Got lots of money, and want to spend it on a Birkin bag? That’s nice. Now get in the back of the line.
I read a fantastic quote this week from self-proclaimed Hermès superfan, Alex Pardoe: “Hell hath no fury like a wealthy person told no”. Recalling the many times he has witnessed “grown men and women having five-star meltdowns” in the Hermès flagship store in Paris, Pardoe’s wit paints a vivid picture of these luxury-induced tantrums.
The outbursts, Pardoe explains, are invariably triggered by the same scenario: a wealthy individual walks into the store, confidently requests to purchase a Hermès Birkin bag – the very epitome of high-status handbags, often priced at $10,000 (~R185,000) or more – only to be informed that none are available. Cue shrieks of fury.
This scene is a common occurrence, as Birkins (according to luxury handbag lore) are far from ordinary commodities that can be picked up off the shelf. The process of acquiring a Birkin involves more than just having deep pockets. The bags are produced in limited quantities and their allocation is often at the discretion of the sales associates, who tend to reserve them for their most favoured clients. And how does one become a favoured client? By spending money on other Hermès items, of course.
In a world that demands instant gratification and customer satisfaction (and in which cash is usually king), I can understand why it might be a novel experience for people to be told that they need to be pre-selected in order to be allowed to purchase something.
How did Hermès manage to create this reality without instantly alienating its ultra-wealthy consumer base? This writer thinks it has something to do with the thrill of the chase. But before we start theorising, let’s start at the very beginning.
The supermodel and the straw basket
In 1984, a chance encounter on a flight from Paris to London led to the creation of one of the most iconic handbags in fashion history. Hermès chief executive Jean-Louis Dumas found himself seated next to actress and singer Jane Birkin. Just two days earlier, Birkin’s signature straw basket had been run over by her then-partner, Jacques Doillon, forcing her to use a different travel bag. As she attempted to stow the bag in the overhead compartment, its contents spilled out, prompting a scramble to gather her belongings.
During their conversation that followed, Birkin lamented to Dumas about the difficulty of finding a leather weekend bag that suited her needs. She wondered aloud if Hermès could produce a larger, more practical version of Hermès’ famous Kelly bag. This offhand comment sparked an idea in Dumas.
Inspired by Birkin’s plight and her suggestion, Dumas set out to design a new bag. Drawing from an earlier Hermès design, the Haut à Courroies, which dated back to around 1900, he created a supple black leather bag that combined elegance with practicality, and named it after the woman who inspired its creation.
The method behind the madness
Hermès’ Pantin workshop is one of four in France, with others in Ardennes, Lyonnais and Lorraine, but it is exclusively at Pantin where the iconic Birkin bag is crafted. Creating a Birkin takes at least 18 hours, varying by size, materials and embellishments.
Artisans train for at least five years before making a Birkin independently, ensuring mastery of traditional techniques, consistency and exceptional skill. Each Birkin is handcrafted by a single artisan using medieval leatherworking techniques and specialised tools like awls, needles, and pinces-à-coudre. They must master the saddle stitch, where two needles are pulled through the same hole in opposite directions, and finish by polishing the seams with beeswax to perfection.
Hermès produces an estimated 70,000 Birkin bags each year, yet the Birkin remains one of the most coveted luxury items. It’s hard to find reliable information online as this is such a closely guarded space, but back in 2006 the waiting list reportedly extended up to six years, highlighting its exclusivity and high demand.
That’s all well and good. We have a heritage brand, an interesting backstory and an undeniable dedication to quality. Almost every other luxury brand could claim to have the same. So what is it about Hermès in particular that renders consumers willing to participate in their buy-in games?
“The Scientology of purses”
On the subreddit r/handbags, a user named Dismal_Ad411 asks the question: “How much did you spend at Hermès before being offered the Birkin?”.
Among comments by users decrying the brand’s tactics as unfair and exclusionary, a variety of answers come to the fore. User bertie9488 admits to spending $5,000 on a smaller bag, a couple of scarves and a bangle before being given the chance to buy the Birkin. Others seem to think it takes an average spend closer to $50,000 to unlock the prize. User shinyjewels quips: “I’ve probably spent 25k and still haven’t gotten offered a quota bag. I did get a limited edition Bolide though, which is included in the price of the 25k I spent thus far. Had to jump an SA (sales associate) cuz we didn’t click, so that’s like, 4k-5k out the window”.
Indeed, the ringmasters who appear to hold up the hoops that customers must jump through are the Hermès sales associates. According to redditor Ennui, “If you have a good SA and you have a good connection they will give you a shot. I can’t remember how much I spent but my favourite SA at a smaller store gave me what I was looking for within a short period of time. But any hiatus or break from shopping with them is like a setback. It drives me nuts.”
All that hoop-jumping certainly helps the bottom line at the end of the day. In the latest financial year, Hermès reported annual sales of €13.4 billion. The current market cap is over €240 billion, dwarfing the likes of Nike despite selling a significantly smaller number of goods, but still much smaller than LVMH at €390 billion.
Not everyone wants to play the game
Jeffrey Berk is the CEO of Privé Porter, a leading Miami-based Birkin reseller. According to him, there are two distinct types of Birkin buyers. The first group consists of individuals willing to engage in the lengthy and often humbling process of securing a Birkin directly from Hermès, an endeavour that we now know involves cultivating a relationship with the brand and demonstrating loyalty through various purchases.
The second group, however, opts for a different route. These buyers turn to resellers like Privé Porter to obtain their coveted Birkins without the wait or the need to build a rapport with a Hermès sales associate. For this convenience, they are willing to pay a substantial premium – often double the original asking price of the new item – for a secondhand bag. This clientele includes high-profile figures such as Paris Hilton and Kris Jenner, who value the immediate availability and exclusivity offered by the reseller market.
Berk claims that 70% of his stock comes from Hermès VIP buyers, who often purchase bags in colours or leathers they don’t actually want, fearing that declining an offer from a sales associate might jeopardise their relationship with Hermès and stop them from getting the bags they’re holding out for. Before making such purchases, they often email Privé Porter to ensure the company is interested in trading or reselling the bags before pulling the trigger on the purchase.
What recourse is there for those who are unwilling to do the Hermès dance, but unable (or unwilling) to pay for a secondhand item? Well, there’s always the courts.
Hermès is currently facing a lawsuit in California, accused of violating antitrust laws by allegedly “tying” the sale of one item to the purchase of another. Two California residents initiated this lawsuit through a proposed federal class-action filed in March of this year. The irony of this legal action lies in its inherent weakness: not only are these allegations challenging to substantiate, but most Hermès customers are reluctant to risk being blacklisted by the brand.
Who among the Birkin hopefuls would jeopardise their relationship with Hermès by participating in a class-action lawsuit?
About the author:
Dominique Olivier is the founder of human.writer, where she uses her love of storytelling and ideation to help brands solve problems.
She is a weekly columnist in Ghost Mail and collaborates with The Finance Ghost on Ghost Mail Weekender, a Sunday publication designed to help you be more interesting.
Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:
Afrimat marches on (JSE: AFT)
Construction Materials and Bulk Commodities both saw profits jump
Afrimat released numbers for the year ended February 2024 and they are well in line with the track record that the company is famous for. Revenue increased by 23.9% and HEPS was up 24.0%. That all sounds very consistent across the income statement, but it’s worth noting that operating profit was up 19.8% and hence there was some operating margin pressure.
The balance sheet is in fantastic shape and it will need to be, as the Lafarge acquisition will now be the focus.
