it to fixed income style instruments and property and all these kind of things. So what do these distributions look like along the way? And then how are they taxed? Are they taxed as dividends or do they come out as normal income?

Tivon Loubser: Yeah, so interesting question. So the investment vehicle is an en commandite partnership. The reason we’ve done that is, and another caveat to claim the 12BA allowance is that you have to be deemed to be carrying on trade because the general partner, which would be the 12B GP, is deemed to be carrying on trade, selling energy, all the LP’s, which would be the investors, are deemed to be carrying on trade.

What that means in terms of tax is that the distributions, they aren’t dividends. Distributions are taxed in their individual capacity, so it’s a complete flow through principle. An en commandite partnership isn’t a taxed entity, so all the tax will be dealt with in one’s individual capacity. We pay out biannual cash distributions. So it’s a high cash yielding investment. And what’s nice about that is that it’s a very liquid fund. And when we talk about private equity, we talk about illiquidity premiums, etcetera, etcetera. And as you mentioned, a ten year investment horizon is a long term investment. I think the average lifespan of an investment in South Africa is 7.5 years. And people are skeptical on the outlook of South Africa. But what we do is we do say we can create liquidity events. We’ve got high cash yielding underlying or underpinning assets. And obviously, given liquidity constraints and given a proper analysis, we can buy back partnership interests. Obviously that will be at a discount, which is determined given the market conditions. But we do always advise staying in until maturity. You really are getting a large windfall in year ten, and I think the risk profile of this investment warrants that ten year investment horizon.

The Finance Ghost: In terms of that windfall in year ten, that would then be a capital gain at the end of the period. Right. The amount you get back.

Tivon Loubser: So we’ve included the tax in our financial model. So if you look at our financial model in year ten, you’ll see there is a larger tax payable. What that’s made up of is a recoupment, but the recoupment can only ever be up to 100% or whatever the value of the assets is. Anything over and above that will be CGT. The important part to note there is if you exit in the first two years, SARS have said that they will recoup you on the full 125%. And I think what they realized very quickly when they announced this is people are going to arbitrage it, people are going to invest in the product today, exit next year, and they’ve essentially arbitraged that 25% if they were only recouped at 100%. So I think SARS were pretty smart to that. And they’ve said you’ve got at least a two year lockout where you can’t exit.

The Finance Ghost: Yeah, that does make sense. So with the investment term, the ten years, that is quite long, there might be some liquidity along the way. But I think the message coming through here, loud and clear is if you are going to invest in this, you need to believe that this is money that you do not need back for the next ten years. So if you’re planning to emigrate in two years or, you know, you have other challenges in your life and unfortunately, adulting does happen, you know, then maybe just be careful with the amount going into this or whether or not you get involved. You do need to treat this as something that is a bit of a lockup investment in South Africa. And therefore, I suppose it’s like anything, it should be part of a broader portfolio discussion. I imagine a lot of your clients would work through financial advisors. I’m sure your recommendation would be to speak to a financial advisor as part of understanding this stuff.

Tivon Loubser: I mean, we’ve got our partners at GIB Wealth, and when I speak to the executive team, they always say, 12B is a great product, but it needs to form part of your larger investment base or your large portfolio. I mean, and again, we always say it’s a product for high net worth individuals. You really maximizing your returns when you’re in that top tax bracket. And it’s definitely, if you look at the term sophisticated investors, that’s what it would cater to. So we always advise, chat to your financial advisors, make sure it really makes sense for you, and definitely incorporate it into your overall wealth portfolio. But it’s a very nice way to diversify your portfolio and experience a great tax break while doing it.

The Finance Ghost: Yeah, if you’re in one of the lower income tax bands, then you could go and get yourself a better outcome. In all likelihood, by just investing in interest yielding instruments, you would get that tax free portion each year on the interest as well. So, yes, speak to a financial advisor, understand the maths of this thing and how it all works, see if it is for you. And I guess that’s a good place to end off with. What is the minimum investment size for this thing and what is the right way for people to invest? Should they only be working through investments advisors? Or if they are sophisticated financial investors who can go and do all the maths themselves? Is this something they can do directly with you?

Tivon Loubser: So our minimum ticket size is R100,000. And as soon as you’ve hit that threshold, you can then top up your investment with no limits. So if you invested today and you wanted to invest in June again, as long as you’ve hit that R100,000 threshold, you can invest with no limits. Yeah. So, I mean, we always advise chat to your financial advisors if you have one, if you are a sophisticated investor and if you, if you really understand the mechanisms, you can invest directly with Twelve B. So you can either go to our website, twelveb.co.za, or you can send me a mail, tivon@twelveb.co.za. And I think we rarely tell investors to do your due diligence, whether it’s our product, whether it’s someone else’s product. Set up a meeting with myself or some of our analysts or Jeff, have a chat, really grasp the underlying assumptions, the concept behind it, and then you can make an informed decision whether to go forward or not.

The Finance Ghost: Yeah. Fantastic. And how quickly do people need to move? So what is the timing on this fund? When does it close? And then I think we are done. Today, we’ve learned a lot about solar and how Grovest looks at it.

Tivon Loubser: So we’re closing the fund. What we’ve done is we’ve moved the peg forward to the 30th June. Again, that just gives us more than enough time to deploy all the capital. You know, we are once again very cognizant of that 12BA allowance. And that is one of the major reasons why investors are getting involved. So the fund will close at the earlier of 30th June or R100 million raise. And the raise is currently going very well. The fund also operates on the premise of a first come, first serve basis. So if you want to guarantee your tax allowance, it’s very important to invest soon to further enhance your chances of getting that 12BA allowance.

The Finance Ghost: Fantastic. Well, thank you so much for your time today and to the team at Grovest for doing this with Ghost Mail as well. How do people reach you? I imagine LinkedIn and the Grovest website.

Tivon Loubser: LinkedIn. Grovest website. Twelve B websites. Or again, you can come directly to me tivon@twelveb.co.za

The Finance Ghost: Okay, fantastic. Thank you so much and good luck with the raise and deploying the funds.

Tivon Loubser: Brilliant. Thank you so much, Ghost. Really appreciate your time.

The Finance Ghost: Please do your own research. Discuss this with your independent financial advisor. And if you would like to set up a meeting with the Twelve B team or would like more information, visit the Twelve B or Grovest websites. Twelve B Fund Managers Pty Limited is an approved juristic representative of Volantis Capital Proprietary Limited and authorized financial services provider FSP number 49836.

Ghost Bites (AB InBev | Lesaka | MTN | Renergen)

Ghost Bites

The Finance Ghost

9 May 2024

Ghost Bites (AB InBev | Lesaka | MTN | Renergen)

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

It’s all about the margins at AB InBev (JSE: ANH)

Top-line growth is hard to come by

AB InBev has reported numbers for the first quarter of 2024. Total revenue is only up 2.6%, so that’s not exactly a highlight. Volumes fell by 0.6%, so the modest revenue growth was thanks to pricing increases and the mix effect of being more focused on premium brands.

People might be drinking less from AB InBev (despite all the efforts to drive group growth through “occasions development” and more no-alcohol products), but the group has still managed to pull off a solid result once we get further down the income statement. Normalised EBITDA is up 5.4% to just under $5 billion, with normalised EBITDA margin expansion of 90 basis points to 34.3%. This margin expansion is the real highlight here.

Underlying EPS came in at $0.75 per share, an increase of 15.4% year-on-year.

The 2024 outlook is for EBITDA to grow in line with the medium-term outlook of 4% to 8%. Net finance costs will be $220 to $250 million per quarter, which is not a problem relative to EBITDA levels. Of course, a drop in interest rates would bring that down further – and give consumers more money for general jolling purposes!

Lesaka makes another major fintech acquisition (JSE: LSK)

Apis Growth Fund and African Rainbow Capital will become shareholders in Lesaka

Lesaka has announced the acquisition of Adumo RF for the meaty sum of R1.59 billion – although it sounds more like a dollar-denominated transaction at $85.9 million. The amount will be settled through the issuance of Lesaka shares plus $12.5 million in cash, so the bulk of the consideration is settled in Lesaka shares. This is the power of being a listed platform – your shares can be used as “acquisition currency” in precisely this way.

