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Ghost Bites (Ascendis | Bell Equipment | Emira | Heriot | Renergen | RMB Holdings | Workforce | York Timber)

The Finance Ghost
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Ghost Bites (Ascendis | Bell Equipment | Emira | Heriot | Renergen | RMB Holdings | Workforce | York Timber)

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

Ascendis swings sharply into the green (JSE: ASC)

You do need to read carefully for the once-offs though

Revenue at Ascendis may be down 5% for the six months to December 2023, but that’s where the bad news stops. Gross profit margin increased by 150 basis points to 40.9% and significant cost-cutting efforts have paid off, with a substantial drop in operating costs across the board. Without adjusting for once-offs, operating profit came in at R47.6 million vs. a loss of R122 million in the comparable period.

That’s quite the swing, isn’t it?

The group goes on to explain that there were major line items like a VAT provision reversal of R43.1 million and an accounting gain of R27.1 million. There were also various transaction costs and impairments. On an adjusted basis, operating profit was R8.9 million vs. a loss of R47 million in the comparative period.

Interest paid was R5.1 million, vastly less than R50.5 million in the comparable period after all the progress was made in reducing debt on the balance sheet.

Remember, Ascendis is currently at the centre of what became a controversial potential take-private transaction. This is being spearheaded by the current CEO, which is relevant information when there’s commentary in the announcement that the company may look to raise further equity from shareholders to enable growth. This suggests that if the take-private doesn’t go ahead, the group may look to equity funding mechanisms on the public market. Some will heed this warning and others may see it as a strategy to encourage the delisting.

Either way, aside from the extensive noise around the potential deal, it’s clear that things have improved significantly at Ascendis from an operational standpoint. The group is profitable, albeit not by much once you look at the adjustments.

Dividend disappointment at Bell Equipment (JSE: BEL)

HEPS up strongly, yet the dividend has disappeared

After a couple of trading statements, there’s been much excitement around Bell Equipment. With the release of annual results though and the disappointing news of no dividend at all, the share price closed around 10% lower on the day.

A revenue increase of 32% drove a HEPS improvement of 69%. The cash flow tells an incredibly different story though, with a massive cash outflow of R437 million for the year vs. an inflow of R14 million in the prior year.

You may assume that this is related to working capital, but a deeper look reveals that this isn’t the case. You’ll find that cash generated from operations actually looked just fine thanks (with 2023 in dark blue):

The biggest swing in cash actually happened in financing activities, shown here:

The company notes that working capital investment across inventory and receivables is the primary reason why the dividend is gone. That’s a forward looking view of where the cash might go in the coming year. Based on the financials, a contributing factor to why the dividend disappeared seems to be more related to the longer term debt on the balance sheet rather than working capital.

Emira sells two properties (JSE: EMI)

Makro Crown Mines and Market Square in Plett have been sold in separate deals

Emira has decided to recycle capital by selling two properties. The first is Makro Crown Mines, disposed of for R337.5 million. The second is Market Square in Plettenberg Bay, sold for R354 million. These are two separate deals with different buyers.

The net operating income for Makro Crown Mines for the six months ended September 2023 was R14.98 million. On an annualised basis, the property has been sold on a yield of 8.9%. Market Square’s net operating income over the same period is R12.4 million, implying an annualised yield of just under 7%.

The net proceeds will be used to reduce Emira’s debt and fund new acquisitions once opportunities are identified.

In a separate update, Emira gave investors a pre-close view for the 11 months to February 2024. The overall story is that the local commercial portfolio is performing in line with expectations. It’s rather interesting to note that retail vacancies increase from 3.2% at September 2023 to 4.1% at the end of February, whereas office vacancies actually improved from 12.0% to 11.3%! For completeness, the industrial portfolio improved marginally from 0.7% to 0.6%.

Moving on to residential, this was an important period for the company as the takeover of Transcend was completed. 486 units in the residential portfolio have been disposed of during the period at a small premium to book value. A further 74 units should transfer by the end of March.

In the US-based portfolio, vacancies increased from 3.6% to 4.7%. There are some larger tenant failures that have negatively impacted results.

The loan-to-value ratio of 43.7% as at the end of February is up from 41.2% at the end of September, with the increase driven by the acquisition of the remaining shares in Transcend. That does feel a bit high to me in this environment, with the firm continuing to recycle capital and diversify the fund. Perhaps some of that capital will be used to bring debt down.

Heriot took a knock from financing costs (JSE: HET)

The distribution per share has fallen for the interim period

Property fund Heriot reported a 4.2% decrease in the distribution per share for the six months to December 2023. This is despite a 12.9% increase in net property operating income. Property funds have been hit hard by the rising interest rates, with Heriot as just one of many examples.

The retail portfolio has been the biggest source of growth, with net operating income up by a very impressive 21.2%. The Industrial property increased by 9.9%. Office and residential assets have a less pleasing story to tell. Luckily, 71% of the portfolio is retail and 19% is industrial.

Heriot is looking to increase exposure to Safari Investments, with a 48.7% direct interest and a further 10.1% held by a concert party, Thibault REIT.

The net asset value per share at Heriot increased by 21.3% from R13.02 to R15.78. The share price is R13.50.

Renergen gives a quarterly update (JSE: REN)

There’s nothing new here, but it’s still a useful summary of the past three months

Renergen releases a quarterly update to give investors a summary on the latest strategic news and the state of the financials. The fourth quarter of the 2024 financial year can count the Mahlako Gas Energy investment as the major highlight, with that party putting in R550 million for a 5.5% equity stake in the South African operating entity. The investment by Airsol has also been completed.

Although LNG deliveries resumed in February, it’s the production of helium that investors are really waiting for. The helium system integration is nearly complete, with no significant issues detected. The OEM supplier is busy with pre-checks ahead of the final performance test.

Whatever the outcome of that test, I would expect a pretty big share price move either up or down, depending on the results.

RMB Holdings finds a way to exit Divercity Urban (JSE: RMH)

The group is trying to turn assets into cash – and some aren’t as easy as others

Trying to sell a tiny stake in a private company really isn’t easy. This is generally why listed groups avoid holding such stakes in the first place. RMB Holdings is trying to turn assets into cash as part of the strategy to return value to shareholders. On more strategic holdings, it’s a lot easier. For the 7.15% stake in Divercity Urban, there probably weren’t many buyers in town.

This is why RMB Holdings has agreed to the company repurchasing shares and shareholder loan claims held in and against Divercity. The company is loss-making, so RMB Holdings didn’t get a great price here. The carrying value of Divercity in RMB Holdings’ accounts as at 30 September 2023 was R87 million. In that period, there was a fair value loss of R9.8 million. The price for this repurchase is only R50 million, so that’s a long way down from the September carrying value.

This will in all likelihood lead to another special dividend to RMB Holdings shareholders once the deal is completed.

Workforce suffered major headline losses (JSE: WKF)

This is despite an increase in revenue

Revenue at Workforce Holdings increased by 4% for the year ended December 2023. Despite this, EBITDA came down sharply from R201.1 million to R151.3 million off a revenue base of R4.5 billion. Those are very skinny margins indeed.

It looks much worse at HEPS level, with a drop from 46.8 cents to a headline loss of 13.3 cents per share. There’s no final dividend, which is to be expected when there are losses.

The revenue increase was simply no match for margin erosion and increases in overheads. The company put steps in place to reduce costs, but they were only completed by September 2023. This suggests that a more palatable 2024 may be on the cards.

In general, a low margin company in a volatile market like South Africa is always going to be a rollercoaster.

At York, the assets go up in value and HEPS comes down (JSE: YRK)

The share price has been on a steady slide since 2022

York Timber has released results for the six months to December 2023. Revenue fell 2% and cash generated from operations was down R111 million, so it was another difficult period for the group. HEPS fell sharply from 13.27 cents to 4.67 cents. Core earnings per share deteriorated from a loss of 2.62 cents to 10.06 cents.

Despite the financial performance dropping faster than the trees being cut down for processing, the biological asset value increased by 5%. It strikes me as such a theoretical concept, as we can quite clearly see that extracting value from the trees is far harder than the valuation would otherwise suggest.

There’s no dividend for this interim period, just like in the last period as well.

The outlook isn’t a source of encouragement either, with York noting that the lumber market is expected to remain weak in terms of demand and pricing.

Little Bites:

