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At Acsion, the market continues to ignore the NAV (JSE: ACS)
You won’t see a discount to NAV of this size very often
In the property sector, a discount to net asset value (NAV) is nothing new. Most funds trade below the NAV per share for various reasons. At Acsion, the discount is just particularly huge. The share price closed at R5.61 on Friday and the NAV per share is R26.62.
The portfolio is a difficult thing to understand, as it includes complications like an hospitality model where Acsion is owner and operator of the hotel rather than just the landlord. This makes it difficult for the market to predict the cash flows. Another complication is that Acsion isn’t a REIT, so investors can’t value it based on the net operating income and the knowledge that most of it will pop out as dividends.
Case in point: the dividend per share for FY24 is 33 cents, but HEPS was 98 cents. That’s a low payout ratio. Speaking of HEPS, it fell by 18% for the year.
Another interesting angle to Acsion is that the loan-to-value ratio is only 10%, but current liabilities exceed current assets as at the reporting date because of when loans are maturing. Acsion is confident that this won’t be an issue, as banks have approved new facilities at more favourable terms. Still, the market doesn’t like uncertainty.
There really is no reason for this company to pay dividends. Acsion should only be executing buybacks at this discount to NAV. They executed repurchases worth R357 million in FY24 and declared dividends worth R132 million. I suspect that the share price would respond positively to dividends being dropped completely in favour of buybacks.
Altron shows one of the better ways to do a B-BBEE deal (JSE: AEL)
Avoiding bank debt makes sense and a genuinely broad-based approachis a noble one
Altron has announced a new B-BBEE transaction. There have been many ways to do these over the years, with the initial years of B-BBEE deals leading to highly leveraged transactions funded by banks and supported by corporate guarantees. Time showed us that those deals often end in tears, with only the banks actually making any money. These days, there are better ways to do things.
Altron’s new deal uses a sustainable funding structure in the form of a preference share that effectively takes the ordinary equity of the empowered entity down to zero. Instead of going to the banks and asking for a big loan to buy ordinary shares, this approach captures the current value of the entity in a preference share and allows the B-BBEE partner to buy ordinary shares at a nominal value, thereby participating in future value creation.
The B-BBEE partner is structured as a broad-based trust, with objectives around addressing scarce ICT skills within South Africa. Instead of empowering one person or even a handful of people, Altron is aiming to make a broader difference to the skills crisis in South Africa and the lack of employment opportunities. Altron will contribute R5 million to the trust in FY25 to get these initiatives off the ground.
The trust will acquire a 20% interest in Altron South Africa Holdings, which in turn will hold 100% in Altron TMT SA Group.
In this case, the preference share is priced at a spread to the official prime lending rate – in other words, a rate higher than prime. Current Altron shareholders therefore continue to earn that return from the empowered entity, as well as 80% of the equity value going forward.
Although it wasn’t strictly necessary for the deal, Altron obtained a fairness opinion for the transaction from BDO Corporate Finance. They opined that the terms are fair to Altron shareholders.
Generally speaking, the B-BBEE partner is no worse-off in this structure than in a deal funded with external bank debt. The current shareholders in Altron are materially better off than in a traditional structure that gives a guarantee to an external bank. With the trust structured with a long-term approach in mind, another benefit is that this isn’t a deal that will need to be restructured after 7 – 10 years, the typical holding period in private equity structures.
AVI’s most important businesses are doing well (JSE: AVI)
But I&J remains a worry
AVI has released a trading update for the year ended June 2024. Group revenue is up by 6.3%, but that is an over-simplification of what’s going on at AVI. Before we dive into the segments, the important point to note is that HEPS will be up by between 21% and 25% vs. the prior year, so AVI has managed to turn a modest revenue performance into a great performance at HEPS level.
The biggest part of the business is the Food & Beverage segment, which grew revenue by 9.0%. This consists of Entyce Beverages – the star of the show with 18.2% growth – as well as Snackworks (up 6.4%) and I&J (down 1.1%). I&J is thankfully the smallest part of the segment and contributes 15.5% of group revenue, so it’s important but not critical to the group result. Still, it would be a lot better to see the fishery heading in the right direction.
The Fashion Brands segment fell by 4.8%. Within that, Footwear & Apparel put in an asthmatic performance of 3.6% growth. Personal Care was down 16.4% but there was a change to the underlying business in this period which contributed to the drop. The Coty distribution agreement ended in July 2023, leading to only a marginal decline in profit despite a negative impact on revenue.
As has been the case for a while, AVI’s food and beverage businesses are the best part of the group. When both volumes and price head in the right direction, revenue does well and margins tend to be protected (or even expanded) as well.
I&J has been the exception, with the fishing industry notoriously difficult to predict and understand. Catch rates and global selling prices lead to volatile earnings, with I&J struggling with reduced demand in key abalone markets in the latest period. Thankfully, I&J’s margins were in line with the previous year despite the revenue pressures, with the business putting a lot of effort into expense management.
Net finance costs were marginally lower than the previous year, with the benefit of lower debt being mostly offset by higher interest rates.
BHP and Vale will share any payments related to Samarco class action suits (JSE: BHG)
This confirmation was made necessary by proceedings filed outside of Brazil
The Samarco dam disaster has been going on for years, with extensive legal proceedings and rehabilitation work in Brazil. The issue has gone broader than that recently, with proceedings filed in English as well as Dutch courts.
As BHP and Vale each held 50% of Samarco, they previously entered into a framework agreement stipulating a 50-50 share of amounts payable to claimants in court proceedings. Oddly, BHP is the only defendant in the English court proceedings and Vale is the only defendant in the Dutch proceedings, so this agreement ensures that if liability will be established in either of those proceedings, BHP will only be on the hook for 50% of the payments.
Burstone could sell its Pan-European Logistics portfolio (JSE: BTN)
There’s no guarantee of a deal at this stage
Burstone has released a cautionary announcement regarding a potential transaction related to the Pan-European Logistics portfolio. Burstone is considering a disposal of the majority of its stake in that portfolio, with the purchaser being funds of Blackstone Europe.
They are calling this “exclusive negotiations regarding the potential formation of a strategic partnership” with those funds. A strategic partnership is different to a typical disposal, as it implies a working relationship going forward.
At this stage, there’s no guarantee of a transaction being concluded, hence why the cautionary has been released. There’s also no indication of price or deal structure at this stage.
Capitec flags a very strong period (JSE: CPI)
The six months to August were fantastic
Capitec released a trading statement for the interim period and the jump in headline earnings per share (HEPS) is something to behold. This all-important metric is up by between 25% and 35%, benefitting from a combination of strong operating conditions for the bank and a weak base period.
Let’s start with the base period, where HEPS only increased by single digits. This was driven by an increase in impairments and a generally tough economic climate. They’ve effectively now lapped a period of high rates and the economy is looking better, so the credit impairment charge and credit loss ratios are having a less negative benefit than a year ago. Essentially, the momentum from the second half of the previous financial year has continued, as the second half of FY24 saw an increase of 22% in HEPS.
They also got a boost from the acquisition of Avafin, an international online lending group. Capitec previously had a 40.66% stake in this company and accounted for it as an associate. Since 1 May 2024, Capitec has held a 97.075% stake and thus almost all the profits are attributable to shareholders of Capitec.
The Capitec share price has had a terrific time of things in 2024:
And over five years, it looks even more impressive. It took a while to regain the highs of 2022, but the share price has now pushed strongly through those levels:
Ninety One’s assets under management have ticked higher (JSE: NY1 | JSE: N91)
This is always good news for an asset manager
In the past couple of years, asset managers have had a tough time. For one thing, higher interest rates and inflation have put people under pressure and ensured that more of their capital is sucked into debt repayments and the cost of living. For another, most equity markets haven’t had a great run of things in recent times.
As asset managers earn their fees based on the quantum of assets under management (AUM), this has been a difficult time for many of the companies in this sector – particularly the ones that don’t have an army of wealth managers out there doing distribution.
The good news at Ninety One is that AUM has continued to tick higher. It was £124.8 million a year ago (June 2023). By March 2024, the end of the previous quarter, it had moved up to £126 million. As at June 2024, the end of the latest quarter, this had ticked up to £128.6 million.
Sirius announced the results of the UK retail investor raise (JSE: SRE)
Sadly, South African retail investors weren’t given a chance to participate here
As part of the latest capital raise activities at Sirius, the goal was to raise £150 million through a placement with qualifying institutional investors, as well as £2.5 million through a retail offering in the UK market. Whilst I absolutely love seeing retail investors being given a chance to invest, it’s a pity that South African retail investors weren’t included here.
Sirius had no problem raising the money from either group of investors, with the latest announcement being that the retail offer has closed and the full amount has been raised.
Spear REIT sells the legacy assets at the DoubleTree (JSE: SEA)
These are non-core sectional title units and parking spaces
Back in February 2022, Spear sold the Upper East Side Hotel, which is run as the DoubleTree by Hilton Hotel in Cape Town. I’ve been there and it’s a pretty cool place, not that this matters.
As part of the deal, Spear retained some sectional title units and parking bays. These units and bays have now been sold as well, with the hotel as the purchaser. The selling price is R11.8 million, which is higher than the net asset value of R9.5 million on the Spear balance sheet as at February 2024. It’s still tiny in the overall Spear portfolio, so this was a distraction more than anything else. Spear can take this capital and redeploy it into the opportunities that investors want to see, like retail and industrial properties in the greater Cape Town Metropole.