The implied value per share is $4.25 and they used R18.50 to the dollar for their calculations, noting that this issue price is a premium of 11% to the three month VWAP of Lesaka shares. Issuing shares at a premium is a great outcome.

Adumo’s current shareholders are Apis Growth Fund, African Rainbow Capital, the International Finance Corporation and Adumo management. Lesaka makes a point of noting in the announcement that Apis and African Rainbow Capital (the names recognisable to South Africans) will now be shareholders in Lesaka.

Adumo is a card acquiring, integrated payments and reconciliation services business that processes more than R24 billion per year across 23,000 active merchants. You might recognise the GAAP brand from point-of-sale machines in the hospitality sector. That’s part of Adumo as well.

Adding this footprint to the existing Lesaka business creates an ecosystem of 1.7 million consumers, 119,000 merchants and over R250 billion in processed payments per year. There will be 3,300 employees across five African countries. Obviously, the company is working hard here to sell a story of its positioning as a consolidator of FinTech businesses, but the track record is there.

MTN Rwanda’s EBITDA heads the wrong way (JSE: MTN)

More headaches in Africa for MTN

Although the problems in Nigeria make just about any other issues look simple, the reality is that doing business in Africa can be tricky for many different reasons. In Rwanda, the current challenges relate to cuts in mobile termination rates and the impact this has on voice revenue, which in turn hurts the investment case for infrastructure.

Although total subscribers increased 7% year-on-year for MTN Rwanda, service revenue is up just 2.3%. EBITDA margin has contracted by 5.4 percentage points to 40.1%, with EBITDA down 10.4%. It gets worse at profit after tax level, down 61.5% due to depreciation on assets and the pressure on the EBITDA line.

At least capital expenditure was down 2.1%, giving some relief to cash flow.

The company is hoping that the regulatory environment around mobile termination rates will improve. Were it not for that issue, service revenue growth would’ve been 8% rather than 2.3%. Unfortunately, “were it not” can be used many times in African markets. It’s never that simple.

Renergen releases detailed annual financial statements (JSE: REN)

This gives a useful overview of the recent activities at the company

The year ended February 2024 was a busy one for Renergen, with good news on the balance sheet and setbacks in the operations.

Starting with the balance sheet, the company raised senior debt funding from the United States DFC and Standard Bank, with further capital raising coming from a debenture issue to Italian specialist gases company SOL (no relation to Sasol). From an equity perspective, the plan remains to list on the Nasdaq.

Operationally, although LNG production increased from 977 tonnes to 2,876 tonnes and an offtake agreement was concluded with Time Link Cargo, there were operational issues related to the all-important helium operations (and phase 1 LNG production). Just before the release of these financials, Renergen announced that the helium cold box was working again, with performance testing and continuous operation still to come.

Although the current financial performance across LNG production and expenses gets a lot of attention in the market, the reality is that Renergen is a far more binary outcome than that. I can’t see how just the LNG operations could ever be sufficient without the helium story. Phase 2 helium (which is the scale play) only comes into operation in 2027, which is a long way away. Bulls focus on the long-term story and bears focus on the existing concerns.

I have no position here, but I do enjoy watching the bulls and bears fight over this one. That’s what happens in a healthy market, with one side thinking about the option value (“what if they get this right?”) and bears looking to discredit the likelihood of this outcome by pointing out the operational challenges, or the extent of costs currently being capitalised rather than expensed.

Since the peaks of 2022, the bears have had it all their own way with this one:

Whether you are bullish or bearish here, I highly recommend you do the work and dig into the annual financial statements. You’ll find them at this link.

Little Bites:

Director dealings:
- A prescribed officer of FirstRand (JSE: FSR) bought shares in the company worth R2.3 million.
- An associate of a prescribed officer of Discovery (JSE: DSY) sold shares worth R2.05 million.

In a messy situation that wouldn’t have endeared the broker to the director in question, a director of Mpact (JSE: MPT) sold shares worth over R270k without clearance. This is because the broker sold without instruction. To rectify the error, the broker had to buy shares again in the market. I’m purely including this because it’s an example of how things go wrong in the markets, rather than because it tells us anything about the Mpact share price.

Capital & Regional (JSE: CRP) announced that CEO Lawrence Hutchings has resigned after nearly seven years in the role to pursue a new opportunity. That’s a decent innings, during which the company navigated COVID and repositioned the portfolio strategy. The group is doing well right now, so he leaves on a good note – provided the next year goes well, as there’s a 12-month notice period. A replacement hasn’t been named as of yet.

Canal+ has increased its stake in MultiChoice (JSE: MCG) to 43.54% of shares in issue. The recent purchases have been at prices between R119.42 and R119.97.

If you are an Oasis Crescent (JSE: OAS) holder, then you should be aware that the circular for the cash vs. new units distribution has been sent out.

Ghost Bites (Attacq | CMH | Gold Fields)

Ghost Bites

The Finance Ghost

7 May 2024

Ghost Bites (Attacq | CMH | Gold Fields)

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

Attacq to buy the remaining 20% in Mall of Africa (JSE: ATT)

Shareholders in RMB Holdings (JSE: RMH) will want to pay attention as well

Attacq has announced that its 70%-held subsidiary, Attacq Waterfall Investment Company, will acquire the remaining 20% in Mall of Africa. This will take it to a position where it owns 100% of the property.

The seller is Atterbury Property, which should ring a bell if you’ve been following RMB Holdings. The relationship between RMB Holdings and Atterbury is anything but simple, but this is perhaps a step closer to a realisation of further specific dividends for RMB Holdings. I was more than a little surprised that RMB Holdings didn’t release a SENS announcement related to this transaction.

This is a solid property and is obviously already extremely familiar to Attacq, so the deal makes sense from a strategic standpoint.

The purchase price is R1.07 billion and the forward yield is 8.0%, so they are paying what looks like a pretty high price for the it. The independent external market valuation is even higher though, as this price is a 7.7% discount to the valuation. I’m not qualified to argue with that valuation, but this seems like a low yield in this environment and thus a full price for the mall. I wouldn’t call this a bargain by any means.

CMH managed steady operating profits (JSE: CMH)

But the banks got a much bigger slice of those profits than in the prior year

Combined Motor Holdings, or CMH, is facing winds of change in the South African motoring industry that are blowing with increasing severity. In the CEO’s report for the year ended February 2024, the company noted that over half of vehicles sold in South Africa are from China or India. This is because South Africans are getting poorer on the global stage thanks to the rand and our economic policies.

OK, that last bit is from me, not the CEO of CMH. I doubt he would disagree, though.

CMH has a substantial dealer footprint that includes a number of marginal brands that aren’t easy to sell to consumers who are under pressure. This makes life difficult for them, especially when OEMs are putting pressure on dealers to move stock out the door. This leads to discounting in a market that is already known for low margins.

This is precisely why WeBuyCars is my position in this sector, rather than new car dealers. WeBuyCars is brand-agnostic and can stock whatever they want in the warehouses. CMH doesn’t have anywhere near that level of flexibility. Although they have brands that must be really killing it right now, like Haval and Chery, they are also stuck with European brands that are already tough sells – and that’s before the ranges become increasingly focused on expensive EVs that are suffering from low levels of adoption in South Africa.

This isn’t a simple footprint to manage:

With such difficult conditions, it’s impressive that the group saw only a slightly drop in operating profit from R791 million to R781 million. The problem is that finance costs have risen from R193 million to R280 million on a similar level of working capital in the business. When consumer spending is tight and interest rates are high, new car dealerships struggle. To add to the pain, the financial services joint ventures saw an 18% drop in profits because of higher bad debts. At least the insurance cell captives did a lot better, with 25% growth in profits.

