In this piece, Tivon Loubser of Twelve B Fund Managers comments on the ongoing need for solar investment in South Africa and how investors can participate through Twelve B Energy Fund II. For more information on how the team approaches solar, this recent podcast with Tivon is highly recommended:
In the wake of our politically motivated load shedding sabbatical, we seem to be back on track for what has become status quo (albeit under a different guise – Load Reduction). While it would not have come as a surprise to anyone, it does reiterate the dire position of our energy crisis.
In what has been a trying time for South Africa, characterised by little to no growth in our economy, it is tough to find the silver linings. In this case the one silver lining that does come to mind, is the 125% SARS-approved Section12BA tax allowance, and the resulting investments into renewable energy-generating assets. This has served as a catalyst for South Africa’s transition to a low carbon economy, while also reducing reliance on the failing power grid. At the end of 2023, South Africa had an installed capacity of just under 8GW, which accounts for almost 50% of installed capacity on the continent.
A lot of this stimulus has come from foreign direct investment, as well as the private capital markets. In the private market space, at Grovest we pioneered Section 12BA investments through the Twelve B Green Energy Fund. Not only has this made investing in solar accessible to retail investors, but it has also provided a mechanism for businesses and body corporates to finance solar installations at their premises through Power Purchase Agreements (PPAs).
Investing in solar
Investing into the Twelve B Green Energy Fund enables taxpayers, including individuals, trusts, companies and pension funds, to invest in a portfolio of renewable energy-producing assets and benefit from the Section 12BA tax incentive. The Fund also offers bi-annual income distributions, an average annual cash yield of 14.22%, and a targeted IRR of 18%.
There are a number of important caveats to the 12BA allowance. In order to claim the allowance, the money must be invested into renewable energy-generating assets during the period of assessment. Therefore, it is very important to do your homework when choosing which Section 12B fund to invest in. Make sure the respective fund has sufficient deal pipeline to deploy all the raised capital. It is also important to ensure that the fund is using reputable solar installers (Engineering, Procurement and Construction companies – EPC’s). As the solar industry is currently a gold rush, more and more ‘fly by nights’ are popping up, which has resulted in subpar installations, and installations which poser a major fire risk.
Twelve B Green Energy Fund I successfully closed at the end of 2023, and all monies raised were successfully deployed, enabling all investors to claim their full 12BA allowance. Our Fund I portfolio consisted of 10 different projects, creating a strongly diversified portfolio.
Fund II: 30 June closing date
Fund II is closing on the 30th of June, and operates on the same premise as Fund I. The big difference is that we have expanded our network of vetted EPC partners. Extensive due diligence is done on all the prospective EPC partners, ensuring they have all the necessary industry accreditation and a strong track record.
The existing Fund II pipeline is well in excess of R200m, with a number of blue chip off-takers. This bodes well for Fund II, and ensuring all the raised capital is deployed. This is imperative considering the 12BA allowance is going to be sunset on the 28 February 2025.
Further to the financial returns, and the lucrative tax allowance, one of the reasons we at Twelve B are so passionate about this investment is the tangible impact it is having on South Africa. To date we have had countless success stories of businesses and homeowners experiencing increased efficiencies due to the solar installations.
This article includes forward-looking statements which have been based on current expectations and projections about future results, which although the Fund Manager believes them to be reasonable are not a guarantee of future performance.Twelve B Fund Managers (Pty) Ltd is an approved juristic representative of Volantis Capital Proprietary Limited, an Authorised Financial Services Provider FSP No 49836.
This article is not a recommendation by The Finance Ghost regarding this project. Please do your own research and speak to your financial advisor as part of any investment decision.
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Ethos will pass the Brait hot potato to shareholders (JSE: EPE | JSE: BAT)
There is very little love for Brait in the market
In a voluntary NAV update, Ethos Capital announced that the net asset value per share has increased by 1.8% over the three months to March, now at R7.44. The share price is R4.25, so the shares trade at a significant discount to NAV per share – a common problem in the market for investment holding companies.
The unlisted portfolio contributed a R0.55 increase in NAV and the listed portfolio suffered a R0.22 reduction thanks to the sell-down in Brait.
Ethos has decided to unbundle Brait ordinary shares as part of the “value unlock” for shareholders. It’s just a pity that there isn’t much value. RMB has agreed to amend existing covenants and extend debt facilities until February 2028, when proceeds from the Brait exchangeable bonds will reduce that facility.
The group is also unwinding the Black Hawk Private Equity structure, which is held by non-executive directors of Ethos and their associates. The shares will be sold back to Ethos for nil consideration, as there is debt associated with the structure. Ethos shareholders are stuck with the guarantee in respect of that debt.
I like my money, which is why I keep it far away from Ethos and Brait.
After eight years, Peter Hayward-Butt is resigning as the CEO of Ethos. Over that period, the share price has lost 55% of its value. Anthonie de Beer will take over as CEO.
Concerning metrics in Hyprop’s local portfolio (JSE: HYP)
I get so irritated by the silly things that local management teams have to focus on – like water!
Travelling abroad is a wonderful thing, but it definitely elevates your frustrations with things that don’t work in South Africa. When a property group has to include a paragraph about initiatives for backup potable water in the most important province in South Africa, it really is time to hold our politicians to much higher standards.
Property funds in the UK and Europe aren’t stressing about where the water will come from, that much I can assure you.
Leaving the basics aside, Hyprop took a risk with the Table Bay Mall acquisition (especially at the price they paid) and the dividend suffered for it. They blamed the Pick n Pay issues for the lack of dividend, but Hyprop was the only fund in the market to take that route, so I suspect it was more of a convenient excuse against the backdrop of the balance sheet pressure from the Table Bay Mall deal. Although the mall is in a fast-growing area of Cape Town, I still worry that they’ve overpaid for it. The deal was paid for with R500 million in available cash, R250 million from revolving credit facilities and R900 million from the issuance of DMTN bonds. The group loan-to-value ratio is up from 37.4% at December 2023 to 40.2%.
Looking at the South African portfolio as a whole, tenant turnover only increased by 2.1% year-on-year for the five months to May. This is despite a 5.7% increase in footcount. We are walking around in the malls it seems, but we aren’t buying enough. As a further concern, trading density (sales per square metre) fell in both April and May on a year-on-year basis, as did tenant turnover. That’s not the trend you want to see.
Although they are achieving positive rent reversions in the local portfolio, that situation will change if tenant turnover growth doesn’t turn positive again in the aftermath of the elections.
Compare this to the Eastern Europe portfolio – a land of reliable water supply and consumers with some disposable income. With only a 0.5% increase in footcount, there was an 8.7% increase in tenant turnover. These numbers are based on the four months ended April. Unsurprisingly, there are positive rental reversions in that market.
In the sub-Saharan Africa portfolio, Nigeria has been severely impacted by the devaluation of the naira. The political climate in South Africa is full of people arguing that “the markets” don’t matter and that we don’t need a business-friendly GNU. Well, here’s life on the ground when the markets go against you:
Ghana isn’t doing much better, unfortunately.
As a further challenge in Nigeria, the Ikeja City Mall sale didn’t meet the conditions precedent. Hyprop has signed a letter of intent with another party for the entire sub-Saharan Africa portfolio. Fingers crossed.
A dividend for the full financial year will be considered by Hyprop. With not a single mention of Pick n Pay in the pre-close update, that excuse has hopefully run its course now.