One of the highlights was Nkomati within Bulk Commodities, with the anthracite enjoying strong local demand as a substitute for imports. Nkomati contributed 14.6% of group operating profit for the period. The iron ore business within the segment is dealing with headwinds like slower export volumes due to rail infrastructure challenges, as well as a dip in iron ore prices. Despite this, the overall segmental operating margin was slightly higher than the prior year, coming in at 31.8%.
In Construction Materials, revenue increased 22.3% and operating profit more than doubled, up 111% for the period. They attribute this to increased demand from the road and rail industries, which is encouraging for South African infrastructure.
Although there were some disappointments (like the Industrial Minerals segment), the overall trajectory is excellent and puts Afrimat on a strong platform for what needs to be done with Lafarge.
Barloworld’s profitability suffers a dip (JSE: BAW)
Continuing operations are what count here
Due to the unbundling of Zeda in December 2022 and its inclusion in the prior period numbers as a discontinued operation, the right way to look at Barloworld is to focus on continuing operations for the six months to March 2024.
On that basis, the company has suffered a drop in profitability. HEPS from continuing operations is down by between 6.2% and 9.7%. The impact of current infrastructure problems on South African mining groups hasn’t helped here, as that sector is a major customer for Barloworld.
Detailed results are due for release on 27 May.
An acceleration at Karooooo (JSE: KRO)
The rate of growth is important here
Karooooo is the owner of the Cartrack business, which is a classic recurring income model that depends on subscriber growth. Not only must subscriber growth be happening, but it should ideally be accelerating.
This is indeed the case in the fourth quarter numbers, with total subscribers up 15% and net additions (i.e. the number of new subscribers) up 65%. For the full year, total subscribers were also up 15% (as the Q4 and full-year end points are the same), with the number of net additions for the year up 33%.
Subscription revenue was up 18% for the quarter and 17% for the full year. On a constant currency basis, those numbers are 15% and 14%.
Operating profit came in at a record level for Karooooo, up 18% for the full year. I look forward to Carzuka being out the numbers, as operating losses were worse in that business as Karooooo stepped away from it. It’s also very nice to see that Karooooo Logistics achieved an operating profit of R26 million, way up on R5 million in the prior year.
For full-year 2025, Karooooo expects to have between 2.2 and 2.4 million subscribers vs. the 1.97 million at the end of 2024. Revenue should be R3.9 billion to R4.15 billion, up from R3.54 billion.
Despite the big jump in profits, cash from operating activities dipped from R1.13 billion to R998 million. In a period of rapid growth, cash tends to get tied up in telematics devices that generate revenue in years to come.
Nampak has managed to sell its Nigerian business (JSE: NPK)
This is a major step forward for the group
When a share price closes 14.5% higher on the day, you know that the market liked something. In this case, the market loved the news of Nampak finding a buyer for Bevcan Nigeria (the second-largest manufacturer of cans in that country).
Nampak will get roughly $68.5 million for the stake, with $48.5 million as the base consideration and another $10 – $12 million dependent on the level of working capital in the business on closing. Your maths isn’t letting you down here – there’s another $10 million in the form of repayments by Bevcan Nigeria of its historical debt to Nampak within 20 business days from completion of the deal.
Naturally, the net proceeds from this will be used to repay debt at Nampak. One of the challenges will be to get the proceeds out of Nigeria within a reasonable timeframe, as the foreign currency issues in Nigeria are terrible at the moment.
A circular will be sent to shareholders in due course. Nampak will no doubt hope to get this across the line as quickly as possible, including regulatory approvals.
Double-digit growth at Sanlam (JSE: SLM)
The first quarter reflects a great start to the year
Sanlam has released an operational update for the first quarter of the new financial year and it tells a great story, with 14% growth in the net result from financial services. Net operational earnings were up 16%, with improved investment returns boosting the group. Life insurance volumes and value of new business also look strong, both up double digits.
Investment management new business volumes fell 7%. In a group this size, there will always be a headache somewhere.
This is a strong set of numbers and a wonderful base off which to grow. The R6.5 billion acquisition of Assupol has been approved by Assupol shareholders, with that deal set to significantly improve Sanlam’s mass market business. In other inorganic growth news, the Absa Fund Managers platform was merged into Sanlam Collective Investments in March 2024.
You may also recall the recent news of Sanlam selling down minority stakes in India to facilitate an increase in Shriram life and general insurance entities to over 50%.
Be careful in extrapolating this growth rate for the rest of the year. Sanlam notes in the outlook section that the first quarter growth was helped greatly by investment returns, which are sensitive to global asset values. They don’t expect to see the same growth rate for the rest of the year.
Record profits at Southern Sun (JSE: SSU)
Cost efficiencies and Western Cape exposure have been the drivers here
Southern Sun has released a trading statement dealing with the year ended March 2024 and they have good news to share, calling it a record year of profitability. EBITDAR (a typical hotel industry measure) is up 31% to 34% and HEPS is up 5% to 9%.
But perhaps most importantly, adjusted HEPS (which excludes the once-off payment from Tsogo Sun in the base period) increased by a massive 87% to 90%, coming in at 56 to 57 cents per share. The share price closed nearly 7% higher at R5.55 in appreciation.
Little Bites:
Director dealings:
Des de Beer has bought R760k worth of shares in Resilient (JSE: RES).
An associate of a director of Astoria Investments (JSE: ARA) has bought shares worth R164k.
A non-executive director of Renergen (JSE: REN) has bought shares worth R116k.
A number of directors and prescribed officers at Hammerson (JSE: HMN) acquired shares under the dividend reinvestment plan.
I’m very pleased to report that Bytes Technology (JSE: BYI) didn’t mess around when it came to the undisclosed trades by disgraced ex-CEO Neil Murphy. The investigation hasn’t found any evidence that other parties were involved in this. The company has reached a settlement with Murphy in which he will forfeit entitlements under the company’s performance share plan and deferred bonus plan (i.e. no further amounts will be received by him under these schemes). What will really sting is that he will also repay his after-tax bonuses since IPO to the company.
Canal+ has now increased its stake in MultiChoice (JSE: MCG) to 45.2% in the company.
In an unusual step, Shirley Hayes will move from non-executive chairman of Copper 360 (JSE: CPR) to executive chairman, with specific focus on the capital requirements for the Rietberg mine and the move into production,
Those following Southern Palladium (JSE: SDL) will be interested to know that the company presented at London Platinum Week and has made the presentation available here.
Visual International Holdings (JSE: VIS), languishing at R0.01 per share, released a trading statement for the year ended February 2024 that reflects a swing from losses into profits (without giving a range). The group also expects to shift from negative NAV to positive NAV. This seems to be based on a property valuation rather than cash profits.
Old Mutual’s private equity arm has disposed of its majority stake in Beverages HoldCo 2, operating through Stellenbosch-based beverage company Chill Beverages and Heidelberg-based Inhle Beverages. The stake was sold to a consortium led by private equity firm Alterra Capital Partners, Rwandan-based Admaius Capital Partners and the Mineworkers Investment Company. The beverage company’s key brands include Fitch & Leeds mixers, Score Energy and Bashew’s drinks and Chateau Del Rei canned sparkling perle wine. Financial details were undisclosed.
Nampak is to dispose of the entire issued share capital of Nampak Bevcan Nigeria to Singaporean Alucan Investments. The company will also transfer shareholder loans advanced by Nampak International to Bevcan Nigeria, to the purchaser. The cash consideration to be paid to Nampak is c.US$68,5 million excluding the cash held at Bevcan Nigeria on completion. Nampak will apply the net proceeds to repaying existing debt. As the value of the disposal exceeds 30% of Nampak’s market capitalisation, the transaction is deemed a category 1 transaction as per the JSE listing requirements and will require shareholder approval.