The car hire business has a better story to tell, although it’s not smooth sailing there either. The average daily hire rate is down 3% due to increased competition in the sector. This has impacted the fleet utilisation rate. First Car Rental has benefitted from the relationship with FlySafair though, so there’s a highlight.

As a reminder of how substantial the difference in margins is across the two segments, car hire generates 50% of group profit before tax from just 7% of group revenue. Sometimes, you need to see the numbers to fully appreciate the significance. Car hire made profit before tax of R280 million off revenue of R891 million. Motor retail could only manage nearly R188 million in profit before tax off R11.74 billion in revenue.

And of course, motor retail is far more capital intensive, with R2.8 billion in assets vs. R1.4 billion in car hire. This adds to the challenges when financing costs are high.

I think these two charts from the report do a very good job of showing that (1) earnings are coming down to earth, but (2) the business still generates strong returns on capital:

With a full year dividend per share of 386 cents (down 1.8%), CMH is trading on a dividend yield of around 14.6%. The market is pricing in a fair bit of pain in the year ahead. Although this is a classic example of where value investors get excited about a stock, I would be cautious of an unwind in the share price that delivers an unimpressive total return despite the potential for a high dividend yield.

There are structural weaknesses in the motor retail business model that make me worried.

Gold Fields has given investors a negative surprise (JSE: GFI)

All-in sustaining costs (AISC) are through the roof

Gold Fields found itself on the wrong end of the “physical gold vs. miners” debate, with a poor outcome for the quarter at a time when gold prices are doing well. With weather-related issues and operational challenges at various mines, attributable equivalent gold production is down 18% year-on-year and 22% quarter-on-quarter. These numbers are excluding Asanko, which was sold in the quarter.

As you’ll know by now if you regularly read mining updates, a drop in production means an increase in all-in sustaining costs (AISC). AISC from continuing operations came in at $1,738/oz, a horrible jump from $1,372/oz in the three months to December 2023 and even worse when compared to $1,149/oz in the quarter ended March 2023.

Net debt at the end of the quarter was $1.143 billion, which is up from $1.024 billion at the end of December 2023. Net debt to EBITDA was 0.51x, so the overall leverage doesn’t look problematic. It’s just the direction of travel that is a concern.

Despite the poor start to the year, annual group production and cost guidance remain unchanged. They will need a very strong performance for the rest of the year to manage that. AISC is expected to be between $1,410/oz and $1,460/oz including the capital expenditure on the St Ives renewable energy project.

The market wasn’t impressed, with the share price trading over 5% lower in late afternoon trade.

Little Bites:

Director dealings:
- Various associates of a director of Brimstone (JSE: BRT | JSE: BRN) bought shares worth a total of almost R390k across the two classes of shares.
- The chairman of London Finance & Investment Group (JSE: LNF), a company you almost never hear anything about, bought shares in the company worth £54k.

Kibo Energy (JSE: KBO) released an announcement by subsidiary Mast Energy Developments that is an incredibly long-winded story about Riverfort putting in a further £1.1 million in funding for the company to do work on its gensets. The VAT portion of the spend will be reclaimed and paid back to Riverfort within a couple of months. There’s also a new term loan of £325k priced at 10% and repayable in 10 months, also with Riverfort. Finally, there’s a settlement of £325k related to a legacy facility with Riverfort, settled by a director of the company in exchange for shares that were subsequently placed in the market. For a company trading at R0.01 per share, Kibo sure does know how to make things complicated.

It’s a pretty small point, but Accelerate Property Fund (JSE: APF) made a technical correction to its rights offer circular. The company already has sufficient unissued share capital to implement the rights offer, so CIPC accepting the amendment to share capital is no longer a condition precedent for the transaction.

Ghost Stories #37: Investing in Private Credit

The Finance Ghost

7 May 2024

Ghost Stories #37: Investing in Private Credit

Listen to the podcast using the podcast player:

Summarised transcript:

A deep dive into the growing popularity of private market investments and the availability of liquid alternatives. In conversation with Reginald Labuschagne, Head of Product and Strategy at Sanlam Private Wealth; and Harris Gorre, a partner at Grovepoint Investment Management.

Hosted by The Finance Ghost, making investment concepts accessible.

Ghost: Private markets have really taken off in popularity over the last couple of years. In fact, there seems to have been a structural shift in favour of private market opportunities with fewer and fewer new opportunities coming to public markets. Even the recent listing of WeBuyCars here on the JSE (to much fanfare) was an unbundling of something that you could already buy through Transaction Capital. It’s not like the old IPOs of bull market days that I’ve admittedly only read about in the classics. So, investors need to get a bit more creative when they’re looking for new opportunities and so my first question for Reg is really to what extent do private markets feature for you, as opposed to just looking at what is publicly available?

Reginald: I think it’s a critical question, especially in our space, because we deal primarily with private clients. So that means individuals who each have their own portfolio built around their specific needs. That’s important in this discussion, we don’t run a big, pooled vehicle where it’s easy to allocate 10% of total funds to private markets. We have to sit with each client to understand their requirements and, if you go into private markets, there are quite a few hurdles, from illiquidity to the large ticket sizes often required. When you deal with private clients it’s not straight forward.

“Institutionally there’s been a shift to low-cost passives and an increased allocation to private markets to help beat the index.”

Yet we know most of the companies in the world are private and so there’s huge opportunity. Access to private markets has also increased with technology and increased access to information. It’s becoming more interesting and easier for certain institutions and people to invest in private markets and more large private market players are looking for ways to access the retail market. It normally starts in the institutional space, and then things start shifting across into the broader market and the man on the street; that’s the space we play in, that bridge between institution and retail. Our private clients typically have larger portfolios and are looking for interesting things so we’re constantly looking at how to access these markets. But the biggest challenge is access; firstly, finding the right players in the market and secondly, how to invest in those things operationally, and make it accessible to our type of investors. That’s part of the guts we’ll get into today.

“If you find good private market operators, you can extract good returns for clients.”

Ghost: Just to be clear when we talk about private assets, we’re not talking about mom-and-pop shops that you acquire for a few hundred million rand. So, before we carry on what are some examples of the private assets that do end up in portfolios where it does work from a liquidity perspective?

Reginald: Firstly, we always need to understand the fundamentals; does it add better return, or does it diversify the risk. These are two of the roles that instruments can play in the portfolio. But to answer your question on what we have invested in private companies, the example you said about R200 million, we have done one or two of those deals for clients….

Ghost: Turned out to be a terrible example, it’s always fun when you assume something, and it’s completely wrong. I love that.

Reginald: …it’s part of the debate, right? I mean we have not invested in a business where the total enterprise value is R200 million, but we have allocated R200 million across a couple of client accounts into private businesses. Dis-Chem for instance was something we were in quite early, before it listed, so we had some private exposure that worked out very well. But it’s heavy lifting, every time doing extensive due diligence on every business you invest in.

“We try to be innovative without being fancy. Everything we invest in for clients must play an important role in the portfolio.”

We’ve also have a big multi-manager team that do a lot of work in the institutional space, looking for private equity managers, private credit managers, hedge funds and other exotic assets. They do a lot of the due diligence work and then we look at those opportunities and see which of those opportunities are good opportunities for our clients to invest in. Where we’ve invested in South African middle-market, growth focused private equity funds it’s worked out very well for our clients. One of our private equity funds, currently in its final phase, has done about 28% net IRR for clients so that’s a good rate of return on an annualised basis. We’ve since invested in a couple of private credit funds locally and offshore and that’s where we’ve been in long discussions with the team at GIM around their solution, which we recently approved for investment; but again, we need to understand what role it plays in the client’s overall portfolio.

Ghost: Those returns are great, but risk return is ultimately the trade-off in in finance, right? So, when you talk about 28% returns in private equity, that’s good but private equity needs to give you those high 20s to make up for the risk involved. The beauty of portfolio construction is looking for returns that are commensurate for the risk you’re taking, and then adding diversification to create a good outcome for clients. With this in mind the proliferation of listed instruments that reference private market assets must help with the liquidity problem and some of the due diligence issues you’ve raised?