A flat profit performance at Invicta (JSE: IVT)
This is despite decent revenue growth
For the year ended March 2024, Invicta reported revenue growth of 7%. That sounds like it should lead to a great result at profit level, but profit was actually 0.5% lower for the year.
One of the reasons is that selling, administrative and distribution expenses were up 10%, with 400 basis points attributable to the acquisition of Imexpart Limited. There were also some asset impairments in this financial year.
A major factor was the significant jump in finance costs from R131 million to R177 million, more than offsetting the growth in equity accounted earnings from Kian Ann, which increased from R152 million to R172 million.
Although HEPS fell by 4% to 470 cents, the group also reports sustainable HEPS with further adjustments for non-trading items. This metric was up 5% to 488 cents, which is why the dividend also increased by 5% to 105 cents per share.
Jubilee is acquiring two more copper assets (JSE: JBL)
The copper strategy in Zambia is going well
Jubilee has significantly increased its copper resource base through two transactions to acquire copper resources that are currently in production (Project M and Project G). The combined value of the deals is $3.85 million. Only $0.25 million is settled in cash, with the rest paid for through the issuance of new Jubilee shares at a 30-day VWAP.
It’s great to see smaller companies being able to use their shares as acquisition currency, as this is one of the key reasons to be a listed company. This is made possible by what the company is achieving in initiatives like the Roan Upgrade.
Jubilee is pushing hard on what it calls its Integrated Copper Strategy in Zambia, which allows for targeting of copper resources ranging from tailings through to near-surface copper reef that is accessible through open-pit mining.
Kore Potash isn’t across the line with PowerChina yet (JSE: KP2)
This is anything but an easy negotiation
Negotiations where so much is on the line are always tricky. Both Kore Potash and PowerChina are heavily invested in the Kola project, with the latter having spent considerable time and resources in putting together the Engineering, Procurement and Construction (EPC) proposal. Of course, for Kore Potash, they are committed rather than just involved in the project. It simply has to work for them.
After meetings in Beijing in May, further important issues were raised around completion and performance guarantee tests. This is because the goal is to achieve a fixed price contract with only minimal variations. This puts the risk on PowerChina. If you’ve followed the South African construction industry, you’ll know that a single bad contract can sink an entire company, so it’s understandable that the parties are taking their time to get this right.
A follow-up meeting has been planned for July 2024.
Another interesting development is that PowerChina has expressed interest in operating the mine after construction, with a draft operating proposal expected to be received in July.
As soon as the EPC is finalised, Kore Potash will need to move forward with raising funds from the Summit Consortium.
The market hated the uncertainty in the news, with the Kore Potash share price closing 22% lower on much higher volumes than an average day of trade, so that wasn’t because of an isolated trade.
The flowery language continues at Orion Minerals (JSE: ORN)
Sometimes it sounds like they are selling tickets to a show
It’s very unusual to see emotive language on SENS. Companies shy away from words like “exceptional” and “outstanding” and with good reason. The use of hype words can turn against you very quickly if things go slower than expected, or aren’t quite as outstanding as was promised.
Nonetheless, Orion has referred to “More Outstanding Hits” – which sounds like a Saturday radio show – at the Okiep Copper Project. Basically, they are excited about the drilling results coming through.
Interestingly, the company notes a slow turnaround time from local laboratories, which gives an idea of the activity in the copper exploration space.
Orion is working to complete the Bankable Feasibility Studies. As the name suggests, these are needed to move forward with financing and further development activities.
Profits have declined at PBT Group (JSE: PBG)
The share price has come a long way off its highs
The PBT Group share price is a good example of why patience can pay off in the markets. Before the pandemic, nobody knew anything about this company. It then exploded onto the scene (and I think launched my career as a ghost to be honest, as writing on this company landed me my first Financial Mail opportunity). After excellent results during the pandemic, reality set in about the sustainable growth prospects and the share price washed away:
In a trading statement for the year ended March, the company has advised that normalised HEPS from continuing operations will be down by between -13% and -7.6%. This is because revenue growth is between -0.1% and 6.1%, with EBITDA expected to be -8.4% to -2.7% lower.
The normalisation adjustment always took into account the treasury shares related to the BEE structure. Those shares have subsequently been classified as ordinary shares in issue, so HEPS from continuing operations without the normalisation adjustment fell by between -26.1% and -21.5%.
The highlight is cash generated from operations, which increased by between 1.2% and 7.5%.
The discontinued operation is PBT Australia, which was disposed of on 30 September 2023.
The PPC CEO doesn’t mince his words (JSE: PPC)
There’s proper tough talk here
If you read PPC’s high level results for the year ended March 2024, you really wouldn’t think that there’s anything to be worried about. After all, revenue is up 20.6%, EBITDA margin expanded by 160 basis points and HEPS swung from a loss of 20 cents to a profit of 19 cents. Bliss, surely, especially when you consider that there’s a dividend of 13.7 cents?
The newly appointed CEO thinks otherwise, noting that “problems are pressing” and that a “meaningful organisational reset and tough decisions” are going to be necessary here. I’m very glad that PPC doesn’t pay my salary, then.
The wording is quite incredible really, with the growth in revenue in the South African and Botswana cement business described as being “marginal” – despite being +5.2%. Materials business did see revenue drop by 6% though. It’s also worth noting that the revenue growth in cement was driven by pricing increases, as volumes were negative.
Of the R502 million increase in trading profit, Zimbabwe contributed R395 million. CEO Matias Cardarelli will clearly be focusing on improving things in the local business, which is exactly why he was the chosen successor. PPC faces major market headwinds like slow economic growth and the problem of imports, so he has his job cut out for him.
Still, I can only admire someone who recognises the problem instead of pretending that it isn’t there. We have far too many executives on the JSE who have become accepting of mediocrity.
I like the new CEO and it will be interesting to see where this story goes
Naspers and Prosus have released results for the year ended March 2024. The group has achieved eCommerce profitability in the second half of the financial year, which is a big deal. They are well ahead of the commitment to be profitable in that business in the first half of the new financial year. The fact that the announcement starts with a note on profitability tells you that the winds of change have blown strongly in the group.
Here’s another indication of the changes: the group invested $571 million in M&A in the year, way below the peak of $6.3 billion in 2022 when the previous CEO was all about tight shirts and loose deals. Management is now trying to rectify significant underperformance in the past couple of years, which is what happens when you deploy most of your capital at the top of the cycle. They have $16 billion in capital on the balance sheet, so discipline with that money is key.
I always like to look at the Naspers results specifically to see what’s going on with Takealot Group, which includes Mr D. For this period, gross merchandise value increased by 3% and revenue was up by 8%. Mr D was profitable for the first time, with a trading profit of $3 million for the year. As for Takealot, it reduced losses by $4 million but still isn’t profitable. I also look at Media 24, which suffered an impairment of R280 million in this period as performance is below expectations.
The offshore assets are obviously where the real value lies in this group.
RCL Foods will let Rainbow go on a high (JSE: RCL)
A trading statement shows that Rainbow has been a helpful contributor in this period
With the unbundling of Rainbow by RCL Foods coming up on 1 July, RCL has released what will be its final trading statement that includes references to Rainbow.