  • Director dealings:
    • With the share price at Quantum Foods (JSE: QFH) continuing to run amok from speculation (now up to R13.50), the company announced that director Hendrik Lourens has agreed to buy shares worth R1.26 million for either R9.00 or R10.00 depending on which tranche you look at. Director Wouter Hanekom, acting through an associate, bought R1.7 million worth of shares at R10 per share.
    • Following the release of the annual results, the chairman of Kore Potash (JSE: KP2) will subscribe for shares worth $150k. In those results, the company confirmed that it is still targeting the signing of full EPC documentation in Q2 2024, with funding required to help the company reach that point.
  • If you’re closely following the MC Mining (JSE: MCZ) offer by Goldway and all the to-and-fro with the independent board, then you’ll want to check out the fourth supplementary bidder’s statement released by Goldway. They are focusing on trying to discredit the work of the independent expert here, which of course underpins the board’s decision to recommend that shareholders do not accept the offer. There’s far too much detail to go into here. If you hold shares in MC Mining, you need to read everything carefully.
  • Jubilee Metals (JSE: JBL) released an update on its copper projects and expansion of chrome operations. On the copper side, International Resources Holding in Abu Dhabi has exercised its right to proceed with the formation of the joint venture for the implementation of the Waste Rock Project. At the Roan Project, ramp-up is expected to commence in April 2024. At Project Munkoyo, initial deliveries of copper ore to the Sable Refinery are expected in September 2024. Moving to local chrome and PGMs, the chrome tolling agreements have been extended to February 2027 and the construction of Thutse’s second chrome processing module is on track to commence in August 2024.
  • Zeder (JSE: ZED) has appointed PSG Capital and Rabobank as co-advisors to consider any approaches from third parties regarding the investment in Zaad Holdings. This may or may not lead to a formal process to find a buyer. Zeder also confirmed that third parties have made approaches regarding the Pome Division that was excluded from the disposal of Capespan.
  • enX (JSE: ENX) announced that the urgent application by Inhlanhla Ventures to try and interdict the general meeting for the disposal of Eqstra has been withdrawn. This means that the meeting will go ahead on 3 April as planned.
  • Europa Metals (JSE: EUZ) released results for the six months to December 2023. As this is a resource development company, it shouldn’t really shock you that there are net losses. They came in at A$248k, which is a lot better than A$1.2 million in the comparable period. The company is developing the Toral project in Spain. Of critical important is the funding arrangement with Denarius, which gives that company the option to acquire up to 80% in the Toral project. If you’re investing in junior mining, you need to understand that massive dilution of your equity interest is par for the course, unless you have very deep pockets to help fund the development.
  • DRA Global (JSE: DRA) released its annual report and announced a dividend of A$0.11 per share for the year ended December 2023. This is the company’s first dividend since listing. It works out to 136.35 cents per share. For reference, the share price is R22 at time of writing.
  • The Foschini Group (JSE: TFG) has announced the appointment of Ralph Buddle as CFO, which relieves Anthony Thunström from the role as executive financial director in addition to being CEO. Buddle was previously interim CFO at Oceana Group and has been in an executive role at The Foschini Group since September 2023.
  • Stefanutti Stocks (JSE: SSK) has reached agreement with its lenders to extend the capital repayments profile of the loan as well as its duration to 30 June 2025. This is part of the group’s restructuring plan.
  • Sanlam (JSE: SLM) implemented a B-BBEE deal in 2019 that ended up being badly impacted by COVID. These highly leveraged structures depend on dividends and significant share price growth to be successful. When those things don’t happen, they end up underwater. This is what has happened here, with Sanlam looking to buy the shares back from that structure at a nominal value. It’s even worse than that really, as Sanlam had to step in to buy the preference shares from Standard Bank that funded the deal. It’s an expensive outcome for Sanlam shareholders.
  • Wesizwe Platinum (JSE: WEZ) does not have any revenue at the moment. The auditors have also made it clear that there are uncertainties around the company’s ability to continue as a going concern, with the group’s existence dependent on ongoing support from the majority shareholder and a willingness not to call the current shareholder loans. Although the loss per tax for the year came down significantly from R134 million in the prior period to R25.2 million in 2023, it was still a substantial loss.
  • Randgold & Exploration Company (JSE: RNG) is focused pursuing legal claims and limiting operational costs. It’s not the most inspiring company vision in the world, but somebody has gotta do it. The company reported an operating loss of R30.6 million for the year ended December 2023, worse than R22 million in the prior year.
  • SAB Zenzele Kabili (JSE: SZK) released its annual report. The net asset value has increased from R2.26 billion to R2.67 billion, a direct result of a strong finish to the year for the AB InBev share price.
  • In order to meet B-BBEE requirements under ICASA licensing provisions, Telemasters (JSE: TLM) is disposing of 30% in major subsidiary Catalytic Connections to the Sebenza Education and Empowerment Trust. This is a Category 2 transaction, so there is no shareholder vote on this. A more detailed announcement with terms of the deal will be released in due course.
  • Chrometco (JSE: CMO) is an absolute mess that is suspended from trading. The reporting is running behind schedule and the company is struggling to appoint auditors because subsidiaries are in business rescue. On top of all this, the business rescue practitioner in on subsidiary is even suing another subsidiary! It sounds like only the lawyers are making money here, with the creditors meeting for the business rescue plan to be held on 11 April 2024.
  • Afristrat Investment Holdings (JSE: ATI), perhaps the most broken company of all on the JSE, would really like to voluntarily liquidate itself. It can’t though, as a creditor is trying to liquidate it first. Yes, really.
  • Deutsche Konsum (JSE: DKR) has basically zero liquidity on the JSE and has announced an intention to drop this listing. Still, in case you are one of the few local shareholders, it’s important for you to know that the company has sold off a large portfolio of properties to try reduce debt and is negotiating with bondholders to extend debt maturities.

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

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

Exchange-Listed Companies

Deutsche Konsum REIT-AG has disposed of a sub-portfolio of 14 retail properties with an annual rent of c. €5,5 million. The properties were sold at a discount of 3.8% on current carrying amounts. The funds will be used in full to repay bank and bond liabilities.

Sirius Real Estate is to expand its UK portfolio with the acquisition of Vantage Point Business Village, a multi-let business park in Gloucestershire for a total acquisition of £48,24 million. Through the purchase, Sirius will add more than 1,5 million square feet of space to its BizSpace portfolio, of which 1 million square feet is industrial space. The acquisition has been made using the proceeds of the company’s £147 million capital raise achieved in November 2023.

MTN has accepted an offer from Africa-focused telecommunications company, Telecel, to acquire its units in Guinea-Bissau and Guinea-Conakry. The disposals are part of MTN’s portfolio optimisation strategy and investment in digital platforms and fintech offerings. Financial details were undisclosed.

Following the failure to get the deal with Alma Trading CC across the line, Accelerate Property Fund has announced the sale of Cherry Lane Shopping Centre in Pretoria to Cadastral Assets for a cash consideration of R60 million. Accelerate purchased the property as part of a retail portfolio acquired in 2014.

CA Sales, through its wholly owned subsidiary CA Sales Investments, is to acquire a 49% stake in Roots Sales from Mass Market Distribution Holdings. The acquisition is part of the company’s channel broadening strategy and has the option to increase its shareholding in the future. Roots has an integrated market offering that combines all commercial requirements, including sales, merchandising, auditing and delivery solutions into a single interlocking and dynamic service enterprise specialising in the main market. Financial details were undisclosed.

In August last year Nampak announced it would undertake to implement various turnaround initiatives including an asset disposal plan to raise c.R2,6 billion. This week the group announced the disposal of its liquid cartons business in South Africa and its businesses in Zambia and Malawi for a total consideration of R450 million. The assets have been acquired by a consortium represented by RMB Corvest (FirstRand) and Dlondlobala Captial.

After several months of cautionary announcements and speculation around Telkom’s sale of its mast and towers business Swiftnet, the company has finally released further details. Towerco Bidco, a consortium comprising an infrastructure fund managed by a subsidiary of Actis and a vehicle owned by Royal Bafokeng Holdings (RBH) will acquire Swifnet. As its BEE partner, RBH will hold at least a 30% of the acquiring entity. The aggregate consideration to be paid to Telkom will be calculated with reference to an enterprise value of R6,75 billion.

Hot on the heels of the release of details on the listing of WeBuyCars, Transaction Capital has announced the disposal of Nutun Australia (NAH) for A$58,3 million. The sale, to Australian alternative investments company Allegro Funds, is in line with Transaction Capital’s announcement that it was reviewing its operations to reposition or dispose of non-core assets. Nutun International has entered into a strategic partnership with NAH and its new shareholder, through the on-going provision of customer and debtor engagement support services and associated technologies to NAH clients from South Africa.

Copper 360 has entered into a memorandum of understanding with Far West Gold Recoveries (FWGR) in terms of which the DRDGold subsidiary will conduct a due diligence (DD) on Copper 360’s copper tailings dams over a 12-month period. The DD will determine the viability of the copper dumps which may result in the parties entering into a joint venture agreement, with FWGR acquiring a 50% interest and becoming the operator of the dumps.

Telemedia, a subsidiary of the Rex Trueform Group, is to acquire a number of properties from Telelet, a company owned by The Bretherick Family Trust. The R51,5 million acquisition of the properties is seen as a strategic opportunity for Telemedia which currently partially occupies the properties for operational purposes. Additional rental revenue from remaining portions will diversify Rex Trueform’s existing portfolio of properties.

Actis has exited its investment in Octotel and RSAweb to a consortium led by African Infrastructure Investment Managers (Old Mutual). AIIM is investing alongside STOA, an impact fund in infrastructure and energy and Thebe Investment Corporation. Octotel is a key player in the fibre-to-the-home and business markets in the Western Cape.

Zeder Investments has received several approaches from third parties regarding the company’s portfolio investments, namely the Pome Division, previously in the Capespan Group and Zaad Holdings. Zeder will consider these approaches and will, it says, embark on formal processes where appropriate though this may take several months.

Unlisted Companies

Medu Capital has acquired a majority stake in Optron Group, a distributor, supporter and integrator of cutting-edge technology brands. The strategic partnership, through its Medu IV fund, will aim to foster innovation, drive market expansion and deliver value to both customers and stakeholders.

RH Managers, a local private equity firm headquartered in Johannesburg, has invested R270 million, split evenly between debt and private equity, into Herolim Private Hospital, a healthcare facility in Mthatha.

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

Weekly corporate finance activity by SA exchange-listed companies

Marylou Greig
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Weekly corporate finance activity by SA exchange-listed companies

Adcorp has repurchased 73,701 shares for a consideration of R295,798 in terms of its Odd-lot Offer, representing 0.07% of the company’s total issued share capital.

Kore Potash plc has advised on the conversion of Convertible Loan Notes into 109,865,053 new ordinary shares in the company at a price of 0.38 pence per new ordinary share. Following the issue of the new shares, the total issued share capital of the company will consist of 4,229,532,173 ordinary shares.

Deutsche Konsum REIT-AG has announced it is to withdraw its secondary listing on the JSE. The company, which has a primary listed on the Frankfurt Stock Exchange, listed on the JSE in March 2021. The intention was to attract interested South African investors. However, despite various initiatives, engagements with investors have not yielded the desired results from a local market perspective. Further details will be announced in due course.

Oando plc, which has a secondary listing on the JSE, has had the trading of its shares suspended. This follows the company’s failure to comply with the JSE Listings Requirements by not publishing its year-end results for 2022 and the interim results for 2022 and 2023.

A number of companies announced the repurchase of shares.

British American Tobacco has commenced its programme to buyback ordinary shares using the £1,57 billion net proceeds from its sale of ITC shares. The company will buy back £1,60 billion of its ordinary shares – £700 million in 2024 and the remaining £900 million in 2025. This week the company repurchased a further 1,76 million shares at an average price of £23.71 per share for an aggregate £4,17 million.

Tharisa plc, dual listed on the JSE and London Stock Exchange, is to undertake a US$5 million general share repurchase programme during the period 26 March to 21 February 2025. The repurchase will represent up to 10% of the ordinary shares in issue.

Hammerson plc has, in accordance with the terms of its share repurchase programme announced on 12 March 2024, this week purchased a further 857,634 shares at a volume weighted average price of 26,92 pence, for an aggregate £232,393.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 18 to 22 March 2024, a further 3,994,681 Prosus shares were repurchased for an aggregate €109,8 million and a further 315,210 Naspers shares for a total consideration of R976,9 million.

Five companies issued profit warnings this week: Gemfields, Wesizwe Platinum, Salungano, Randgold & Exploration and Balwin Properties.