A couple of shareholders of the purchaser are associates of non-executive directors of Spear, so this is a small related party deal. This is why a fairness opinion needed to be obtained for the transaction, with PSG Capital opining that the terms are fair to Spear shareholders.
As part of the transaction, Spear has given rental income guarantees to the purchaser for a limited period.
Little Bites:
Director dealings:
Pay close attention to this one: Dr Christo Wiese’s personal investment vehicle, Titan Premier Investments, has increased its stake in Brait (JSE: BAT) from 28.66% to 34.26%. He’s therefore just below the threshold for a mandatory offer. This comes through as a director dealing because Wiese is a director of Brait.
In addition to sales by various directors and prescribed officers to cover the tax on vested shares, two prescribed officers of Telkom (JSE: TKG) sold shares in the company worth R1.3 million.
Sebata Holdings (JSE: SEB) announced a further delay to the results for the year ended March 2024. They will be published by no later than 31 July – hopefully.
When it comes to discoveries and inventions that changed the world, people like to applaud and commemorate the geniuses responsible. But how many times are we actually celebrating the right person?
As an artist and writer, I loathe the idea of someone taking credit for my work. This isn’t something that makes me unique – in fact, I think all humans care about attribution to some degree (even those who swear high and low that they don’t). When we do something or create something that we are proud of, we automatically want that something to continue to be linked to our name.
Not to get too philosophical too early in this article, but isn’t it true that while our bodies are mortal, our ideas live forever?
A Stigler for a good idea
A little while ago, I learned about something called Stigler’s Law of Eponymy. This concept was first introduced by a University of Chicago statistics professor named Stephen Stigler in his 1980 publication of the same name. In short, Stigler’s Law suggests that no scientific discovery is ever named after its original discoverer. To prove his point, Stigler provided quite a few real-world examples.
Arabic numerals. Most people associate them with, well, Arabs, but they were actually first used in India around the 7th century.
Another famous example is the Pythagorean theorem. Although it’s named after the ancient Greek mathematician Pythagoras, evidence suggests that Babylonian mathematicians understood this principle long before his time.
Venn diagrams are named after John Venn, who popularised them in the 1880s, but Leonhard Euler had already introduced them in 1768.
Then there’s Halley’s Comet. Although Edmond Halley correctly predicted its return, this celestial phenomenon had been observed by astronomers since at least 240 BC. Halley’s contribution was in the mathematical prediction, not the initial discovery, yet the comet bears his name.
What’s amuses me the most about Stigler’s law is that Stigler credited its discovery to sociologist Robert K. Merton. Yes, you understood that correctly – even Stigler’s Law itself is named after the wrong person. Stigler claims to have done this on purpose as a playful way of illustrating his point, thus further highlighting the ubiquitous nature of this phenomenon.
The issue with originality
Now, I understand why hearing about something like Stigler’s Law might demotivate those who like to think of themselves as pioneers. While that spirit of invention is often found in the origin stories of great businesses, it is actually a bit of an illusion. And seeing an illusion revealed can be a somewhat jarring experience.
I remember a particular lecturer at art school who upset me deeply one day when she quoted Mark Twain: “There is no such thing as an original idea” (although, now that we know about Stigler’s Law, I should probably go check if it really was Mark Twain that said that first). To this already crushing phrase she then added her own little epilogue: “Every original idea is just unintentional plagiarism”.
As a young artist, utterly convinced that my brain was brimming with original and important ideas, this was not something that I wanted to be true. Yet the quote stuck with me, irritating me like a grain of sand inside an oyster until it delivered a pearl of wisdom.
In truth, the step away from the pressure to produce something completely new was much more freeing than I expected it to be. And from that freedom flowed a different type of creativity: the creativity of the remix.
To illustrate my point, consider the full version of that Mark Twain quote:
“There is no such thing as a new idea. It is impossible. We simply take a lot of old ideas and put them into a sort of mental kaleidoscope. We give them a turn and they make new and curious combinations. We keep on turning and making new combinations indefinitely; but they are the same old pieces of coloured glass that have been in use through all the ages.”
Is there anything wrong with a refined idea? I don’t particularly think so. Any business that was built on the idea of a competitor will tell you the same – think of the likes of Facebook after MySpace or Netflix after Blockbuster+. There are definite benefits to improving instead of inventing. Inventing something from nothing is a messy game that often results in blind spots and missed opportunities. Assessing an existing idea from the outside often provides the ideal vantage point, a view from which to see the steps towards perfection.
Every idea worth having has already been had. So now what?
Ask any person on the street who invented the first automobile, and you are almost certain to receive Henry Ford as the answer. However, the story of the automobile actually started with Nicolas-Joseph Cugnot, a French military engineer who built a steam-powered tricycle in 1769 to haul artillery. Because it was steam-powered, not everyone considers Cugnot’s invention the first true automobile.
The title of the first real car often goes to Karl Friedrich Benz and Gottlieb Daimler, two German inventors who, working independently in different cities, both created their own gasoline-powered vehicles in 1886. Benz actually drove his three-wheeled car in 1885, making it the first practical modern automobile and the first commercially available car in history.
In 1908 came Henry Ford, the name now synonymous with the automobile. Ford of course is famous for the Model T, which he mass-produced using a revolutionary moving assembly line. This innovation made cars affordable for middle-class Americans and changed the landscape of auto manufacturing forever – perhaps part of the reason why his name has been permanently affixed to the idea of those early era cars.
In one of my recent articles, which covered the history of the 24 Hours of Le Mans, I discussed the fact that a hydrogen-powered supercar was tested on the track for the first time this year. This is a massive technological leap from the first petrol-powered cars that put-putted their way out of the Ford factory. While their work is certainly innovative, the inventors of the hydrogen supercar cannot claim to have to have invented the automobile.
Perhaps they understand something of the mental kaleidoscope that Mark Twain referenced in that famous and irritating quote: the fact that invention in the 21st century relies on the combination of existing ideas and materials in new and useful ways.
The invention of the automobile – by Cugnot, Benz, Daimler and Ford – may have changed the trajectory of mankind, but the constant innovation of the automobile is what will drive us into the next century.
About the author: Dominique Olivier
Dominique Olivier is the founder of human.writer, where she uses her love of storytelling and ideation to help brands solve problems.
She is a weekly columnist in Ghost Mail and collaborates with The Finance Ghost on Ghost Mail Weekender, a Sunday publication designed to help you be more interesting.
Andri Joubert of Investec Structured Products joined me on this podcast to explain the opportunities and risks related to two new products that give interesting exposure to global indices.
If you’re interested in investing in Japanese (Nikkei 225) or European (Euro Stoxx 50) exposure, then the benefits of these structured products are well worth researching and considering as part of your portfolio.
The closing date for both products is 8 August 2024, so don’t delay if you’re interested in investing.
To assist with your research, listen to the podcast below or read the transcript further down. And remember: you should always discuss an investment like this with your financial advisor.
The Finance Ghost: Structured products have come a long way. From a specialised, exotic investment tool, they are now mainstream and financial advisors are more comfortable about investing in them on behalf of clients. In this fifth podcast with the Investec structured products team, Andri Joubert lends his voice to Ghost Stories to unpack two exciting new products with an offshore equity flavour. If you are considering exposure to the Nikkei225 or the EURO STOXX 50, then Investec’s latest offerings have a risk-reward profile for those investments that is worth considering.
Welcome to this episode of the Ghost Stories podcast, and it’s another one featuring the Investec Structured Products team. Now, if you’ve been listening closely to Ghost Stories over the past year or so, you would have learned about some pretty interesting structured products coming out of Investec. And certainly this show, well, I was going to say will be no different, but actually it is a little bit different because today, firstly, we have a new voice on the podcast.
That is Andri Joubert, who is an investment specialist in the Structured Products team. But secondly, we’re also doing two products in one. You’re going to have to concentrate for this one. But obviously we’ll try and make it as simple as we can. And Andri, I think part of what we’ll talk about, obviously, is why you are effectively marketing these two products at the same time and what the similarities are. But before we dive into all of that, welcome to the show. Thank you for doing this. And as I say, it’s great to have yet another voice from Investec on the platform.
Andri Joubert: Thank you and thanks for having me and the team. It’s a good question. We recently had two products maturing. Earlier this week, on Monday, actually, both products did tremendously well. So we had one product paying investors 17.1% in rands and one product paying investors 11.05% in US dollars. And they were structured in a similar way that these two products are structured that we’ll discuss today. It was an autocall structure. Initial term would have been five years. But we did give investors the opportunity for it to be up after one year or two year, or three year, or four year, or at the end of five years. The whole idea was bring something out based on research, and if the client is interested in the research and the index that we’re tracking, we give them five bites at the cherry.
So fast forward to Monday this week, the products did both mature so effectively, investors were invested for one year and they got their returns. The two new products work exactly the same. So ideally we looked at opportunities in the market. We looked at indices that will diversify global portfolio risk and we identified the Nikkei225 that we have marketed earlier this year as well, and we identified Europe. What is unique is that we are targeting a rand return for the Nikkei225 and a dollar return for the EURO STOXX 50 product. That is what we’re bringing out. Ideally we’re going to go to investors that just received a return, get them to reinvest, because they would have been in for five years in any case, and then of course get new investors on board, as we do believe there are unique opportunities in these two indices.