Not only did Anglo American reject BHP’s updated buyout proposal which values the business at £34bn, maintaining that the offer significantly undervalues the company and its future prospects, it announced its own restructuring plan. Anglo will aim to streamline its business to focus on copper and iron ore with the demerging of Anglo Platinum, sale of De Beers and its nickel business likely to be placed on care and maintenance. Both proposals face execution risk. BHP’s revised proposal represents a 15% increase in the merger exchange ratio and increases Anglo American shareholders’ aggregate ownership in the combined group to 16.6% from 14.8% in BHP’s first proposal. BHP has until 22 May 2024 to make a firm offer.
Novus, through its wholly owned Print subsidiary, has announced the small related party acquisition of Bytefuse (owned by Novus CEO), which is in the business of developing machine learning and artificial intelligence technology for application in various fields. Novus will issue 2,513,558 shares at a discounted R4.30 per Novus share to Marblehead Investments and will subscribe for an additional 289 ordinary shares and 30 million Investor Preference shares for R30 million which result in Novus holding a 48.58% equity stake in Bytefuse. The company also has the option to subscribe for an additional 361 ordinary shares and 20 million investor preference shares for R20 million which if exercised will result in Novus holding 58.87% of the ordinary shares and 85.06% of the Investor Preference shares.
Mantengu is to acquire Birca Copper and Metals, from Birca Investments and SA Metals and Fossils. The purchase consideration of R29,89 million will be settled by the issue of Mantengu shares and will be issued in the ratio of 80% to Birca Investments and 20% to SA Metals and Fossils. The acquisition is a Category 2 transaction and as such does not require shareholder approval.
Delta Property Fund has disposed of two properties for an aggregate disposal of R20 million. The letting enterprise situated at 149-151 St Andrews Street, Bloemfontein has been sold to Siguroni Investments for R15 million and the property 5-7 Elliot Street in Kimberley to Candy Sun Liquor for R5 million.
Unlisted Companies
Melitta Group, a German company selling coffee, paper coffee filters, and coffee makers, has acquired a majority stake in the Caturra roastery in Cape Town. The new partnership will be managed by Melitta Europe – Coffee Division based in Bremen.
Canal+ has notified MultiChoice shareholders that it has, this week, acquired a further 7,374,918 MultiChoice shares in open/off market transactions. The shares were acquired at an average price per share of R119.59, below the mandatory offer price of R125.00 per share, for an aggregate R882,4 million. Canal+ now holds an aggregate of c.45.20% of the MultiChoice shares in issue.
A number of companies announced the repurchase of shares:
In line with its share buyback programme announced in March, British American Tobacco this week repurchased a further 3,271,931 shares at an average price of £24.47 per share for an aggregate £8 million.
Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 6 – 10 May 2024, a further 3,691,771 Prosus shares were repurchased for an aggregate €123,67 million and a further 326,582 Naspers shares for a total consideration of R1,23 billion.
Kore Potash plc and The Spar Group commenced trading on A2X with effect from 14 and 15 May respectively.
Four companies issued profit warnings this week: Trematon Capital Investments, Salungano, Stefanutti Stocks and Barloworld.
Four companies either issued, renewed, or withdrew cautionary notices this week: EOH, Pick n Pay, Insimbi Industrial and Spear REIT.
Senegalese B2B e-commerce startup, Maad, has raised US$3,2 million in debt and equity seed funding to aid in its expansion plans. Ventures Platform, Seedstars International Ventures, Reflect Ventures, Oui Capital, Launch Africa, Voltron Capital and Alumni Ventures provided the US$2,7 million in equity, with Proparco and local banks providing the US$900,000 in debt.
QatarEnergy has signed a farm-in agreement with ExxonMobil to acquire a 40% participating interest in the Cairo and Masry Offshore Concession exploration blocks. ExxonMobil as operator, will retain the remaining 60%. Financial terms were not disclosed.
ASX and LSE AIM-listed Atlantic Lithium’s shares began trading on the Ghana Stock Exchange on Monday 13 May 2024. This is the first listing on the West African bourse in two years. The company did not raise any new capital through the listing of its entire issued capital of 649,669,053 ordinary shares on the GSE Main Market.
MNZL, an Egyptian fintech founded in 2023, has raised US$3,5 million in seed funding. The round was led by P1 Ventures, Localglobe and Ingressive Capital and also included 500 Startups, Flat6Labs, First Circle Capital, ENZA Capital, Beenok and other angel investors.
Spark+ Africa Fund has provided US$1,5 million in long-term quasi-equity financing to the Mauritius affiliate of ATEC to accelerate the rollout of its IoT-enabled eCook appliances across Africa.
Last year ended with a flurry of M&A activity in South Africa, and the first quarter of 2024 has continued to show evidence of this renewed M&A appetite, nudged on by an emerging tailwind of optimism in the country, and a more constructive global backdrop.
Despite some risk being priced in, given the upcoming South African election, the base case is that we don’t expect any significant economic impact to lead to subdued investor appetite. We believe that the election will have a neutral to positive outcome, once it is over.
In the near-term, we expect an improvement in GDP, as some of the major challenges facing our economy start to ease. Logistic and port problems have been so detrimental to South Africa’s economic growth recently that even the smallest green shoots of improvement – such as recent executive appointments at parastatals, or improved momentum on public-private partnerships in respect of rail and ports – should create greater economic confidence.
We also expect the benefits of a greater supply of renewable energy to feed into the economy. If the energy challenges have indeed reached a turning point, it would prove a massive boost in confidence, from an economic perspective, influencing what people and businesses are prepared to commit.
And as M&A is driven by confidence, this could mean increased M&A activity over the next 18 months.
Globally, M&A activity has picked up after a slow period. This trend – fueled by factors such as improved financial markets; pent-up demand for deals; an expected easing of inflation; and anticipated rate cuts – could also translate to increased activity in South Africa. The first quarter of 2024 has seen good levels of M&A by volume and value. As such, the factors that drove activity at the end of 2023 are expected to remain, and possibly gain momentum during 2024.
International interest in South African businesses Despite a mixed economic backdrop in South Africa, there is still an appetite for South African opportunities from global buyers, who are keeping a close eye across various sectors.
Recent examples of this include Varun Beverage Limited’s (VBL) acquisition of South Africa’s The Beverage Company. VBL is an Indian listed company that manufactures, bottles and distributes beverages across a number of markets, and is the largest bottler of PepsiCo’s beverages globally, outside the United States and China. Furthermore, French media company Canal+ has made a formal offer to acquire Multichoice. These deals highlight that certain global investors are taking a decades-long view, looking past current difficulties to acquire strategically important businesses in the region.
Domestic consolidation in certain sectors In recent years, South African corporates have de-levered, sought out efficiencies, and re-focused their efforts on domestic consolidation opportunities. Indeed, there is limited appetite from institutional shareholders to support corporates expanding offshore in a meaningful way; rather, they are looking closer to home for complementary and value-accretive deals. A good example is Sun International’s proposed acquisition of Peermont Holdings to expand its South African portfolio.
