Ghost Bites (African Rainbow Capital | Caxton – Cognition | Exxaro | MC Mining | Resilient | Standard Bank)

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ARC is putting more focus on its growth investments (JSE: AIL)

Rain and Tyme Group are major focus areas, but Kropz Plc is hungry for capital

African Rainbow Capital Investments (ARC Investments) reported an intrinsic net asset value (INAV) of R11.15 per share as at the end of December 2023. This was up 12.9% year-on-year but down 2.3% from the interim period.

During the year, the group raised equity capital of R750 million. Debt in the fund was reduced by 21% to R1.775 billion and further investments were made in Rain (R81 million), Tyme Group (R76 million) and Kropz Plc (R379 million).

Both TymeBank and Linebooker reached breakeven in the past six months. Philippines-based GOtyme reached 2 million customers within 13 months.

A lot of work has been done to make the portfolio simpler, with the top 12 investments now contributing 89% of the portfolio value.

Rain is 27.2% of the fund value, with EBITDA of over R2 billion for the year ended February 2024 expected. Tyme Group is 20.3% of fund value, with breakeven achieved in December 2023 and sustained profitability expected. Kropz is 11.3% of fund value and mining is never an easy game, with the ramp-up of mining operations progressing slower than anticipated and an impairment recognised on this investment. Alexforbes is 6.6% of the fund value and has been doing well recently.

Aside from Kropz that is starting to look like an increasingly deep hole for capital, things are looking up at the group. At some point, Tyme Group will surely be IPOd on a growth-friendly market like the Nasdaq. If we are really lucky, the JSE might even get some of that action, giving us a rare thing on our market: a genuine growth asset.

Unsurprisingly, Caxton’s offer for Cognition is a modest premium (JSE: CAT | JSE: CGN)

This is because the bulk of Cognition’s value sits in cash anyway

There is finally a firm intention announcement related to Caxton and CTP Publishers and Printers wanting to take Cognition private. The price on the table is R1.07 per share, which is a premium of 2.88% over the price per share on the day before the first cautionary announcement was released.

Caxton currently owns 75.52% of Cognition’s shares.

Whilst this may sound like a cheeky offer, the reality is that Cognition is deriving the bulk of its value from cash at the moment (after the sale of Private Property) and this is more of an exit mechanism for minority shareholders than an opportunity to earn a premium on the shares. The independent board has recommended acceptance of the scheme and I’m not surprised.

Holders of 11.6% of shares in issue have indicated that they will vote in favour of the scheme.

Exxaro reports a 22% drop in HEPS for 2023 (JSE: EXX)

The good news is that there’s a substantial special dividend, though

At Exxaro, revenue for the year ended December 2023 fell by 17% and HEPS was down 22%. Although the final dividend was also lower, there’s a substantial special dividend to ease the pain. This special dividend of R5.72 (in addition to the ordinary dividend of R10.10) is because of the solid net cash position of the group.

For reference, HEPS was R46.81 per share, so even with the special dividend included there’s only a modest payout ratio here.

The coal business contributes the bulk of group EBITDA (R12.2 billion out of R13.4 billion) and earnings fell 36% as a result of revenue dropping 18%. This tells you that the energy and ferrous segments did well (up 24% and 51% respectively), leading to a smaller drop in group HEPS than would otherwise have been the case.

And in case you’re wondering, export sales fell by 2% due to lower rail performance at Transnet. To mitigate the impact, Exxaro transported export coal to alternative export ports using road transport. Some coal that would otherwise be exported had to be sold in the domestic market.

Things heat up at MC Mining (JSE: MCZ)

Goldway has responded to the “target’s statement”

Those who have been following this story will know that Goldway Capital made an offer to acquire all of the shares in MC Mining for A$0.16 per share. A potential other bidder then emerged and disappeared within the space of a week, leaving Goldway as the only current bidder in town once more.

In the meantime, the independent board of MC Mining released what is known as a target’s statement – basically a response to the offer and the recommendation to shareholders. The board recommended to shareholders that they do not accept the offer.

Goldway is allowed to respond to the target statement and they have now done so. A serious allegation has been raised by Goldway regarding a potential breach of the Corporations Act. Goldway holds more than 30% of the voting rights in MC Mining and this means that an independent expert report should’ve accompanied the target’s statement.

There are a bunch of other responses as well, with the board of MC Mining having accused Goldway of making an opportunistic bid and undervaluing the operations. This wording from Goldway made me laugh for just how matter-of-fact it is:

The Makhado Project has been at Definitive Feasibility Study (DFS) status and ‘shovel ready’ for over a decade and has never produced any coal.

This gives you a flavour of the overall Goldway response, which basically highlights that simply pointing to what the assets might be worth one day isn’t good enough. Goldway has valued them based on what the assets are producing today and what the likely outcomes are, none of which are without risk.