The Finance Ghost: I mean, the best outcome for investors is actually that the autocall does its magic after one year, right? You get that full return basically after twelve months, and now you have your money back and you have the flexibility to do it again. Would that be an accurate statement?
Andri Joubert: Yeah, exactly. That’s a very good point. The reality is if we look at where markets are at the moment, all-time highs, everyone is nervous, no one knows, are we going to be in for a five-year bull run? Are we misjudging inflation, rising debt levels in the US, uncertainty in Europe? There’s just a lot of uncertainty in the world in general. And with markets hitting all-time highs, people want to be in the market because they’ve tasted recent returns, but also they don’t want to necessarily go into the market and then experience a correction. So I think that’s where these products are very well-positioned in a portfolio and it forms part of an alternative asset class.
So it’s not for all your money, but it is very, very much important to have an allocation to such an asset class. And the idea is that if equities do well, you will participate in the upside with a defined return that we’ll discuss today. And if for some reason there’s volatility or instability or market correction, there’s a lever of market capital protection in these products and that’s also why we structured over a five-year term. If we see a short-term bull run, the product will pay out after one year. But if we don’t, you can wait for year two or three or four or five. I think it’s well-positioned in very uncertain times.
The Finance Ghost: Yeah, it is incredibly interesting. I mean, on a personal level I’ve really enjoyed learning about these structured products that we’ve covered on the various podcasts. And this is not the first time that we’ve seen the Nikkei225 come up in one of your structured products. I’ve done a podcast with Investec before on a product that was linked to the Nikkei225. And obviously Japan is all over the headlines these days.
You’ve mentioned the general level of markets, and we don’t necessarily want to go into the details of whether or not Japan itself is a great investment and the Investec house view on that, because obviously that’s something that investors – or would it be accurate to say that’s something investors need to believe going into this? It’s like, I want exposure to Japan, but I’m worried about where the index might be. Hang on, this is a cool way to get exposure to that index with the benefits of a structured product, ultimately. Is that the decision? And then ditto, obviously, on the EURO STOXX. Is that the mindset with which investors need to enter this product?
Andri Joubert: Yeah, 100%. So if you look at a typical South African investor, they are overweight emerging markets from a risk profile. They earn their money in South Africa, their property in South Africa. They probably own SA Inc. Their retirement annuities have an allocation to South Africa, so they typically invest in global markets and specifically the US. Now, most of them are overweight US. And we all know the US has seen a tremendous run recently, specifically driven by seven very big companies. And that, of course reduces diversification. Even though they think they are diversified, they’re not really, because there’s concentration risk in that allocation.
So by looking at Europe and by looking at Japan, it gives two unique opportunities that are not very correlated to the US, so it brings in diversification to that South African portfolio and it’s something the investor can buy – for instance, the Nikkei, which is a rand product that’s listed on the JSE – it’s something the investor can buy on their JSE stock broking account. It’s like having international equities in their SA Inc portfolio. And if he’s got an offshore custodian account, they can purchase the EURO STOXX 50 product, which is Dublin listed, which is 100% priced in dollars and offshore.
But we have seen a strong Nikkei rally recently. We still believe there’s value. Japan is expected to maintain a moderate recovery. Remember, it’s coming off a low base. There was many years of flat returns, negative returns, that’s coming off a low base. But there’s still measures to improve capital efficiency and the sector composition is focused more on heavy industry, manufacturing, strong semiconductor industries. So it’s more the hardware than the software the clients would have exposure to in the US allocation.
And the same with Europe. The European Central bank was the first bank to the first developed market bank to cut rates as inflation is starting to decline and that gives an opportunity. Relatively undervalued. If you look at US markets, they appear to be 15% to 20% overvalued. The eurozone definitely stands out as one of the few regions where valuations are below fair value. And the reality is, when you look at this product, you don’t need the market to run. So the product is structured in such a way that you only need this index to be at the same level on the day we trade, at the next observation date or higher. We’re not asking for a bull run. That’s why those two indices.
The Finance Ghost: Europe is interesting. I mean, you make some great points there about Japan and what’s in that index versus some of the US exposure. I always have a small laugh at the Magnificent Seven in the US – it’s basically six plus Tesla. I’m quite the Tesla bear as people know. But I still think it’s criminal that Netflix was kicked out of the Magnificent Seven, really in the place of Tesla.
But moving right on from that, because that’s not what we’re talking about today. What we are talking about is these indices. And I think in Europe, just an observation from my side that’s quite interesting from my recent travels to London. You speak to professionals operating in London and then you go and do some research on the London Stock Exchange and the number of listings. And they have got a lot of the same problems as the JSE, actually, which is quite interesting. And Brexit has really caused them some big issues in terms of attracting new listings. There’s kind of been this general shift in interest from the London exchange, I think, towards the European markets and therefore the European indices. It’s just quite an interesting underpin for the EURO STOXX index in general.
And something to keep in mind, because as we talked about earlier, investors need to go into this wanting to own that index and then effectively using the Investec product as a way to get some downside protection and potentially a nice kicker on your upside return. But you need to understand that you’re buying the EURO STOXX and you need to do the research to say, hey, that is what I want to own. Or the Nikkei225, that is what I want to own. And then go into a product like this.
Andri Joubert: You make a very good point. And also, it’s not just about owning the EURO STOXX or owning or having exposure to the Nikkei225. It’s about how do I diversify my concentration risk to what I have. And when you build a portfolio, ideally what you want is you want many different structured products within the alternative asset class that you invest in. Smaller chunk. When I say small, so let’s say an investor’s got R500,000 to invest on day one. Ideally you don’t want to put R500,000 – that is your only investable income – you don’t want to put all that into one product. I’d rather say, okay, let’s identify three products over the next year and you have the opportunity to diversify your indices, your currency, whatever the product tracks, the level of the market, just a different part of the cycle.
You want to build a portfolio with many different structured products within that asset class, giving you exposure to different indices and all those points just listed. And if you look at the general portfolio at the moment, as I mentioned earlier, overweight US for a typical South African. And that’s why these two indices offer great pricing opportunities and diversification and lower correlation to the rest of the portfolio, as opposed to just looking at a unique opportunity in the index. It’s more about how do I structure my portfolio better.
The Finance Ghost: Yeah, absolutely. These things are always part of a broader portfolio decision. I mean that is absolutely the right way to understand it. And actually, before we get into the mechanics of how the autocall works, etcetera, any portfolio decision always needs to take into account whether or not your money is being locked up for a period and what the liquidity looks like. Now, in this case we’ve got I think what’s called a Flexible Investment Note. And I’m keen to understand more about how that works. I mean, you referenced earlier that the Nikkei product would be listed, you can confirm if the EURO STOXX one is as well, but what does that actually mean for investors?
Because obviously when something is listed, people immediately think, oh, okay, not only would I be able to buy some down the line – and you can comment on that as well – but would I be able to sell early if life gets in the way, which life sometimes does. Despite everyone’s best laid plans, you can go through things like illness or divorce and then suddenly you need to free up money. I think let’s talk through the liquidity and then let’s get into the specifics on how these products actually pay out to an investor.
Andri Joubert: 100%. Both products provide daily liquidity. The JSE listed note, the Nikkei225, is structured as a flexible investment note. Investors would see in the term sheet there’s a 20-year term. But don’t be alarmed, it’s not a 20-year product. I almost want to say it’s a structure that allows investors that holds the note, or that buys the note, to, at the point of maturity, allocate capital quicker to the next issuance and reduce the time lag between the product expiring and reinvesting in a new product.
What happened at the moment or previously before we launched this flexible investment note is the product will pay out, cash will settle, trade plus five days in the client’s account. We would bring out a new product, show to the client, the cash will lie idle in the client stockbroking account, earning a money market interest rate, and then the capital will be reinvested. So how it’s going to work now is we’d go to investors and say, you invested in, let’s use the product that paid out on Monday, that example, you invested in an index, the product is up, it’s going to pay you 17%. It’s likely going to call in a week’s time or two weeks’ time. Would you like to reinvest the proceeds in capital or do you want to exit?
Then the client can elect and that money will automatically be reinvested in a new product, which greatly reduces the time in between maturity and reinvestment. And you can do that for 20 years. You will have five or six or depending how many times these products pay out and whether they run a five-year term or a one-year term, you can have many different variations of product within this 20-year note. If you decide to exit, you can exit at any time still. Still daily liquidity, Investec is the market maker. If you want to sell the product, if you want to sell your share today, we’ll give you a price, we’ll buy it back from you. And we have an active secondary market that we sell these shares in.
You asked about the offshore listed one. The EURO STOXX 50 product is also listed. It’s listed on the Dublin Exchange and that is also daily liquid. We provide investors with daily liquidity and daily pricing, so they’ll see a value of that product in the share trading accounts daily.
The Finance Ghost: Okay, fantastic. So it might be listed in Dublin, but your money can’t be doublin’, unfortunately, but it can go up. And I think the payout ratio is something that we should be talking to now. And I think the payout ratio is super interesting. You mentioned a little bit about it, now we’ll dig into it.