Three company either issued, renewed, or withdrew cautionary notices this week: Telkom SA SOC, Pick n Pay Stores and AYO Technology.

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

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

Vanessa Aitken
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Who’s doing what in the African M&A space?

DealMakers AFRICA

Altona Rare Earths has entered into an agreement with Sustineri Group and other shareholders to acquire the entire issued share capital of Phelps Dodge Mining (Zambia), the registered holder of Large Scale Exploration Licence 21403-HQ-LEL located in the Mufumbe District in Zambia. The consideration will be settled as follows – US$40,000 on completion and US$150,000 12 months after completion payable in Altona shares.

AI-powered edtech Sprints.ai, has raised US$3 million in bridge funding in a round led by Disruptech Ventures and includes EdVentures, CFYE and others. The Eqyptian startup, launched in 2020, is looking to use the funding to scale its end-to-end platform that bridges the tech talent gap.

The COMESA Competition Commission has approved the 100% acquisition of Kenyan dairy company Highland Creamers by Uganda’s Lato.

Kenya’s BasiGo announced a US$3 million equity investment by Toyota Tsusho Corporation’s CFAO to accelerate the production and delivery of electric buses in Kenya and Rwanda.

British International Investment has provided a US$100 million finance facility to the Eastern and Southern African Trade & Development Bank (TDB Group) which will assist the group with providing financial support to local businesses and financial institutions in several key African markets.

Flour Mills of Ghana has acquired a stake in Ghana’s oldest animal feed producer, Agricare, from Injaro Agriculture Capital Holdings for an undisclosed sum. The sale represents a full exit from Agricare for the fund which is managed by Injaro Investments.

The International Finance Corporation and other lenders, including African Development Bank, Bangkok Bank, British International Investment, Citibank, DEG, DZ Bank, Emerging Africa Infrastructure Fund (EAIF), Rand Merchant Bank, FMO, Export-Import Bank of India (India Exim Bank), Export-Import Bank of Korea (KEXIM), the Standard Bank Group, Standard Chartered Bank, and the United States International Development Finance Corporation (DFC) have announced a US$1,25 billion financing package to Indorama Eleme Fertilizer and Chemicals in Nigeria to ramp up its fertilizer production and develop a port terminal for exports.

CANAL+ Group has acquired a stake in Marodi TV, a Senegalese production company. Financial terms were not disclosed.

Many Peaks has announced an agreement to acquire a 100% interest in the Turaco Gold and Predictive Discovery Ltd joint venture [CDI Holdings] which holds the right to acquire an 85% interest in four mineral permits in Côte d’Ivoire (including the Ferke Gold Project). The purchase will be settled through the issue of 5,617,978 fully paid ordinary shares in Many Peaks.

DealMakers AFRICA is the Continent’s M&A publication.
www.dealmakersafrica.com

Africa: from basket case to breadbasket

Michael Avery
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Africa: from basket case to breadbasket

I stopped an old man along the way, hoping to find some old forgotten words or ancient melodies. He turned to me as if to say, “Hurry boy, it’s waiting there for you.” ~ Africa by Toto

In the heart of Africa’s transformative journey towards becoming a net exporter of food, a new chapter is being written, guided by the winds of change brought by the African Continental Free Trade Area (AfCFTA). The narrative is set for the agricultural sector to emerge as the protagonist in this story, igniting Africa’s domestic processing capacity and ushering in a denouement of economic rewards. Among the lead authors of this fresh new story is Amos Dairies, the latest venture under the strategic wing of EXEO Capital’s Agri-Vie Fund II.

Agri-Vie Fund II, a US$150m food and agri-business investment juggernaut managed by EXEO Capital, is strategically positioned to leverage the expansive landscape of sub-Saharan Africa. From the farm to the table, this fund spans the entire food and agribusiness value chain, making it a dynamic force in shaping the future of agriculture across the continent.

Paul Nguru, Partner at EXEO Capital, sheds light on the latest development, where Agri-Vie Fund II earmarks $10m for Amos Dairies’ next strategic growth phase. This injection of capital positions Amos Dairies as a key player in Uganda’s dairy sector, standing tall as the largest milk processor in the country, and the sole processor of casein in sub-Saharan Africa.

“Amos Dairies has not just secured a foothold in the market; it has become a standout player in the value-added African dairy sector. Through our Agri-Vie funds, we’ve successfully invested in other dairy processors across the continent. This recent investment is a natural progression, allowing us to build on our experience and extend the Fund’s reach into Uganda and beyond,” remarks Nguru.

Amos Dairies, an African success story with vast potential, currently manufactures a diverse array of nine products, ranging from ghee and butter to casein and various milk powders. The production of casein, a crucial milk protein with a global market value of $2,7bn in 2020, gives Amos Dairies a significant competitive edge.

Nguru highlights Amos Dairies’ strategic positioning, with around 90% of its revenue derived from exports to markets such as Egypt, Kenya, India, and America. This not only provides a natural hedge to foreign exchange risks, but also positions the dairy giant to tap into dollar revenue streams, aligning with the interests of both Amos Dairies and EXEO’s diverse portfolio.

However, what sets Amos Dairies apart is not just its product diversification and export success; it’s the positive impact it has on smallholder farmers. Currently supporting 1,600 farmers, Amos Dairies plans to grow its workforce by 80% over the next five years, creating 140 new jobs. Doubling milk volumes during this period will directly benefit approximately 3,200 smallholder farmers.

Nguru emphasises the centrality of impact in their investment strategy, stating, “Investing in African food and agribusiness companies is about nurturing prosperity. These enterprises represent windows of opportunity, fostering sustainable development on the continent. While economic viability is paramount, we deeply appreciate the transformative impact such investments can have.”

As part of EXEO Capital’s portfolio, Amos Dairies gains more than just financial support. EXEO will provide governance support, opening doors to new markets and customer bases through their extensive networks. Over the next five years, potential partnerships with EXEO’s existing dairy portfolio companies and the development of value-added products are on the horizon.

EXEO Capital aims to guide Amos Dairies strategically, enhancing corporate governance, optimising operations, and fortifying environmental and social governance practices. Mal Beniston, Chair of the Board at Amos Dairies Limited, echoes the sentiment, emphasising the shared commitment to agricultural and agribusiness development across the continent.

In this transformative story, EXEO Capital’s trust in Amos Dairies’ vision propels them to push boundaries in dairy production, while uplifting communities and fostering economic resilience. As the investment arc unfolds, collaboration, growth and a positive impact on Africa’s agricultural landscape are the supporting cast, hopefully changing the narrative from basket case to breadbasket.

This article first appeared in Catalyst, DealMakers’ quarterly private equity publication.

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

The benefits of due diligence in drafting sale and purchase agreements for M&A deals

Thandiwe Nhlapho and Roxanna Valayathum
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The benefits of due diligence in drafting sale and purchase agreements for M&A deals

In mergers and acquisitions (M&A), acquiring a business or an asset without conducting a due diligence investigation (DDI) substantially increases the risk, particularly to the acquirer. Not only is the DDI important to understand the nature of the business, its affairs, and its assets and liabilities, conducting a DDI on the company to be acquired (Target Company) may inform the negotiation and/or drafting of the sale and purchase agreement for shares or business (Sale Agreement), particularly in relation to the purchase consideration, suspensive conditions, warranties and indemnities, and post-closing obligations.

An M&A transaction often requires a financial, legal and tax DDI, typically to identify any red flags which could be deal breakers or diminish the value of the Target Company, which would impact the purchase consideration payable under the Sale Agreement. These red flags will determine whether or not the acquirer continues to negotiate the transaction and subsequently conclude the Sale Agreement with the owner/s of the Target Company or business (Seller/s).

Notwithstanding the red flags, the acquirer may still be interested in the transaction, provided that the risks identified can be mitigated through, among other things, (i) an adjustment to the purchase consideration; (ii) the Sale Agreement being subject to suspensive conditions, i.e. conditional on certain events taking place prior to the Sale Agreement becoming effective; (iii) warranties and indemnities being given by the Seller in favour of the acquirer; and (iv) post-closing obligations of the Target Company.

This article will provide an overview of the way in which a legal DDI will highlight the aspects which are vital to protect the acquirer’s interests in a Sale Agreement.

ADJUSTMENTS TO THE PURCHASE CONSIDERATION

The DDI may be beneficial in negotiating the purchase consideration. For example, during the DDI, a penalty payable to a regulatory authority as a result of a breach of environmental laws or the termination of a material supply agreement with preferential terms which, if replaced, may increase the overall expenses of the Target Company, may be identified. In such instance, the acquirer may wish to negotiate:

• a discount to the purchase consideration; or
• structuring the payment mechanism in the Sale Agreement in a way which mitigates the financial exposure to the acquirer, such as:

(i) retaining a portion of the purchase consideration in escrow pending settlement of such penalty or conclusion of a renewal to such contract; or
(ii) requesting a guarantee to be issued by a reputable bank or the parent company of the Seller in favour of the acquirer as a suspensive condition, pending settlement of such penalty or conclusion of a renewal to such contract.

SUSPENSIVE CONDITIONS

In order to ensure that the deficiencies identified in relation to the Target Company are dealt with prior to the implementation of the acquisition, to the extent possible, the acquirer will include certain suspensive conditions in the Sale Agreement.

For example, the DDI will reveal material agreements between the Target Company and third parties (usually lenders, customers or clients, and suppliers) in terms of which prior written approval or notification is required for the proposed transaction. For instance, the proposed transaction may trigger a change of control which requires approval of, or notification to a counterparty in the case of a sale of shares, or consent for assignment in the case of a transfer of business. Such approvals/consents and notifications ought to be included in the Sale Agreement as suspensive conditions. Similarly, it may be discovered during the review of accreditations, licences or registrations that regulatory approval from a regulator or governmental body is required prior to the implementation of the Sale Agreement.

In addition to approvals or notifications, although not always ideal for deal certainty, and especially when there is a need to close the deal expeditiously, there could be documents or information which the acquirer requires to consider which may not be available during the period of the due diligence, and these can be included in the suspensive conditions. Further, during the DDI, it may come to light that certain agreements would need to be renewed or would terminate as a result of the M&A transaction.

The renewal of, or entry into such agreements (such as a lease agreement) on terms and conditions acceptable to the acquirer may be included as a suspensive condition, so as to ensure the smooth operation of the Target Company or business post implementation of the Sale Agreement.