For the year ended June, RCL Foods expects HEPS from total operations (including Rainbow) to be at least 75% higher than the prior period. Rainbow has been a major driver of that performance, as has the grocery business which has enjoyed the demise of load shedding in recent months. The sugar business is also doing well. Baking is facing volume and margin pressures though in an extremely competitive environment.
The announcement notes that Rainbow’s trading performance in the second half of the year was broadly in line with the first half, with an interesting comment that retail and wholesale volumes increased while quick-service restaurant volumes softened. It seems that South Africans are eating at home more often, presumably a combination of affordability and the abundance of electricity. Although feed costs increased in the second half of the year and volumes were under pressure in the external feed business, Rainbow navigated this with lower input costs thanks to breed performance and cost control measures as part of the turnaround strategy.
Little Bites:
Director dealings:
Various top Nedbank (JSE: NED) executives sold shares in the company worth over R31 million.
The CEO of Mr Price (JSE: MRP) received share awards and promptly sold the whole lot for over R19 million. The CFO took the same approach to the value of R2.6 million, as did the company secretary to the value of R1.8 million. The company secretary also sold additional shares worth R56k.
The former CEO of The Foschini Group (JSE: TFG) has sold shares in the company worth R25.8 million.
An associate of directors of Astoria Investments (JSE: ARA) bought shares in the company to the value of R4.4 million and entered into a CFD trade with a value of just under R5 million.
A director of a major subsidiary of Novus (JSE: NVS) received share awards and sold the whole lot for R973k.
Various directors of Anglo American (JSE: AGL) were happy to receive shares in lieu of fees for services rendered, with a total value of around R700k.
A director of Copper 360 (JSE: CPR) acquired shares i the company worth R22.5k.
Adrian Gore has entered into replacement hedging transactions over Discovery (JSE: DSY) shares. There are two distinct tranches. The first is a put – call structure expiring mid-2025 at prices of R113.1836 and R168.5769 respectively. The second is a similar structure that expires in March 2026 at prices of R114.3028 and R184.9017. These structure protect against downside below the put price and give away upside above the call price. The current share price is R135. There are 3,000,000 options in total, so the nominal value being hedged is just over R400 million at current prices.
Trustco (JSE: TTO) has agreed a share repurchase with University of Notre Dame du Lac in the US, which holds 12.8% in Trustco, 0.7% in Trustco Resources and 8.65% in Legal Shield. Each of those entities will repurchase their respective shares from the university. The aggregate value is $5 million. This is a related party deal, so a circular with an opinion by an independent expert will be sent to shareholders in due course.
Tiny little Visual International (JSE: VIS) released a trading statement that reflects HEPS of 3.33 cents for the year ended February 2024. The share price is only R0.03!
Putprop (JSE: PPR) announced the results of the odd-lot offer, in which 4,048 shares in the company were repurchased. This took 362 individual holders off the register, holding 0.01% of the shares in issue.
MC Mining (JSE: MCM) has announced that Godfrey Gomwe is stepping down as managing director and CEO. This comes after the successful offer by Goldway Capital for the company. Don’t feel too sorry for him, as there’s an accelerated vesting of 8,000,000 share options that can be exercised before April 2027. Separately, the company announced the appointment of non-executive director Christine He as interim Managing Director and CEO, effective 1 July 2024.
Ibex Investment Holdings (JSE: IBX) (the old Steinhoff investment vehicle) has announced the placing of up to 400 million Pepkor shares in the market. This represents 10.9% of Pepkor’s current issued share capital. Ibex currently owns 43.7% of issued Pepkor shares. Ibex may increase the size of the placing subject to demand and pricing. Barclays, Investec and JPMorgan are acting as Joint Global Coordinators and will be picking up the phone to qualifying investors to try place the shares.
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A major win for Coronation against SARS (JSE: CML)
And indeed, a win for corporate South Africa
This is the news that many had been waiting for. The Constitutional Court delivered judgment on the landmark tax matter between SARS and Coronation, with Coronation as the victor. This has important ramifications for offshore structures put in place by local corporates.
The full impact of this matter was R794 million, which Coronation had provided for in full. This is a great windfall for shareholders, especially as the SARS fight had ruined the Coronation dividend for a year. Investors will be very happy to see this cash kept within the company (and hopefully paid out as a dividend) rather than paid to the tax authorities.
Insimbi is selling two underperforming businesses (JSE: ISB)
And there’s an innovative structure to help the buyers pay for them
In listed companies, we are quite accustomed to seeing asset-for-share transactions. In these deals, the companies buy assets (usually private companies) and pay for them by issuing shares to the sellers. In Insimbi’s latest announced deals, they are doing things the other way around.
The core outcome here is the disposal of the AMR Booysens Business and the AMR WR Business, both of which are underperforming. The trick is that the disposals are linked to specific repurchases of shares from shareholders who are related to the buyers of these businesses. Effectively, most of the proceeds from the specific repurchases of shares will be used to pay Insimbi for the businesses.
In both underlying transactions, the repurchase price is R1 per share. Insimbi closed at R0.80 on Friday but has a 52-week high of R1.35, so the repurchase price isn’t as silly as it may look. This is an illiquid stock where the price can move significantly in a single day.
The repurchases represent 11.41% of Insimbi’s total shares in issue, with a total value of R43.05 million. Insimbi will get back R30 million for the disposals, so the shareholders in question are pocketing a net R13 million from these transactions. Frustrating as that may sound, these businesses are currently making losses, so shareholders need to think about the long-term picture.
This is certainly an interesting structure, with Mazars Corporate Finance appointed as independent expert to opine on the deal. The opinion will be included in the circular.
Motus gave an important strategic update (JSE: MTH)
Proper capital markets days are thin on the ground in SA, so pay attention when you see them
Listed companies need to meet a minimum disclosure requirement under regulations, but nothing stops them from going beyond that. Although very few take the route of hosting capital markets days and really talking to the market, there are those that do. This is to be applauded, with Motus as the latest such example.
The full presentation is available here and I recommend checking it out.
The group targets 65% of EBITDA in South Africa and 35% from international operations. They also target 50% of EBITDA from vehicle sales and the other half from non-vehicle sales. In both cases, they are currently in line with these targets, so no major changes are expected there.
The acquisitive activity has been focused on building out the international arm of the business, which makes sense when the group has its roots in South Africa and has roughly 20% market share in its home market for vehicle sales. Beyond the UK and Australia in terms of vehicle sales, the business that really has them excited is the aftermarket parts business in the UK and Asia. They call this the best growth potential for the group.
Of the many slides in the deck, one that jumped out at me deals with a structural shift in the South African car parc. That’s not a typo – this is the correct term for the total number of vehicles on the road in a given country or segment. With owners keeping their vehicles for longer (and often financing them over a longer term), there’s more demand for value-added products and services. This is a great opportunity for Motus, with strategies in place to develop products (e.g. telemetry) and markets like insurance. They even manage to bring the buzzwords like AI and machine learning into it!
Overall, the flavour of the strategy is to build annuitised revenue streams that are less cyclical than new car sales. Aftermarkets parts and value-added services sit squarely in this strategy.
Remgro has confirmed that Mediclinic is still very boring (JSE: REM)
Margins are down and earnings are flat
Hospital groups generally confuse me from an investment perspective. Although you would expect them to be licences to print money, the reality is that return on capital tends to be sub-par. Despite this, Remgro was happy to take Mediclinic private along with its consortium partners. The latest numbers for Mediclinic (covering the year to March 2024) have done nothing to convince me that this sector is interesting.