Reginald: Even if it’s listed, your due diligence work is still the heavy lifting. You have to understand the team and their strategy. Take private equity as an example, private equity is broad, from early-stage high risk companies to later stage large buyouts. There’s a big spread in private equity strategies and in each one of those categories. Some managers will take minority stakes and have a passive view on a business, some will take significant minorities all the way to majority stakes and take control of the businesses change management, etc. You’ve got to understand each one of those managers and what role they play, what value they add to businesses and how they crystallise value. Quoting one good example is always dangerous. The spread in returns on private equity is very big. You can invest in the same sector and the same strategy, and one manager will produce negative returns and another manager will do 30% per annum. As you say the risk return payoff is significant.

“Liquidity is a massive thing for clients, you only realise it when you need capital.”

Even in the listed space, you must be very careful about the managers you pick. You still need due diligence and an understanding of the underlying. The listing helps with access and hopefully liquidity, but you can suffer big discounts in the listed space. When we trace the prices of these things; at some points they trade at significant discounts to the underlying assets, we’ve seen 30, 40, 50% discounts on some of these counters. So as much as a listing is convenient, there’s risk in buying these things for clients. You must be very aware of what you go into.

Ghost: Absolutely. I guess listed instruments also do help with access to other markets. It’s one thing to do private deals in your home market. It’s another thing entirely to be able to find opportunities offshore and be able to bring those into a portfolio. Harris, that’s ultimately where liquid private credit is very interesting as it gives people the ability to invest in private markets somewhere else in the world. I’ve been to many a presentation in my life about how small South Africa is in the global context and by the time you consider the property you own, your job and everything else you’re probably too exposed, so it’s really cool when there are opportunities on the local market to be able to get exposure to stuff elsewhere in the world.

Harris: Certainly Ghost, building on what Reg said earlier the market has trended in two directions. One is passive investing i.e. cheap low-cost access to listed equity via ETFs. Today, if you look across most client portfolios, they have some exposure to these low-cost strategies. Number two is the search for alpha often via private markets where excess returns can be generated as a result of asymmetric information, deep sector expertise, scale, a shortage of capital, complexity, etc. But as Reg said, it’s very much about which horse you back and your access to that horse, your information in that space and how you select the right manager(s), the right underlying’s, and how you deploy your capital.

In terms of portfolio positioning, I’d say anyone listening probably has exposure to the S&P 500 but very few have exposure to U.S. middle-market private companies. We can touch on how big that market is, but senior debt in these companies can generate very attractive returns through market cycles and that’s an example of where private credit is a good diversifier.

“Loans to high-quality private companies earning 10 or 11% p.a. in USD can be a wonderful diversifier.”

Ghost: Yeah, I mean, there must have been quite a lot that attracted you to this space I mean, it’s quite a big career decision to move from public markets into doing more private stuff. There a lot of different opportunities and you really have to scratch to find the right stuff. It’s harder in that regard than some of the public markets stuff which is available on a screen and there’s so much you’ve got to balance. The quality of the assets, the depth of disclosure available and the level of the management teams in those companies, people forget that there are private companies that are as big and impressive as public companies and run to the same standards or better.

Harris: Without a doubt. In the U.S. market 90% of companies generating more than $100 million dollars of revenue are private. That market, taken in isolation, is a $10 trillion a year market in GDP terms. You’re talking about a market that is three times greater than the UK economy, bigger than India, Japan, and Germany, yet this is a market that very few investors have exposure to. These private companies are generating earnings of up to $1bn a year and there are almost 200,000 of them.

Historically lending to these companies was highly prized business for the U.S. banks but this all changed in 2008. Banks were badly wounded by the Global Financial Crisis and lending dried up around the world but especially in the U.S, which was the eye of the storm. You then had a deluge of regulation that sought to limit how many private company loans U.S. banks could hold on balance sheet and as a result you had an exodus of bankers, often to private credit managers.

The pace of change has undoubtedly been greatest in the U.S. If you look at the numbers, there was a 50% fall in the number of U.S. banks between 2008 and 2022. In the UK there’s been a less than 5% fall in the number of banks over that same period. In fact, there’s been an increase in challenger banks, as many people in South Africa have probably followed. It’s worth pausing on that; this dramatic decrease in U.S. banks, combined with regulations that made it more expensive to lend to quality middle-market companies, this is what created the opportunity in private credit.

“40% of U.S. private credit assets can now be accessed via the listed market.”

In fact, the opening left by the banks in the U.S. was so large that many private credit managers Apollo, Ares, Oak Tree, Blue Owl, New Mountain, Blackstone etc. listed vehicles to take advantage of the opportunity to lend to these middle-market corporates. They already had their private credit funds but they added to them with vehicles that they listed on the New York Stock Exchange and the NASDAQ, these vehicles raised additional capital from public market investors supporting their growing direct lending franchises. Importantly the listed vehicles have the same management teams, originators, and underlying borrowers. What many investors don’t know is that today, there are over 130 of these listed private credit vehicles in the U.S. and that many of them are larger than the SA financial institutions. Their shares are certainly more liquid; a well-constructed portfolio could easily trade around $700 million a day. Speaking to Reg’s point earlier about liquidity this means you can invest R500 million or a billion rand in this market in a day and not move the price. That’s very, very attractive.

Ghost: Crisis breeds opportunity, right. It’s the most horrible cliche in the book, but it is very true. Now that yields are higher and interest rates are higher aren’t the banks starting to compete in this space. Surely they’ll come back in, or is the cost of compliance just too heavy for them?

Harris: That’s an interesting question. The banks have never gone away entirely. You’re always going to have banks competing to lend to high quality middle-market companies, especially as the loans get larger and when the broadly syndicated loan (BSL) markets are working well. Often $1bn+ loans will be divided up and sold to asset managers and so the banks don’t need to hold them on balance sheet. Syndicated loans generally have standardised terms and are often cov-lite due to the standardised loan documentation. Direct lenders tend to focus on loans below this threshold, they can move faster than the banks and offer more flexibility and price certainty to the borrower. In exchange borrowers pay a higher credit margin and agree to customised loan documentation which often includes greater monitoring rights, security over assets and / or cash flows, better financial covenants, and greater lender rights in the event of default.

“The relationships and skills have moved out of the U.S. banks and it’s hard to reverse that trend.”

It’s hard to see how banks re-enter this market when the relationships, origination and structuring skills have relocated. We’ve had almost 20 years of this trend, where the number of banks has decreased, and the direct lenders have got bigger. Being quite blunt about it, top lenders have more flexibility to originate business, and get paid more, at a private credit manager than they could ever do at a listed bank.

This transfer of market share and skills from banks to non-bank lenders has really been unique to the U.S. In South Africa banks are still your first stop if you’re running a business generating R2 billion a year. Similarly in the UK and Europe you’ve got lots of regional banks and lots of smaller banks that still dominate this market. In the U.S. this market belongs to the non-bank lenders.

This business also fits better in a direct lender or a private credit fund. If you’re going to hold illiquid loans on your balance sheet, and you’re going to fund those with short term deposits then you’re asking for trouble. It doesn’t matter how big your bank is, if you’re holding too many illiquid assets and deposits start running out the door you have a big problem, which is why U.S. regulators are again trying to tighten the bank capital rules. But if you raise permanent capital, like these listed vehicles on the New York Stock Exchange and the NASDAQ, then you can recycle that capital whilst paying out the distributions from the loans as dividends. That’s a better place for these loans to sit from a regulator’s point of view.

Ghost: Indeed, asset liability mismatch poses serious risk for banks. Reg, I want to bring you back into the discussion here to just give us some South African context. Harris has given a good lay of the land of what’s going on in the U.S. where there are so many big companies that it creates this large alternative debt market. Do we really have something like that in South Africa? Or do the banks pretty much address all the high-quality borrowers and the rest of it is working capital loans into SMEs and not a hell of a lot else?