For those who have kind of been waiting for the “drumroll please” moment, it’s here. I won’t give you a drumroll. It’ll just be embarrassing. But what I will do is hand over to Andri to talk through, I guess, just how these payouts work. We need to cover the autocall tests and then what you actually get paid out. And I think maybe let’s bank that and then get into the capital protection and then the extent to which you can’t get capital protection, because obviously, with all the clever structuring in the world by the good people at Investec, they also can’t work a complete economic miracle. There’s no way that you can have upside and zero downside risk. This doesn’t exist in markets. It just doesn’t. I think let’s start with the upside and then maybe let’s talk through the capital protection and then the potential for losing money if things do go really badly.
Andri Joubert: We have two products, both five year terms. I’ll first talk about the rand product. So, the rand product, JSE listed, it tracks Nikkei225. Investors invest rands, they buy a share in rands and the product will pay out in rands. It tracks the Nikkei225 index from a point perspective. It doesn’t track it re: price to a certain currency. What happens is we trade. We’ll close this product on the 7th of August, we can touch on that now. We trade the product as an initial public offering on the 15th of August, and we look at the level of the market on that day. Let’s say the Nikkei, the index, on a point basis, is pricing at 40,075 points, which we saw yesterday.
That is the only observation for the client. You’ll look at that level of the market, you’ll log into Bloomberg or Google, type in Nikkei225, and you’ll see 40,075 points on the day that we trade. In a year’s time, if that index is pricing at the same level – 40,075 points or higher – the product will automatically call. And that’s why it’s called an autocall.
And there’s a defined return. That defined return is 17% at the moment. And I say at the moment because prior to trade date, there’s still different market dynamics that come into play. But conservatively, we can say clients can expect 17% traded per annum payout if the market is flat or positive. But let’s say the market is not flat or positive, and in a year’s time, the index is pricing at 39,000 points. Then instead of the product exiting, or the client incurring a loss or client getting their money back, you can wait for the following year.
And then on the 15th of August, in two years’ time, we look at the level of the market. If the market is 40,075 points or higher, the product will pay out 17% times two, because they were in for two years. Fast forward for five years. So they will have, in a five year term, five opportunities on the 15th of August for the market to be either flat or positive, for it to pay out. They cannot elect to stay. If the market is flat or positive, it pays out and we’ll bring them another solution. Or they can take their cash.
The Finance Ghost: Okay, that is super interesting. So before we jump onto the EURO STOXX one, earlier I said, well, maybe the best case scenario is you get your money back in a year and you get 17%. I guess it’s kind of debatable, right? Because actually, if you had a crystal ball, you’d say, well, give me my money back in five years and make me 17% a year for five years. That will be lovely, thank you. It’s not about which is the exact right outcome. It’s going to be different per investor and portfolio and what they’re looking for.
Basically, the upside here is in a given year, we wouldn’t expect the Japanese exchange to return 17%. That would be a very, very strong equity return. I mean, we can only dream of these levels in the JSE over any kind of extended period, let alone in a lower risk market like Japan. So there is a potential upside here that is better than you would typically see over the long term out of the Nikkei, right?
Andri Joubert: Correct. And you don’t need the market to run. The market can give you 2%, you’ll get 17, it can give you five, you’ll get 17, it can give you 0.01, you’ll get 17.
The Finance Ghost: And obviously, to qualify that statement, I guess, 17% in rands. I understand the test is in points on the index, but obviously, the payout – you effectively put in rands, you’re getting back rands. The Nikkei return that you would historically look at would be in yen, which historically has been a very nice, steady, stable thing. Not so much anymore. So that’s also an interesting thing to take into account. But from a rand perspective, you can compare that effectively to “what would you be able to get on local opportunities” and then take into account that Japan, well I would see it as a lower risk destination. Yes, there’ll be lots of debate right now around the macroeconomic trend in Japan, maybe, versus South Africa, actually. But on the whole, I think you just have to speak to someone who’s travelled to Japan, and I think we can all agree that the country is probably a little bit more stable than South Africa.
So that 17% in rand, then, does become appealing, especially when you consider that you do have capital protection on the downside, which is something you wouldn’t get if you just bought the index without any of the structuring. So maybe let’s chat through, what is that downside protection on the Nikkei product?
Andri Joubert: We provide capital protection in case of a market correction. If there’s a market correction and the index falls more than 30%, 40%, 50% within the five-year term, nothing happens. The client remains invested because the defined term is five years. So the market can drop 50% in year two, it can come back 20%, drop another 10%, come back 40. It doesn’t affect the product at that point in time.
The price the client will see in their stockbroking account will show the market is down or up, but it doesn’t force them to exit. They are only forced to exit once the product matures and pays out at one of the five observation dates or at the end. If on the last day the market is down 10%, the client will get their capital back. If it’s down 20%, they’ll get their capital back.
There’s a 30% barrier, so if the market is down more than 30%, the client is live in the market. So it’s as if they owned the market and they did not receive any dividends. So you go to a client, you say you can invest in the Nikkei today. You’ll have five opportunities for the Nikkei to pay you 17% per annum until the first date it pays out. If something goes wrong, you’ll have capital protection. If something goes wrong on the last observation date, and when I say wrong, more than 30% wrong, you will be live in the market. How does that sound?
Most clients would like that. There’s a level of capital protection, the market does not have to run, and you get a defined outcome. Clients need to be comfortable with the fact that there is capital at risk on the last day. But also having that barrier there allows us to give a better return. If you do not have a barrier and you provide a client with 100% capital protection, that 17% simple interest will be lower, and then it’s not as attractive. And it’s a risk that we’ve back tested and looked at, and it’s a risk that we think is justifiable for that additional upside.
The Finance Ghost: Yeah, and the point here is that if you’re going to go in and buy the Nikkei blind effectively, or live in the market, as you say – that’s quite a nice term, that’s a better term than mine, for sure – you’re going to own the index, and if it tanks, it tanks, you’re going to wear that. If it drops by up to 30%, you’re going to wear that too. And if it does its normal sort of upside, you’ve then got to ask yourself, well, what am I really giving up by being in the structured product? Because the structured product doesn’t just give you the downside protection, it also gives you potentially a nice leveraged upside.
I think it would be quite brave to say that from these levels, if you just go and buy a Nikkei ETF, that you reckon you are going to do materially better than 17% a year in rands over potentially up to five years. I mean, that is a very big call. And you’d have to look at it on a risk-weighted basis, right? I would never personally – and obviously, each investor would have to make their own decision – I would never look at the index and say, okay, I think I can beat that kind of return, risk-weighted, I don’t want the capital protection, I’m just worried about not giving up the upside. Give me the ETF. That sounds like a big call. Obviously, each investor must make their own decision, of course. But I do think that the profile of this instrument is interesting, it’s appealing.
Andri Joubert: It is very unique. And also it’s proven. We just had a product paying out, as I mentioned earlier, and that index didn’t give investors 17% or the dollar index didn’t give investors 11% in US dollars. It was quite a bit lower. You’re 100% right. With the EURO STOXX 50 product, there’s slight differences. The one difference is it’s not structured as a Flexible Investment Note. At the end of the product, when the product matures, at the end of the term, the product will cash settle in the client’s securities account or custody account. It’s 100% in US dollars. The capital protection is in US dollars and the potential payout is in US dollars. But it does offer a very attractive 10.25% US dollar return per annum until the first call date.
The difference here is the first call date is only after three years, not after one year. The EURO STOXX is not a typical index that will rally massively and correct quickly and rapidly. It’s a very mature market that includes value stocks, that pays high divvies, it includes your very well-priced banking and industrial sector companies. For that reason we’ve elected to have the first potential payout after three years rather, to give it time, also with the ECB that only recently cut rates, so we should start seeing that positive effect over time. But the clients will still be compensated per annum. If the product pays out after three years, if the index is up after three years, the client will get 10.25% in US dollars per year. It solves to 30.75% after three years.
And then if for some reason the index is flat after three years, or down, sorry, not flat, down, then the investor will have another opportunity, another observation date in year four and again in year five. With the EURO STOXX 50 dollar product, you have three bites at the cherry over a five year term, where with the Nikkei225 rand product you have five bites of the cherry.
The Finance Ghost: And just with that one being in dollars, so does that mean you need to already have your money offshore? This would be part of your investment allowance, your foreign investment allowance as an individual. Whereas the Nikkei product, I think you said it’s listed on the JSE and it’s rand. So there, it’s no issue, you’re not actually using up your allowance.
Andri Joubert: You can asset swap through your local securities account, you can chat to your financial advisor to assist you with that, or you can go direct and use that asset allowance. You have two options. You either asset swap, then the money has to come back, or you can just send the money offshore directly to that offshore custodian account, or with money already sitting offshore.
The Finance Ghost: Let’s get into some of the plumbing then, in the last few minutes of the podcast. Investment minimums, that’s always important. And I think to what extent can it be individuals, companies, trusts, just for people listening to this, if this has piqued their interest and they’re thinking about where they put this in their structures, what does that look like?
Andri Joubert: For the Nikkei225 rand product, the minimum investment is R100,000 and increments of R1,000 over that. And then for the US dollar product, the minimum is $6,000. Those are the two minimums. The closing dates are the 8th August. So it gives us just a bit more than a month. The way you can purchase it is on your stockbroking account. So any entity or person that holds a stockbroking account could purchase the share, because it’s a listed share. So if a trust has a stockbroking account, it can purchase the share for individual or company, it can purchase the share. It’s not limited to individuals.
