Ghost Bites (African Rainbow Minerals | Capital & Regional | Capitec | Caxton | Fortress | MC Mining | Mondi | Mpact | Quantum Foods)

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Commodity prices and inflation hit African Rainbow Minerals (JSE: ARI)

Earnings fell sharply in the latest period

African Rainbow Minerals released results for the six months to December 2023 and they tell a story of a very painful period for the company. Mining is exceptionally cyclical, with profits rising and falling due to factors completely outside of the control of the company.

Headline earnings per share fell by 43% to R15.07 per share. The interim dividend is down from R14 to R6 per share, so the payout ratio has decreased as the company takes a more cautious approach.

This just shows how important it is for our infrastructure to work consistently. In the comparable period when commodity prices were higher, Transnet was terrible. Goodness knows Transnet is still bad, but at least there wasn’t industrial action in this period. Sadly, commodity prices had already fallen by then, so an improvement in volumes couldn’t offset the loss of revenue due to lower prices on key commodities. The pain was at least mitigated to some extent by the weaker rand and higher average realised export iron ore prices.

On top of this, unit production costs were a struggle because of lower production volumes, higher electricity costs and general inflationary pressures, contributing to the drop in HEPS.

There are a number of operations in the group, with ARM Platinum worth highlighting for a momentous negative swing from headline earnings of R1.33 billion to a headline loss of R282 million.

Capital & Regional grows its dividend (JSE: CRP)

Footfall moved higher and new leases are at higher rates than before

Capital & Regional is a REIT focused on the UK market and specifically community shopping centres. The audit for the year ended December 2023 is still being finalised, but the group has released an update on key metrics in the meantime.

New lettings were achieved at a 6.8% premium to the previous rent, so that’s very good news indeed. Footfall is up 1.5%, yet is still only 86.7% of the levels seen in 2019. Occupancy declined slightly from 94.1% to 93.4%. Adjusted profit was over 23% higher for the year, which is a great outcome.

Like-for-like property valuations increased 2.6% for the year, with the Gyle property up 4.0% as the company paid a good price for it and there have already been strong renewals there.

The Gyle acquisition did impact the balance sheet, with the loan to value up from 40.6% as at December 2022 to 43.6% as at December 2023. The other impact is that the EPRA NTA per share (a measure of net asset value per share) dropped from 103p to 89p because of the additional shares in issue from the equity raise in September that funded the Gyle acquisition.

The total dividend for the year came in 8.6% higher.

Capitec achieved further earnings growth (JSE: CPI)

As we saw at Nedbank, the credit loss ratio improved recently

Capitec has released a voluntary trading statement. This is because although earnings are higher, they aren’t more than 20% up (the level that triggers a trading statement). Group HEPS will be between 14% and 16% higher for the year ended February 2024, which is still a solid outcome.

The second half of the financial year was a strong performance, particularly thanks to tighter credit granting criteria that led to an improved credit experience in the second half of the year. Although loan book growth is obviously a core part of Capitec’s strategy, the performance was boosted by double-digit growth in net transaction and commission income based on client transactional activity.

Results are due to be released on 23 April.

This hasn’t been a great period for Caxton (JSE: CAT)

The silver lining is the balance sheet

For the six months to December 2023, revenue at Caxton and CTP Publishers and Printers fell by 3.3% and profit for the period was a down by a rather ugly 30.8%. The drop in HEPS was far less severe, with a 6.2% decrease. Like in the comparable interim period, there’s no dividend per share.

We need to dig deeper to understand the result. For example, revenue would actually have been slightly up were it not for the closure of a subsidiary, so the top line result isn’t as bad as it looks. Having said that, a constrained consumer environment isn’t good news for Caxton’s community newspapers, as media advertising drops in this environment. Notably, advertising revenue in Johannesburg showed a sharp decline.

If you can’t see the decay everywhere in Joburg and the clear trend, then I can’t help you. The money is moving to the coast and at frenetic pace.

The packaging business was therefore the highlight for this period, with turnover growth of 8.1%. Although this sounds strong, margins came under pressure here.

In response to the difficult conditions, Caxton focused on reducing costs. If we exclude the closure of a subsidiary, staff costs were up 3.3% and operating costs increased 4.4%. Although this is below inflation, it looks like the group still struggled to maintain margins even if we exclude the closure.