Private equity (PE) activity and new emerging players in South Africa and Africa While many of the PE incumbents in South Africa (and Africa) have struggled to generate returns over the last decade, impacting their future capital raising ambitions, there is still a healthy level of capital in many PE funds. These funds need to be deployed into targets in the region, across industries where growth (on a relative basis) can be delivered. Market leadership features high on the list of criteria. A case in point is the acquisition by Adenia of The Courier Guy, which showcases that certain niche sectors still see significant growth and expansion opportunities. In addition, fund managers continue to seek realisations and return capital to investors, which continues to drive deal flow in this segment. More deals are expected.
SA corporates focusing on their core businesses and more actively managing their portfolios The last two themes have paved the way for PE buyers with capital to acquire assets that have received renewed focus and attention as standalone businesses. Actis / RBH potentially acquiring Swiftnet from Telkom, and Capitalworks’ proposed acquisition of The Building Company are good examples.
This underlines the ongoing focus by corporates on balance sheet and capital structure optimisation. Together with a renewed focus on their core operations, this could lead to further spin-offs, conceptually similar to RCL Foods’ proposed unbundling of its chicken business.
Sectors to watch
Some sectors are particularly well positioned for M&A activity.
Consumer & Retail – Aligned with the themes highlighted above – a combination of continued international interest, South African corporates refocusing on their core businesses, and consolidation in sub-sectors that have faced pressure from consumer weakness – greater PE activity is expected to drive deal flow in the coming 12-18 months.
Industrials – South Africa’s industrial sector remains unloved by the market, at least for the moment; notwithstanding many businesses showing value when applying a ‘through the cycle’ view. This may lead to M&A activity in the form of strategic acquirers with strong balance sheets looking for opportunities to consolidate.
Resources – While the global economic climate is negatively affecting certain commodity prices, consolidation within the South African mining industry remains a focus for specific commodities. South African mining companies continue to look at broader Africa and international expansion; and sustained downward pressure on certain commodity prices is likely to result in the sale of non-core assets, the rebalancing of portfolios, and capital raising.
Renewables and energy infrastructure – South Africa’s ongoing focus on renewable energy and infrastructure development could present attractive M&A opportunities for investors. We expect more deal flow in this segment to come to market during H2 2024.
Looking ahead to the next 18 months, the outlook for M&A activity in South Africa for the rest of this year and into 2025 appears cautiously optimistic, with a potential rise in deal volume compared with recent years.
Krishna Nagar is Co-head of Corporate Finance | Rand Merchant Bank.
This article first appeared in DealMakers, SA’s quarterly M&A publication
The Divided States of America, the Battle for Britain and SA’s coalition conundrum, the stakes are high as over 60 nations around the world go to the polls this year. Investec Wealth & Investment Chief Investment Strategist Chris Holdsworth shares his insights on what election outcomes matter most to markets, and how investors should navigate this time of uncertainty. Listen to the latest episode of Investec’s No Ordinary Wednesday podcast.
Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:
Coronation’s earnings trajectory is worrying (JSE: CML)
This is the case even with adjusting for the tax battle
Coronation avoids giving proper comparative numbers in its SENS announcements. When they release an assets under management announcement, they usually make you go digging for comparatives. Similarly, in this trading statement, they don’t show the base earnings excluding the tax adjustment. Instead, they just talk about a huge year-on-year increase.
This irritates me immensely.
There are few things I enjoy more in Ghost Bites than giving you the real story, so here’s the trajectory for Coronation’s fund management earnings per share (their preferred metric) over the past three years and without the impact of the tax fight:
March 2022: 214.8 cents
March 2023: 191.5 cents
March 2024: 183.5 – 186.1 cents
It’s pretty clear why they don’t go out of their way to make this obvious to casual readers of SENS. Asset management is a tough business, which is why I far prefer the wealth management strategy of players like PSG Financial Services or Quilter. Offering only products simply isn’t lucrative enough anymore.
Sea Harvest is no longer a subsidiary of Brimstone (JSE: BRT | JSE: SHG)
This leads to a change in how the investment is accounted for
Sea Harvest announced this week that the acquisitions of businesses from Terrasan were completed, making Terrasan the second largest shareholder in the group.
The other implication of these deals being concluded is that Sea Harvest is no longer a subsidiary of Brimstone. This means that the accounting switches from consolidation to equity accounting as an associate in the books of Brimstone.
Although this makes a difference to how the financials are presented, the market tends to focus on the discount to Brimstone’s intrinsic net asset value per share, a calculation which is unaffected by consolidation vs. equity accounting. It will of course be affected by how Sea Harvest’s value moves after the Terrasan acquisitions, taking note of the diluted stake that Brimstone now holds in that group.
Continuing operations are way up at enX (JSE: ENX)
The market might start paying some attention here
With the classification of Eqstra as a discontinued operation in these numbers, the market can get a clearer view on what enX looks like with that sale out of the way. With HEPS from continuing operations more than doubling to 61 cents, the answer is that it looks good!
These numbers are for the six months to February, so you would need to annualise the HEPS number to really compare it to the current share price of R9.50, which is still trading well below the net asset value per share of R13.86.
The group has three divisions: enX Lubricants (oil lubricants and greases and the sole distributor of ExxonMobil among other brands), enX Power (diesel generators, industrial engines and solar alternatives) and enX Chemicals (polymers, rubbers and more).
In the lubricants business, profit before tax doubled to R48 million, although large impairments in the base mean that the move in cash profits was less spectacular. The power business did well out of data centre customers, although sales of solar PV systems slowed as load shedding magically disappeared and the market was saturated with solar equipment. Still, profits there were up 59% to R46 million. In chemicals, profit before tax increased by 61% to R45 million.
As you can see, the segments are of equal importance from a profitability perspective, which makes enX an interesting and diversified group. With the capital-hungry division (Eqstra) now sold to Nedbank, the strategy of the group is bearing fruit.
NEPI Rockcastle’s momentum continues (JSE: NRP)
The fund is in the right place at the right time
For a property fund, being in a vibrant economy with strong tenant demand is a wonderful experience. NEPI Rockcastle is living that life right now, with a 12.7% increase in net operating income in the first quarter of 2024. On a like-for-like basis, net operating income increased by 9.4%.
This was driven right from the top, with tenant sales up 10.5%. Basket size increased 8.8% despite a moderation in inflation, with footfall up 2.1%. It’s all very good over there.
The balance sheet is also in excellent shape, with a loan-to-value ratio of 31.5%. The group feels comfortable up to a level of 35%. The strength of the business makes debt cheaper of course, with an average cost of debt of 2.87%. When compared to these growth rates in net operating income, that cost of debt leads to lucrative returns for shareholders.
Still, the guidance for growth in distributable earnings per share is a conservative 4%, so we will have to see how the year plays out. They expect a 90% dividend payout ratio.
Here’s the share price performance since before the pandemic (and keep in mind this excludes any dividends):
The global freight cycle has hit Santova (JSE: SNV)
The group may be less cyclical than shipping companies, but isn’t immune
Santova has released results for the year ended February 2024. They reflect a drop in revenue and net interest income of 4.5%, with HEPS down by 20.1%. There’s no dividend, although that isn’t anything new. In previous years, the company has prioritised share buybacks.
At some point, the macroeconomic realities of the world had to bite Santova. Container freight rates are down and so are volumes, with the company expecting overcapacity in shipping to continue until the end of 2025 – so don’t get too excited about near-term improvement.
Perhaps most concerningly, the US business that was recently acquired had a really tough period, with operating losses in this year and the derecognition of deferred tax assets on prior year assessed losses – something that doesn’t send a great message about immediate prospects. The most resilient segment turned out to be the UK, with net profit after tax down by 13.7%.
