Ghost Bites (Adcorp | Balwin | EOH | MTN)

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Adcorp declares an interim dividend

This is the first year-on-year increase in revenue since August 2018

Adcorp’s share price has dropped by 6.5% this year, which has ironically made it a far better investment than many other companies in 2022!

Revenue from continuing operations increased by 3.2% and gross profit increased by 6.3%, so there was margin expansion at that level. The same can’t be said for operating profit, which fell by 0.3% after the group invested in people (especially in Australia).

Headline earnings per share (HEPS) from continuing operations decreased slightly from 25.7 cents to 24.6 cents. Despite the decrease, Adcorp feels confident enough to declare an interim dividend of 12.2 cents per share.

The discontinued operation is allaboutXpert in Australia, which continues to suffer “problems” in general. The loss from discontinued operations is R13.7 million.

Looking at the balance sheet, the net unrestricted cash position fell from R197.7 million to R144.8 million. This decrease was driven by working capital investment, share buybacks and a net dividend during the period.

The group has unrecognised tax losses of R798 million and recognised losses of R238 million. As profitability improves, Adcorp would be able to recognise more of the losses.

In South Africa, Adcorp expects to sustain the progress made in the first half of the year. In Australia, Adcorp expects demand for white collar staff to soften and demand for blue collar contingency staff to stay strong.

Even with solid results, Balwin hits a resistance level again

What will it take for the share price to break higher?

Balwin Properties closed 7% higher on Monday after releasing solid results. Here’s one for the share price chart enthusiasts:

As you can see, the price has been bumping its head on a strong resistance level. I certainly don’t profess to know much about technicals, but I do enjoy seeing these patterns. The results released on Monday took the closing price back to that level but not beyond it.

For the six months to August, Balwin grew revenue by 20% and HEPS by 47% to 36.63 cents. The net asset value increased by 11% to 771.39 cents per share.

With a share price of R2.75, Balwin is trading at a substantial discount to net asset value per share and a modest earnings multiple.

The market is clearly worried about something, despite gross profit margin increasing from 24% to 26% thanks to cost containment measures and better pricing on apartments. The balance sheet has also improved, with the loan-to-cost ratio reducing from 41.2% to 39.7% and a cash balance at the end of the period of R581.2 million.

With a 15-year development pipeline, there’s no shortage of opportunities for the group. There’s even a dividend of 9.9 cents per share, up from 7.4 cents in the comparable period.

Interestingly, Gauteng contributed 62% of apartment volumes in the comparable period and that has dropped to 50% in this period. The contribution by the Western Cape and KwaZulu-Natal increased, with Balwin noting the trend of semigration.

In case you’re curious, one-bedroom units contributed 45% of sales. 35% of sales were two-bedroom units and the remainder were three-bedroom apartments.

The market must be worried about prevailing macroeconomic conditions and the impact of rising interest rates. Balwin highlights these challenges but also notes the healthy pre-sales position of the group, with 1,551 apartments forward sold beyond the reporting period.

As expected, EOH needs to raise equity capital

I’ve been telling you this for a while now

Broken balance sheets either end in business rescue (like Tongaat) or substantial capital raises, like EOH. It’s really as simple as that.

With a market cap of R760 million, EOH is looking to raise R600 million in fresh equity. As dilutive capital raises go, that’s a big one. The structure is R500 million through a rights offer and R100 million through a specific issue of shares for cash to Lebashe Investment Group as the group’s B-BBEE partner.

In addition to raising all-important equity capital, EOH notes that Level 1 B-BBEE credentials will be assured until 2028 through the Lebashe transaction.

With the “correct” capital structure in place, EOH reckons that the business would have generated revenue of just under R6 billion and profit after tax of R112 million at a 2% margin.

2%. Exciting stuff. Still, that’s a far better outcome than Tongaat has managed.

MTN Nigeria reports solid free cash flow growth

I’m still happily holding MTN after reading this

Having lost a quarter of its value this year, MTN has been the victim of general risk-off sentiment in equity markets. If you do detailed work on it, you’ll perhaps agree with me that it doesn’t take heroic assumptions to see value at this level.

The latest news is a quarterly result from MTN Nigeria, which means we now have numbers for the nine months to September 2022. If we look at that period, we see mobile subscribers up by 9.7%, active data users up by 14.6% and fintech subscribers up by 68.7%. MTN’s African growth story continues to do well, with service revenue up by 20.6% and EBITDA 23% higher.

Within service revenue, the year-to-date growth was 4.4% in Voice and 49.1% in Data as the largest sources of revenue (contributing almost 90% on a combined basis). The rest of the business is growing quickly but is much smaller at this stage.

The margins are incredible in the African subsidiaries. In Nigeria, the year-to-date EBITDA margin is 53.6%, 100 basis points higher than the comparable period. Concerns about this margin “normalising” are getting harder to justify, as MTN is doing an excellent job of generating more revenue through smartphones with each passing year.