The cash is the highlight here, up by 59% over 12 months. It’s slightly down since June 2023 (the last year-end) but this is due to seasonality. The current cash balance is already R360 million higher than it was at the end of December 2023. With high interest rates, this is driving much higher net finance income.

Of course, Caxton shouldn’t be making money for shareholders by putting cash on deposit. Investors are looking for far more than that. Caxton is sitting on significant firepower and there are multiple pressures in the market. This does create a recipe for some acquisitive activity, but there’s nothing confirmed yet.

Finally, there’s a dividend at Fortress Real Estate (JSE: FFB)

Sorting out the share class structure led to a significantly smaller holding in NEPI Rockcastle

Fortress has released results for the six months to December 2023 and they reflect a major shift at the company, as the share class structure has been simplified and that is shown in these results. This makes per-share comparability completely useless, as there is now only one class of shares vs. two. The other impact is that the shareholding in NEPI Rockcastle has reduced from 24.2% to 16.2%, as NEPI shares were used to achieve the collapse of two share classes into one.

This means that there is finally a dividend, coming in at 81.44 cents per share for the interim period. For reference, the share price is R16.39. On an SA REIT Best Practice disclosure basis, the NAV per share is R16.24 but as an eagle-eyed reader pointed out to me, that includes the previous FFB shares in the calculation. The NAV today is quite a lot higher, so there is a discount to NAV that is more in line with what we usually see on the market. Another important consideration is that the dividend is taxed as a dividend rather than as income, as Fortress is not a REIT.

If we dig into the portfolio itself, the good news is that net operating income grew by 9.2% in South Africa and 14.3% in the logistics portfolio in Central and Eastern Europe. The loan-to-value ratio is 34.2%.

Note: the Fortress sector has been updated after engagement with a reader who picked up the NAV issue

There’s a bidding war underway for MC Mining (JSE: MCZ)

This is when things can get exciting

The independent board of MC Mining must be feeling rather smug right now, having advised shareholders to not accept the offer of A$0.16 per share from Goldway Capital Investment. Out of nowhere, a competing bid has come in from Vulcan Resources (which owns the largest steelmaking coking coal mine in Africa) for between A$0.17 and A$0.20 per share.

This offer range is subject to a due diligence, but at least we know that the range is higher than the Goldway offer. At this point the independent board obviously cannot give a view on the Vulcan offer as nothing binding has been received yet.

This is usually where things can get exciting for shareholders. The ball is now in Goldway’s court to consider increasing its offer!

Mondi and DS Smith are proposing a merger (JSE: MNP)

Mondi shareholders would own 54% of the enlarged group

Difficult markets frequently lead to a consolidation strategy in which major players look to join forces to become more competitive. This is the route that Mondi looks to be taking, with a proposal to acquire DS Smith in exchange for shares to be issued by Mondi. The net result would be that existing Mondi shareholders would own 54% of the enlarged group and DS Smith shareholders would have 46%.

The groups have of course identified a number of synergies, like the combined geographic footprint and the strength in the value chain for products like containerboard. The groups will need to publish an estimate of the synergies that the merger can realise, so I can guarantee that there are some very highly paid people currently running around trying to figure that out.

I must also tell you that most mergers fail hopelessly to deliver on the promised synergies, so be sensible and apply a significant haircut to whatever number the companies put forward. Spreadsheets are easy; real life is hard.

Mondi has until 4 April 2024 to either announce a firm intention to make an offer for DS Smith or to announce that it does not intend to make an offer. The UK Takeover Code doesn’t allow things to hang in the air forever.

Mpact moved forward in a very tough environment (JSE: MPT)

The group has focused on margins and working capital management

Mpact has released results for the year ended December 2023. Revenue increased by 3.6%, despite sales volumes being 10.7% lower. This tells you that pricing increases saved the day, which also benefits margins. This led to a record result for cash generated from operations of R2 billion, which is literally double the 2022 number.

The paper business grew revenue by 3.3%, with an 11.2% reduction in volumes due to subdued demand and a decrease in fruit exports because of the weather. Mpact helped manage its working capital by choosing downtime of around 16% of total capacity at Felixton and Mkhondo Mills. This is to avoid being in an overstocked situation. The paper business grew underlying operating profit from R1.1 billion to R1.2 billion.