Cash generated from operations suffered a sharp correction, down by 68.8%. This was driven by the drop in profits as well as working capital absorption in the current year vs. the previous year.
The market seems to believe that Santova can keep it together during this part of the cycle, with the share price still firmly at 2022 levels. On HEPS of 123.77 cents, that’s a trailing Price/Earnings multiple of 6x which feels rather high right now.
Stefanutti Stocks is moving in the right direction (JSE: SSK)
The company is still loss-making though, even in HEPS from continuing operations
Stefanutti Stocks has been busy with a disposal strategy to get the business on a sustainable footing. Naturally, this causes all kinds of nuances in the accounting results. One must distinguish between continuing and discontinued operations, as well as earnings per share (which includes many of the related gains and losses) and headline earnings per share (which excludes them).
The cleanest number to look at is therefore HEPS from continuing operations, as this gives the best indication of how the core business is performing. On this metric, the company is still making losses – a headline loss of between 8.19 cents and 2.73 cents per share (remember a smaller loss is a better number, hence the range is described that way around). This is much better than the comparable period at a loss of 27.29 cents.
From total operations (i.e. including discontinued), the headline loss is much larger at between 52.29 cents and 60.03 cents vs. a loss of 38.73 cents in the prior period.
This shows just how important it is that the company gets the sales of the discontinued operations across the line.
Universal Partners reports a drop in the NAV (JSE: UPL)
No new investments will be considered going forward
Like so many other investment holding companies, Universal Partners is battling a discount to NAV in its share price. And as we see so often, the plan now is to return surplus cash to shareholders rather than take on new investments, although follow-on investments in existing portfolio companies will still be possible.
As Universal has such a diversified (arguably incoherent) portfolio, they will struggle to close the discount unless they dispose of some assets at the directors’ valuation that underpins the NAV. This is also the way in which the management company is incentivised i.e. only on exit.
Universal’s stake in PortmanDentex, one of Europe’s largest dental care platforms, has come under pressure in its value because of a drop in valuation multiples globally in the sector. They blame higher interest rates and inflationary pressures.
Workwell, a workforce management business that focuses on compliance and recruitment technology, recently acquired Precision Consulting Group in the US. Workwell now generates 60% of profits from outside the UK. Still, they are running below budget because of a generally difficult staffing environment in the UK. Nevertheless, the valuation of Workwell is 12% higher.
Over at SC Lowy, the investment management group focused on credit investing and lending, results for the quarter were in line with expectations. Xcede Group can’t say the same, with the trading environment for recruitment remaining challenging, even in the technology sector.
Still, it’s better than the fancy toilet technology that Propelair is trying to sell, with that business still running far behind the original business plan. This is the reason for it being valued at a nominal value.
Overall, the net asset value per share dropped by 8.9% year-on-year to GBP 1.293. This equates to R29.98 at current exchange rates, with the share price at R22.00.
Little Bites:
Director dealings:
Des de Beer has bought R2.43 million worth of shares in Lighthouse Properties (JSE: LTE).
An Italtile (JSE: ITE) director has been executing some rather odd trades recently, with what looks like swing trading strategies of buying and selling shares after short holding periods. In a further strange one, there was a small sale on 9th May and then a purchase and sale on 10th May. Out of nowhere, we then saw a meaningful sale on 11th May of R401k and on 14th May of nearly R45k.
Spear REIT (JSE: SEA) is in the process of acquiring a portfolio of Western Cape properties from fellow listed company Emira (JSE: EMI). The circular with full details will be distributed by no later than 2nd July and the cautionary announcement has been renewed accordingly.
Deutsche Konsum (JSE: DKR) practically never trades on the JSE, so the earnings only get a passing mention here. For the first half of the financial year, net rental income fell 6.5% and funds from operations dropped by 17%. To add to the worries, the loan-to-value ratio is at 61.4%. This REIT isn’t in good shape at all.
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Accelerate’s rights offer is going ahead (JSE: APF)
The company will raise R200 million in equity
Accelerate Property Fund needs to raise equity to improve its balance sheet. The mechanism to do this is a rights offer, through which the company will raise R200 million in equity by issuing 500 million shares at R0.40 per share.
This is going to be highly dilutive for any shareholders who don’t follow their rights, as the issue ratio is roughly 38.60 shares for every 100 shares held. The offer is renounceable, so shareholders can sell their letters of allocation in the market. If you ignore this completely and neither follow your rights nor sell the letters, it’s going to be an unpleasant time for you.
All necessary shareholder and board approvals have been obtained and the rights issue will now go ahead. This is a fully underwritten offer, with the underwriter receiving R10 million as an underwriting fee (5% of the amount to be raised).
Anglo American suddenly has a plan, which includes demerging Anglo American Platinum (JSE: AGL | JSE: AMS | JSE: KIO)
There’s zero doubt that the BHP discussions have accelerated this plan
The approach from BHP has clearly lit a fire under the you-know-whats of the Anglo American directors. One wonders how long it would’ve taken them to get to this point without the BHP plan
The way Anglo American sees it, they should focus on copper (obviously – this is the best part of the group), iron ore and crop nutrients. The crop side of things will go slower than before, as Anglo also wants to deleverage the balance sheet.
For all the complaining about BHP requiring Anglo to demerge certain assets, the group has now acknowledged that this is the ideal way forward with or without BHP. You’ll notice that there’s no mention of platinum or diamonds in that focus list.
Aside from a potential sale of steelmaking coal and nickel (or the placement of nickel – a battery metal! – on care and maintenance), the big news here is an “orderly” demerger of Anglo American Platinum and a potential demerger or sale of De Beers.
Why are they wanting to sell off De Beers at a time when the diamond market has so many question marks? Remember that this is the same group that literally gifted Thungela to shareholders. Timing isn’t a strong point over at Anglo. Of course, they explain this timing as being a result of the progress in finalising the sales agreement with the government in Botswana.
The other big news is that they want to keep Kumba Iron Ore, which is one of the things that BHP didn’t want. At Anglo level, this means they would also keep Minas-Rio in Brazil.
If they do this, EBITDA margin would increase from 31% to 46%. They would have less than 1.5x net debt to EBITDA and they could maintain the 40% dividend payout ratio.
Management is now firmly on the back foot in trying to convince shareholders not to accept other offers. Any argument along the lines of the buyer requiring extensive restructuring now falls flat, as Anglo is taking that route themselves (and frankly an even more difficult one that includes the sale of unlisted assets, not just the demerger of listed assets).
BHP presents at a mining conference – and there’s an Anglo slide in there too (JSE: BHG | JSE: AGL)
This gives a good visual idea of what the combined businesses would look like
Although Anglo American has now given BHP the cold shoulder twice, this hasn’t stopped BHP from continuing to tell the story of what the combined businesses could look like. At a presentation at the Bank of America Global Metals, Mining & Steel Conference 2024, the CEO of BHP talked through a slide deck (find it here) that included this view on the combined businesses:
Anglo American looks small next to BHP in this context, but you need to remember that BHP is only interested in certain parts of the Anglo American business and would require the company to demerge certain assets (Anglo American Platinum and Kumba Iron Ore) as the precursor to a deal. This is one of the sticking points for Anglo, although the latest plan from the company weakens that argument (as discussed above).
Delta Property Fund enjoyed a strong day on the market (JSE: DLT)
This is what happens when the market was pricing in a disaster that didn’t come
Before all hell broke loose on the Delta Property Fund share price (in a good way), it was trading at R0.18 per share. Late in the morning, the company announced a disposal of two properties for combined net proceeds of R19.3 million, which would reduce the loan-to-value ratio from a very broken 61.4% to an almost-as-broken 61.2%.