Where non-compliances have been identified during the DDI, the acquirer may agree for regularisation to be a suspensive condition if the Seller is not prepared to indemnify the acquirer for any claims which may occur as a result of such non-compliance. The suspensive condition will provide the Seller with the opportunity to rectify such non-compliances or irregularities prior to the M&A transaction becoming effective.

WARRANTIES AND INDEMNITIES

If the acquirer cannot ascertain certain information during its DDI, and the seller cannot provide confirmation, for example, that there is no threatened litigation against the Target Company, the acquirer may request that the Seller warrants this position. If not true or correct, the acquirer can take some comfort in bringing a claim for damages for a breach of the warranty. If the Seller has negotiated a limitation of liability, the acquirer must consider this limitation in light of the potential risk and financial magnitude posed by the risks identified, or which may potentially arise.

The acquirer may also request indemnification in the Sale Agreement against potential risks identified in the DDI. For instance, the Target Company may be involved in a legal dispute where it may or may not be successful. In another instance, statutory non-compliance may be identified in the DDI where no claim or action has been brought. If the acquirer is indemnified by the Seller, the Seller will recover its loss on a Rand-for-Rand basis when claiming under an indemnity, provided that this is permitted by the wording of the Sale Agreement.

Legally, indemnities provide benefits that warranties do not, and one may be appropriate over the other in the context of the Sale Agreement and the negotiations. However, both are important for mitigating risks identified during the DDI.

CONCLUSION

While the costs for conducting a DDI may appear to be prohibitive, such costs are a justifiable expense when considering the potential legal, financial and reputational risks associated with acquiring shares in a Target Company, or the business of a Seller, ill-informed and unprepared.

Understanding the importance of a DDI and how to utilise its findings offers a greater chance of a successful M&A transaction for all parties involved.

Thandiwe Nhlapho is a Senior Associate and Roxanna Valayathum a Director in Corporate & Commercial | Cliffe Dekker Hofmeyr

This article first appeared in DealMakers AFRICA, the continent’s quarterly M&A publication.

DealMakers AFRICA is a quarterly M&A publication
www.dealmakersafrica.com

Ghost Bites (Balwin | Burstone | CA Sales Holdings | Datatec | Metair | Momentum | Old Mutual | PPC | SA Corporate | Sasfin | Sirius)

The Finance Ghost
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Ghost Bites (Balwin | Burstone | CA Sales Holdings | Datatec | Metair | Momentum | Old Mutual | PPC | SA Corporate | Sasfin | Sirius)

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

Balwin is really struggling in this environment (JSE: BWN)

Apartment sales have plummeted

This isn’t a good time to be trying to sell apartments to middle-income South Africans. Not only are they getting obliterated by inflation on things like cars, but higher interest rates are making it really difficult to justify buying property vs. just renting it.

This is why Balwin’s HEPS for the year ended 29 February 2024 is down by between 45% and 51%. The problems start right at the top, with apartment sales down by a whopping 32%. Gross margin on apartments also fell from 27% to 25%. Due to growth in the annuity business portfolio, now contributing 5.5% of group revenue, total group gross profit margin has remained in line with the prior year. Read that carefully. Total margin, not total gross profit.

Balwin did its best to reduce costs under the circumstances, but it was nowhere near enough. The pressure has also continued to the end of the year, with only 530 forward sold apartments vs. 870 at the end of the last financial year.

The balance sheet looks fine for the time being. That doesn’t mean that troubles can’t come down the line though. The share price has lost roughly a third of its value in the past 12 months.

Burstone’s distributable income per share to inch higher (JSE: BTN)

A strong second half has saved the full-year result

Burstone Group released a pre-close update for the year ending 31 March 2024. It’s exceptionally detailed, so I’ll just touch on some highlights here. This is an interesting property fund, with 55% of assets offshore and a lot of progress made in managing third-party capital. The fund recently internalised its management company at great overall cost, which obviously leads to annual management fee savings on the income statement.

The second half of the year saw growth in distributable income per share of between 6% and 8%. This takes the full-year performance to between 0% and 2% higher, which shows how tough the first half of the year was. The European business was the star of the show for the second half.

Even over the full year, the South African portfolio could only deliver like-for-like property net income growth of 1% to 2%. In contrast, the European business managed growth of 6% to 7%. The European result in particular was then impacted by higher funding costs, so earnings only grew by between 1% and 2% in euros.

The loan-to-value is expected to be 42% to 43%, which is higher than anticipated due to various capex and investment activities. Assets identified for disposal should drop this by between 300 and 500 basis points.

2023 was rather magnificent for CA Sales Holdings (JSE: CAA)

You won’t see growth like this very often

CA Sales Holdings isn’t some kind of frothy tech company that has suddenly shot into profitability. In fact, the group is pretty simple. The business model is to help FMCG producers reach their clients through retail networks. Managing shelf presence is a real thing and CA Sales does it very well.

The results for the year ended December 2023 speak for themselves. Revenue increased by 19.4%, operating profit was up 40.7% and HEPS was 25.3% higher at 97.97 cents for the year ended December 2023. The final dividend was 27.4% higher at 19.56 cents.

Despite such strong growth in 2023, the group is confident of its positioning and further growth prospects for 2024. Across organic and inorganic opportunities (like the recently announced acquisition in South Africa), CA Sales can keep generating solid earnings growth.

Datatec’s growth was spearheaded by Westcon International (JSE: DTC)

Full details will only be released in May

Datatec released a trading update for the year ended 29 February 2024. It focuses only on revenue, which will be up 5.8% year-on-year. The company reports in dollars, so that’s a hard currency growth rate.

The Westcon International division is the largest (roughly two-thirds of revenue) and fastest growing part of the group, with revenue up 7.6% Logicalis International struggled at 1.5% growth, although the second half of the year was an improvement on the first half. Logicalis Latin America grew 3.9% for the year but struggled in the second half relative to the first half.

Metair has released its 2023 financials (JSE: MTA)

This period shows a strong swing back into profitability

After a run of exceptionally bad luck, Metair is at least back in the green. A headline loss per share of 17 cents in the year ended December 2022 is now firmly in the rear-view mirror, with HEPS of 135 cents in 2023 to scrub away that memory.

This improvement was driven by a 14% uptick in revenue and a 12% increase in EBITDA. Once equity-accounted earnings from associates are included, the EBITDA line moves up 86% year-on-year. I must point out that Hesto’s share of equity losses is not brought into the income statement as the group has no obligation to fund those losses. This is the key difference vs. the way a subsidiary is accounted for, where losses are consolidated. Hesto’s losses are considering in debt covenant calculations, though.

Speaking of debt covenants, the group is within agreed banking covenant levels even with the challenges at Hesto. It would’ve certainly helped matters that cash generated from operations jumped from R151 million to nearly R1.2 billion.

IFRS 17 is all over the Momentum numbers, but perhaps following the dividend is the answer (JSE: MTM)

Cash is cash, you know

The insurance industry’s recent results have all been severely affected by a major new accounting standard. Despite efforts to restate the comparable period, this always makes it really hard to know what is actually going on.

For example, we now have a strange scenario where Momentum Metropolitan reported an improvement in return on equity for the six months to December 2023 (from 14.9% to 17.8%), yet a deterioration in return on embedded value per share from 15.6% to 12.0%.

In these situations, it’s usually more useful to read through the announcement to figure out the flavour of what’s going on. For example, new business margins are not high enough and the group is trying to address this. On the plus side, Momentum Insure’s claims ratio has improved despite flooding in the Western Cape, so management interventions there have helped.

Sometimes, the cash tells the best story. With 20% growth in the interim dividend and R500 million allocated for further share repurchases, the group clearly feels confident in the business.

Old Mutual’s metrics head in the right direction (JSE: OMU)

The total dividend is up 7% for the year

Old Mutual has released results for the year ended December 2023. Thanks to key drivers like Life APE sales (up 17%) and gross flows (up 14%), the results look good. Value of new business increased by 37%, with a 10 basis points improvement in the margin. Gross written premiums were up 14%, as Old Mutual Insure had a solid year as well.

Notably, there are still net client cash outflows. The economic conditions are causing many problems for people and this makes saving extremely hard (and in most cases, impossible). This is obviously a worry.

Still, return on net asset value improved by 170 basis points to 11.1% and HEPS was 28% higher. Adjusted HEPS increased by 21%. The total dividend per share was only 7% higher, perhaps pointing to some caution about the road ahead. I must also remind you that IFRS 17 has impacted all of these numbers, except the dividend.

Despite the obvious economic challenges in South Africa, Old Mutual is still moving ahead with its plan to build a bank. It will be very interesting to see how that works out.

Zimbabwe is the highlight for PPC (JSE: PPC)

South Africa and Botswana remain subdued

PPC has released an operational update for the ten months ended January 2024. The important starting point is that numbers exclude CIMERWA in Rwanda, as that business was sold in January 2024 for $42.5 million.

For the ten months to January, revenue excluding CIMERWA grew by 27.6%. This was firmly driven by Zimbabwe rather than South Africa and Botswana. Group EBITDA margin was 13.6%, well up on 9.9% in the comparable period. This is significantly lower than the 15.3% achieved in the first six months of the year though, with weaker performance in South Africa as one of the major factors alongside other issues.

Free cash inflow of R364 million for this period (excluding dividends from Zimbabwe) is higher than R242 million in the comparable period. A timing delay for a major capex project is one of the factors to keep in mind here.

Digging deeper, South Africa and Botswana (which is now a cash positive segment after the proceeds from the CIMERWA disposal were received) saw volumes decrease by 4%. Price increases more than offset this decline, with revenue up 6% for the 10 months and EBITDA margin up from 10.7% to 11.4%.

The materials business still reported negative EBITDA but the losses are far more manageable, coming in at negative R7 million vs. a loss of R60 million in the comparable period. The disappointment is that EBITDA was positive R14 million at the six-month mark, so there’s been a major negative swing since then.

Zimbabwe is the real star here, with volumes up 41% and EBITDA margin expanding from 18% to 22%. The drop from 25% in the interim period was driven by the high cost of clinker imports as local production couldn’t meet demand levels. The business declared dividends of $4 million in July 2023 and $7 million in November 2023, with another dividend expected in July 2024.

With the balance sheet in vastly better shape, PPC will either continue with dividends or implement a share repurchase programme if there are no corporate investment opportunities available.