Reginald: I think it’s changing. The first difference, as you said, is the depth of the market. The size of the market and the quality of the underlying businesses, the growth in the economy, that’s fueling business’s growth, that’s where South Africa is very different.

We have some good stories in South Africa with some private businesses doing well. And again, in South Africa, you’ve got more private businesses than listed businesses doing significantly well. You just have to drive around some of the industrial areas and look at the brands out there. You are seeing these businesses more and more via private credit funds and we’ve invested in one or two local private credit fund managers that have done extremely well for our clients. One of the managers who has been doing this for a long time, probably 11 years, generating between 16 and 19% per annum.

But it is extremely hard work for the guys in South Africa to find proper deal flow. If you speak to these managers everyone’s looking for funding in South Africa. There’s a big funding gap, but to find good quality businesses is hard. Most of these guys will want to securitise their loans so if you loan R10 million to business you want security of at least two times. So, they must have assets worth R20 million + as an example, and you need to have control of their business when things go wrong. You need to be able to dictate the terms and control your security to get your money back. That’s where you really start seeing the good managers versus the bad and how they structure those loans.

“You see more private lending but finding good quality deal flow is hard. You’ve got to do a proper due diligence.”

So, to answer your question, you definitely see more private lending starting to take place in SA, including a lot of working capital financing and factoring; some of it directly from family offices where they’ve built teams, but you are also seeing an increase in funds. To be clear though, it’s no different to the private equity model, you’ve got to do proper due diligence on the underlying managers and understand their process. You need to understand how they roll up their sleeves and get involved in the underlying businesses. They can probably only run 8 to 10 big deals at a time, because they have to closely monitor these businesses every month, see what’s going on in their businesses and manage the cash flows. A lot of these private businesses go through cycles; you run into problems at some point and then you have to get the equity holders and management teams around the table and discuss adding more equity or selling something to service your debt.

How this situation is managed is where the banks are failing. I don’t want to generalise but banks are very systematic, if you don’t pay, they come for your assets, they don’t restructure, they’re not flexible in how they manage the situation with the underlying loans. They don’t have the teams and they don’t have the skill set or spend the time and effort. They’re very compliance driven and use systematic decision-making processes. And that’s where you see the secret sauce, I was nervous to say that as it sounds sexy, but it’s just bloody hard work in the background, to go and make those loans and squeeze out the extra returns over time. That’s where you really see the difference.

Ghost: I’m lucky enough to have had a bit of exposure to banking, because I didn’t do articles in the traditional way. So, it was very cool to see how balance sheet management really does drive everything the bank is doing, there’s this holistic view that says what the bank can afford to do in terms of the assets, what they’re willing to bring on to the balance sheet based on what their funding looks like. And therefore, that team over there, they’re getting a lot of capital this year to go off and do renewables or infrastructure or whatever, but if you’re stuck in the team that does lending to private companies, you might not get such a big allocation of balance sheet and that absolutely creates the opportunity for other players to come in. And that explains why these private market lenders have a business.

Reginald: the simplest analogy for people that have been around long enough; is that in the old days you used to walk into your bank manager, as a business owner in a small town like I’m sitting in Swellendam now. The farmers would walk to their local manager, have a discussion, and that guy would have the authority to do a deal with that farmer. It was based on a trusted relationship. That whole model has changed fundamentally, that decision making at the branch was taken away to mitigate the risk of people doing irresponsible things. Compliance systems now drive the whole risk matrix of banks, so that model has been drawn back to the center where everything lives and decisions are made. That opens opportunities for the people that build those relationships with that farmer, understand their business, and fill that gap that’s been left by the banks. That’s a really simple analogy of how that model has changed and what’s created the opportunity.

Ghost: Yeah, absolutely. And of course, trying to find opportunities to deploy capital at scale. That’s the challenge, right, you are trying to scale into an area of the world that is hard to scale into via the right types of investments. Harris, I know you have experience in this space and that Sanlam has just completed due diligence on your process so maybe you can add some colour?

Harris: Thanks Ghost, as we discussed earlier, I think the size of the U.S. market combined with the dominance of non-bank lenders in that market makes the job a little easier for investors there. When considering the U.S. market, the question of how to scale is probably better approached by comparing an investor allocating to private credit via a traditional illiquid lock-up fund verses investing in their listed liquid cousins. When approaching scale from this angle there are really 5 key points worth considering:

How do you earn that illiquidity premium in the most efficient way? The U.S. market is unique in that it offers a deep, broad, and liquid universe of listed vehicles managed by the same leading private credit managers that run the illiquid funds. This allows you to capture the illiquidity yield premium via listed liquid shares – for most investors retaining liquidity is a clear win.
How do you manage your exposure? Deep market liquidity means you can be fully invested when you see opportunity, rather than wait for capital to be drawn over several years. Investors can also rotate their exposure to capture market moves and idiosyncratic pricing opportunities. Liquidity also means that asset allocators can rebalance portfolios in line with their macroeconomic view and to reflect changing client requirements.
Can you create a well-diversified portfolio across both high-quality managers and underlying borrowers? You generally need $5m – $10m minimum investment to access a single top U.S. private credit fund that then originates less than 100 loans over a 3 – 5yr period. This means only the largest institutional investors can create a very well diversified portfolio. By comparison, via the listed market, you can create a portfolio of thousands of underlying loans to great companies with substantial market share and wide competitive moats.
When investing in credit, this diversification is incredibly valuable as, unlike equity, credit has limited upside (the yield you receive on the loans) but can have full downside, so you want to make sure you’re in a broad range of high-quality companies in steady sectors and avoid cyclical industries such as energy, hospitality, aviation retail, etc.
You need to have the correct systems in place to extract the best results. A regulatory change introduced in 2015 by then U.S. President Obama permanently changed the withholding tax treatment for non-US investors in this space. For those unfamiliar with the U.S. withholding tax regime, non-U.S. investors are charged up to 30% withholding tax on certain U.S. source income such as dividends and interest income. Historically this would have cost investors up to 3% p.a., which is a material portion of the 10% – 12% p.a. target return when investing in private credit. The 2015 change meant non-U.S. investors can now reclaim most of this tax. To do this they need the right systems in place to monitor, calculate, and claim the rebate. For investors with a few hundred million dollars invested, the few thousand dollars it costs to lodge a tax return with Uncle Sam is more than covered by the taxes recovered.

“Non-U.S. investors, in certain listed private credit vehicles, can reclaim most of their withholding tax.”

When thinking about asset allocation; this liquidity, coupled with the ability to create a very well diversified portfolio means you can be flexible with your asset allocation. Like endowment style managers who favour a larger allocation to private markets, a well-diversified portfolio of private credit managers could then be as much as 15% of a client’s asset allocation.

“Liquid access to private credit is unique to the U.S.”

Ghost: I’ll will have to get you back to talk more through that process, you’ve been threatening me with the pleasure of another podcast, and I’m going to have to take it up with you. Because clearly, there’s a lot in there.

Harris: I’ll gladly do round two with you guys, but frankly I would suggest anyone interested should speak to Reg and the team at Sanlam Private Wealth who have gone through it several times over the past year or so.

Ghost: Reg has a queue of people outside that window waiting to come and speak to the manager who’s got the private credit, they heard about him coming to Swellendam. He’s gonna be a busy man soon.

Reginald:…if I had that they would be in here already. The process is definitely worth spending time on; it’s when the switch went on in our heads about what they do. Anyone could go and buy this private credit stuff; you can go do that yourself tomorrow. But having the discipline and the process to consistently apply something that delivers returns over time, that’s what we’ve appreciated. So, I’d recommend spending some time on that. For us, as I said earlier, we need to spend a lot of time understanding every instrument we invest in, the team behind it and how it works. That’s for us to tick the box on and hopefully lend some credit to the whole process.

“The process is worth spending time on. Anyone could buy this private credit stuff, but having the discipline to consistently apply something that delivers returns over time, that’s what we’ve appreciated.”