This announcement wasn’t enough to excite the market.
Around lunchtime, thing got much juicier with the release of a trading statement. Distributable earnings per share would increase by between 49% and 68% from the base of 11.12 cents in the 2023 financial year. This implies a range of 27.67 cents and 29.78 cents, which is particularly ridiculous in the context of a share price that started the day at 18 cents.
As the market read the announcement and saw the narrative around increased recoveries, reduced administrative costs and ongoing management efforts to improve things, the fireworks started. The share price eventually finished the day 27.8% higher at 23 cents a share, which is still a multiple of less than 1x vs. distributable income per share. It got as high as 29 cents a share in afternoon trade.
Dipula Income Fund’s dividend is going backwards (JSE: DIB)
Expense growth is running well ahead of revenue growth
With revenue growth for the interim period of 9%, you would expect Dipula Income Fund to be telling a positive story in distributable income. But alas, property expenses were 15% higher, so that caused challenges. Efforts to reduce overall operating costs helped drive a 6% increase in net property income, but distributable earnings per share still moved 5% lower. This wasn’t helped by the increased number of shares in issue after the dividend reinvestment programme.
The dividend followed suit, down 5% to 24.57634 cents per share.
The net asset value per share moved ever so slightly higher to R6.60, with the share price of R3.90 reflecting a 41% discount to net asset value. As you’ll see with Octodec further down in Ghost Bites today, this is because the market focuses on yield rather than net asset value unless a fund is actively recycling capital and returning value to shareholders.
Dipula is on an annualised yield of 12.6%.
Equites Property Fund reports a 22.7% drop in the dividend (JSE: EQU)
The main reason is that cross-currency interest rate swaps have been settled
Equites has reported numbers for the year ended February 2024. The properties are performing in line with expectations operationally, with like-for-like rental growth in South Africa of 6.4% and in the UK of 5.0% (in GBP). The loan-to-value ratio has improved ever so slightly from 39.7% to 39.6%. The net asset value is up 3.0% to R17.14, assisted by an upward move in valuations both in SA and the UK.
So, why the 22.7% drop in the dividend per share? There were a number of contributing factors as shown in this chart, with the largest being the settlement of cross-currency interest rate swaps (CCIRS) and thus the income from the swaps no longer being included in distributable income:
Technically, this creates a cleaner set of numbers that are more reflective of the underlying properties and the distributions they can support.
The share price closed 4.4% higher at R13.13.
The pressure continues on the MTN share price (JSE: MTN)
It’s not like the market wasn’t warned here
I sometimes wonder about the level of attention that the market pays to even the larger stocks on the local market. MTN releases its subsidiary results before the group results came out, yet the MTN share price barely reacted to all the bad news at subsidiary level. Only once group numbers came out did the share price react, down 8.5% for the day.
The group numbers tell a tough story, as there’s a vast difference between the reported performance and the constant currency performance. The currency risks in Africa are so baked into the investment case that I would largely ignore constant currency here. It really doesn’t help to keep growing subscribers in Nigeria if the capex is exposed to USD and the naira is falling off a cliff.
The market response seems to be in line with this approach as well, punishing the share price for an 18.8% drop in group service revenue and a 28.7% decrease in group EBITDA, with margin contracting by 580 basis points to 37.9%. Concerningly, the EBITDA margin in South Africa also contracted (admittedly by only 120 basis points), so even the most stable business is struggling.
The group net debt to EBITDA ratio is 0.5x, very well within loan covenant limits of 2.5x. Net interest cover of 5.6x is also fine. The thing to watch for is cash getting stuck in subsidiaries and causing heartache at holding company level, with holding company leverage moving higher from 1.4x at December 2023 to 1.7x.
Capex deployment for 2024 has been revised downwards to R28 to R33 billion, reflecting lower planned spend in MTN Nigeria as they look to reduce exposure to USD-denominated outflows in that business. The previous guidance was capex of R35 to R39 billion, so that’s a major pull-back in spend.
Fun fact: the average prepaid subscriber in South Africa consumed 3.3GB per month and the average contract subscriber consumed 21.9GB, with mobile users at 12.9GB. And therein lies the problem for the telcos: the days of super profits based on voice calls are long over.
It’s important to mention the fintech revenue as well, which is where the telcos have been focusing to try and make up the gap. It increased 25% on a constant currency basis, which is reasonable consumer adoption but also not a thrilling growth rate. Transaction volumes increased by 18.3%.
Octodec’s earnings are down, but the dividend is stable (JSE: OCT)
Things need to improve or the dividend will take a knock at some point as well
For the six months to February 2024, Octodec grew revenue by 4.7%. Sadly, due to expense and finance cost pressures, distributable earnings per share fell by 6.4% to 82.47 cents.
Despite this pressure on earnings, the distribution per share was maintained at 60 cents. They do have some headroom there in the payout ratio, but the challenges for earnings will at some point flow down into the dividend.
The loan-to-value ratio of 38.5% is slightly down on 38.8% a year ago, but has increased from 37.7% at the end of the last financial year.
The net asset value per share has dipped by 0.5% to R24.11. The share price at R9.56 is at a massive discount to net asset value, but the annualised yield is 12.6% and even that isn’t really exciting enough for the risk here. The net asset value doesn’t mean much in this case unless the company is recycling capital at those prices.
Santam is doing well overall, with no shortage of challenges (JSE: SNT)
The underwriting result is within the 5% to 10% target range
Santam has released an operational update for the quarter ended March. It sounds positive overall, with a few areas causing them headaches, like the property book.
In the conventional insurance business, net earned premium growth was 7% and gross written premium was up 10%, with timing differences explaining the mismatch (and expected to reverse during the year). Even if the MTN update further up didn’t have much good news, at least Santam has a positive story to tell about the telco. New business written through the MTN partnership is ahead of expectations. Another highlight was MiWay, which grew gross written premium by 7%.
One of the challenges in conventional insurance has been delayed crop planting due to weather conditions, putting pressure on growth in that type of insurance.
At Santam Re, there was a double-digit increase in gross written premium, but a decrease in net earned premium due to timing differences in unearned premium reserves.
Although South Africa is never short of a disaster or two, the group underwriting margin was within the 5% to 10% target range. This is despite the Western Cape storms and fires in April 2024 with an estimated loss to Santam of R300 million net of reinsurance, which is within the catastrophe and large loss budget for the year.
It helps that yields in the market are still nice and high, allowing Santam to earn 2.3% of the net earned premium in investment returns.
The Alternative Risk Transfer business reported “solid” operating results, but no numbers are given.
The underperformance in the property book is the main issue at Santam, with various management interventions in process like geo-coding and higher excess amounts.
A useful overview of South32’s strategy (JSE: S32)
If you enjoy the mining sector, these conference presentations are useful
South32 also delivered a presentation at the Bank of America Global Metals, Mining & Steel Conference 2024, with the highly detailed slide deck available in all its glory at this link.
I thought that this was a pretty good slide, showing how the group has changed since its demerger in FY15. The focus has clearly been on base metals:
Is Transaction Capital becoming an investment holding company? (JSE: TCP)
This is surely the right accounting treatment going forward
Transaction Capital released a trading statement for the six months to March. Naturally, it starts with a reminder to the market that the company unbundled WeBuyCars to shareholders and raised R1 billion via a placement of shares before the unbundling, with those proceeds used to pay down debt and move to a net cash position at holding company level.