SA Corporate had a better second half to the year (JSE: SAC)

Full year distributable income is down, though

SA Corporate Real Estate has released results for the year ended December 2023. They reflect a 4% decline in distributable income for the full year. For the second half though, distributable income increased by 5.5%.

This is despite net property income being 4.6% higher on a like-for-like basis.

The distribution of 23.18 cents per share is 4% lower than in the comparable year, tracking the decrease in distributable income.

The loan-to-value ratio of 41.9% is up from 38.1% and looks to be on the high side, especially as the weighted average cost of funding (including of swaps) has pushed higher from 9.0% to 9.4%. This does no favours for distributable income.

Sasfin’s rough year continues (JSE: SFN)

The share price is down 45% this year and results look poor

In 2023, banks either did very well (like Standard Bank) or reasonably well (like Nedbank). There aren’t any others I can think of that watched HEPS get smashed, yet Sasfin’s HEPS for the six months to December fell by 62.4%.

The cost-to-income ratio has now moved 131 basis points higher to 83.79%, which is far too high. Return on equity is 2.91%. It was 8.09% in the comparable period and I joked about how a fixed deposit gives a better return. We are now well below money market. If this trend carries on, perhaps just keeping your money in a current account would be a better return on equity.

If you’re looking for the problem in this particular period, a 55 basis points uptick in the credit loss ratio to 1.72% holds the answer for you, especially when combined with a 1.8% decline in gross loans and advances.

Asset Finance grew operating profit by 10.5% to R101.1 million, coming through as the highlight in the group. The Business and Commercial Banking division recorded an operating loss of R58.4 million, which is even worse than the loss of R50 million in the comparable period. Sasfin Wealth’s operating profit fell slightly to R59.4 million.

Somewhere inside Sasfin is a a potentially decent financial services business. Perhaps the disposal of Capital Equipment Finance and Commercial Property Finance to African Bank will help reveal it.

Sirius makes an acquisition in the UK (JSE: SRE)

A multi-let business park in Gloucestershire is the target

Sirius Real Estate raised £147 million in November last year and has been busy spending it. There have already been three acquisitions in Germany announced this year, coming in at a total of €53.75 million. The latest deal is an acquisition in the UK for £48.25 million, or €56.4 million. The UK deal is thus larger than the three German deals combined.

The target is a multi-let business park in Gloucestershire and the net initial yield for the acquisition is 10.2%. The property is 81% occupied and Sirius has plans in place to improve the economics of the property. Sirius has also acquired a solar business from the seller that supplies most of the electricity on site.

In a separate announcement, Sirius noted the disposal of an industrial park in Germany for €40.1 million on a net initial yield of 5.7%. The selling price is a 6% premium to the last reported book value.

I can’t fault Sirius here on selling high and buying low, albeit in two different markets. This the kind of dealmaking that does wonders for the valuation multiple.

Little Bites:

  • Director dealings:
    • To make you feel poor, Mark Sorour (a director of Naspers JSE: NPN) sold shares worth R111 million. He also sold shares in Prosus (JSE: PRX) worth R3.8 million.
    • There are significant purchases by two directors of Remgro (JSE: REM), coming in at nearly R3.4 million worth of shares.
    • An associate of Wouter Hanekom, a director of Quantum Foods (JSE: QFH), has continued buying up shares. Purchases worth R1.15 million have been executed and there are agreements in place for another R1.19 million.
    • At Sibanye-Stillwater (JSE: SSW), the Chief Regional Officer of the Americas bought shares worth $45k.
    • A trust associated with the chairman of Stor-Age (JSE: SSS) sold shares worth R126k. The announcement calls this a “portfolio rebalancing” but I always completely ignore that. It’s a voluntary decision to sell, hence it’s a sale.
  • Pick n Pay (JSE: PIK) has released a further cautionary announcement, confirming that the two-step recapitalisation plan (a planned rights offer of up to R4 billion in mid-2024 followed by an IPO of Boxer on the JSE towards the end of the year) is making progress. More details will be provided in late May at the results presentation.
  • Copper 360 (JSE: CPR) has signed a memorandum of understanding with Far West Gold Recoveries (a subsidiary of DRDGOLD (JSE: DRD)) for a period of 12 months to conduct a due diligence on copper tailings dams at various operations. If all goes well, the DRDGOLD subsidiary would look to acquire 50% in the copper tailings dams. We know that DRDGOLD has been looking for new asset opportunities, so this is a particularly interesting development.
  • Right at the bottom of the announcement dealing with results from the AGM, the CEO of Hudaco (JSE: HDC) gave commentary on trading for the first quarter of the new financial year. This includes the holiday months of December and January, so treat it with caution. The overall feeling is that the engineering consumables business has continued its good form and the consumer-related products are still under pressure. The alternative energy business is overstocked and hasn’t corrected. Pricing is under a lot of pressure in that side of the business, which is luckily only 5% of group turnover.
  • Astoria Investments (JSE: ARA) released results for the year ended December 2023. The net asset value per share increased slightly in ZAR terms but fell in USD terms. The compound annual growth rate (CAGR) in the net asset value (NAV) per share for the period under the current management team has been 32.4% in ZAR and 24.8% in USD. This is since December 2020. The largest exposure is Outdoor Investment Holdings (47.6% of NAV), followed by Marine Diamond Holdings at 17.8%. Astoria is also busy with a transaction to increase its exposure to Leatt Corporation.
  • Shareholders of Clientele (JSE: CLI) showed strong support for the proposed acquisition of 1Life Insurance from Telesure.
  • A 17-year legal battle has come to an end, no doubt much to the disdain of the lawyers who have made a fortune over that period. AfroCentric (JSE: ACT) announced that Medscheme, a group company, was on the right side of an arbitrator’s decision to dismiss all claims brought against it by Neil Harvey & Associates as baseless. Costs were also awarded in Medscheme’s favour. The proceedings had been launched back in 2007 on the basis of agreements concluded in 2003 and 2004. The claim was initially R80 million and grew somehow to over R2 billion!
  • Accelerate Property Fund (JSE: APF) has agreed to sell Cherry Lane Shopping Centre for R60 million. It was valued at R65 million as at March 2023, but beggers can’t be choosers. Accelerate needs the money to reduce its debt. To be fair, the vacancy rate deteriorated significantly from 31 March 2023 to 30 September 2023, now at a whopping 47.8% vs. 32.3%. On that basis, the sales price actually looks rather appealing!
  • Tiny little Telemasters (JSE: TLM) may have closed 65% higher on the day, but there’s almost no liquidity in this thing and the bid-offer spread is the size of the moon. The company released results for the six months to December 2023 that reflect a revenue decline of 3.4%. Operating expenses fell by 9% though, so EBITDA came in at R3.9 million instead of R3.4 million. Yes, the company really is that small. A dividend of 0.201 cents per share has been declared, with HEPS coming in at 0.61 cents.
  • Coronation (JSE: CML) is going ahead with the odd-lot offer to shareholders. If your stake is worth around R3,000 or less based on the latest share price, this affects you. Be especially careful of the structure of the offer as a dividend, as this is most likely a worse tax outcome for you than just selling your shares in the market. Read carefully.
  • Rex Trueform (JSE: RTO) released results for the six months to December 2023 that reflect revenue growth of 2% and a HEPS decline of 62.2%, which is what happens when operating costs increase by 35.8%. There is no ordinary dividend. African and Overseas Enterprises (JSE: AOO) is essentially the same group of companies and reported a HEPS decline of 72.3%.
  • AYO Technology (JSE: AYO) has reached an agreement with the GEPF to amend terms of the settlement agreement. This has been structured as an addendum that covers matters like minority protections for the GEPF in the event that AYO is delisted from the JSE. The company will release a circular to shareholders with full details in due course.
  • All conditions for the scheme of arrangement to take African Equity Empowerment Investments (JSE: AEE) private have been met. The listing will be terminated from 16 April and shareholders will receive R1.15 per share.

Ghost Bites (Ascendis | Barloworld | EOH | Master Drilling | Nampak | Salungano | Spar | Tharisa | Vukile)

The Finance Ghost
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Ghost Bites (Ascendis | Barloworld | EOH | Master Drilling | Nampak | Salungano | Spar | Tharisa | Vukile)

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

Ascendis is making profits again (JSE: ASC)

The market will consider this in weighing up the offer for the shares

The offer on the table for Ascendis shares is 80 cents per share. The market will give that careful thought after the company just announced that for the six months to December 2023, HEPS from continuing operations was between 9.2 cents and 11.2 cents. Remember, that’s an interim number, not a full-year number.

From total operations, HEPS was between 11.4 cents and 14.0 cents.

In both cases, this is a swing into the green from a loss-making position in the comparable period.

Detailed results are due on 28 March.

Barloworld’s margin resilience has proven useful (JSE: BAW)

The pain of a revenue drop has been partially mitigated

Barloworld released a trading update for the five months to February 2024. Group revenue has fallen by 5.5% and EBITDA is down 2.5%. The improvement in EBITDA margin from 11.5% to 11.9% has helped substantially here as revenue fell. Operating profit margin has dipped from 8.9% to 8.7% though.

Equipment Southern Africa saw revenue drop by 4.9%, attributed to a 17.8% drop in machine sales due to lower demand from mining customers. Parts sales were up 13.2%. Operating margin went the wrong way in this business, with operating profit down 7.5% and margin coming in at 7.1% vs. 7.3% in the prior period. EBITDA margin moved slightly higher though, from 10.3% to 10.4%. EBITDA came in at R1 billion. The highlight in the division was 38.1% growth in the profit attributable from the Bartrac joint venture.

The order book is a worry in the local business, down from R5.7 billion to R3 billion.

Equipment Eurasia saw revenue drop by 11.1%, with Barloworld Mongolia up 24% and VT down 30%. Despite this, operating profit from core trading activities grew by 17% as the mix shifted towards after-market sales. Good cost control was also a major contributor here. The firm order book grew massively from $15.9 million in the prior period to $119.8 million. EBITDA in Mongolia was $20.1 million, up a whopping 78.6%. This is an EBITDA margin of 25.9%, which absolutely dwarfs the Southern African business in terms of margin. In VT in Russia, EBITDA was $17 million, which is 19.8% lower than the previous period.

Ingrain, the consumer industry business, suffered a 5.2% reduction in revenue. Exports felt the pressure thanks to Durban harbour issues and competitive pricing of starch. EBITDA was R318 million, down 9.9%. Operating profit fell by 16.9%. To address the concerns in the trajectory of the business, Barloworld is right-sizing the business. That can only mean a reduction in jobs.