This, however, was my favourite jab:

The IBC (independent board committee directors) are all long-term directors of MC Mining and have never bought a share in YOUR company, despite their view that MC Mining is significantly undervalued. In contrast, the Bidder Parties have invested considerable capital in MC Mining.

The ball is now in the court of the independent board committee. Aside from why they will need to explain the alleged lateness of the independent expert’s report, they will also need to respond to this rather juicy piece of corporate finance.

Resilient’s dividend in 2023 was slightly ahead of guidance (JSE: RES)

The total dividend for the year is down 7.3%

There are two types of REITs at the moment: those that pay dividends in line with reduced earnings and those that make excuses. Resilient is one of the former thankfully, paying a dividend despite pressures from interest rates and lower distributions from investee companies.

In South Africa, the portfolio grew net operating income by 7.1% for the year. Rentals on lease renewals were 4.6% higher than expiring rentals. For new tenants, leases were up 26.5% vs outgoing leases. The blended reversion was therefore positive 7.9%, which is strong.

Resilient is also invested in a portfolio in France alongside fellow listed group Lighthouse, where several retailers with private equity structures failed in the past year. French vacancies increased from 7.2% to 9.0% by the middle of the year and reduced to 7.9% by December 2023. Resilient also has an investment in Spain, with an agreement to recently acquire the dominant regional shopping centre in Castellon on a net initial yield of 7.7%.

The group also has an investment in Nigeria, but not for much longer. Those malls are being sold to equity partner Shoprite for R1, with Shoprite taking full responsibility for the debt in the structure.

Finally, the company sold its stake in Hammerson during the year and received proceeds of R1.2 billion, having originally paid R746 million for the shares. This will be used for energy initiatives.

It’s also worth highlighting that Resilient owns 30.8% of Lighthouse Properties.

Resilient’s net asset value per share is R65.71 and the loan-to-value ratio is 35.2%. Based on the full year dividend of 406.24 cents, the share price of R46.01 is a trailing yield of 8.8%.

Standard Bank grew HEPS strongly in 2023 (JSE: SBK)

The bank took advantage of favourable conditions

As I’ve written a few times now, 2023 should’ve been a strong year for banking thanks to higher interest rates and larger balance sheets. Some banks took advantage and others lost out. Standard Bank is firmly in the former category.

HEPS grew 26% for the year, the dividend is 18% higher and return on equity improved from 16.3% to 18.8%. The cost-to-income ratio improved from 53.9% to 51.4%. It all looks very good.

The Africa business is performing well, contributing 42% of group headline earnings. Standard Bank has managed to achieve the toughest balance around: finding growth beyond South Africa’s borders but without falling foul of the risks of doing business in Africa.

Standard Bank expects 3 cuts of 25 basis points each starting in July 2024, with one 25 basis point cut in 2025. This suggests a 100 basis points decline in South African interest rates over the next year. As part of this overall bullish macroeconomic view, Standard Bank expects electricity supply and logistics constraints to both ease in the next year. I sincerely hope they are right on all three counts.

2024 return on equity is expected to be in the target range of 17% to 20%. The credit loss ratio is expected to be near the top of the through-the-cycle range of 70 to 100 basis points.

Little Bites:

• Director dealings:
  • The group COO of Astral Foods (JSE: ARL) bought shares in the company worth R16.8k.

• Woolworths (JSE: WHL) announced a change in leadership in the Woolworths Food business, with Zyda Rylands retiring as CEO of at the end of August 2024. Sam Ngumeni, currently group COO, will take over the position. He has 28 years of service with Woolworths and Rylands has retired after 29 years of service, so there’s proper institutional memory and consistency of leadership there.

• South Ocean Holdings (JSE: SOH), which has absolutely nothing to do with fishing, released a trading statement for the year ended December 2023 that reflects a jump of 99% in HEPS! That means that HEPS doubled from 2022 to 2023. Full details will be available when results are released on 18 March.

• Altria Group has reduced its stake in AB InBev (JSE: ANH) from 10.0% to between 7.8% and 8.1%, depending on whether underwriters exercise their options to purchase additional shares. Altria is achieving this through a combination of a public offering of the shares, as well as AB InBev agreeing to repurchase shares worth $200 million from Altria. There are no new shares being issued by AB InBev here. Only shares currently held by Altria are changing hands.

• At Famous Brands (JSE: FBR), Chris Boulle looks set to take the role of chairman with effect from the AGM in July 2024. Santie Botha is stepping down after serving as chairman since October 2013.

• Rex Trueform (JSE: RTO) released a trading statement reflecting a drop in HEPS of 62.2% for the six months to December 2023. African and Overseas Enterprises Limited (JSE: AOO) is part of the same group and also released a trading statement for the same period, reflecting HEPS down by 72.3%.

• Southern Palladium (JSE: SDL) released its interim report for the period ended December 2023. This is firmly in development stage, with minimal revenue. The operating loss was A$3.1 million for the period.

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