In this period, Mobalyz (which houses SA Taxi) made a core loss from continuing operations. They are running the business to preserve cash rather than generate a profit. Although those two things might sound like they belong together, it’s not quite that simple. Losses can be impacted by non-cash items, like the accelerated impairment in the insurance side of the business due to reduced cover. The funders are in support of this approach.
There’s a clue in this release that Transaction Capital should move from consolidating its subsidiaries to rather accounting for its portfolio as an investment holding company:
“These losses incurred at SA Taxi, its subsidiaries and funding entities, while consolidated in accordance with IFRS at a group level, are not funded by Transaction Capital nor do they impact the equity of Transaction Capital at a holding company level.”
Here’s the even stronger clue:
“As a consequence of the corporate activities in H1 2024, Transaction Capital has achieved its objective of becoming an unencumbered investment holding company with two assets: 100% of Nutun and 75% of Mobalyz (written down to zero) with net cash of approximately R120 million.”
Goodness knows it would be more helpful to understand the movement in net asset value per share of the group in current form than to read about a headline loss per share that is between 22% and 32% worse than the loss in the prior period.
Detailed results are due on 21 May. Perhaps management will talk to the accounting policies going forward at that event.
Little Bites:
Director dealings:
The CEO and FD of Pan African Resources (JSE: PAN) have both bought shares in the company using a loan and associate collar structure (put/call options to hedge the position). The shares are pledged with a dividend sacrifice as security. You don’t borrow money to buy shares unless you have a bullish view on them.
Kore Potash (JSE: KP2) shareholders approved the issuance of shares worth $150k in the company to the chairman. This cash will be used to help keep things going until the EPC contract is finalised.
Grindrod Shipping (JSE: GSH) has released the circular dealing with the proposed capital reduction that would see the “selective capital reduction” of the company through the buyback of all shares not held by Good Falkirk (part of Taylor Maritime) for $14.25 in cash. The meeting of shareholders for this proposed deal will take place on June 20th. If the deal is approved, Grindrod Shipping will delist from the JSE.
Eastern Platinum (JSE: EPS) released results for the quarter ended March 2024. Revenue fell 12.9% vs. the restated comparable quarter, yet mine operating income increased by 49.5% to $5.3 million. The group made a slight operating loss and thus a net loss attributable to shareholders of $0.9 million. Costs related to the soft restart of the Zandfontein underground operations contributed to the loss. The company still has a large working capital deficit.
Sea Harvest (JSE: SHG) announced that the acquisitions from Terrasan have now met all conditions precedent and become unconditional. This makes Terrasan the second largest shareholder in sea Harvest and creates the largest abalone business in the Southern Hemisphere, as well as the largest black-owned diversified fishing business in South Africa.
Salungano (JSE: SLG), which is suspended from trading, has released a trading statement for the year ended March 2023. Yes, you read that date correctly. At least they are getting closer to catching up on financial reporting backlogs.
Canal+ is up to a 45.20% stake in MultiChoice (JSE: MCG) after recent purchases of shares between R119.44 and R119.66 per share.
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BHP asks Anglo American to dance again (JSE: BHG | JSE: AGL)
They’ve sweetened the deal
BHP’s initial play for Anglo American was met with a firm dismissal by the latter’s board, without any chance of the board taking the offer to shareholders. There wasn’t even engagement with BHP about the offer, at least according to the latest announcement by BHP.
This is pretty much par for the course in corporate dealmaking. It’s rare to see an independent board support the first offer on the table.
As many expected, BHP has now sweetened the deal by increasing the merger ratio i.e. the number of BHP shares that Anglo American shareholders would receive. There is a 14.6% increase in the merger exchange ratio. If the deal went ahead, Anglo American shareholders would own 16.6% in the combined group instead of 14.8% as per the initial proposal.
The offer implies a premium on the “undisturbed market value” of Anglo American’s unlisted assets of 50%. This is calculated based on the value at which Anglo American traded before the press speculation, less the look-through values of the listed assets (Anglo Platinum and Kumba Iron Ore).
The requirement to “demerge” Anglo Platinum and Kumba Iron Ore is still there in the revised proposal. BHP doesn’t want either of them. This means that in addition to the shares in the merged entity, Anglo American shareholders would also receive shares in Anglo Platinum and Kumba Iron Ore.
This is still not a firm intention to make an offer under UK takeover law. BHP is simply testing the resolve of the Anglo board and their willingness to take this price to shareholders, assuming BHP is willing to go ahead with the offer.
It didn’t take Anglo long to reject it once more, with the group focusing on the unappealing nature of the demerger structure as well as the price. The company highlights the regulatory complexity and costs of the demergers, the burden of which would be made to fall on Anglo shareholders under this proposed deal.
Of course, BHP could go the hostile takeover route and approach shareholders directly. That’s a very expensive and time consuming process though, which is why it is rarely followed.
BHP has until 22 May to make a firm offer, or to confirm that it does not intend to make an offer.
Calgro M3 finally declares a dividend (JSE: CGR)
Shareholders have been asking this question for a while
Calgro M3 has certainly made the most of a period in which revenue decreased in the residential property segment, leading to group revenue dropping by nearly 16% despite a solid increase in cash receipts in the Memorial Parks segment.
The drop in revenue was far less severe by the time we reach gross profit, which only fell by around 2% as gross profit margin moved higher. Along with other efficiencies in the income statement (particularly a sizable drop in administrative expenses), profit before tax actually increased by nearly 7%. You won’t often see this kind of result at profit level when revenue has dipped like that.
Thanks to extensive share buybacks (a whopping 18.5% of shares in issue in the past year), HEPS growth was much more exciting. It increased by 24% to 189.87 cents, which means the share price at R5.75 is still on a very modest Price/Earnings multiple.
Considering the success of the buybacks, it came as a surprise to some to see the company finally declare a dividend. Although shareholders had been raising this point, it seemed like the buybacks were working incredibly well as a way to return value to shareholders. Mind you, it’s a very small dividend at just 9.49350 cents per share.
The loan to value ratio has moved higher, from 31.04% to 31.97%. Shareholder will keep a close eye on this, as buybacks and dividends shouldn’t be so extensive that the balance sheet becomes too heavily geared.
Insimbi jumps 30% on a cautionary announcement (JSE: ISB)
Welcome to the world of small caps
Insimbi Industrial Holdings released a cautionary announcement dealing with two potential activities that seem to be part of the same transaction.
This includes the repurchase of roughly 11% of shares in issue from certain shareholders, along with the potential disposal of assets held by subsidiaries of Insimbi. Presumably, the asset disposal provides the funding for the repurchase. The announcement doesn’t comment on this, though.
Despite the relative lack of details, the share price rallied 30% on volumes well in excess in average daily traded volume.
Mantengu Mining acquires Birca Copper and Metals (JSE: MTU)
The mining group is scaling and paying for the acquisition with shares
Mantengu Mining is on a growth path and is making it happen through acquisitions. In mining, that’s really the only way to do it unless you have plenty of patience to go through the development phase and all the pain along the way with capital raising etc.
Instead, Mantengu is acquiring Birca Copper and Metals, which mines and processes high grade chrome ore in the North West Province. This roughly doubles Mantengu’s chrome ore supply.
Perhaps most importantly, the deal consideration of just under R30 million will be settled through the issuance of shares in the company based on the 15-day VWAP and with reference to the terms of the GEM Global Yield share subscription facility. The VWAP will be subject to a minimum of R0.60 per share.