On the whole, it remains quite shocking to me to see how poor the South African performance is relative to places like Mongolia. This is a clear indication of the broader decay in South African conditions.

EOH reports on a very poor interim period (JSE: EOH)

Operating profit has all but disappeared

EOH’s revenue for the six months ended January 2024 was R3.1 billion, which is below the R3.2 billion achieved in the comparable period. That difference has dropped straight to the bottom line, with operating profit plummeting from R142 million to R9 million.

Adjusted EBITDA is R97 million vs. R171 million in the prior period. Whichever way you cut this, it hurts.

The headline loss per share came in at 11 cents per share. Funnily enough, that’s better than the headline loss per share of 17 cents per share in the comparable period. The thing you need to remember is that the comparable period included tons of debt, whereas this period is theoretically the new and improved version of EOH. Interest costs dropped from R102 million to R68 million but this still wasn’t enough to help the group move into profitability, all because of the challenges in the core business.

EOH makes it clear to the market that the issues experienced towards the end of the prior financial year continued into the first half of this interim period. The problem is that the business still relies to a large extent on public sector and other lumpy contracts, so I can’t really see it getting better despite EOH’s hopes for the contrary.

Master Drilling: record revenue and a helpful ZAR move (JSE: MDI)

The dividend is up 10.5%

Master Drilling reports its numbers in both USD and ZAR. As you might imagine, the percentage moves can be very different.

Revenue for the year ended December 2023 was up 7.2% in USD to a record high of $242.8 million. Despite this, HEPS in USD only increased by 2.1% to 14.5 cents. The story in ZAR looks different, with HEPS up by 15.1% to 267.7 cents.

The dividend in ZAR increased by 10.5% to 52.5 cents. That’s a very modest payout ratio, especially in the context of cash from operations being 42% higher. The company is investing in new technologies to remain relevant, so it does make sense that a high proportion of earnings needs to be retained.

Debt decreased slightly from $46.1 million to $44.1 million. Including cash, the gearing ratio was flat at 7.8%.

The group sounds confident about the pipeline and committed order book. They are currently working towards a 75% fleet utilisation rate.

Nampak chips away at the debt (JSE: NPK)

There’s a long way to go, but this disposal sure does help

Nampak needs to dispose sufficient assets to raise around R2.6 billion. This will do wonders for the balance sheet and will result in a far more focused group. As a step on that journey, Nampak has agreed to sell Nampak Liquid Cartons, Nampak Zambia and Nampak Malawi for R450 million.

The buyer is a consortium of Corvest (a private equity arm of FirstRand), along with Dlondlobala Capital and two key management members as well.

Nampak Liquid Cartons operates in South Africa, selling paper liquid packaging products. Nampak Zambia focuses on conical cartons (with supplementary income from bags, crates, bottles and more) and Nampak Malawi helps Nampak Zambia and Nampak Zimbabwe sell various products in the Malawian market.

The net asset value of the disposal assets comes to R399 million. Profit after tax is R104.7 million for the year ended September 2023. A Price/Earnings multiple of 4.3x tells you where the market is on risky African assets.

This is a Category 1 transaction as it is more than 30% of Nampak’s market cap. A detailed circular will thus be released.

In a separate announcement, Nampak noted a cyber attack on the group’s IT systems. There has been no impact on manufacturing facilities, so it’s not obvious to me why they released a SENS announcement on this topic.

Salungano flags substantial losses (JSE: SLG)

At least EBITDA is positive

Salungano Group has released a trading statement for the year ended March 2023. The headline loss per share is between 50.65 cents and 57.65 cents, which is a lot when the share price is only 50 cents! HEPS in the comparable period was 6.13 cents.

The group achieved positive cash from operations at least, with EBITDA of between R80 million and R120 million.

Spar is treading water and needs to do better (JSE: SPP)

I think they can win from some of the Pick n Pay pain though, so I’ve taken a modest position

Spar is very much the “other guy” in grocery retail at the moment. Shoprite is the superstar, Pick n Pay has been left for dead in the mud and Woolworths is standing on the second step on the podium wondering how Shoprite made it to the top.

Spar? Well, it’s an odd one. When they aren’t scoring own-goals in South Africa with the ERP system, they are fighting difficult conditions in the European markets. Despite this, the group isn’t in anywhere near the trouble of the likes of Pick n Pay. With the share price down 38% in the past year and trading very close to 52-week lows, there’s some resilience in this performance that caught my eye. I’ve taken a small speculative position accordingly.

It’s going to be a while until things come right, assuming they do. Group turnover increased by 8.8% for the 24 weeks ended 15 March. Of course, you have to dig deeper than that.

SPAR Southern Africa grew wholesale sales by 5.7%, with grocery up 5.0% and TOPS up 12.8%. Volumes were under pressure, with core grocery and liquor turnover growth of 6% vs. price inflation of 7.2%. Build it could only manage 1.1% growth, but at least that’s heading in the right direction again. The pharmaceutical business grew by a strong 17.7%.

Looking abroad, BWG in Ireland and South West England is a jewel in a highly uninspiring crown. Turnover was up 6.6% in EUR terms and 16.9% in ZAR. SPAR Switzerland saw turnover fall 4.7% in CHF terms and increase 8.8% in ZAR. They have a real issue in that market with locals buying groceries across the border, as Switzerland is such an expensive place to live. SPAR Poland remains a mess, with turnover down 4.2% in PLN and up 13.2% in ZAR.

In other words, rand weakness made all the difference here, without which the turnover result would’ve been poor. Like I said, there’s a lot of fixing up to do.

SPAR is trying to sell the business in Poland and hopefully that will happen sooner rather than later. With group net debt of R11.5 billion, management believes they can achieve an optimum debt structure without tapping shareholders for funds. If that doesn’t work out, I’ll regret my speculative position here.

Another thing they desperately need to get right is the SAP implementation in KZN. It is still not running at the correct efficiency levels.

There are some encouraging signs in recent trading performance, particularly in February (even after taking the leap year into account). EBIT margin is under pressure though thanks to the irritation of the SAP system.

There’s a bumpy ride ahead. I’m just hope that SPAR can get its house in order quickly enough to take advantage of the mess at Pick n Pay. If not, then Shoprite will just keep pulling further and further ahead.

Tharisa’s share repurchase plan excites the market (JSE: THA)

When used properly, share repurchases are great

The concept of a share repurchase is quite simple, actually. When shares are trading at a valuation that the company believes is too cheap, a share repurchases is preferred to a dividend as it helps the company mop up shares at a low price. This is earnings accretive for the shareholders who choose not to sell their shares. Over time, this becomes a very important component of returns.

Tharisa is commencing with a share repurchase programme of up to $5 million, taking advantage of the pressure on the share price that has been felt across the PGM market.

The share repurchase programme can technically run until February 2025, or until the allocated amount has been used up.

The share price closed 11.5% higher in response, ironically making the share buyback slightly less lucrative for shareholders!

Overall, this is solid capital allocation discipline and that’s exactly what investors like to see, especially in mining groups. The sector is notorious for questionable capital discipline.

Vukile gives an encouraging pre-close update (JSE: VKE)

The recent R1 billion capital raise shows that the market supports this growth story

Vukile’s pre-close update is incredibly detailed. You can find the full document here.

In the South African portfolio, the like-for-like net operating income growth in 5.4% for the period ended February 2024. Retail vacancies fell slightly, with rural and value centres effectively fully let. That part of the market is incredibly strong at the moment. Commuter and township vacancies increased slightly, so it’s still difficult to get the positioning exactly right in the lower-income market. Reversions moved higher to +2.6% and trading densities are also 2.6% higher, so that’s encouraging. KZN is the exception, with trading density down 3.8%.

This chart gives you a really good idea of just how strong the pharmacy / health and beauty combination is:

Pick n Pay exposure in the Vukile portfolio is 6.2% of total rent. 4.4% is in the lower LSM brands, which is actually a good thing in this case.

In the Spanish portfolio, footfall achieved record levels and tenant sales are growing strongly, reflecting overall positive momentum in that economy. The average rent increase came in at 9.92% from 1 April 2023 to 29 February 2024. The group also sounds happy with the investment in Lar España by Castellana.

In terms of capital allocation, Vukile wants to increase the stake slightly in Lar España. They avoid bidding wars on Spanish assets and are happy to be outbid. In contrast, they are selling down the stake in Fairvest and allocating that capital into Lar España shares and the roll out of solar.

The R1 billion from the equity capital raise is currently in a money market account earning 9.25% interest. They plan to invest all the money by September 2024, with 35% gearing on new assets.

Guidance has been upgraded to reflect growth in FFO per share above 6% and growth in the dividend of over 10%. Vukile is doing really well at the moment.

Little Bites:

  • Director dealings:
    • Three Anglo American (JSE: AGL) non-executive directors took advantage of the “shares in lieu of fees” scheme. That’s a purchase in my books, with a total value of £31k.
  • Keep an eye on enX (JSE: ENX) and the planned shareholder meeting for the proposed sale of Eqstra Investment Holdings to Nedbank. The meeting is scheduled for 3rd April and a company called Inhlanhla Ventures (which holds 1.12% of enX shares in issue) has made an urgent application to the High Court to interdict the company from proposing the resolution. This relates to a transaction in 2020 in which Inhlanhla defaulted on obligations and lost shares in a company called eXtract Group. enX has responded to the application and received legal advice that the Inhlanhla action doesn’t have reasonable prospects of success. For now at least, the board plans to go ahead with the meeting. If a judge grants an interdict, then that’s a massive spanner in the works for this deal.
  • Copper 360 (JSE: CPR) has released the circular related to the share subscription facility with the GEM Yield funds that are willing to invest up to R650 million in ordinary shares. This also comes with substantial share warrants. If you’re a shareholder here, you need to have a very careful think about what this means for the group’s prospects and your current and future dilution as a shareholder. I must point out that if you’re shocked by dilution when investing in a junior mining house, you didn’t do your research on how this sector works.
  • Deutsche Konsum (JSE: DKR) has announced that the company intends to withdraw its secondary listing on the JSE. I am really not surprised, as there’s absolutely no point in a listing that has zero liquidity.
  • Textainer (JSE: TEX) will be delisted on Wednesday 27 March 2024 due to the implementation of the Stonepeak deal.
  • Randgold & Exploration Company (JSE: RNG) released a trading statement for the year ended December 2023. The headline loss per share is between 30.84 cents and 33.16 cents. This is a deterioration of between 33.47% and 43.47% vs. the prior year.