Group revenue may have increased by 5% at Mediclinic, but adjusted EBITDA was down 2%. Adjusted EBITDA margin contracted from 15.8% to 14.7%, with margins in both Switzerland and South Africa going the wrong way. At least margins in the Middle East were slightly up. Adjusted earnings came in flat in dollar terms for the year.
The second half was an improvement on the first half of the year, so perhaps some of that momentum will be carried forward. Even then, I just don’t see the appeal of hospital groups as equity investments.
Spear is recycling R160 million worth of capital (JSE: SEA)
The buyer for this property is The City of Cape Town
Spear REIT is selling 100 Fairway Close for R160 million to The City of Cape Town, which also happens to be the current tenant. This is an exit from a commercial office building, which Spear is happy to do as part of optimising the portfolio in the context of the pending Emira Western Cape portfolio implementation.
This also creates further headroom on the balance sheet, which is important as part of the broader funding and planning around the Emira deal. After this disposal, Spear’s loan-to-value will be between 23% and 23.5%. The strategic target for the loan-to-value ratio is between 38% and 43%, with management looking to operate at 39% on a go-forward basis after the Emira acquisition.
The yield for the disposal is 9.8%. This reflects some of the challenges in the office sector, even in Cape Town. The price of R160 million is identical to the value at which the assets were carried as at February 2024, the date of the last published annual financial statements.
Vunani suffers a sharp decline in profits (JSE: VUN)
The fund management and insurance businesses are to blame
Vunani had a year to forget for the 12 months to February 2024. HEPS has plummeted from 30.1 cents to just 7.4 cents. Despite this, the final dividend was only slightly down from 11 cents to 9 cents.
The decrease in profits wasn’t because of some kind of non-operating adjustment. Alas, operating profit tumbled from R124.6 million to R55.2 million. A combination of a drop in income and an increase in operating expenses did the damage.
If you look at the segmental results, there’s still no turnaround in sight for the institutional securities broking business, which made a loss of R12.4 million this year after a loss of R9 million in the prior year. Insurance also swung into losses, with a result of negative R7.6 million vs. positive R10.3 million in the prior year. A blow was also dealt by the fund management business, which saw profit drop from R21.2 million to R9.5 million.
It was only the asset administration business that made a decent, consistent contribution. Profit was R34.6 million this year vs. R33.7 million in the prior year.
If Vunani was serious about creating shareholder value, they would’ve at the very least walked away from the institutional securities broking business by now. Instead, they are willing to still carry those losses for some reason, which really doesn’t work when the rest of the group also goes the wrong way.
Little Bites:
Director dealings:
There are some very large disposals of Dis-Chem (JSE: DCP) shares by directors and prescribed officers. An associate of director Stanley Goetsch sold shares worth R165 million. Saul Saltzman sold shares worth R38.4 million. Christopher Williams sold shares worth R51 million. They sure weren’t shy to take advantage of the recent rally in the shares.
A director of Investec (JSE: INP | JSE: INL) sold shares worth £1.34 million.
As part of the related party deal for Novus (JSE: NVS ) to acquire Bytefuse, an associate of the CEO of Novus received R10.8 million in Novus shares in exchange for the shares in Bytefuse.
Jan Potgieter, ex-CEO of Italtile (JSE: ITE), sold shares worth R2 million.
An associate of a director of Safari Investments (JSE: SAR) purchased shares worth R1.1 million.
A director at City Lodge (JSE: CLH) sold shares in the company worth R132k.
In a trading statement for the year ended March 2024, Marshall Monteagle (JSE: MMP) flagged a major jump in HEPS from negative 4.4 US cents to positive 5.8 US cents.
Castleview Property Fund (JSE: CVW) released a trading statement for the year ended March. It reflects the final dividend per share as being 42.147 cents per share. This is well more than double the comparative period, but Castleview went through so much restructuring that I wouldn’t put too much focus on the year-on-year move.
As South Africa celebrates 87 loadshedding-free days, the feeling on the ground is that things can only improve for businesses across every industry. Well, perhaps not every industry.
I read a statistic the other day that made me simultaneously happy and sad. Everybody’s favourite loadshedding notification app, EskomSePush, has seen its active user base plummet from more than 3.2 million to 300,000 since the current loadshedding break started.
Of course this makes sense in the context of the service that’s provided. Personally, I don’t think I’ve logged on to the ESP app since March – probably around the same time I last charged my battery-powered lights. A precipitous drop in users of that scale can only be devastating for a free-to-use app that relies on advertisers to keep the lights on (pardon the pun). As traffic halts, so does the interest from potential advertisers. When I opened the ESP app just minutes ago out of sheer curiosity, there was one lonely banner ad on display – for solar installations, of course.
The reason that I was sad to read this statistic is because I’ve always had a soft spot for businesses that prove themselves to be adaptable. From the start, I’ve watched as the ESP team have taken what was a very basic idea and embroidered it with features to appeal to their audience. From calendar integration to home screen and lock screen widgets, expanded area coverage, area recommendations, AskMyStreet, water outage coverage and even a throwback Snake game, there seemed to be no limit of useful add-ons to the app. This clever thinking transformed something that we all had to use, and somewhat begrudgingly at that, into something that I actually wanted to use.
But will they be able to adapt their way out of their core use case vanishing (touch wood: permanently)?
The trouble with trends
Starting a business based on short-term trends or addressing transient problems can be perilous for entrepreneurs. In the defence of the team behind the ESP app, nobody expected loadshedding to just up and vanish overnight, so we can’t really say that they built around a “transient” problem in this case. The app reached 12.36 million downloads by the end of 2023, which also happened to be the worst year of loadshedding on record. To say that Eskom’s sudden turnaround (again, touching all the wood as I write this) was unexpected is a massive understatement.
While the allure of quick profits during periods of high demand is tempting, ventures that rely on that high traffic often prove to be unsustainable. When the trend fades or the specific problem is resolved, the business can swiftly lose its relevance, leading to a sharp decline in interest and revenue. It then comes down to whether they made enough money in a short space to time to justify all the effort.
This kind of short-term approach lacks a foundation in long-term value creation or adaptability, making it difficult to pivot or find new markets once the initial opportunity evaporates. For instance, a company that flourished by selling fidget spinners at the height of their craze will have faced a steep decline once the fad passed. Similarly, businesses that capitalised on temporary market conditions, like certain types of pandemic-related products (didn’t we all know an auntie who suddenly became a hand sanitiser stockist?), found themselves struggling as conditions normalised.
Another local textbook example of this is the great Prime hype of 2023. When the beverage created by YouTubers Logan Paul and KSI first went viral, some South Africans spent thousands of rands on getting stock into the country by any means possible. At the height of the madness, a bottle of Prime cost R800 locally – and demand was high even at those prices. Then the Shoprite Group managed to pull off a small miracle and secure a vast amount of stock. Before long, Prime was being sold in every Checkers from Kraaifontein to Kakamas at a much-more-affordable price of R40 per bottle. That’s still a ludicrous price to pay for what is essentially an Energade in disguise, but compared to its previous highs, R40 seemed reasonable – and people were willing to queue like it was 1994 (or 2024!) to get their Prime fix.