It all sounds good, but Birca Copper and Metals only made profit of R2 million in the year ended February 2024 off a net asset value (NAV) of R102 million, so there are some question marks there. Mantengu is only paying roughly R30 million and is thus getting it at a large discount to NAV, but that’s still a high earnings multiple.
Raubex celebrates 50 years in business with great results (JSE: RBX)
Profitability has moved strongly in the right direction
Raubex played its cards close to its chest for the year ended February 2024. They expected an uninspiring outcome from a growth perspective, as the Beitbridge Border Post Project was in the base year and that created a difficult number off which to grow. Despite this, they’ve pulled off revenue growth of 13.8%, operating profit up 20.4% and HEPS up 21.3%. It’s a fantastic outcome.
On top of this, the order book stands at R25.55 billion, up from R20.04 billion a year ago. They attribute this to the diversified business model.
Looking deeper, the Materials Handling and Mining Division achieved very impressive revenue growth of 39.6%, which was enough for operating profit to skyrocket from R168.6 million to R584.7 million. Operating profit margin in that segment more than doubled from 5.9% to 14.6%. The investment in Bauba is clearly going well.
The Construction Materials Division also has a great story to tell, with revenue up 29% and operating profit up 41.1% to R115 million. It’s still a modest business in terms of margins though, with operating margin of only 4.8%.
The Roads and Earthworks Division is one place where the year-on-year impact of the Beitbridge Border Post completion was felt, with revenue down 6.1% and operating profit down 35.1% to R331.5 million. Operating profit margin was 5.8%. Importantly, the secured order book is up 30.2% in this segment.
The Infrastructure Division was good for 17.8% growth in revenue, but this didn’t translate into profit growth. Operating profit fell by 1.9% and operating profit margin unwound from 11.4% to 9.5%. The Beitbridge Border Post Project was in the base period for this division as well, without which revenue and profit would’ve been up very nicely indeed by 42.7% and 120.4% respectively.
If there’s anything to point a finger at, it would be cash generated from operations decreasing by 2.9% despite the major uptick in profits. The blame lies in working capital, with a significant increase in trade receivables and contract assets, along with a much lower move in payables year-on-year. Certainly nothing to panic about right now, but worth keeping an eye on.
Despite the cash trajectory not matching earnings, a final dividend of 92 cents per share has been declared, well up on 76 cents the prior year.
Stor-Age ramps up the third-party management business (JSE: SSS)
This is a useful way to drive return on equity for a property group
Stor-Age is a self-storage property company, not a hotel group, yet the parallels are interesting. In the hotel industry, a major brand (think Hyatt or Hilton) needs to first establish itself through owning and operating its own hotels. Over time, people see the success and want to emulate it with their own properties, so they enter into hotel management agreements that put e.g. the Hyatt name on the door without Hyatt owning the property. This is when hotel companies really start to generate proper returns for shareholders, as there’s now another source of revenue that is earned without capital outlay.
Stor-Age can clearly see the opportunity to boost return on equity (ROE) by earning income off properties owned by others. They’ve been pushing the third-party management business and the latest news is that Hines has entered into such an agreement with Stor-Age for three properties in Kent in the UK. They will be added to the Storage King platform within the Stor-Age stable, helping Hines with a successful UK market entry. Hines has a presence in 30 countries, so forming a strong relationship here can only be beneficial.
With this deal, Storage King now operates 43 properties in the UK.
Revenue may be up, but HEPS has dropped at Vodacom (JSE: VOD)
Just like at MTN, having high-growth African businesses with risky currencies doesn’t work
Vodacom has released results for the year ended March 2024 and they start off very well, with group revenue growth of 26.4%. A chunk of this is thanks to the inclusion of Vodafone Egypt since 8th December 2022. If you look at service revenue growth with Egypt on a pro-forma basis (i.e. assuming Egypt had been consolidated since the start of the year), the number is 9.2%.
That still sounds good.
Then we get to EBITDA growth, coming in at 24.3% as reported, or 7.8% making that adjustment for Egypt. Margin compression, sure, but still decent growth.
It goes wrong below that, with HEPS down by 10.8% thanks to foreign currency losses in Egypt and startup losses in Ethiopia. Vodacom has been copying MTN’s homework here in acquiring African subsidiaries in markets with volatile currencies.
Due to the drop in HEPS, the dividend per share has also fallen by 11.9%. As many investors see Vodacom as a source of yield, that’s not going to be popular. With Egypt now contributing around a quarter of group revenue, ongoing pain in the Egyptian pound will put further pressure on dividend growth.
Are there any silver linings? Well, the so-called “new services” are now 20% of group service revenue, so the efforts to diversify away from charging people for phone calls and SMS bundles have been working. Financial service customers increased by 11.8% year-on-year.
The problem for Vodacom (and its sector peers) is that South Africa, the most stable market of the lot, only grew service revenue by 2.6%. We are a very mature market here where people are spending less and less on their connectivity thanks to data services. This really doesn’t help when inflationary pressure on costs is significant, especially expense lines like energy and security. This is why Vodacom is so keen for the fibre deal to be approved by the Competition Tribunal, with hearings due to commence on 20 May 2024.
WeBuyCars is sweating those assets (JSE: WBC)
HEPS is up 26.1%, yet only one additional car supermarket was opened in the past year
I actually sold a car to WeBuyCars the other day. It was a genuinely excellent experience and one that encouraged me greatly as a shareholder. You know what else encourages me? Revenue growth of 15.9% and core HEPS growth of 26.1% for the six months to March.
In case you’re wondering, core HEPS strips out the transaction costs around the recent listing and non-cash movements on the call option derivative assets linked to certain shareholders. In other words, core HEPS is the actual business without the noise of the Transaction Capital unbundling.
With improved volumes and higher average selling prices, this result has been achieved despite only one additional car supermarket being opened in the past year. This suggests improved inventory turnover, which is a key driver of the economics of the business and a great way to ensure that they don’t get stuck with old stock. Cash generated by operating activities being up by a whopping 96.6% tells you how effective the working capital strategy has been, with only a modest uptick in inventory value despite the growth in sales.
Momentum was good throughout the period, with sales volumes achieving an all-time high in March 2024. This is exactly what is needed as the business looks to open further facilities, with an Eastern Cape supermarket planned to open in June 2024 and land having been acquired in Cape Town and Rustenburg for future development.
The company will consider a dividend when full-year results are released, with a planned payout ratio of 25% to 33% of headline earnings.
Little Bites:
Director dealings:
The spouse of the CFO of Standard Bank (JSE: SBK) sold shares worth R6.7 million.
A director of Harmony Gold (JSE: HAR) sold shares in the company worth R331k.
Pick n Pay (JSE: PIK) released a further cautionary announcement regarding the recapitalisation plan for the group. There’s actually no new news in it, with Pick n Pay continuing to refine the plan that will comprise a rights offer of up to R4 billion in mid-2024, followed by the separate listing of Boxer on the main board of the JSE. The share price is down around 13.5% this year, having given up all the gains from the rally during February.
If you’re a shareholder in Collins Property Group (JSE: CPP), then look out for a circular dealing with proposed changes to the employee share trust to cater for the special dividend that the company declared after the disposal of Moorgarth by Tradehold. It seems as though the adjustment mechanisms in the trust don’t adequately allow for this corporate action and they are looking to sort that out accordingly.
Trencor (JSE: TRE) is a listed shell that will be wound up as soon as possible after obligations under a legacy indemnity have been discharged. The company is engaging with regulators and other parties to try and make the winding up process as efficient as possible after 31 December 2024. This will end in a cash payment to shareholders, so everyone is motivated to make it as quick as possible.
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