Ghost: Absolutely worth spending time there. It’s scaling the unscalable. Of course, the one other thing we need to touch on when we talk about investing is the fees. People are always obviously very sensitive to that.

Harris: 100% Ghost. I think managers in this space should be aligned with investor outcomes and so a material portion of the fee should be linked to performance over time. As an investor you want the best net return for a given level of risk and so linking some of the managers’ compensation to performance makes sense. Historically this has played out well for investors who have taken c. 90% of the return generated since 2015; once you’ve recovered taxes due this adds up to 11 – 12% p.a. in dollars net of fees. Based on this performance fees would have been c. 1.4% p.a.

Fees are important but as Reg mentioned earlier, it’s more than just paying people to select the right vehicles. You want a manager with a detailed and disciplined process making sure you’re not overpaying for vehicles, and crystallising gains when the market is overpaying. They should have the right process in place to reclaim the tax, and they should have deep insight into the underlying universe of managers and assets.

Ghost: Yeah, I mean double digits in dollars is hard to come by. Anyway Reg, I think a closing comment from your side. You guys have been through the process with Harris and the team at GIM and you’ve gotten yourselves comfortable, but maybe we can just end off with what sort of role this plays for you in terms of your view and the comfort around the instrument and the liquidity?

Reginald: Absolutely. This comes down to portfolio construction. There’ll be a portion of the portfolio where we’re looking for yield, especially dollar yield over time. And something that is not necessarily correlated with other parts of the portfolio for a client. Meaning it doesn’t move up and down in the same direction as some other assets and is therefore part of your portfolio diversification.

I want to clarify the access point though; a lot of people think because the GIMLPC vehicle is listed it’s going to trade up and down with NAVs and discounts. But the way this instrument is set up, you can almost see it as a listed fund. When we invest in this vehicle, it creates new units that then invest in the underlying assets so there’s no discount or premium on the JSE listing. In general, just because something is listed doesn’t mean there is always liquidity but here you buy into a very big liquid pool in the background. I think it’s important to understand that distinction.

“The underlying investments are very liquid, traded on large U.S. stock exchanges. So, when you sell units on the JSE you’re selling the underlying. It’s not this illiquid thing.”

And then at a later stage we need to spend some time on asset allocation and correlation. But that’s a debate for another day.

Ghost: Thanks Reg, hopefully you can join us on the next one; we can do a tour of South Africa’s greatest small towns. Gentlemen, we’re out of time. I think it’s been an awesome podcast. Thank you so much. I’ve learned a lot.

Sanlam Private Wealth (Pty) Ltd, registration number 2000/023234/07, is a licensed Financial Services Provider (FSP 37473), a registered Credit Provider (NCRCP1867) and a member of the Johannesburg Stock Exchange (‘SPW’).

Nothing in this podcast should be taken as advice. You must always do your own research on opportunities and speak to your financial advisor.

Ghost Bites (Accelerate Property Fund | Calgro M3 | Eastern Platinum | Orion | Redefine | Renergen)

Ghost Bites

The Finance Ghost

6 May 2024

Ghost Bites (Accelerate Property Fund | Calgro M3 | Eastern Platinum | Orion | Redefine | Renergen)

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

Some good news for Accelerate’s insurance claim (JSE: APF)

The company is pursuing a business interruption claim going back to COVID lockdowns

Accelerate Property Fund is in a court battle with various insurance companies related to its COVID business interruption insurance claim. Accelerate holds 50% of Fourways Mall and the claim is for loss of rental income at that property due to lockdown restrictions.

Juicy stuff.

Of course, any such legal debate starts with the most basic stuff of all, like “was there a valid insurance policy in place?” and other such first principle questions. To this end, the Gauteng High Court has delivered judgment on three separated matters, dealing with the final form of the insurance contract and the premium paid by the plaintiffs. In all three matters, the judgment was delivered in favour of the joint owners of Fourways Mall, with all costs to be paid by the defendants.

Personally, I have very little love for insurance companies that tried every trick in the book to wriggle out of COVID-related claims. People take out insurance to save them in terrible circumstances. Whilst I appreciate the existence of fraud and other problems in the market, I don’t think too many people will side with insurers rather than businesses in examples like this.

Accelerate Property Fund’s balance sheet is in a tough spot and they could certainly do with an insurance payout. I suspect that there is still a long road to travel in court with this.

Calgro M3 flags strong growth in HEPS (JSE: CGR)

Share repurchases help tremendously with this

There are only two ways for headline earnings per share (HEPS) to get bigger. The clue is in the name. Either earnings must go up, or the number of shares must go down. In a perfect world, a company achieves both. This really turbocharges HEPS growth, which is why profitable companies love share buybacks.

Calgro M3 is a perfect example of share buybacks done right, with the company having taken advantage of a share price that was trading at incredibly low multiples. This is a textbook case for using share buybacks rather than paying cash dividends.

The result? Growth in HEPS of between 20.2% and 27.7% for the year ended February 2024. When full results come out on 13th May, shareholders will want to really dig into the numbers to understand the drivers of performance beyond just the recent share repurchases.

The share price has more than doubled in the past 12 months, proving once more that you can make money on the local market if you know where to look.

Eastern Platinum publishes its financials – finally (JSE: EPS)

2023 was a record year of revenue for the group

The 2023 financial results at Eastern Platinum were delayed due to the company needing to thoroughly investigate whistleblower allegations regarding undisclosed related party transactions. The claims were found to be unsubstantiated, but by then the damage was done in terms of delaying the audit and thus the results.

The delay is now behind them, with results for the full year released to the market. They reflect record revenue of $106.9 million, way up on the restated 2022 number of $53.9 million. Mine operating income jumped from $7.6 million to $31.6 million. Net income attributable to shareholders was $13.8 million vs. an attributable net loss of $0.9 million.

This was obviously a much better period, reducing the working capital deficit at the end of December (current assets minus current liabilities) from $37.8 million in the prior year to $15.5 million. Although the auditors have not modified their opinion in this regard, it does create uncertainty related to the company’s ability to continue as a going concern.

2024 is a very big year for the company, with the original CRM tailings from the tailings storage facility expected to be fully processed by late 2024. The restart of the Zandfontein underground section has been initiatives and is expected to process underground run-of-mine ore by June this year. As the company still needs to confirm its funding plans related to a full reopening of Zandfontein, I would tread very carefully here.

Orion completes the Okiep Copper Project acquisition (JSE: ORN)

The all-important approvals by the IDC have been obtained

Orion Minerals announced that it is able to complete the acquisition of a controlling interest in the Okiep Copper Project in the Northern Cape. The IDC as strategic funding partner has given its approval for the deal, including for R43.75 million in additional funding for its proportional share of ongoing drilling and operating costs.

The closing of the transaction is expected this week, with payment of R46 million (R11 million in cash and R35 million by issuing shares in Orion) to the sellers.

The company is firmly still in drilling phase, with a diamond drilling program underway. The next batch of results is due this month. The goal is to complete the feasibility study by July this year.

Redefine takes a cautious approach with the interim dividend (JSE: RDF)

Despite growth in income, the dividend is slightly down year-on-year

In the property sector, investors pay close attention to dividends. Most major investors in REITs are primarily looking for yield, with capital growth as a second prize. When there are question marks around the dividend, investors get nervous very quickly.

Redefine has released results for the six months to February 2024 and the dividend is a talking point. Despite distributable income per share having increased by 6%, the dividend per share has come in 0.2% lower. The payout ratio for the interim dividend has decreased from 85% to 80%, which puts it right at the bottom of the group’s guided range for the full-year payout ratio (80% to 90%).

Of course, they can play catch-up with the final dividend to take the full-year payout ratio higher if they so desire. Based on the guidance, they could just as easily keep it at 80% and play it safe. With commentary around elevated levels of inflation and the likelihood of interest rate relief only coming in the next financial year, there’s enough macroeconomic noise to suggest that the lower end of the guidance could well be where they end up.