Fast forward into 2024, and the Prime craze has completely blown over. Where once there were moshpits, there are now bargain bins of surplus Prime, marked down to just R7 a bottle. That’s a 99% drop in price in just over a year from the hype prices and is even a nasty drop for Checkers.
Fortunately, the Shoprite Group is more than big enough to take that bath without falling over. That’s the difference between indulging in a trend and building your whole business around one.
Endings and beginnings
In the early days of this column, I wrote an article about what happened in the art world after the mainstream adoption of the camera. You can read the original article here, but the TL;DR is that the primary purpose of art before the camera was to produce accurate representations of things because there was no other way to do so. When the camera was invented it completely fulfilled that purpose in a way that was quicker, cheaper and more convenient than, for instance, sitting for five hours to have your portrait painted.
Many artists perceived this as the death of their industry. Like the ESP app, painting seemed to lose its use case overnight. An essential pivot was needed, and thankfully artists (being a creative bunch) found one. By focusing on what the camera couldn’t do nearly as well as a human being could, they managed to shift the purpose of art from pure representation to expression.
(In a karmic moment, the same film cameras that caused artists so much grief in the 1800s were overtaken by digital camera technology in the 1900s. The original disruptors, Kodak, were so unprepared for this industry shift that they became almost as irrelevant as the film cameras they once sold by the thousands. Disruption comes for us all.)
Moving on, the mechanical watch and horse-based transport are products of industries that survived massive disruption (via the quartz crisis and automotive technology, respectively) by accepting that they now appeal to a niche audience. There’s nothing wrong with a niche, if you can manage to carve one out for yourself. Demand may be lower, but you have fewer competitors (usually), and those who seek you out are often more committed to what you’re selling (and willing to pay a premium as a result).
Of course, you can only have a niche if there is still some use for your product. Digital and quartz-powered watches may reign supreme, but the underlying need to tell the time still exists, which is why mechanical watches are still being sold. From my perspective, I can’t say that I see a niche userbase in the future of the ESP app.
This generation’s Kodak moment
I can’t really write about disruption without thinking about my own business and my own industry at this point in time. This is an issue that I’ve been wrestling with for a few months now.
In 2023, a report from Harvard Business School, the Imperial College Business School and the German Institute of Economic Research examined 2 million online job listings across 61 countries from July 2021 to July 2023. The report found that since ChatGPT debuted in November 2022, demand for freelance writers has dropped by 30%. This research was done a year ago, before the launch of GPT4. I can practically guarantee that demand has dropped even more since then.
I’m not the only one in a pinch, according to the report: demand for freelance coders has dropped by 20%, graphic designers by 17%, and social media managers by 13%.
I’ve seen many writers in my industry lean into the trend in order to try to secure their incomes. They now offer prompt engineering services, or cleanup and “humanification” of AI-generated content. With AI regulation still a hot topic and some businesses actively distancing themselves from “unproven” technology, there’s still a question around whether AI is here for a long time or just a good time. Building a business or a product offering around it, in my opinion, is not that different from joining the mad rush to stock up on Prime. Sure, customers want it now. But are they going to want it this badly a year from now?
Is the answer to carve out a niche instead? I certainly hope so, as that is the route that I’ve taken. As AI fatigue starts to set in, readers might find a restful reprieve in writing that not only sounds human, but that showcases human thought. ChatGPT may be able to imitate my cadence if I trained it on enough examples of my writing, but at this stage it cannot link ideas in the same way that I do. It would have written this article without referencing the invention of the camera or the Prime craze, and I doubt it even knows what ESP is, or understands why South Africans formed such an attachment to an app.
Like the classically trained painters in 1816, my fellow writers and I stand at the edge of an industry today and gaze into the unknown. The great disruptor has found us, and the way before us is unclear. Fortunately, like the artists that executed their brilliant pivot all those centuries ago, we are a creative bunch. I’m sure we’ll figure something out.
As for ESP… well, I’m not sure if there’s much room left for innovation there, unless loadshedding makes a sudden comeback. I guess sometimes things just end.
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.
The Constitutional Court ruling is coming on Friday morning
After much legal to-and-fro, the big day has finally arrived. The Constitutional Court will deliver a landmark ruling on Friday regarding Coronation’s battle with SARS and the tax assessment on its transfer pricing. This ruling will have ramifications for many South African corporates.
At 10am on Friday, the magic will happen. Watch that Coronation share price either way.
Grindrod Shipping approves the selective capital reduction (JSE: GSH)
This is effectively a take-out of minority shareholders
At a price of $14.25 per share, Grindrod Shipping shareholders were happy to say goodbye. Good Falkirk Limited and its concert parties were not allowed to vote on this deal to effectively cancel the shares held by non-controlling shareholders, so only those shareholders who would see their shares cancelled in exchange for that price were entitled to vote.
There was strong approval for the deal, with over 95% approval from those who voted.
Harmony has affirmed its guidance for FY24 (JSE: HAR)
This has been a poor year for safety at the group but a strong financial year
Harmony Gold has released far too many announcements recently that start with “loss-of-life” – a stark reminder that this is still a dangerous industry. There is much focus on safety, but any loss of life is unacceptable and the industry knows that. If it wasn’t for those incidents, Harmony would be putting together the perfect financial year. Against the backdrop of those incidents though, the financial performance for FY24 can only be celebrated to a lesser extent than would otherwise be the case.
For the year ending June 2024, Harmony is obviously taking advantage of strong rand-denominated gold pricing. They are also enjoying improved recovered grades, so the production metrics are strong at the right time, with total production expected to exceed the FY24 guidance of 1,550,000 ounces. All-in sustaining costs will be well below R920,000/kg.
Total capital expenditure will be marginally below the guided R8.6 billion, so that’s promising for free cash flow as well. The investment plan for FY25 is focused on the higher quality assets across both gold and copper, with Harmony looking to de-risk its business.
Sirius has recycled capital into new UK assets (JSE: SRE)
This is a good example of the typical approach taken by Sirius
Sirius Real Estate doesn’t sit still, which is why investors like the fund. To create additional value in property, it’s important to buy underperforming properties and turn them into gems before selling at a much better price. Rinse and repeat.
Sirius has been very busy with raising new capital and deploying it into assets. They also recycle capital by selling properties, like the disposal of two sub-scale assets in Hartlepool and Letchworth for £1.9 million. This was a 2.7% premium to the last reported book value.
The bigger news is the two industrial asset acquisitions in the UK for £31 million, representing a 9.2% net initial yield. These deals have been funded by the Maintal disposal, which was achieved on a gross yield of 6% for €40.1 million. Remember, you want to buy on a high yield and sell on a low yield. To improve the value of the properties that have been acquired, Sirius will use its extensive industrial asset platform in the UK.
Sasol gets a major win against Transnet – but it’s not over yet (JSE: SOL)
Talk about a windfall!
For beleaguered Sasol shareholders, every SENS announcement must seem scary right now. For once, there’s a good one to read. The High Court has a gift for you if you are a Sasol shareholder.
This goes back to an agreement in 1991 regarding the setting of pipeline tariffs for the conveyance of crude oil by Transnet for both Sasol Oil and TotalEnergies Marketing from Durban to the Natref crude oil refinery in Sasolburg. Sasol Oil and TotalEnergies are co-invested in Natref and in 2017, Sasol followed TotalEnergies in instituting legal action against Transnet for damages based on Transnet overcharging for a number of years.