The Finance Ghost: Okay, so I could go into my Easy Equities account – well, I’m sure it’s not quite as easy as going into my Easy Equities account because the – is the instrument listed already? I mean, would I be able to find the ticker on my brokerage app or whoever I trade with, I mean, with Investec or whatever the case may be. Is it there already? Or is it a case of contacting the broker?
Andri Joubert: You need to contact the broker because the structures are listed as an initial public offering, an IPO, so you won’t see it on your stockbroking account as a share that’s available to buy.
What I suggest is contact your financial advisor, tell them that you’ve heard about this product, you would like to invest. And if your advisor can’t help you or he doesn’t have access to these kind of investments, you can contact any one of our team that will put you in contact with an advisor. Typically the advisors have the experience to look at the portfolio as a whole, position it from a risk-return perspective, and just give realistic financial advice and also give their opinion on allocation, size, etcetera. We suggest working through an advisor to invest in these kind of products.
The Finance Ghost: Okay, fair enough. Yeah, look, that’s always the advice is go through an advisor. Not everyone has one, but it’s certainly always the advised route. If you’re going to go it without an advisor, then just understand the risks you are taking.
Last couple of questions. One is about risk. It’s always important to understand the credit risk that sits underneath these structures because they have derivatives and other kind of cool things in them. So where does the credit risk sit in this particular structure?
Andri Joubert: The products are issued by banks or by a bank. This product is issued by Investec Bank Limited.
Your absolute risk is Investec Bank Limited from a credit perspective. If you are not comfortable with Investec Bank or having your money invested with Investec bank, you shouldn’t invest in the product, because if Investec bank falls over, your capital is at risk, right. So no one, I mean, you have capital protection against market corrections, but the nature of these products and the risk inherent to it is credit risk.
To explain what level of risk that is, the articles represent general unsecured senior contractual obligations of Investec Bank Limited. The Nikkei225 only references Investec Bank Limited, and the EURO STOXX 50 references Investec Bank Limited and also Bank of America Corp. Bank of America being one of the biggest banks in the world, it is additional risk, but it’s not more risky in absolute terms. And we felt comfortable extending the risk to Bank of America Corp to enable us to enhance the return slightly.
Clients need to be comfortable with both of those institutions or both of those banks. Because if there’s a massive market – well, not market correction, but if there’s a run on a bank or, and it has happened before, but very low probability in our mind, capital can be at risk.
The Finance Ghost: Yeah, I don’t like to downplay risk, I think people who listen to me know that. But I think that if Investec and Bank of America go down, I think the least of your problems realistically will be your R100,000 sitting in a Nikkei product, because it means that the world has literally caught fire. That’s the way I think about these things.
Last question from my side, Andri. Just the fees involved in the products. We’ve talked about the returns, are those net of the money that Investec is making from this, bluntly? Obviously you guys don’t do this for charity and everyone knows that. So are those returns net of fees?
Andri Joubert: Correct. Yhe capital protection and the returns quoted today, 100% capital protection or being live in the market, or getting 17% after year one, or getting 10.25% US dollars after year one, is net of fees, right? Yhe way a structured product is structured, we provision for the fees in the structure. The financial advisor that sells the product receives a fee and the structuring house i.e. Investec Bank Limited will receive a fee, but it doesn’t affect the payout that the client will get. For financial advisors, with the Nikkei225 having its first potential call date after one year, we will pay them a 2% distribution fee in year one. If the product runs for five years, then there’s no fees in year two, three, four, or five. So effectively, it’s a 40bps per annum fee again, built in. And then with the EURO STOXX 50 autocall, the first call being after three years, we structure it paying 1.25% in year one, 0.75% in year two, and 0.75% in year three for the distributor, and then no fees in year four and five.
So very competitive from a fee perspective, you alluded to it being net fees. And there might be a stock broking account fee that your stockbroker might charge. Typically that’s R60 or R80 a month for the stock broking account. But that that’s not an investing charge.
The Finance Ghost: No. And you’re probably paying that anyway, because you probably have an account already if you’re listening to this. So I think, Andri, that basically brings us to a close. It’s been a great discussion. Some really interesting stuff, as usual. I’m super tempted, particularly on the Nikkei one, so I’ll go and do some more thinking around that. But thank you very much for your time. And I think as a closing comment, where do listeners go and find more information about these products?
Andri Joubert: Clients can go onto our website, it’ll be listed there. We will send out the official launch documents to all our distributors – most of the financial institutions that provide financial advice and that distribute these kind of products. I’d say best is just to contact your financial advisor or just go onto the Investec website and the product will be listed there.
The Finance Ghost: Fantastic. Andri, thank you so very much, and to Investec, and good luck with the product. I have no doubt that it will close successfully like the zillions of products you’ve done before. And I look forward to doing the next structured product discussion with you and the team.
Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:
The global nickel market is a mess – and BHP is being affected (JSE: BHG)
Western Australia Nickel’s operations are being temporarily suspended
The global nickel market is struggling with major levels of oversupply. Welcome to capital cycles and the pain they can inflict when too much capital flows into a particular service or product before demand has been fully established. When prices fall, supply must decrease as nickel miners choose to rather suspend operations than continue making losses.
This is exactly the case for BHP at Western Australia Nickel, where operations are being suspended from October 2024. BHP will review the suspension by February 2027, so they expect the oversupply to remain a problem for a while.
The transition period (i.e. the period of suspension) will cost BHP $300 million per year, so there’s no enjoyable way to deal with this problem. They have to follow a care and maintenance program and they are choosing to continue investing in exploration. They also plan to support the affected communities.
This pales in comparison to the $3 billion that BHP has sunk into Western Australia Nickel since 2020. Despite that capital investment, the expected EBITDA for the year to June 2024 is negative $300 million. Presumably they expect the losses to worsen, as that sounds a lot like the annual cost they’ve put forward for the transition period.
Every affected frontline employee will be offered an alternative role at BHP, so they are doing their best here to look after the staff.
The market hated the Bytes update at the AGM (JSE: BYI)
A 6.3% drop on the day wasn’t pretty
If you enjoy putting on a speculative long trade based on the share price that has dropped all the way down to a support level, I present you with a chart of Bytes:
The damage of a 6.3% drop in a single day was done by an announcement with just a few relevant sentences in it. At the AGM, the company gave an update on trading in the first four months of the year. Perhaps the worry is around the mix effect, with lower margin software revenue delivering much of the growth.
This is the challenge when a company is trading at a high multiple: any concerns are punished severely by the market.
Whatever the reason, the facts are that both Gross Invoiced Income and Adjusted Operating Profit grew by double digits, with Gross Profit growth in the high single digits. So yes, there is margin pressure in the revenue mix, but they still achieved double-digit growth in operating profit which is actually what counts.
It’s also important to note that Bytes makes its money offshore, so this is a rand hedge. A strong rand has a negative impact on the Bytes share price.
Insimbi releases the circular for the recently announced disposals and share repurchases (JSE: ISB)
This is basically the opposite of an asset-for-share transaction
Insimbi has released a circular that does just about everything except solve world peace. In one circular, they’ve covered the repurchase of shares from various associated shareholders representing 11.41% of shares in issue, as well as the disposal of two businesses.
But if you read closely, you’ll see that the deals are linked. This is because they are executing a deal that is the reverse of the usual asset-for-share acquisition. In those deals, a listed company usually buys assets and pays for them by issuing shares. In this case, the company is selling assets and helping the buyers pay for them by repurchasing shares from those buyers for cash.
It’s not quite that simple, as only a portion of the repurchase proceeds will be used for the acquisitions. Insimbi will part with R43 million for the repurchases and will receive R30 million back for the disposals.
The transaction cost for the deals comes to R2 million. It’s expensive as a percentage of the deal value, but perhaps not unreasonable for the level of complexity.
Showtime for the Pick n Pay rights offer (JSE: PIK)
Unsurprisingly, the underwriters really don’t want the shares
In a rights offer, you can tell a great deal about the capital raising strategy from the way that the deal is structured.
For example, in a rights offer where there’s a strategic shareholder who wants to mop up more shares at a discounted price, you’ll typically see a fairly modest discount on the shares and an inability to apply for excess applications. This encourages a situation where the demand for the rights offer is limited, so the underwriter can step in and buy a significant number of shares. In an illiquid stock where buying up a meaningful stake is difficult, this is a very effective way to build a large strategic position.
At Pick n Pay, the underwriters are the banks. They are basically there under duress, as they need to make sure that this systemically important company lives to fight another day. The banks have no interest in owning Pick n Pay shares over the long-term though, or even the near-term. Instead, they are hoping that the market will take up the shares.
How do you achieve this? Well, a rights offer price of R15.86 per share is a good place to start. This is a 32.48% discount to the theoretical ex-rights price per share as at 30 July. Perhaps the better way to think about this price is that Pick n Pay was trading at R40 a year ago. Before things started to go severely wrong, it was at R60. Today, the share price is a sad and sorry R27.50 at market close, with a 52-week low of R16.62 before the disappearance of load shedding and the GNU-phoria took over.
There are a couple of other strategies at play here, like the ability for shareholders to trade their letters of allocation. Even if they don’t want to take up the shares, they can sell the letters at a price that should reflect the difference between the rights offer price and the market price. This helps mitigate the damage from the dilution for shareholders who won’t follow their rights.