Full-year distributable income is expected to be between 48.0 and 52.0 cents per share. If the 80% ratio sticks and they only hit the lower end of that guided range for income, that’s a full year distribution of 38.4 cents. Based on the current share price, that’s a six-month forward yield of 9.8%.

In terms of other key stats, Redefine earned 78% of its net property income for the period from South Africa and 22% from Poland. With 35% of the South African portfolio in office properties, they are still struggling with rental reversions, coming in at -6% for this interim period vs. -7.5% for the comparable period. The renewal success rate was only 65.3% for this period in South Africa vs. 80.3% in the comparable period.

And if you’re looking for another reason why the distribution this year might be disappointing, the SA REIT loan-to-value metric has increased from 40.9% to 42.6%. This is above their medium-term target range and debt isn’t cheap right now, so they will prioritise bringing this back down.

Some good news from Renergen – at least (JSE: REN)

This is the kind of stuff that investors want to hear

Renergen has announced that the helium cold box has been brought to the appropriate temperature to liquify helium in batches from its wells. The OEM has been intricately involved here after there were a few hiccups with commissioning the system.

The company still isn’t quite there yet, with performance tests as the next step and then the really important stage: continuous operation mode.

Bulls will happily latch onto the good news story here. Bears will point out that there is still some way to go, with the company needing to still establish a proper track record as an operator. If we didn’t have both bulls and bears in the market, then we wouldn’t have a market to begin with!

The company also noted that LNG production hasn’t ceased at any stage during this process.

Little Bites:

Ascendis (JSE: ASC) announced that because its transaction is not yet unconditional, the timetable in the supplementary circular will need to be revised. No indication of revised timing has been given at this stage. The big story in the background here is of course the Takeover Regulation Panel investigation into the various complaints received regarding the deal.

As a junior mining house, Copper 360 (JSE: CPR) is likely to make regular announcements that will range from fairly mundane to highly relevant. Sometimes, one announcement will have both elements. In the latest such example, the less exciting part is that the company has entered into instalment sale agreements for the financing of underground equipment for the Rietberg Mine. The more exciting bit is that first development underground at the mine is expected to commence 3 months ahead of schedule. These things are linked of course, but it shows how every milestone is important for a junior mining. You wouldn’t normally see a company announcing that it had bought some equipment!

Ghost Stories #36: Using Bond ETFs in a Portfolio

The Finance Ghost

5 May 2024

Ghost Stories #36: Using Bond ETFs in a Portfolio

Listen to the show using this podcast player:

When planning your wealth creation journey, it helps to understand all the tools available in the toolbox. Bond ETFs remain poorly understood by many investors, leading to portfolio strategies that don’t include fixed income investments.

In this podcast with Siyabulela Nomoyi of Satrix*, we put the spotlight on bond ETFs. We covered topics like the relationship between interest rates and capital values, the way in which these ETFs add value to a portfolio and the macroeconomic conditions that can lead to good outcomes here.

There’s so much to listen to in this podcast, underpinned by Satrix’s commitment to South African investor education. To find out more about SatrixNOW, visit this link>>>

*Satrix is a division of Sanlam Investment Management

(this article was first published here)

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

Disclosure

Satrix Investments (Pty) Ltd is an approved FSP in term of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. 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 podcast (“the information”), the FSP’s, 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 disclaims 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.

Ghost Wrap #68 (MTN Nigeria | Datatec | Capital & Regional | Harmony Gold | Astral Foods + Quantum Foods)

The Finance Ghost

5 May 2024

Ghost Wrap #68 (MTN Nigeria | Datatec | Capital & Regional | Harmony Gold | Astral Foods + Quantum Foods)

Listen to the show here:

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

In just a few minutes, you can get the latest news and my views on MTN Nigeria, Datatec, Capital & Regional, Harmony Gold as well as Astral Foods and Quantum Foods in the poultry sector. Use the podcast player above to listen to the show.

Ghost Bites (Mondi | MTN | Netcare)

Ghost Bites

The Finance Ghost

5 May 2024

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

Mondi’s Q1 was in line with company expectations (JSE: MNP)

The benefit of price increases will only truly be felt in the next quarter though

Mondi has released an update on trading for the three months to March, representing the first quarter of Mondi’s financial year. They compare this to Q4 of 2023 i.e. the immediately preceding three months, as they are focused more on the trend than the year-on-year numbers. Welcome to cyclical businesses.

EBITDA came in at €214 million vs. €260 million in Q4 2023. This includes a once-off €32 million loss from the devaluation of the Egyptian pound. The overall story is that costs were broadly in line with the preceding quarter and although average selling prices were lower, price increases have been announced and that will come through as a boost to Q2 numbers. The major driver of this result was thus an increase in sales volumes, seen across Corrugated Packaging and Flexible Packaging.

The company also reminded the market that it paid a €1.60 per share special dividend to shareholders from the net proceeds of the Russian asset disposal.

MTN Nigeria has a lot of work to do (JSE: MTN)

For now, there’s breathing room for initiatives to fix the business

If you followed the recent updates on MTN, you would know that MTN Nigeria is in a negative equity position thanks to massive forex losses in the group and other operating pressures. The company held an extraordinary general meeting to explain its plan to rectify this to shareholders.

Firstly, MTN Nigeria needs regulated tariff increases. This is a matter of lobbying the relevant regulators to put through the increases to support ongoing investment in the industry. Relationships with regulators aren’t always easy as they work to balance the needs of services providers and consumers.

Within the business, MTN Nigeria will focus on improving margins through stricter cost control. They will also optimise capex, which is a nice way of saying that it will be reduced over time without compromising network quality (in theory).

Perhaps most importantly, they will reduce exposure to the US dollar. This goes hand-in-hand with the plan to slow down on capex, as the letters of credit obligations are related to capex and add to the forex problem.

Finally, they will review tower lease contracts. It’s not exactly clear what this will entail, but they make reference to forex exposure as well, so perhaps some of the leases are priced with reference to the US dollar.

It’s a good plan and hopefully one that will work. Breathing room to implement it will be important here, with MTN Nigeria’s lenders being supportive for the time being.

At least Netcare’s margins are going the right way (JSE: NTC)

Return on capital metrics remain unexciting for me

Hospital groups are capex-intensive businesses that struggle to generate appealing returns on capital.

They are seen as defensive stocks, but my view remains that there are many discretionary services in the business model and the juicy stuff isn’t as defensive as people think. This is similar to a grocery store, where the defensive categories aren’t what deliver the best returns to shareholders. Within any hospital group, there are higher margin and lower margin services, with the proportion of each type creating the final return to shareholders.

Even though Netcare’s normalised EBITDA margin has improved from 17.5% to between 17.8% and 18.2% for the six months to end March 2024, return on invested capital (ROIC) is only 10.9%. It’s going the right way at least (up from 10.6%), but is that a remotely strong enough return to justify equity risk in an environment where there are many ways to get yield? The market is saying no, with the share price down 29% in the past year.

At least Netcare is showing positive operating leverage, with EBITDA up by 7.3% to 7.7% thanks to revenue growing between 4.2% and 4.4%. There are hospital groups that can’t even get margins going in the right direction, let alone return on capital.

Group net debt is up from R5.0 billion to R5.8 billion (excluding IFRS 16 lease liabilities), with Netcare sending cash in the direction of shareholders (dividends and buybacks) instead of paying down debt. The net debt to annualised EBITDA ratio was 1.3 times for this period, up from 1.2 times in the comparable period.

And here are two pieces of information that tell you so much about modern society: maternity cases are in decline and mental health demand is strong.

Little Bites:

Director dealings:
- The chairperson of Mondi (JSE: MNP) bought shares in the company worth £77.3k.
- A director of Italtile (JSE: ITE) has sold shares worth just under R24k.

Harmony Gold (JSE: HAR) announced its second loss-of-life incident in just one week, after a rock drill operator lost his life at Doornkop after a fall of ground incident. This is being investigated internally and by the regulator.

Zeder Investments (JSE: ZED) has obtained SARB approval for it special dividend of 10 cents per share. It will be paid on 20th May to shareholders.