After years of litigation and many happy lawyers, the High Court eventually handed down judgment in favour of Sasol Oil and TotalEnergies. Damages to the value of R3.9 billion plus interest of R2.3 billion were awarded to Sasol Oil. Even on Sasol’s market cap of R85 billion, that’s a welcome bit of news.
It’s not a guarantee just yet, as Transnet intends to appeal the ruling.
Standard Bank’s earnings growth has slowed down (JSE: SBK)
African currency exposures have applied the handbrake
Standard Bank has released an update for the five months to May 2024, with the key takeout being that HEPS is up by low-to-mid single digits. That’s a far more modest growth rate than we’ve seen from the bank in recent times, with movements in various African currencies relative to the ZAR to blame. On a constant currency basis, HEPS would be up by mid-teens, which is certainly more like it.
The banking activities achieved headline earnings growth of mid-single digits, with the trends in the first quarter continuing into the subsequent months. Income growth was driven by the combination of higher average interest rates and transactional volumes at clients, with trading revenues as a dampener on the numbers. Balance sheet growth has also slowed down, with clients perhaps struggling to justify ongoing growth in debt at these rates. Importantly, income growth was ahead of operating expenses growth, so there was positive jaws – a key metric in banking that measures the direction of travel for operating margin. Impairments were higher in the retail and business banking books in particular, partially offset by lower charges in the corporate and investment banking book. The credit loss ratio is above the group’s through-the-cycle target range of 100 basis points.
In the insurance and asset management segment, a better risk claims experience in South Africa helped drive earnings. This benefit was partially offset by the impact of the Nigerian naira on the asset management earnings in Africa.
At ICBC Standard Bank, earnings were profitable but lower vs. the comparable period which was a high base.
The group’s Return on Equity (ROE) is down year-on-year but has remained in the target range of 17% to 20%.
When you consider just how strong the base period is, this remains a decent set of numbers at Standard Bank.
Little Bites:
Director dealings:
A director of Investec (JSE: INL | JSE: INP) sold shares worth £885k.
Here’s one you don’t see every day: a director of Capitec (JSE: CPI) has donated shares to a charitable foundation to the value of R2.6 million.
An independent non-executive director and an associate of Bytes Technology (JSE: BYI) bought shares in the company worth nearly £48k.
A director of a major subsidiary of RFG Holdings (JSE: RFG) sold shares worth R738k.
A director of Afrimat (JSE: AFT) sold shares worth R508k. Separately, an associate of director of Afrimat sold shares in the company worth R140k.
A director of a major subsidiary of Sanlam (JSE: SLM) sold shares worth R326k.
An associate of Piet Viljoen bought shares in Astoria Investments (JSE: ARA) worth nearly R320k.
Associates of the CEO of Spear REIT (JSE: SEA) bought shares in the company worth R220k.
A director of a major subsidiary of Vodacom (JSE: VOD) sold shares in the company worth R193k.
Sean Riskowitz bought further shares in Finbond (JSE: FGL) worth R75k. A different director bought shares worth R69k.
A director of Premier Group (JSE: PMR) bought unlisted A1 ordinary shares worth R225. That may sound entirely unimportant, but just be aware if you are a shareholder here that there are two classes of shares. Digging into the rights of the A1 shares would be wise if you hold Premier shares.
Capital & Regional (JSE: CRP) announced back in May that controlling shareholder Growthpoint (JSE: GRT) had received a preliminary expression of interest from NewRiver REIT in relation to a possible offer in shares and cash for Capital & Regional. The original PUSU (the “put up or shut up” – i.e. commit to an offer or not) deadline was 20 June, which has obviously passed. Discussions are still underway and the Takeover Panel has consented to an extension to 18 July.
MTN (JSE: MTN) announced that the offer of MTN Uganda shares to the public was heavily oversubscribed. MTN made a portion of its holding in MTN Uganda available to the public to raise funds and increase the local float. The offer was 2.3 times oversubscribed, so there was strong interest in the shares. MTN Uganda has attained the 20% minimum public float requirement as well.
Although a director dealing, I wanted to include this separately to the others as a hedging transaction isn’t the same as a sale or purchase. Barry Swartzberg has bought put options over Discovery (JSE: DSY) shares at a strike price of R112.03 (giving downside protection below this level), in two tranches, with exercise dates in mid-2025 and December 2025. In both cases, the notional value is R84 million. To finish the collar structure, Swartzberg chose to give away upside by selling call options with a price of R172.32 per share for mid-2025 expiry (R129 million in value) and a price of R187.29 per share for end-2025 expiry, with a value of R140 million. The current share price is R134.
Kibo Energy (JSE: KBO) has announced its new corporate restructuring plan. Considering that the last one had a very short lifespan before being cancelled, forgive me for not putting too much faith in this plan at this stage. Either way, Louis Coetzee is on his way out as CEO. A placing of £340,000 is part of this plan. The debt reduction with Riverfort announced earlier this month remains in place.
Trustco (JSE: TTO) announced that the Supreme Court of Appeal upheld the JSE’s directive to Trustco to restate its financial statements. This restatement already happened, so there’s actually no further action required. This was purely a matter of legal precedence. Interestingly, the court confirmed that members of the Financial Services Tribunal do not need to have experience or expert knowledge of financial services or the financial system in order to adjudicate on a case. Do with that what you will.
Sanlam and MultiChoice have entered into an agreement which will see Sanlam Life take a 60% stake in NMS Insurance Services (SA). MultiChoice will receive an upfront cash payment of R1,2 billion for the stake with a potential earn-out payment of up to R1,5 billion. A pre-acquisition dividend of R59 million will be declared by NMSIS. The deal is a category 2 transaction for both companies and accordingly does not require shareholder approval.
Zeder Financial Services (Zeder Investments), through its direct and indirect subsidiaries Pome Investments and CS Agri, will dispose of Theewaterskloof Farm to the Japie Groenewald Trust for R283 million. The disposal consideration will be paid to CS Agri which intends to distribute most of the proceeds to shareholders.
To facilitate ongoing discussions, and on the request of Growthpoint Properties, the UK Panel on Takeovers & Mergers has extended the deadline to July 18, 2024, for NewRiver REIT plc to make a formal offer for Capital & Regional. Growthpoint owns a 68% stake in Capital & Regional. In May, Vukile Property Fund withdrew its bid to acquire Capital & Regional, leaving NewRiver as the only suitor.
Sirius Real Estate has completed the acquisition of two industrial assets in Banbury and Wembley in the UK for c.£31 million. In addition, the company has disposed of two sub-scale assets located in Hartlepool and Letchworth for a combined total of £1,9 million.
Unlisted Companies
Azelis, a global innovation service provider in the specialty chemicals and food ingredients industry, has signed an agreement to acquire Durban-based specialty chemicals distributor CPS Chemicals (Coatings). CPS distributes to the paint, ink, resins, paper, plastics and rubber industries. The acquisition expands Azelis’ footprint in South Africa, complementing the company’s lateral value chain in the CASE (coatings, adhesives, sealants, and elastomers) segment. Financial details were undisclosed.
Remgro has completed an accelerated bookbuild offering of 122,908,061 Momentum Metropolitan shares raising aggregate proceeds of R2,7 billion. The shares were placed at a price of R22.00 per share representing a 7.6% discount to the closing price of R23.82 on 18 June 2024 and a 0.3% premium to the 30-day VWAP average price of R21.93. The placement represents 8.9% of the total issued ordinary shares of Momentum. Remgro no longer holds any ordinary shares in the company.