And as referenced earlier, excess applications are also part of this rights offer. Shareholders can apply for excess applications and hope that they get a decent allocation, which means buying up shares in excess of what their pro-rata amount would imply.
Like I said, the underwriters really don’t want these shares. As for the Ackerman family, they will follow their rights up to R1.01 billion. That’s a pretty big cheque to write, but I can’t see how they would’ve gotten any support at all to save Pick n Pay if they weren’t prepared to put more money in.
This process to raise R4 billion in equity capital is officially underway, with the circular to be sent to shareholders on Monday 15 July. If you are a Pick n Pay shareholder and you don’t want to follow your rights, then at least make sure you sell your letters of allocation. You also need to check how your broker operates in terms of the rights offer and how to go about following your rights – or not, as the case may be.
Either way, you cannot ignore this as a Pick n Pay shareholder. Make a note to read the circular on Monday.
In a separate announcement, Pick n Pay announced that CEO Sean Summers has been awarded shares worth R108 million based on the deemed award price of R27. He doesn’t get them all straight away and he might not even receive all of them. Here are the vesting conditions:
There’s almost nothing fluffier than a target like “an effective leadership and operational structure” – what does that actually mean? Sadly, Pick n Pay wasn’t exactly in a strong negotiating position here, so I’m not surprised that Summers managed to attach only 25% of the award to financial targets. To make 75% of the award, all he has to do is hire people and find a new CEO.
Sigh.
Schroder’s property valuations seem to have bottomed (JSE: SCD)
This supports my thesis that the property sector is a good place to play right now
Schroder European Real Estate Investment Trust has been struggling for a while now with property valuations moving the wrong way. This is what happens when yields in the market have kept rising. When the yield is higher, the value of the underlying asset is lower, all else being equal. This is why property is an appealing place to be when rates start to come down.
At Schroder, the great news is that values may well have bottomed. In the latest quarter, the direct portfolio was valued 0.1% higher. Although the office portfolio continues to be under pressure, the valuation increase in the industrial and retail sectors more than offset this impact.
It always come down to the individual property details of course, but the overall point I’m taking from this is that European values are starting to tick higher.
Schroder’s loan-to-value is 33% based on gross asset value and 24% net of cash.
Sirius had no trouble getting the capital raise away (JSE: SRE)
Raising £150 million in a day’s work is why being listed is powerful
As covered on the previous day when Sirius announced the capital raise, the fund has identified a further pipeline of acquisition opportunities in the UK and Germany and has gone to the market to raise the required funds. This, right here, is why companies like being listed on a stock exchange. Providing exit capital for shareholders is one thing, but the ability to raise a fortune from the public (or a select group of institutional shareholders – even better) is the real highlight.
In literally one day, Sirius’ advisors made a few phone calls and raised £150 million for the fund. They get this done at a discount of 3.5% to the closing share price on 10 July. A small discount is common, as you need to give the investors an incentive to support the capital raise. The discount is only 2.1% to the 30-day VWAP prior to 10 July.
The capital raise was supported by existing and new investors, which is also a sign of a healthy shareholder register.
Distinct from the private placement, UK-based shareholders are still able to participate in the subscription of shares via PrimaryBid, with a minimum subscription of £250 per investor. It’s a pity that Sirius opted not to make this offer available to South African investors.
After raising equity in November 2023 debt in May 2024, this is another sign of not just the appeal of Sirius to large investors, but the improving health of the property sector at large.
Little Bites:
Director dealings:
A director of Newpark REIT (JSE: NRL) bought shares in the company worth R576k.
It’s not worth delving into all the details, but be aware that several directors (including the CEO) of Sirius Real Estate (JSE: SRE) participated in the accelerated bookbuild.
Vukile (JSE: VKE) announced that Encha Properties sold its entire stake in Vukile, representing 4.6% of the company’s shares. They were sold at R15.50 per share in a placement run by Investec, representing a 0.8% discount to the 30-day VWAP before the placement was launched. The total value of the sale was R820 million and the sales were required to settle loan financing from Investec. In other words, the bank helped make sure its debts were paid by running the placement!
Sibanye-Stillwater (JSE: SSW) must have angered the ancestors. Having dealt with floods and a terrible market for PGMs, the company is now suffering a cyberattack. Presumably the locusts are next. I would love to include the link to the website, but it doesn’t work because of the attack!
Trustco (JSE: TTO) has noted that the circular for the various transactions underway will be issued to shareholders in due course. Vunani Capital has been appointed to provide the fairness opinion. For this reason, the cautionary announcement related to the transactions has been lifted. I will now revert to my standard approach regarding Trustco: caution regarding everything.
The business rescue practitioners of Rebosis (JSE: REA | JSE: REB) have been appointed to the board of the company as non-executive directors.
Rex Trueform will increase its stake in Telemedia to 88.71% by acquiring a further 25% interest, for R14,15 million in cash, from the company’s remaining minority shareholders (excluding African and Overseas Enterprises). Rex Trueform, together with its controlling shareholder AOE initially acquired an interest in Telemedia in 2020 through the acquisitions of a 63.71% and 11.29% stake respectively. The initial investment provided the company with an opportunity to diversify its investment portfolio to include a media and broadcasting segment.
Zeder Investments continued with its strategic review of its various portfolio assets as it seeks to maximise wealth for shareholders. Following the disposal of Theewaterskloof Farm in June, Zeder will now sell Applethwaite Farm (APL) to Vredenhof Beleggings, the beneficial owners of whom are the beneficiaries of the Sass and Emma Trust. The Farm is one of three primary farming production units that comprises CS Agri. The disposal consideration is R190 million plus the value of the agricultural inputs on hand and the 2025 seasonal costs already incurred. The value of the net assets comprising APL Farming Business as at 31 December 2023 (CS Agri’s last audit) was R255,6 million. The disposal constitutes a category 2 transaction and as such does not require shareholder approval.
Discussions between TeleMasters’ two largest shareholders and an undisclosed BEE company to acquire their shares in TeleMasters are ongoing. An offer is still to be made but if accepted the result will be a change in control of the company and a mandatory offer will be made minorities. The company has also released a cautionary notice saying it was in the early stages of issuing an expression of interest for an acquisition which would be substantial if concluded, requiring shareholder and regulatory approvals.
Nutreco, a Dutch producer of animal nutrition, fish feed and processed meat products, has announced its intention to acquire Chemfit Fine Chemicals, an AECI company trading as AECI Animal Health. The disposal is in line with AECI’s strategy to streamline operations and focus on its core competencies. Financial details were undisclosed.
The disposal by Accelerate Property Fund of the Cherry Lane Shopping Centre situated in Pretoria is proving to be a headache for the property fund. The sale has been terminated three times with different buyers since the R60 million sale was first announced in December 2023. Announcing the latest termination of sale to QSPACE announced a few weeks ago, the company said it was in discussions with other potential purchasers.
Unlisted Companies
Private equity firm Sanari Capital, which is women-led and majority black- and women-owned, has announced an R80 million follow-on investment in EduLife Group, a network of independent schools offering diverse and tailor-made education across the economic spectrum. The investment will be used by EduLife to build on its foundation in the Free State and expand its offering further in the Eastern and Western Cape and potentially in Gauteng. Continued demand in existing areas of operation will see part of the funding used to expand capacity in these schools.
South African mid-market private equity Investment firm Agile Capital has acquired a significant stake in Berry Astrapak for an undisclosed sum. Berry Astrapak is a specialised manufacturer of a range of rigid moulded, and thermoformed plastic packaging products serving the African market. The group has manufacturing operations in Gauteng, the Western Cape and KZN.
HOSTAFRICA, a Cape-based online solutions provider offering a broad spectrum of online solutions including websites, e-commerce platforms and VPS services, has acquired Kenyan company deepAfrica’s hosting assets. deepAfrica will remain a holding company for its construction and web design businesses. Its hosing assets hostpoa.co.ke and jijihost.com brands will be rebranded to HOSTAFRICA. Financial details were undisclosed.
Earlier this week Sirius Real Estate announced it would undertake a capital raise of £150 million comprising and institutional placing conducted through an accelerated book building process and a placing to select qualifying investors in South Africa. Sirius has successfully placed 159,574,468 shares at an offer price of 94 pence which represents a discount of c.3.5% to the closing price of on 10 July 2024 and 11.8% of the existing capital of the company prior to the raise. Sirius will also raise up to £2,5 million in terms of a conditional retail offer of new shares via PrimaryBid on its online platform. Sirius will apply the net proceeds of the capital raise towards executing on its acquisition pipeline. The company has identified high-quality assets of more than €100 million in Germany and in the UK which fit the acquisition criteria and have attractive net initial yields.
Pick n Pay has secured shareholder approval to undertake a R4 billion fully underwritten, renounceable rights offer. The Company has concluded a standby underwriting agreement with Absa Bank, Rand Merchant Bank and Standard Bank to underwrite the offer amount in equal proportions. Pick n Pay will offer 252,206,809 renounceable rights to subscribe for new Pick n Pay ordinary shares in the ratio of 51.11 rights offer shares for every 100 Pick n Pay ordinary shares held. The subscription price of R15.86 per share represents a 32.48% discount and will constitute c.33.8% of the company’ share capital. Proceeds will be used to recapitalise the company as will the net proceeds of the intended Boxer IPO.