Ghost Bites (ADvTECH | Ascendis | CA Sales | Capital Appreciation | Clientele | Fairvest | Gemfields | Merafe | MC Mining | MTN | Sasfin | Wesizwe Platinum)

The Finance Ghost
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Ghost Bites (ADvTECH | Ascendis | CA Sales | Capital Appreciation | Clientele | Fairvest | Gemfields | Merafe | MC Mining | MTN | Sasfin | Wesizwe Platinum)

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

ADvTECH achieved a 45% increase in the dividend (JSE: ADH)

The year ended December 2023 was cause for celebration

Revenue for the year ended December 2023 increased by 13% to R7.86 billion. The story gets even better from there for ADvTECH, with operating profit up 18% to R1.577 billion. HEPS jumped by 19% to 174.2 cents per share, putting the icing on the cake in terms of a strong revenue increase translating into a great HEPS outcome.

The dividend per share is 45% higher for the year, coming in at 87 cents per share. That’s a modest payout ratio, indicating that the group is retaining significant funds for growth.

The Schools Rest of Africa division was the star in terms of growth, with operating profit up 43% to R114 million. Schools South Africa achieved 18% operating profit growth to R570 million. The Tertiary business was up 16% to R787 million and even Resourcing weighed in, with operating profit growth of 20% to R106 million.

Overall, that’s a really strong outcome.

Ascendis makes changes to the independent board and circular (JSE: ASC)

This follows complaints received by the TRP and associated compliance notices

Ascendis has received more than its fair share of attention on social media in the past few months, with the offer to shareholders from the consortium led by Carl Neethling raising all kinds of interesting questions. There’s also been plenty of noise online, which has led to legal action by an Ascendis director against one of the protagonists. It’s been wild out there and I don’t think the story is anywhere near being over!

Without wading into the hornet’s nest of all the fighting online, the important point is that the TRP has investigated the matter and issued compliance notices where appropriate. This has led to a few changes from Ascendis, such as the disclosure around concert parties and who is included in that definition.

Another important change is that Amaresh Chetty has moved off the independent board on a “voluntary basis and in agreement with the TRP”. This is based on a potential conflict of interest.

A supplementary circular has thus been issued and the rescheduled general meeting is in the diaries for Tuesday, 23 April. If you would like to read the entire thing, you’ll find it here.

CA Sales acquires 49% of Roots Sales (JSE: CAA)

The bolt-on acquisition strategy continues

CA&S, or CA Sales Holdings as its full name, has been one of the best recent success stories on the JSE. The share price is up 61% over the past year, which is massive outperformance vs. the rest of the market.

This has been thanks to a solid and dependable strategy with no fireworks or weirdness. Investors love simplicity. They absolutely adore simplicity that leads to profits.

A bolt-on acquisition strategy is the simplest way to grow inorganically. If you can imagine a piece of Lego in your hands, a bolt-on strategy is about taking some blocks and adding them to what you already have. This is totally different to a high risk acquisition strategy that looks for entirely new opportunities, or a new Lego set to build instead of improving the existing one.

CA Sales has acquired 49% of Roots Sales, a business with a ten-year track record in helping consumer brands reach the market in South Africa. Roots services over 8,000 outlets across Southern Africa. This is a perfect fit with the rest of CA Sales’ business and makes a lot of sense. It’s also good news that CA Sales has the option to increase its shareholding in Roots (thereby taking control), exercisable at a point in future.

Appreciation for the Payments division at Capital Appreciation (JSE: CTA)

This side of the business has carried the team in the latest period

Capital Appreciation released a pre-close update for the year ending 31 March 2024. It tells a tale of two divisions, with the Payments side doing well and the Software side struggling in a period of weak demand. Overall, financial performance improved in the second half of the financial year.

In Payments, terminal sales recovered in the second half of the year and the leased terminal estate doubled from the prior year. This bodes well for revenue and profits in years to come. Annuity revenue is now 56% of total revenue in this division, up from 50% a year ago. To assist further, expenses were tightly controlled and actually came down year-on-year, doing excellent things for improvement in margins.

The Software division is singing a different tune, with delayed contracts that impacted profitability after the business was staffed up. It’s incredibly hard to manage a business like this, as the staff need to be there to service the clients but it’s also quite easy for clients to delay projects. Although revenue growth was achieved for the year, the narrative in the announcement is one of challenges in costs. Notably, the recently acquired Dariel Group has been integrated into this division as well.

At GovChat, the company and other GovChat shareholders will share the costs of litigation against Meta, with GovChat given the right to intervene as a direct party in the Competition Commission’s prosecution of Meta. Further funding of GovChat has been limited and losses will be materially lower for this year.

Importantly, the group still has no debt on the balance sheet (despite the Dariel acquisition).

It’s hard to know where to look at Clientele (JSE: CLI)

The interim results look poor, but have been impacted heavily by IFRS 17

Clientele has released results for the six months to December 2023. HEPS fell by 35%, which doesn’t make for a happy starting point. This is based on restated comparatives for 2022 that take IFRS 17 into account.

The annualised return on average shareholders’ interest has dropped to 9%. That’s also not a good story. The introduction of IFRS 17 led to a significant increase in net asset value and a drop in current period profits. The combination is obviously a disaster for return on capital ratios.

It’s quite difficult to know how to interpret the results. Insurance income is significantly affected by yield curves over the period and how they change shape, which can lead to some volatile outcomes in a time of macroeconomic flux.

Group Embedded Value is calculated on the old IFRS 4 basis and increased from R5.9 billion at June 2023 to R6.0 billion at 31 December 2023 despite the payment of a R420.7 million annual dividend. Recurring EV earnings fell 1% vs. the comparative period.

Without a doubt, these earnings were impacted by a large number of factors that aren’t reflective of the core business. It looks as though earnings were under pressure, but the core business probably isn’t 35% worse than the prior year (as HEPS would suggest). The share price had a horrible day regardless, down 12.7%.

Fairvest affirms distribution guidance for the year for the B shares (JSE: FTA | JSE: FTB)

The balance sheet looks good as well

Property fund Fairvest released a pre-close update dealing with the six months to March 2024. The fund is split across retail (69.4%), office (18.8%) and industrial (11.8%) properties, with those splits based on revenue.

Between September 2023 and the end of February 2024, group vacancy moved higher from 4.5% to 5.3%. That’s not great obviously, but it is good news that positive rental reversions of 2.5% were achieved overall. The loan-to-value ratio is expected to be below 34% for the interim period. Perhaps most importantly, the guidance for the full year B share distribution of between 41.5 cents and 42.5 cents has been reaffirmed.

Interestingly, the presentation includes an entire slide dedicated to the Pick n Pay and Boxer exposure. Pick n Pay contributed 1.8% of group revenue and Boxer was 3.9%. Pick n Pay Liquor and Clothing came in at 0.3%. Overall, Fairvest sees this as a low risk to the business.

I must highlight that the office portfolio seems to have suffered the worst of the vacancy trend, up from 9.7% at September 2023 to 12.8% at the end of February 2024. Both the industrial and retail portfolios also saw a deterioration, but to a far lesser extent.

Gemfields concludes another emerald auction (JSE: GML)

These metrics don’t look so great, but the company has tried to explain why

In the comments related to this emerald auction, the Gemfields executive noted that “the commercial-quality emerald market remains in good shape and prices are broadly in line with the September 2023 commercial-quality auction.” Now, that may well be true, but the metrics for the auction tell a different story. The devil seems to be in the detail of the lower-quality emeralds included in this auction, which would normally be sold via a direct sales channel. There were also unsold lots that weren’t typical auction grades. This has skewed the overall auction result.

Of the last five auctions, this auction achieved the worst result in terms of percentage of lots sold by weight. With sales of $17.1 million, it also achieved the lowest total sales result. The price of $4.45 per carat was way off the other auctions, with the lowest of the other auctions at $7.13 per carat.

The market is a tad nervous of Gemfields after the last results and these metrics wouldn’t have helped, despite the company’s efforts to explain them. The market will watch the results of the next few auctions closely.

Separately, the company released its annual report and announced a dividend of USD 0.857 cents per ordinary share. This is miles off the USD 4.125 cents in 2022.

Merafe announces the second quarter ferrochrome price (JSE: MRF)

This is obviously a very important input into expected profitability

For Merafe, the ferrochrome price is the lifeblood of the business. Each quarter, the company announces the benchmark price for the upcoming quarter. This is just how the ferrochrome market works (vs. e.g. a spot gold price).

For the second quarter of 2024, the European benchmark price has been settled at 152 US cents per pound, which is a 5.6% increase vs. the first quarter.

The announcement doesn’t give the year-on-year move, so I went and dug out the equivalent SENS announcement from 2023. For the comparable second quarter, the price was 172 US cents per pound. Although the rand plays a role here, the USD-based price is 11.6% down year-on-year.

MC Mining starts using stronger wording (JSE: MCZ)

Goldway’s efforts to cast doubt on the independent expert valuation have struck a nerve

At one point, I thought we had heard the last of this fight between Goldway as the bidding party and the independent board of MC Mining as the target. Alas, there’s more.

MC Mining has turned up the overall tone of its announcements, particularly in response to Goldway refuting the approach taken by the independent expert in the valuation. The announcement goes into great detail, defending the approach taken and reminding shareholders that the independent board’s recommendation is to not accept the offer.

Either way, shareholders have the opportunity to accept the cash from Goldway (and therefore ignore the independent expert and the board) or trust what the board is saying here. If Goldway doesn’t get enough acceptances though, the entire offer collapses anyway and even those shareholders who were willing to exit at this price won’t be able to do so.

MTN maintains the final dividend despite HEPS collapsing (JSE: MTN)

The payout ratio is now more than 100%

MTN has released its financial statements for the year ended December 2023, giving full details on a year that saw HEPS drop to 315 cents per share (down 72.3%) with the dividend maintained at 330 cents per share. That’s a very unusual outcome, explained by non-operational impacts being responsible for 888 cents per share of the pain in HEPS.

Although there are pockets of strong growth (like data traffic and fintech transaction volumes), group EBITDA was only 9.8% higher year-on-year on a constant currency basis. As reported, it was down 0.5%. On a constant currency basis, EBITDA margin fell by 120 basis points to 41.5%.

To help you understand where everything went wrong, I’ve highlighted the finance costs and especially the net foreign exchange losses in this income statement. Just look at how much higher they are and what that did to group profit:

Those foreign exchange losses relate to MTN Nigeria and they are causing a great deal of pain for shareholders. Although the dividend is unaffected at this point, the pressure can’t continue into perpetuity.