MTN Uganda attained the 20% minimum public float required in terms of the Uganda Securities Exchange, with MTN successfully placing 1,57 billion MTN Uganda shares at UGX 170 per share (UGX 267 billion/R1,29 billion) to institutional investors. The offer was 2.3 times oversubscribed with 3 billion shares applied for by 20,636 shareholders.
Lighthouse Properties has, on the open market, disposed of a further 109,103,790 Hammerson plc shares for an aggregate cash consideration of R718,48 million.
As part of the restructuring of its existing debt, Kibo Energy plc will issue a further 3,400,000,000 shares in the company to raise £340,000. Shard Capital Partners subscribed for £240,000 worth of shares with the remaining raised through two private subscriptions of £50,000 each.
The JSE has advised that the following companies, Acsion, African Dawn Capital, Sable Exploration and Mining, Visual International and Vunani have failed to submit their Annual Financial Statements (AFS) within the three-month period as stipulated in the JSE’s Listing Requirements. If the companies fail to submit their AFS on or before 30 June 2024, then their listings may be suspended.
Afristrat Investment’s listing will be removed from the Main Board of the JSE following its suspension in August 2022. The company has failed to take adequate action to enable the JSE to reinstate the listing. Accordingly, the last day to trade (off market) in the company’s shares will be 25 June. The listing will be removed on 1 July 2024.
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 210,994 shares at an average price of £24.05 per share for an aggregate £5,1 million.
Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 10 – 14 June 2024, a further 3,225,887 Prosus shares were repurchased for an aggregate €110 million and a further 236,125 Naspers shares for a total consideration of R904 million.
Two companies issued profit warnings this week: Thungela Resources and Nampak.
Two companies issued cautionary notices this week: Choppies Enterprises and Coronation Fund Managers.
MTN Uganda has released the results of the offer announced in May whereby MTN International (Mauritius) offered up to 1,574,807,373 shares (7.03% stake) in MTN Uganda for sale at UGX 170 per share. The offer closed on 10 June and was 2.3 times oversubscribed. The company has now attained the 20% minimum public float required by the Uganda Securities Exchange.
Vantage Capital has provided Two Rivers International & Innovation Centre (TRIFIC SEZ) with US$47,5 million in mezzanine funding. TRIFOIC SEZ is a services-oriented business park in a special economic zone located in the diplomatic blue zone of Nairobi, Kenya. The funding will be used to fund and renovate a 14,975 sqm office tower and to develop two Grade A office towers.
EnjoyCorp has completed the 100% acquisition of The Raysun Nigeria from Heineken B.V. that was announced in February. The Raysun Group holds an 86.5% stake in NGX-listed Champion Breweries.
Ghanaian agritech, Wami Agro, has received an undisclosed investment from Mirepa Investment Advisors’ Mirepa Capital SME Fund I. The funding will be used to scale up operations. Wami currently has a network of over 13,000 farmers across five regions in Ghana in the rice, maize, soya and sorghum value chains.
Kenya Orchards has notified its shareholders that Africa Mega Agriculture Centre (AMAC) is looking to acquire up to,10,863,537 shares (84.423%) in the firm from Westpac Holdings (34.282%); Thakarshi Keshav Patel (33.606%); Vipul Thakarshi Patel (14.886%) and Hansa Dinesh Chandra Shah (1.649%). AMAC has stated in the Notice of Intention that is does not plan to delist Kenya Orchards and will apply to the Capital markets Authority for an exemption from having to make a full takeover offer for the firm.
British International Investment has signed an agreement to provide funding of US$15 million (with the potential to increase this to $25 million) to Rift Valley Energy to finance the installation of an additional 7.6MW of renewable energy for Tanzania’s national grid. Rift Valley Energy is wholly owned by Meridiam and operates and is developing a portfolio of 30MW of renewable energy generation together with its subsidiary Mwenga Power Services.
Yield Uganda Investment Fund managed by Pearl Capital, has fully exited its equity investment in Ugandan vanilla processor and exporter, Enimiro. Financial terms were not disclosed. The fund first invested back in July 2022 with a US$515,000 blend of equity and cumulative redeemable preference shares.
Remuneration plays a pivotal role in the corporate landscape, influencing not only the retention, motivation and performance of executives, but also shaping the overall governance framework of companies.
The recent Companies Amendment Bill [B27B-2023](Bill), a legislative initiative aimed at, inter alia, promoting equity between directors and senior management on the one hand, and shareholders and workers on the other, introduces significant changes to the remuneration disclosure requirements for public and state-owned companies. One such notable reform is the introduction of the ‘Two-Strike Rule’, as defined and discussed below.
Understanding the ‘Two-Strike Rule’ and its alignment with global practices
The ‘Two-Strike Rule’ aims to enhance transparency and accountability in executive remuneration. Arguably, the rule alters the dynamics of remuneration governance, particularly for non-executive directors (NEDs) serving on remuneration committees (RemCom).
The move to implement the ‘Two-Strike Rule’ brings South African legislation in line with global peers, particularly Australia, which previously adopted a similar rule. There are, however, some noteworthy distinctions between the Australian and proposed new South African rules.
In Australia, the ‘Two-Strike Rule’ entails that board members of a company will be required to stand for re-election if the company’s remuneration report (Rem Report) receives a ‘no’ vote of 25% or more at two successive annual general meetings (AGM). The first strike is triggered when the company’s Rem Report receives a ‘no’ vote of 25% or more at an AGM. The company’s subsequent Rem Report in the following year must explain how the shareholders’ concerns have been taken into account. The second strike occurs should the company’s subsequent Rem Report receive a ‘no’ vote of 25% or more at the next AGM (Second AGM), resulting in a ‘spill resolution’ to be put to shareholders at the Second AGM. A successful ‘spill resolution’1 would initiate a ‘spill meeting’, in which the company’s directors (except the managing director, who may continue to hold office indefinitely) would need to stand for re-election.
In South Africa, the Bill proposes that, if the Rem Report (including the background statement, remuneration policy and implementation report) is not approved by ordinary resolution (more than 50% of votes cast by shareholders) at a company’s AGM, the RemCom must, at the Second AGM, present an explanation on the manner in which the shareholders’ concerns have been taken into account. NEDs serving on the RemCom must stand for re-election as members of the RemCom at this Second AGM, at which the explanation is presented. If, at this Second AGM, the Rem Report in respect of the previous financial year is also not approved by ordinary resolution, the NEDs on the RemCom may continue to serve on the board as NEDs, provided that they successfully stand for re-election at the Second AGM. However, there is a crucial caveat – these NEDs will not be eligible to serve on the RemCom for a period of two years thereafter (Suspension Period). The abovementioned provisions do not apply to members of the RemCom who have served for a period of less than 12 months in the year under review.
Legislative perspectives and amendments
Following representations by the business community, Trade, Industry and Competition Minister Ebrahim Patel, who is responsible for overseeing the Companies Act, provided a concession by reducing the Suspension Period from three years to two. Despite this, the introduction of the new re-election requirement to the board adds a layer of complexity, making it a more rigorous provision, compared to the Bill’s predecessor [B27 – 2023].