Numeral (JSE: XII), the renamed Go Life International, announced that it has bought the South African shared services and management company. This is really just a structural thing. They also announced that they are the 210th company in South Africa to be awarded Google Partner status, which seems like an odd thing to be excited about given how many other partners there are. Then again, this is a group that describes itself as follows on the website in the about us section: “Numeral XII is not just a company; it’s an exploration of the boundless possibilities that arise when creativity meets resilience. We thrive on the delicate dance between chaos and order, seamlessly blending innovation with timeless principles. Our commitment is to harness the energy within these opposing forces, transforming challenges into opportunities.” As a rule, I don’t invest in fluff like that.

What tiny pineapples can tell us about our future

Dominique Olivier

3 May 2024

What tiny pineapples can tell us about our future

Fresh Del Monte, a global producer of fruits and vegetables, launched a new product in March of this year. Weighing in at an average of 600g, the Precious Honeyglow pineapple is the smallest pineapple they’ve ever created. And it’s telling you everything you need to know about humanity’s trajectory.

A 600g pineapple doesn’t sound like a big deal at all, until you take into consideration that a standard pineapple averages in weight around 1kg. That means that Precious Honeyglow is about half the size and weight of its full-size sibling. Coming in at $20.99 versus the $11.79 you’ll pay for a regular-sized pineapple from the same producer, “precious” certainly seems to be an apt description.

Why is there even a market for half-sized pineapples? Now that’s where the story gets interesting.

The empty seats at the table

Solo living is becoming increasingly common in the US, with over 28% of American households now inhabited by just one person. For context, that’s the second largest portion of the US population (there are various categories of people living together). With fewer young people getting married or having children, the trend towards solo households is playing a role in the mounting issue of food waste, particularly through spoilage. When there are less people in the house to help eat the leftovers, a lot more food goes to the bin.

According to the USDA’s Economic Research Service, this translates to a staggering 133 billion pounds of food wasted annually, valued at around $161 billion. Fresh Del Monte’s own internal surveys reveal that individuals living alone are notably less inclined than those in multi-person households to opt for full-size whole pineapples, mainly to minimise fruit wastage. Their elegant solution to this challenge is to create smaller pineapples that produce less leftovers and therefore less food waste.

The singleton household phenomenon is not native to the US either. According to the United Nations, the proportion of single-person households worldwide increased from 23% in 1985 to 28% in 2018. By 2050, this number is projected to reach 35%.

That’s a lot of individuals – a few billion people – eating alone, sleeping alone, travelling alone and watching TV alone in 2050.

For many businesses, this presents a fantastic opportunity for increased sales. Consider that for each married household sharing a Netflix account, Netflix could have the chance to sell two subscriptions to two separate solo households. Other businesses are already jumping at the opportunity to cater to this growing market. In 2019, P&G introduced the Forever Roll, a giant toilet paper roll that could (theoretically) see a single-consumer household through an entire month, thereby reducing the household storage space usually required to store extra rolls. Food brands like Kellogg’s, Bisto and Tabasco have already introduced single-serving products to target households with individuals living alone, while appliance manufacturers like Bosch are releasing miniaturised versions of appliances like dishwashers and washing machines, ideal for single households with limited floorspace.

It’s sounding like a future that’s ripe with potential for brands who understand their target markets. But what about humanity as a whole?

Lonely planet

I’m sure we don’t have to go into too much detail around the specifics here (after all, most of us attended biology class in high school), but it’s obvious that a rise in single households today leads to a drop in the birth rate tomorrow.

If you’ve spent any time at all on social media, you’ll know that opinions vary wildly on whether having fewer babies is a good or a bad thing. For every Elon Musk advocating for his 11 children, there are numbers of environmentally or economically concerned men and women getting voluntarily sterilised before marriage. I won’t weigh in on where I stand on this personally, but I will share with you some of the potential outcomes of a slowly shrinking population.

Japan is a very good case study for this. In 2023, the birth rate in Japan was the lowest it had been since the 19th century and seniors in Japan are living longer than ever before. Japan has one of the world’s oldest populations, with almost 30% of Japanese citizens aged 65 or older. Last year, the proportion of those aged above 80 surpassed 10% of the population for the first time in history.

Here’s a statistic that shows you exactly how skewed the Japanese population age is: for the last decade, sales of adult diapers in Japan have exceeded sales of diapers for babies. In a statement, Oji Holdings said its subsidiary, Oji Nepia, currently manufactures 400 million infant nappies annually. Production has been falling since 2001, when the company hit its peak of 700 million infant nappies.

Japan is grappling with a critical issue: a diminishing population due to both ageing and declining birth rates, posing a significant challenge for one of the world’s largest economies. The Japanese government has launched various efforts to tackle these issues, but they have seen little success thus far. The older the population, the more pressure is put on younger taxpayers to make up for the gap left by the ever-growing community of retirees. As the workforce rapidly diminishes, the demand for social and medical services continues to rise.

Despite increased investment in child-related programs and subsidies aimed at supporting young couples or parents, birth rates have not seen a significant boost. Experts attribute this to various factors, including declining marriage rates, greater female participation in the workforce and the rising costs associated with raising children.

Prime Minister Fumio Kishida warned last year that Japan stands at a pivotal juncture which will impact its ability to sustain its societal functions. He emphasised the urgency of the situation, labelling it as a “now or never” scenario.

Of course, declining marriage rates, greater female participation in the workforce and the rising cost of raising children are not unique to Japan at all – in fact, these are trends that impact practically every country in the world. For whatever reason, Japan just appears to be two decades ahead of the curve, a cautionary tale playing out in real time right in front of our eyes.

Will AI solve it?

As I see it (remember, this is still an opinion column at the end of the day), there are a variety of ways that the involvement of AI could affect the declining birth rate and the global economy.

Here’s one way: as the birth rate comes down and the working population begins to decrease on a global scale, AI-enhanced software and machines rapidly scale up productivity. This fills in the gaps in the workflow and allows a smaller group of workers to maintain the same outputs as the more populous generations that came before, thereby supporting older and younger generations despite having fewer hands on deck.

Here’s another, much darker scenario: as AI technology advances, more jobs disappear from the market. Although the workforce is also getting smaller, it is being outpaced by AI, which means that workers have to compete in an ultra-competitive job market while shouldering the burden of a growing senior demographic that no longer pays taxes.

These hypotheses represent opposite extremes, which means it is likely that the actual outcome will be somewhere in the middle. One thing is for sure though: pineapples are getting smaller.

And more expensive.

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.

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Listen to the podcast using the podcast player:

Full transcript:

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

It’s all about the margins at AB InBev (JSE: ANH)

Lesaka makes another major fintech acquisition (JSE: LSK)

MTN Rwanda’s EBITDA heads the wrong way (JSE: MTN)

Renergen releases detailed annual financial statements (JSE: REN)

Little Bites:

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

Attacq to buy the remaining 20% in Mall of Africa (JSE: ATT)

CMH managed steady operating profits (JSE: CMH)

Gold Fields has given investors a negative surprise (JSE: GFI)

Little Bites:

Watch the recording here:

Listen to the podcast using the podcast player:

Summarised transcript:

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

Some good news for Accelerate’s insurance claim (JSE: APF)

Calgro M3 flags strong growth in HEPS (JSE: CGR)

Eastern Platinum publishes its financials – finally (JSE: EPS)

Orion completes the Okiep Copper Project acquisition (JSE: ORN)

Redefine takes a cautious approach with the interim dividend (JSE: RDF)

Some good news from Renergen – at least (JSE: REN)

Little Bites:

Listen to the show using this podcast player:

Listen to the show here:

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

Mondi’s Q1 was in line with company expectations (JSE: MNP)

MTN Nigeria has a lot of work to do (JSE: MTN)

At least Netcare’s margins are going the right way (JSE: NTC)

Little Bites:

The empty seats at the table

Lonely planet

Will AI solve it?

About the author: