Ghost Bites (Absa | Capital & Regional | Fortress | Sanlam)

Absa is also enjoying the banking party

The third bank to release an operating update is also doing well

As recent updates by Nedbank and Standard Bank confirmed, the banking industry is a nice place to be at the moment. Demand for credit is robust, net interest margins are higher, non-interest revenue is doing just fine thanks and credit losses are under control. The net result is positive jaws, which means operating margins are expanding.

We now have a third bank in the mix, with Absa releasing an update for the ten months to October. With solid loan growth and revenue up by a mid-teen percentage, Absa seems to be doing just as nicely as the others. Both net interest income (NII) and non-interest revenue (NIR) are up by mid-teen percentages.

Within NIR and as we’ve seen elsewhere, improved insurance revenue has been a major driver, with pressure in the markets side of the business numbing that benefit.

Absa even calls its jaws “strongly positive” with a note that expenses are only up by single digits, something that certainly suggests a happy story for margins. The cost-to-income ratio has improved to the low 50s.

Pre-provision operating profit for the ten months has posted growth in the low 20s, a really strong result.

The key there is “pre-provision” as this number is before credit losses. The credit loss ratio is in the upper half of the target range of 75 to 100 basis points, so Absa is also running at acceptable levels, like the peers who recently gave updates.

With return on equity of 17%, Absa is doing incredibly well overall. This bank has come a long way.

The outlook for the full year is positive overall, with the bank pouring some water on the fire by noting that vehicle finance and personal loan impairments are likely to increase significantly as the effect of high rates works through the system.

Absa’s share price is up 25% this year and the underlying numbers support this move.

Capital & Counties brings us a property view from the UK

Property metrics continue to recover, with valuations under pressure in the industry

For the five months to the end of November, Capital & Counties reports that footfall was 11% ahead of 2021 and 90% of the equivalent period for 2019.

Supported by a strong period of letting, occupancy improved from 93.8% to 94.6%. Rent collection is nearing pre-Covid levels.

The company is aiming to improve its Adjusted Profit by more than 20% in the medium-term.

The problem facing property funds at the moment is that valuations are under pressure because of rising yields. Despite improving operational metrics, many funds are reporting a net decrease in portfolio valuations because the values are so sensitive to interest rates.

Sanity is prevailing with Fortress (for now at least)

It’s going down to the wire, with the shareholder meeting scheduled for January

In line with its regulatory timetables, the JSE formally notified Fortress of its intention to remove the company’s REIT status based on the requirements for that status not being met. Regular readers will know that Fortress has a dual-share class structure that worked well in the good times. Sadly, the pandemic wasn’t “the good times” by any means and the company is now stuck.

Fortress has lodged an objection to the JSE ruling to buy time until the shareholder meeting scheduled for 12 January 2023. At this meeting, shareholders will consider a temporary change to the company’s rules around distributions, with a view to preserving REIT status.

The important news is that the JSE will wait until that meeting before making a final decision on REIT status, which is clearly a sensible approach.

The future of Fortress will now be determined at that all-important meeting.

Karooooo’s subscriber growth is looking strong

The company has given a sneak peak ahead of results in January

In case you’ve been living under a rock or you just hate vowels, Karooooo is the 100% owner of the Cartrack business. This is a subscription business that is now growing on the global stage, an initiative that has required significant investment in sales teams and other overheads.

For the quarter ended November, Cartrack reported a 14% increase in subscribers. The rate of growth (the number of net paid additions) increased by 27%, which is certainly encouraging and reflects improved operating conditions for the company.

For full details, we have to wait until 19th January.

Sanlam numbers are under pressure

The share price fell 3% in response to an operational update

For the 10 months to October, it’s been a mixed bag for Sanlam with some substantial swings at business unit level. Diversification helps here of course, with the group result inevitably being smoother than segmental outcomes.

The Financial Services side of the business illustrates the point perfectly, down 1% overall. Within that, we see movements like a 23% increase in life insurance and a 50% decrease in general insurance! The group level result from Financial Services would be up 10% were it not for once-off items, though I always view this kind of analysis with skepticism. Most years have “once-off items” in them for the majority of companies. It’s called the risk of dong business.

With further pressure coming from lower investment market returns, net operational earnings declined 6%.

And if you’re wondering what caused all that pain in general insurance, I hope you’re sitting down and ready for a long list. One of the issues is claims inflation, as increases in premiums tend to lag inflationary increases in the costs of repair. Along with investment market volatility and all the usual South African issues (like cable theft), it’s not an easy market.

Notably, the Alexforbes life book is now integrated into Sanlam Life and has been a positive contributor to the business.

Strategically, the most important news is that the proposed joint venture with Allianz is making good progress with regulatory approvals, with a plan to complete the deal by mid-2023.

The share price is down 14% this year.

Little Bites:

• Director dealings:
  • Des de Beer has bought another R5m worth of shares in Lighthouse Properties
  • The CEO of Altron bought another R31.7k worth of shares
  • A director of Afine Investments clearly used some Black Friday savings to buy shares, with a purchase of just R4.4k (not a typo)

• Anglo American is pushing ahead with a $200 million investment as part of a plan to achieve a zero emissions haulage solution. Upon completion of this deal, Anglo will hold a controlling stake in First Mode, thereby accelerating the commercialisation of the nuGen Zero Emissions Haulage System. This hydrogen-powered mine truck is technology that I’m keeping a keen eye on.

• Tharisa announced that construction at the Karo Platinum site has officially commenced. The project is situated in a Special Economic Zone in Zimbabwe.

• Northam Platinum has been granted an extension for the posting of the circular related to the Royal Bafokeng Platinum offer. The circular will be posted by no later than 23 December.

• With Nampak facing serious challenges at the moment, it raised eyebrows in the market that PSG Asset Management has acquired more shares and now holds 6.23% in the company. They clearly see value amidst the troubles.

• Raubex has appointed former CEO Rudolf Fourie as the Chairman of the Board. There’s an interesting corporate governance lesson that you can learn here. As Fourie isn’t independent as defined (due to being the ex-CEO), the board is also required to appoint a Lead Independent Director, with Setshego Bogatsu taking that role.

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