A necessary addition or an undesirable imposition on governance
The ‘Two-Strike Rule’ introduced in the context of executive remuneration has several key benefits. Firstly, it empowers shareholders by allowing them to express their views on the remuneration structure of executives, ensuring that their interests are actively considered. Secondly, the ‘Two-Strike Rule’ promotes accountability by encouraging companies to tie executive pay to performance, with the prospect of a vote against the Rem Report incentivising directors to align their decisions with the company’s long-term success, and shareholder value. Lastly, the ‘Two-Strike Rule’ contributes to improved transparency through comprehensive disclosure of remuneration policies and practices. This heightened transparency enables shareholders to make well-informed decisions, and holds companies accountable for their remuneration choices.
However, the ‘Two-Strike Rule’ also poses some potential drawbacks. Firstly, there is apprehension about the ‘Two-Strike Rule’ fostering a short-term focus on immediate results to secure shareholder approval, rather than incentivising the pursuit of long-term strategic goals. Secondly, the compliance requirements of the ‘Two-Strike Rule’ pose a significant administrative burden for companies, involving extensive time and resources for comprehensive disclosure and adjustments to Rem Reports. Lastly, the requirement for certain NEDs to stand for re-election to the board raises concern about the overall attractiveness of directorship roles, potentially impacting the pool of candidates willing to take on such positions.
Remuneration is a multifaceted area that undergoes continuous evolution, influenced by market dynamics. By placing greater emphasis on shareholder involvement and detailed reporting, the Bill seeks to address concerns related to executive remuneration practices. While the ‘Two-Strike Rule’ aligns South African legislation more closely with international peers, its nuanced provisions and potential implications warrant close attention. The coming months will likely see robust discussions and adjustments as stakeholders navigate this new terrain, in pursuit of a more transparent and accountable corporate environment.
1.The term “spill” refers to the effect of the ‘Two-Strike Rule’; that is, to have board members stand for re-election
Sources:
Companies Amendment Bill [B 27B—2023], https://www.gov.za/sites/default/files/gcis_document/202312/bill-b27b-2023.pdf
Explanatory Memorandum on the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011, https://treasury.gov.au/sites/default/files/2019-10/explanatory_memorandum.pdf
Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act, No. 42, 2011, https://www.legislation.gov.au/C2011A00042/latest/text
It was expected that the steady rise in foreign investments in Africa would result in an equally steady increase in tax revenue. As this has not been the case, African countries have embarked on reviews of their tax policies in an effort to get as much tax revenue in the net as possible. One type of fish, Capital Gains Tax (CGT) seems to have been avoided by both the African governments and the investors, yet it counts for a big percentage of the potential tax revenue collectable from the foreign investments. For instance, in 2020, an analysis by Oxfam highlighted that in just seven disputes emanating from CGT avoidance by multinationals, an amount of US$2,2 billion was in contention.
This article takes a deep dive into the specific steps taken by Kenya to ensure an increase in the amount of CGT collected from both onshore and offshore transactions. In light of this, it is imperative for potential investors to carefully review their activities, to ensure that they are not adversely affected by the changing laws in Kenya and the aggressive position taken by the Kenya Revenue Authority (KRA).
A look at Kenya
In Kenya, CGT has traditionally been levied on gains made from the transfer of property, whether or not acquired before 1 January 2015. The applicable rate went up from 5% to 15% of the net gain, beginning 1 January 2023.
The Finance Act, 2023 (the Act) ushered in a new regime for CGT in Kenya. Of relevance to this article is the fact that, effective 1 July 2023, gains from the sale of shares in foreign entities that derive more than 20% of their value directly or indirectly from immovable property situated in Kenya shall now be subject to CGT. Immovable property is defined within the Act to include land and things attached to the earth or permanently fastened to anything attached to the earth, an interest in a petroleum agreement, mining information or petroleum information. Please see the following illustration.
Figure 1: Before the Act
Figure 1 is an illustration of an onshore transfer of shares in a company situated in Kenya. A and B are individuals owning 80% and 20% respectively of the shareholding in KenyaCo. B is transferring half of his shares in KenyaCo (10%) to C. Before the Act came into force, only transfers of this nature (happening in Kenya) were subject to CGT.
Figure 2: After the Act
Figure 2 is an example of an offshore indirect transfer now subject to CGT in Kenya. In the illustration, Mauritius Holdco indirectly derives more than 20% of its value from immovable property located in Kenya, owned by its subsidiary, KenyaCo. As such, it is liable to pay CGT in Kenya.
It is noteworthy that pursuant to the Act, non-residents holding more than 20% or more of the shareholding in a resident company, directly or indirectly, are subject to CGT on the disposal of their interest in the company. Please see the following illustration:
Figure 3: After the Act
In Figure 3, X is a non-resident who owns Offshore Limited. Offshore Limited and Y (a Kenyan individual) each own 50% of the shares in KenyaCo, a resident company. X is transferring 30% of the shares in Offshore Ltd to A, a non-resident. According to the Act, transactions of this nature by non-residents are now also subject to CGT in Kenya.
This recent development was not only effected in law, it has also been enforced by the judicial organs. More specifically, the Tax Appeals Tribunal, in the case of Naivas Kenya Limited v Commissioner of Domestic Taxes (2022) and ECP Kenya Limited v Commissioner of Domestic Taxes (2022), determined that the Kenya Revenue Authority (KRA) had not erred in taxing the gains from the sale of shares in Mauritius-based entities, for the reason that they were being managed and controlled from Kenya. It is notable that the assessment in both cases related to corporation tax and not CGT. This points to the aggressive position taken by the KRA not just to pursue 15% CGT, but corporation tax at 30% for an offshore indirect transfer that derives value in Kenya.
International best practice
Tax treaties are at the centre of international cooperation in tax matters, such as tackling international tax evasion. To prevent double taxation, they would typically award taxing rights to either the resident state or the state where the asset is located.
Kenya has aligned itself to International best practices, including the OECD Model Tax Convention and United Nations (UN) Article 13 (4). Both the UN and OECD Model Tax Convention stipulate that gains derived by a resident of a Contracting State from the alienation of shares or comparable interests, such as interests in a partnership or trust, may be taxed in the other Contracting State if, at any time during the 365 days preceding the alienation, these shares or comparable interests derived more than 50% of their value directly or indirectly from immovable property situated in that State.
Conclusion
For commercial reasons, Foreign Direct Investors may opt to invest through offshore entities. However, the recent developments in Kenya call for a review of this approach. Kenya and other countries have taken steps to implement concrete measures to effectively collect CGT from capital gains realised through such transactions, and the taxation of offshore indirect transfers is already a fully established international tax norm.
Investors with offshore operations should, therefore, consider taking a step back to ensure that their legal, operational and transactional structures adapt to the changing tax regulations. This calls for expert guidance to identify any potential weaknesses in the existing structures, as well as to advise on and implement the necessary adjustments to maintain tax compliance, minimise tax exposure, and guarantee sustainability.
It is important for global investors to carefully review the tax impact for investments that derive their value from Kenya, to ensure that the risk of CGT and Corporation Tax on offshore indirect transfers is addressed.
Alex Kanyi and Lena Onyango are Partners, and Judith Jepkorir a trainee Advocate | CDH Kenya
This article first appeared in DealMakers AFRICA, the continent’s quarterly M&A publication.
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