Vukile Property Fund’s black economic empowerment investor, Encha Properties Equity Investments, has launched a secondary placement of 52,881,466 ordinary shares in Vukile at R15.50 per share representing a 0.8% discount to the 30-day VWAP as at 10 July 2024. The decision by Encha to dispose of the shares follows discussions with Investec, their funders, to pay down the amount owing under the loan and security agreement it has with Investec.
Orion Minerals has announced a share purchase plan which will provide shareholders with the opportunity to subscribe for new shares in parcels starting from A$165 (R2,000) up to a maximum of A$30,000 (R365,000). Funds raised will be used to progress the development of the Prieska Copper Zinc Mine and on infrastructure development for early production in respect of the Okiep Copper Project.
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 915,000 shares at an average price of £24.73 per share for an aggregate £22,6 million.
In terms of its US$5 million general share repurchase programme announced in March 2024, Tharisa has repurchased 11,695 ordinary shares on the JSE at an average price of R20.13 per share and 329,041 ordinary shares on the LSE at an average price of 84.50 pence. The shares were repurchased during the period 1 – 5 July 2024.
Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 1 – 5 July 2024, a further 4,091,604 Prosus shares were repurchased for an aggregate €135,17 million and a further 301,484 Naspers shares for a total consideration of R1,07 billion.
Six companies issued cautionary notices this week: Trematon Capital Investments, TeleMasters, PSV, MAS, Barloworld and Pick n Pay.
Climate-focused impact investment firm Wangara Green Ventures has announced an investment in Sommalife, an innovative social enterprise based in Ghana. Sommalife provides their digitised network of smallholder farmers with financial inclusion, reliable market access and land restoration services. The undisclosed investment will enable Sommalife to expand its operations, support more rural farmers and so increase its community impact.
HOSTAFRICA, a Cape-based online solutions provider offering a broad spectrum of online solutions including websites, e-commerce platforms and VPS services, has acquired Kenyan company deepAfrica’s hosting assets. deepAfrica will remain a holding company for its construction and web design businesses. Its hosing assets hostpoa.co.ke and jijihost.com brands will rebrand to HOSTAFRICA which will see the company become a leading domain provider in Kenya. Financial details were undisclosed.
Amsons Group, a family-owned conglomerate in Tanzania has made a hostile bid to acquire Holcim owned Bamburi Cement for US$182,89 million. The offer of $0.51 per share to shareholders of the Kenya’s largest cement company represents a 44.44% premium to the closing price on 10 July 2024.
Egyptian fintech arrangement platform EXITS MENA has announced a strategic joint venture with a consortium of Saudi investors led by the founder of Gotrah Ventures. Its expansion into Saudi Arabia will see it leverage opportunities to foster growth and drive innovation among startups and SMEs in the region.
Developed countries continuously seek growth and expansion into new markets, and Africa seems to be the right fit. For that reason, South Africa’s more sophisticated financial and banking sector allows foreign investors to see South Africa as a gateway into Africa; they want to invest in Africa through South Africa. On the other hand, some innovative South African companies want to expand and grow their businesses, but they realise that the South African market is too small. Those South African companies are again looking at developed countries for growth and expansion into new markets. For these reasons, one must consider the consequences of cross-border investment, whether inbound or outbound.
The Exchange Control Regulations govern the South African exchange control regime. While control over South Africa’s foreign currency reserves, as well as the accruals and its spending, is vested in the National Treasury, the Regulations are enforced by the Financial Surveillance Department (FinSurv) of the South African Reserve Bank (SARB), with the assistance of authorised dealers (the South African banks). As the name suggests, authorised dealers are authorised by FinSurv to deal in foreign exchange transactions. Their authority is limited to the transactions under the Regulations, read with the Authorised Dealer Manual. For any other transaction, South African residents must obtain SARB approval.
Key exchange control considerations for mergers and acquisitions between South Africa and foreign persons and entities are highlighted below.
The South African share acquisition
When a foreign person or entity acquires shares in a South African company, those shares are regarded as “controlled securities”, which are strictly controlled by the Authorised Dealers. Authorised Dealers exercise control over the shares owned by a foreign person or entity by placing a “non-resident” endorsement on them. While the requirement of endorsement applies equally to South African listed and unlisted companies, in practice, only unlisted companies’ shares owned by foreign persons or entities are endorsed as “non-resident”. Without the endorsement, the South African company will not be allowed to repatriate dividends to its foreign shareholders offshore, and they may not transfer the proceeds from the sale of controlled securities by the foreign person or entity abroad, nor credit it to a Non-Resident Rand account.
The foreign share acquisition
When a South African entity acquires shares in a foreign entity, it requires the prior written approval of the Authorised Dealer (or SARB for investments exceeding R5bn per entity per calendar year). For statistical purposes, the South African entity must acquire at least 10 per cent of the voting rights of the foreign entity. Once approved, the South African entity may increase its equity interest and/or voting rights, but when its interest dilutes, it must be reported to FinSurv via the Authorised Dealer. A South African entity investing offshore should also note that passive real estate investments focused on achieving long-term appreciation of asset values with limited day-to-day management of the asset itself are excluded from this dispensation. Where the Authorised Dealer is in doubt and/or the conditions noted above are not met, it will refer the South African entity’s request to invest offshore to FinSurv for approval.
When the South African entity decides to sell the shares in a foreign entity, the net sale proceeds must be repatriated to South Africa within 30 days from the date of the sale, under advice to FinSurv via the Authorised Dealer. In the specific instance where the South African entity sells its shares in a foreign entity to a South African third party, FinSurv’s prior written approval is required.
“Loop” structures
Before 1 January 2021, South African individuals and entities required the prior written approval from FinSurv to invest in South Africa through a foreign structure. For example, a “loop” structure is where a foreign trust with South African resident beneficiaries holds shares in a South African company (South Africa – Foreign Trust – South Africa). Another typical example is a foreign company with South African shareholders and a South African subsidiary.
Now, South African individuals and entities with authorised foreign assets may invest in South Africa through a foreign structure, provided that the investment is reported to the Authorised Dealer when the transaction is finalised, and it must be accompanied by an independent auditor’s written confirmation (or suitable documentary evidence) that the transaction is concluded on an arm’s length basis and for a fair and market-related price.
Once reported, the South African target entity must submit annual progress reports to FinSurv via the Authorised Dealer.
Remember
Exchange control compliance should form part of every legal and regulatory due diligence check for any cross-border merger or acquisition, as South African residents may face hefty penalties for contraventions of the Regulations. Therefore, exchange control compliance must form part of the legal and regulatory due diligence check to ensure that unregularised transactions are regularised by FinSurv.
Megan Landers is a Senior Manager: Cross Border | AJM Tax.
This article first appeared in DealMakers, SA’s quarterly M&A publication.
The market for private credit or private debt has ballooned in recent years, and Catalyst caught up with Edmund Higenbottam, principal at Verdant Capital, to find out what’s driving this, and whether that balloon is at risk of popping.
Verdant Capital is a leading investment bank and investment manager, operating on a pan-African basis and specialising in private capital markets. It boasts offices in Johannesburg, Ebene, Accra, Harare, Kinshasa and Frankfurt, and Higenbottam was instrumental in establishing its hybrid fund.
“It’s a fund of about US$40 million or R800 million, and we invest sectorally, in financial services, alternative credit and digital finance, with a broad mandate in terms of the investment types that we make,” explains Higenbottam.
“In terms of the investment sizes, we do junior debt with credit enhancements, all the way through to structures which are preferred equity or senior equity.”
In recent years, a quiet transformation has been reshaping the private equity industry. This change is led by the robust growth of private credit, an asset class that, until recently, was overshadowed by more traditional forms of credit, such as bank loans and public bonds. Today, the market for private credit in the United States has swelled to rival the size of the publicly-traded, junk-rated corporate bond market, reaching an estimated $1,3 to $1,6 trillion.
Private credit refers to debt that is privately originated and is not traded on any public market. This financing option encompasses a variety of debt types, including direct lending, opportunistic debt, distressed debt, and real estate financing. It typically involves loans that are not mediated by banks and are often unrated by major credit rating agencies.
Private credit presents a different appeal to both borrowers and investors. For borrowers – especially those backed by private equity firms – private credit offers certainty of execution, less complexity in deal structuring, and a relationship-driven approach that allows for more bespoke financing solutions.
Until recently, private credit and mezzanine debt was a niche asset class globally.
“It’s almost like the unsexy bit of private equity,” reckons Higenbottam, “and the Barbarians at the Gate, where the big buyout shops had all the glory and all the reward; but I think that’s actually changed.”
Higenbottam sheds light on why this market segment has not only survived, but thrived, even amidst rising interest rates – a scenario that traditionally signals caution for credit markets.
According to Higenbottam, the resilience of private credit can be attributed to its structural advantages over syndicated markets. The personalised, relationship-based nature of private credit deals provides more direct communication and flexibility between lenders and borrowers. This setup often leads to better outcomes in terms of default rates and recovery rates during economic downturns, as was evident during the COVID-19 pandemic.
“15 years ago, private credit was just mezzanine. But now we see a variety of different strategies sectorally, also in terms of layers in the capital stack. The big asset class in private credit today is senior and stretch seniors, not mezzanine anymore. And that, in itself, is very interesting. To some extent, that’s the funds competing with the banks.”