The plastics business grew revenue by 5.9%, with sales volumes down 3.8%. Underlying operating profit moved in the wrong direction unfortunately, from R198 million down to R189 million.

Due to higher average net debt and interest rates, net finance costs increased from R183.8 million to R284 million. Ned debt at the end of the period was R2.67 billion, up from R2.33 billion.

HEPS increased by 8% from total operations and just 3% from continuing operations. It’s very much a game of inches out there, especially with debt on the balance sheet. The total dividend for the year was 4% higher.

Despite this, Mpact believes in the core business in South Africa and continues to invest. Due to the difficulties in 2023, return on capital employed for continuing operations fell from 18.5% to 16.6%. Shareholders will want to see an improvement in this metric.

With the sale of Versapak (the discontinued operation) still in progress, Mpact is looking forward to improved conditions in the fruit sector, with the caveat being that port infrastructure could hurt exports. The containerboard side is less exciting, with an oversupply globally and ongoing risk of being overstocked that Mpact needs to manage. The plastics business looks set to be a mixed bag, with significant improvement in some areas and lower sales in others.

There’s activity on the Quantum Foods shareholder register (JSE: QFH)

Country Bird Holdings swooped in on a few shareholders, including Astral

There was some crazy activity in the Quantum Foods share price during the week. I’m not exaggerating. Take a look at this share price chart:

The activity was driven by the news that Astral Foods sold its entire interest in the company. What we now know is that the buyer is Country Bird Holdings, which acquired a 9.77% stake directly from Astral for R7.25 per share. Quantum had no knowledge of this.

Country Bird Holdings seems to be negotiating with other shareholders as well, with various prices being offered for the shares – all of which are below R9.50 per share based on the disclosure in the Quantum Foods announcement. Where Quantum is aware of discussions, including with other potential buyers, the price being put forward is R7.75.

At this stage, no formal offer or even notification of a potential offer for shares has been received from Country Bird Holdings. Quantum notes that Country Bird holds 15.8% in the company. The other two major shareholders are Aristotle Africa with 34.2% and Braemar Trading at 30.8%.

Little Bites:

• Director dealings:
  • The company secretary of NEPI Rockcastle (JSE: NRP) has sold shares in the company worth R1.75 million.
  • Two directors of Sasol (JSE: SOL) (one of the group company and one of the South African subsidiary) sold shares worth a collective R888k.
  • A director of a subsidiary of AVI (JSE: AVI) received shares under the company incentive scheme and sold the entire lot for R818k.
  • A director of Harmony Gold (JSE: HAR) sold shares worth over R321k.
  • The wife of the CIO of Primary Health Properties (JSE: PHP) has bought shares worth £9.9k.

• Things are tough at Pick n Pay (JSE: PIK), with the company releasing an announcement related to the group company giving financial assistance to subsidiaries in relation to the loan facilities with FirstRand and RMB. This isn’t really anything new, but it shows that the negotiations with banks are happening in the background as the banks waive the covenants and debate the terms and conditions with Pick n Pay.

• Maria Ramos is retiring as chairman and director at AngloGold Ashanti (JSE: ANG), with existing director Jochen Tilk appointed unanimously by the board as her replacement.

• For those interested in Alphamin Resources (JSE: APH), the financial statements for the year ended December 2023 are now available at this link.

• The Schwegmann family has increased its interest slightly in Stefanutti Stocks (JSE: SSK). The reason we know this is because of the move through the 10% mark for one of the family members, which triggers an announcement.

• Life Healthcare (JSE: LHC) has obtained SARB approval for the special dividend. It will be paid on 8 April.

• Tiny little Telemasters (JSE: TLM) released a trading statement that expects a more than 100% improvement in headline earnings per share for the six months ended December 2023. Considering that the comparable period was a headline loss per share of -1.02 cents, this means a swing into the green.

• In a good reminder of just how terrible things can get for a company, Afristrat (JSE: ATI) can’t move ahead with a voluntary liquidation application because a creditor liquidation application is awaiting a new date for the matter to be head. It’s over, we just don’t know how yet.

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