Rolling out the network requires significant investment, which is why capex is 45.2% higher at N379 billion. For reference, profit after tax over the period is N269 billion. If you’re wondering how those cash flows work, depreciation (a non-cash expense in profit before tax) is N243 million.

Free cash flow is 42.9% higher this quarter and 7.5% higher year-to-date.

Interestingly, because of the government’s initiative to register SIM cards, there was a quarter-on-quarter decline in mobile subscribers. MTN Nigeria expects this to moderate in the fourth quarter of the year.

Another blemish on the result is that active MoMo wallets have dropped 29.4%, despite growth in registered wallets. The company prioritised enhancements to the control systems and banking interface rather than growth, so growth is expected to return next quarter. The long-term growth story is positive.

Looking at the balance sheet, MTN Nigeria has a net debt to EBITDA ratio of 0.6x. This is a comfortable level of debt.

MTN’s share price only increased by 1% on the day. I’ve noticed that the share price tends to ignore the subsidiary results and then moves sharply when group results are released.

One to watch, I think.

Little Bites:

• Director dealings:
  • An associate of the CEO of Renergen has bought shares worth R145k
  • Value Capital Partners (an investment firm with representation on the ADvTECH board) has bought shares in the company worth around R3.68 million
  • An associate of the CEO of Spear REIT has sold shares in the property fund worth R1.5 million
  • An associate of a director of Standard Bank has sold shares worth R2.75 million
  • A director of STADIO has sold shares worth nearly R3.5 million
  • Harry Smit (you may remember that name), the chairman of Ascendis, has bought shares worth nearly R69k

• Astoria Investments released results for the quarter (and nine months) ended 30 September. The key metric is net asset value (NAV) per share, which has increased by 3% in USD and 16.7% in ZAR since the beginning of the financial year. There have been no changes in the fair values of underlying assets between June and September. No dividend has been declared as the board is focused on achieving growth in the NAV per share, which has now reached R11.5856 per share. The share price of R7.00 is a discount of nearly 40% to the listed share price.

• RECM and Calibre released interim results for the six months to September 2022. The NAV per share has increased by 24% year-on-year. Almost the entire asset value of the group is attributed to its 58.8% stake in Goldrush. The alternating gaming business was more than happy to see the back of Covid, with operations showing a strong recovery. Goldrush achieved its best ever 12-month rolling EBITDA (R397.7 million) by the end of the period. The group values Goldrush on a 7x EBITDA multiple and then adjusts for net debt (a typical market approach).

• MC Mining has released its activities report for the quarter ended September 2022. Coal production at Uitkomst was 5% higher year-on-year. The conclusion of a coal sales and marketing agreement facilitates the export of at least 20,000t of API4 coal from Uitkomst on a monthly basis. The access to the export market helped increase revenue per tonne from $108 to $125. Load shedding has adversely impacted production as Uitkomst only has back-up generators for underground mining operations. The other SOE letting the team down (Transnet) caused port backlogs and resulted in elevated inventory levels. The group has $2.2 million in cash and launched a $40 million rights offer that is expected to close in November. The proceeds will be used to develop the Makhado Project.

• Having completed the sale of Moorgath Holdings, Tradehold has declared a special dividend of 434 cents per ordinary share. This represents 31.5% of the current market cap.

• The sale by Ascendis Health of Austell Pharmaceuticals for R432 million has closed. Ascendis will use the proceeds to settle the majority of the outstanding debt.

• Finbond is still in negotiations regarding a potential acquisition in Mexico. The group has renewed its cautionary announcement.

• The independent expert on the Famous Brands property transaction (BDO) has opined that the terms are fair to Famous Brands shareholders. This is the key milestone in a small related party transaction.

• After significant recent movement on the Grand Parade Investments shareholder register, the company has issued a further cautionary announcement regarding discussions with potential bidders for GPI or its underlying assets.

• Grindrod Shipping has published the offer documentation related to the conditional cash offer by a wholly-owned subsidiary of Taylor Maritime Investments. The offer opened on 28 October and will expire on 28 November. The special dividend is scheduled to be paid on 5 December and the results of the offer are expected to be announced on 20 December.

• Labat Africa has been issuing shares for cash to expand the cannabis healthcare business and address general working capital needs. The latest issue of 22.6 million shares took place at between 16.83 cents and 19.14 cents per share, above the current traded price of 12 cents per share.

• Anglo American is a company that takes sustainability and emissions very seriously. I have a lot of respect for what the company is achieving, as there is far more than just lip service being done here. If you’re interested in this stuff, check out the sustainability report at this link

• Lwazi Bam, who was CEO of Deloitte Africa until May 2022, is joining the board of Standard Bank as an independent non-executive director.

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