Sasfin releases the circular for the disposals to African Bank (JSE: SFN)

This deal was first announced in October 2023

This circular has been a long time coming. Sasfin is looking to dispose of the Capital Equipment Finance (CEF) and Commercial Property Finance (CPF) businesses to African Bank. This is a Category 1 deal for Sasfin, hence a circular is needed.

This has now been released and is available here for those interested in all the details.

The total deal value is around R3.23 billion. This is based on the loan book values for the two businesses, plus goodwill of R100 million for CEF and an “agterskot” of at least R15.3 million for the CPF business. Sasfin has gotten a decent price here and African Bank is willing to pay it based on the strategic benefits of scale that these acquisitions bring to that group.

Wesizwe Platinum is still loss-making (JSE: WEZ)

The direction of travel has bucked the trend, though

Wesizwe Platinum has released a trading statement for the year ended December 2023. The bad news is that the company is still loss-making. The good news is that the losses have decreased, unlike most PGM groups that had a worse year in 2023 than 2022.

The headline loss per share has improved from -8.24 cents to between -0.95 cents and -1.77 cents.

Little Bites:

  • Director dealings:
    • The CEO of Fortress Real Estate (JSE: FFB) bought shares worth nearly R1.9 million.
    • An executive director of Argent (JSE: ART) has sold shares worth R258k.
  • Cash company Trencor (JSE: TRE) has released results for the year ended December 2023. The group is essentially sitting on a pile of cash that will be distributed to shareholders once the group is able to do so. The total net asset value per share increased from R7.40 to R8.13 over 12 months. The share price is R7.00.
  • There’s another leadership change at Bytes Technology (JSE: BYI), with non-executive director Mike Phillips stepping down with immediate effect. He was Audit Committee Chair. The announcement isn’t explicit on whether this relates to the ridiculous lack of governance around the ex-CEO’s share trades, or something else.
  • Astoria (JSE: ARA) released the “information note” for the deal to acquire more shares in Leatt, which would take Astoria’s stake in the company to 8.84%. This is a Stock Exchange of Mauritius requirement that simply gives more information about Astoria, as the company is proposing the issue of new shares to settle the acquisition of Leatt shares. For those interested, it’s available here.
  • Adcorp’s (JSE: ADR) odd-lot offer has closed. The company repurchased a total of 73,701 shares. This is only 0.07% of shares in issue, yet it takes 6,955 holders off the shareholder register for a total investment of R296k.
  • Hammerson (JSE: HMN) has confirmed that its final dividend for 2023 will be translated into rands at a rate that results in a gross dividend of 18.66017 cents. There is a dividend reinvestment plan available for those who prefer to obtain more shares rather than cash.
  • There is yet another delay in the Conduit Capital (JSE: CND) disposal of CRIH and CLL to TMM Holdings. Approval from the Prudential Authority remains outstanding, with the parties agreeing to extend the fulfilment date to 30 April 2024. This has been going on for a long time now.

Lessons in wealth management from a cursed family

Dominique Olivier
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Lessons in wealth management from a cursed family

The infamous “shirtsleeves curse” is one that has occupied the mind of many a wealthy patriarch on a sleepless night. Affecting 90% of the wealthy, even America’s richest family couldn’t escape its clutches. Could the secret to maintaining family wealth be found in the unfortunate tale of the Vanderbilts?

“From shirtsleeves to shirtsleeves” is an adage that usually pops up when the topic of generational wealth is under discussion. The idea behind this saying is that the first generation of wealth builders in a family will start their journey in shirtsleeves (i.e. not having enough money to afford a coat). Through the hard work of the first generation, the second generation will grow up under better circumstances. Their children, the third generation, will be born into wealth and will eventually squander it, landing themselves and their descendants back in shirtsleeves.

It sounds like a cruel joke or perhaps a myth cooked up by wealth managers, yet the statistics support this theory. 70% of wealthy families are likely to lose their wealth by the second generation. By the third generation, that number can jump to 90%.

Case study: the gilded Vanderbilts

Before he became the richest man in America, Cornelius “Commodore” Vanderbilt was a school dropout hustling on his father’s ferry in New York Harbour. At the age of 16, he borrowed $100 from his mother in order to purchase a two-masted sailing vessel. From there he set sail as a captain on a Staten Island passenger boat. Riding the waves of success, he steamed ahead (literally) into the steamboat business before laying the tracks for his legendary railroad empire, New York Central.

Stretching his reach across the nation, Vanderbilt’s iron veins connected every corner of the United States, monopolising rail services in and out of the Big Apple. By the time of his death in 1877, Vanderbilt’s riches had skyrocketed to $105 million, outshining even the coffers of the US Treasury.

While $105 million in 1877 was enough to make Vanderbilt the richest man in America, the equivalent $3 billion in today’s money (grown at inflation) would make him a relatively small fish in a very rich pond. For reference, Elon Musk, who currently holds the title of America’s wealthiest man, is worth $251 billion.

If Vanderbilt’s riches had been invested wisely, they would surely have grown by more than inflation in the 147 years since their patriarch’s death and there is a good chance that the family would have held onto their position as one of America’s wealthiest. Unfortunately, Cornelius Vanderbilt made the cardinal mistake that often leads to the downfall of the rich: he left his money to his children.

“Any fool can make a fortune; it takes a man of brains to hold onto it,” Cornelius is said to have told his son William Henry “Billy” Vanderbilt, according to a family biographer. The same Billy would go on to inherit the family’s 87% stake in New York Central, with comparatively tiny allowances left to his 12 siblings. His father’s words of wisdom clearly struck a nerve in Billy, who endeavoured throughout his lifetime to protect and grow his father’s fortune. By the time of his death in 1885, Billy had almost doubled the Vanderbilt fortune to $200 million.

Despite the fact that his father had encouraged him to leave his wealth to one heir, Billy’s stake in the family business was divided between his two sons, Cornelius Vanderbilt II and William Kissam Vanderbilt. Combined with the dawning of the Gilded Age in New York, this division of the family’s wealth was the beginning of their downfall.

Divide and don’t conquer

Third-generation heir Cornelius Vanderbilt II managed the railroad business until his passing in 1899 but did little to innovate or otherwise grow it. His brother, William Kissam Vanderbilt, assumed control for a few years but soon retired to focus on his passions for yachts and thoroughbred horses. According to the Vanderbilt biography, William is quoted as saying “Inherited wealth is a real handicap to happiness. It has left me with nothing to hope for, with nothing to define, to seek or strive for.” Talk about the proverbial golden handcuffs.

New York’s Gilded Age ushered in extravagant spending in the Vanderbilt family and relentless pursuits to maintain appearances. Among the family’s prized possessions were an extensive art collection featuring old masters and a string of opulent residences, including The Breakers in Newport, Rhode Island, and ten mansions gracing Fifth Avenue in Manhattan.

It was around this time that the Vanderbilts also embraced philanthropy, with the third generation donating $1 million for tenement housing in New York City. Substantial contributions flowed to institutions like Columbia University, the YMCA, the Vanderbilt Clinic, and Vanderbilt University. This was the point where the family’s wealth accumulation came to a standstill. William’s philanthropic endeavours and lavish lifestyle eventually balanced his estate, reportedly matching the inheritance he received in 1885 upon his father’s demise.

By the fourth generation, things had truly started to spiral. Cornelius II’s son, Reginald “Reggie” Claypoole Vanderbilt, was an avid gambler and playboy who drank and gambled his inheritance away. His brother, Cornelius “Neily” Vanderbilt III, spent vast sums on maintaining his high society appearance. Beyond the open wallets, questionable business decisions took bigger bites out of the family fortune.

The transport business had peaked in the late 1920s, but freight soon declined and by the end of World War II, trucks, barges, aeroplanes and buses had cut into its industry. Instead of adapting to these changes, the family chose to unlock cash by selling shares in New York Central to the Chesapeake and Ohio Railway, allowing their competitor to become a major shareholder.

At one point, New York Central stood as the second-largest railroad in the United States, boasting an extensive network of 17,000 km of track across 11 states and two Canadian provinces. By 1970, the company faced financial turmoil, culminating in bankruptcy. Subsequently, federal intervention led to the transition of passenger services to Amtrak in 1971.

While a handful of Vanderbilts have managed to make names for themselves over the years (fifth generation Gloria Vanderbilt became a famous fashion designer, while her son, sixth generation Anderson Cooper, is a CNN news anchor), the business that once made them one of the most prominent families in America has disappeared without a trace – as has the wealth it brought them.

Is there a cure for this curse?

A recent survey by US Trust targeted high-net-worth individuals possessing over $3 million in investable assets. Its aim was to explore their strategies for preparing the next generation to manage substantial wealth. 78% expressed concerns about the financial readiness of their heirs to handle inheritance. Even more striking, 64% confessed to divulging minimal to no information about their wealth to their children.

The reason behind wanting to hide your wealth from your children seems obvious: parents are probably worried that children who know that they have a juicy inheritance coming to them will grow up to be lazy and entitled. But then what happens when parents pass away and children receive a vast inheritance that they were never adequately prepared for?

Conversely, talking to children about money from an early age – including how to grow it, donate it and spend it wisely – puts them in a far better position to be able to handle a large inheritance when the time comes.

The reason why a family fortune might survive in the second generation is often because that generation is involved in the family business from a young age. They therefore work side-by-side with the founders, witnessing their passion and drive, as well as familiarising themselves with the intricate details of the business and its industry. This explains why Billy Vanderbilt was able to double the family fortune after his father’s death.

Perhaps the greatest gift that you could leave your children – worth far more than their actual inheritance – is a roadmap and a plan to preserve it. Educate them on the wonders of compound interest and guide them in understanding when their spending will start to affect the overall capital. Most importantly, make sure that your children are prepared to do the same for their own heirs somewhere down the line.

And as a final comment, you may also want to enjoy some of the money yourself. The stats tell us that even if you don’t spend it, your kids’ kids probably will.

About the author:

Dominique Olivier is a fine arts graduate who recently learnt what HEPS means. Although she’s really enjoying learning about the markets, she still doesn’t regret studying art instead.

She brings her love of storytelling and trivia to Ghost Mail, with The Finance Ghost adding a sprinkling of investment knowledge to her work.

Dominique is a freelance writer at Wordy Girl Writes and can be reached on LinkedIn here.

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