Higenbottam touches on one of the main drivers of this tectonic shift in private equity markets: changes in bank regulation.
Largely, the air inflating the ballooning private credit market has been by design of the regulators. Post the 2008 global financial crisis, regulators wanted to squeeze out a lot of the riskier stuff from the banks’ capital structures and into the so-called shadow banking market, which includes things like Business Development Companies (BDCs) and private credit funds.
BDCs are publicly traded entities, focused on lending to and investing in private businesses. Established to promote investment in small and mid-sized firms, BDCs open doors to private credit markets. A standout advantage of BDCs is their inherent liquidity. Unlike traditional private credit funds, which often have multi-year lockup periods, BDCs are listed on major stock exchanges and can be traded daily. This grants investors the ability to modify their positions in response to market changes, personal financial needs, or altered investment tactics.
The surprising thing, to some extent, is that private credit has continued to grow, even as interest rates have surged, defying many people’s expectation that this nascent market would suffer once the era of “loose” money came to an end. Instead, the market for private credit in the US now rivals the size of the market for publicly-traded, junk-rated corporate bonds.
Higenbottam believes that the regulators have been correct in forcing this sort of credit extension into the hands of private investors and away from banks, who are responsible to depositors as much as shareholders.
“I do think that there are massive societal issues of deposit-taking institutions with implicit sovereign guarantees playing in risky asset classes, and we saw that in the great crash in 2007, 2008. We’re living in a world today where regulation of deposit money banks in the US and in Western Europe is relatively tight, and so it should be.”
In Africa, specifically, private credit has grown while the rest of the asset class has contracted, and Higenbottam believes it’s because private credit has developed a track record as a higher return asset class than equity funds, with less volatility between the vintages, less variance between the managers, and less volatility around tenor.
“And that’s also been an issue in private equity in Africa; it’s not just returns, and [returns] being perhaps a little bit underwhelming… there’s been term extension, there’s been limited control over tenor, so private credit has grown,” explains Higenbottam.
He concedes that private credit globally has moderated with rising interest rates.
“We see that with some of the firms’ funds with a global mandate or global emerging market or a global south mandate, we’ve seen liquidity in some of those, particularly the senior funds, become less liquid. We’ve seen little outflows, whereas in the last few years, they’ve had big inflows.”
For investors, private credit offers attractive yields and a diversification option that is less correlated with broader market fluctuations. These investments are typically structured with floating rates, providing a hedge against rising interest rates, while delivering consistent income. Additionally, the illiquid nature of these loans commands a premium, albeit at the cost of reduced liquidity.
However, the illiquidity of private credit also contributes to its stability. Since these assets are not marked-to-market as frequently as publicly traded securities, they do not exhibit the same volatility, providing a buffer during market dips, but also masking potential underperformance until a financial distress event occurs.
As banks respond to the competitive threat posed by private credit, some have begun to establish their own direct lending platforms. Nonetheless, the direct lending market is expected to continue expanding, driven by the ongoing need for refinancing as large volumes of syndicated loans reach maturity.
There is a rumbling in the market that, globally, regulators might start to take a closer look at the private debt market and this regulatory arbitrage question between the banks and private credit. But despite potential regulatory scrutiny as the market grows, the fundamentally conservative structure of many private credit investments – like those structured within (BDCs) – places them on a more stable footing. BDCs, for instance, are limited in how much leverage they can incur, offering a built-in protection against over-leveraging.
While some believe that the balloon doesn’t appear to be in danger of popping any time soon, driven by its ability to offer reliable returns and structural advantages that benefit both borrowers and lenders, worrying signs lurk on the horizon, especially in the US.
Currently, corporate interest costs as a percentage of net income are just 9.1%, the lowest since 1956. By comparison, this percentage was as high as 60% during the Global Financial Crisis.
Why is it so low right now?
Most businesses have locked in debt at fixed rates, making them temporarily immune to rising interest rates. However, over US$1 trillion of debt is maturing within the next 12 months, which will be refinanced at much higher rates. Therefore, businesses will soon feel the pain of higher rates.
As the market continues to mature and evolve, private credit faces its sternest challenge yet.
Michael Avery, is the editor of Catalyst
This article first appeared in Catalyst, DealMakers’ quarterly private equity publication.
Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:
Plenty of tin at Alphamin (JSE: APH)
The company has achieved record quarterly production
It was a good day to be an Alphamin shareholder on Wednesday, with the share price closing 4.4% higher on the news of record quarterly production. Compared to the immediately preceding quarter, tin production increased by 28%.
Although ore processed increased by 52% to achieve that number, highlighting an efficiency risk around reduced tin grade, the overall growth is obviously excellent. Oddly, tin sales actually fell by 21%, with the company expecting to clear out the increased tin stocks in the third quarter. It’s also worth noting that the preceding quarter was abnormally high for sales as they were clearing a backlog from Q4 2023 when the roads were damaged.
This is why EBITDA is only 4% higher than the previous quarter, despite the average tin price achieved being up 20%.
Based on this, Q3 should be very strong provided tin prices hold up.
Sirius is tapping the market once more (JSE: SRE)
When the institutional investor ducks are quacking, property funds like to feed them
Successful property funds are capital raising machines. The business model is quite simple, really. They invest in properties and return the cash profits to shareholders in the form of a dividend yield. Where possible, they recycle capital by selling properties at great prices and buying at low prices. If they get this right for a long enough period, the market throws money at the management team to do it at scale.
This is how a healthy market operates. What goes wrong is when the market starts doing this with almost any management team regardless of the track record or intended use of funds. At that point, you’re in a bubble.
The best funds will inevitably raise just as the cycle starts to turn positive, as they have the best chance of attracting capital. This is why it’s so interesting to note Sirius raising capital once more, this time to the extent of £150 million from institutional investors. This comes after a raise of £147 million in November 2023 to fund an acquisition pipeline in Germany and the UK.
The acquisition criteria applied by Sirius still focus on UK and German assets, with an identified pipeline of two assets in Germany and three in the UK.
The latest raise is an accelerated bookbuild process for South African investors, a wonderful throwback to the glory days on the JSE for property stocks. There is a process for retail investors to get involved, but frustratingly only on the UK register to the extent of £2.5 million. The accelerated bookbuild will be wrapped up within a day of the raise being announced, while the retail raise will take a couple of days.
In the announcement, Sirius doesn’t miss the opportunity to point out that the fund acquired 58 assets between 2014 and 2024 at a blended net initial yield of 6.3%. They’ve achieved significant improvements in the portfolio across rentals, net operating income and occupancy levels, which is what Sirius is known for. They disposed of 14 properties over the same period for a total of 67% more than they paid for them.
Tharisa’s production was up in the third quarter (JSE: THA)
On a nine-month basis though, production has moved lower
Tharisa announced its production for the third quarter. Before you question everything you know about the months of the year, remember that this is the third quarter of the financial year, not the calendar year.
Production moved slightly higher quarter-on-quarter, up 4.5% vs. the second quarter. If you look over the nine months though (on a year-on-year basis), production was actually down by 5.4%.
This pales in comparison to the disaster that is PGM prices. For the nine-month period, they have plummeted by 34%. There’s nothing Tharisa can do about this obviously, but it’s worth reminding investors about the state of play for PGMs. As an encouraging story, prices increased 3.6% quarter-on-quarter. Tharisa reports the prices in dollars.
Thankfully, chrome production is up quarter-on-quarter (1.9%) and for the nine months (9.3%). Prices also moved in the right direction, up 8% quarter-on-quarter and 14.3% for the nine months.
The balance sheet is strong, with a net cash position of $92.2 million, up from $70.6 million at the end of March 2024. They are using the weak market conditions to execute a share buyback programme, which speaks to capital allocation maturity.
Little Bites:
Director dealings:
A director of a major subsidiary of Stefanutti Stocks (JSE: SSK) bought shares worth R45.5k.
Rex Trueform (JSE: RTO) is increasing its stake in Telemedia to 88.71% through an acquisition of 25% in the company from various minority shareholders. This decision is based on the strong performance of Telemedia since the initial stake was acquired in 2020. For Rex Trueform, this investment diversifies its portfolio to include a media and broadcasting segment. The purchase price payable to the vendor is R14.1 million in cash. As a whole, Telemedia made a profit for the 11 months to May 2024 of R11.4 million.
Barloworld (JSE: BAW) has been trading under cautionary since April. The company has renewed its cautionary and at this stage, there’s still no information on the nature of the underlying discussions that could impact the share price. We don’t even know if it relates to a disposal or acquisition.
Following the resignation of the managing director of Metrofile’s (JSE: MFL) South African business, the CFO of the group will be stepping into that role on an interim basis as an additional set of responsibilities. It’s never ideal when a company can’t promote from within to fill a vacancy.
Tongaat Hulett (JSE: TON) has released a circular to the shareholders related to the approved business plan. This is a requirement for the Vision Investments equity subscription to go ahead, as Vision would own around 97.3% of the company after the subscription. The threshold that triggers a special resolution is an issuance of more than 30% of shares already in issue, so goodness knows the transaction smashes through that barrier. If you have an interest in reading a circular that is so strongly linked to a business rescue plan, you’ll find it here.
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