Ghost Bites (Afrimat | Balwin | Clicks | Kibo Energy | Mantengu | Nu-World | Oceana)

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Afrimat bucks the mining trend (JSE: AFT)

Diversification helps reduce the impact of cycles

At a time when most mining houses are heading in the wrong direction thanks to lower commodity prices and a difficult production environment, Afrimat is still managing to be in the green. It’s not easy, with revenue growth of 9.6% in the six months to August translating into only a 4.3% increase in operating profit. HEPS growth was similar at 4.4%.

Afrimat’s balance sheet remains solid, with a net cash position of R278.7 million. The debt : equity position of 6.2% is up from 4.7% at the end of February, but remains modest overall.

In the Bulk Commodities business, local iron ore sales carried the story with international sales taking strain thanks to rail limitations. Yes, even Afrimat isn’t safe from the joys of Transnet. The anthracite business is focused on the local market, providing an alternative to importer anthracite.

The Industrial Minerals business suffered the downstream impact of load shedding at its customers. Volumes dropped as customers curtailed their operations and operating profit fell 13.1% as a result.

The big win from a profitability perspective was the Construction Materials segment, where operating profit jumped from R73.1 million to R156.1 million. An increase of 26.5% in revenue combined with cost saving initiatives was enough for profit to more than double.

The Future Materials and Mining segment achieved revenue of R9 million and start-up losses of R8.5 million. The Glenover mine is in a ramp-up phase.

Diversification has always been core to the Afrimat strategy, achieved through a solid track record of acquisitions. The substantial deal to acquire Lafarge seems to be coming at the right time, with the Construction Materials segment performing well and ready to grow further. This is a critical deal, with the CFO temporarily seconded as the integration officer.

The share price closed 6.5% higher based on these results.

I’m not surprised to see revenue dropping at Balwin (JSE: BWN)

The current macroeconomic situation does no favours for property developers

To sell properties, you need confident consumers who have access to credit. The current environment is rather low on those people, which is why I’m not surprised to see revenue down by 25% at Balwin for the six months to August.

Where I am surprised is on the HEPS line, which increased by 4% despite the drop in revenue.

The revenue outcome could’ve been a lot worse, as volumes in terms of apartments recognised in revenue fell by 39%. This means that the focus was on getting improved pricing per unit, which also helped with a substantial gross margin uplift from 26% in the corresponding period to 33% in this period. That’s also ahead of the last full-year result of 29%. On apartments specifically, gross margin increased from 24% to 28%.

The annuity business is up to 4.7% of group revenue vs. 2.5% in the comparable period. This is basically the hustler segment, with everything from fibre networks through to estate support and even mortgage origination. Think of it as Balwin’s side gigs!

I do have a concern about the level of debt, coming in at a loan-to-value of 42% and 3.3 times interest cover. Although within bank covenants, that’s still a lot of debt in this environment. The board seems to agree, with no dividend in this period due to a desire to improve the balance sheet.

The share price is down around 20% this year and has almost halved in value over three years. I can’t see a reason to choose it over Calgro M3 in this sector.

The market liked the Clicks results (JSE: CLS)

Double-digit HEPS growth seems like enough for investors to be happy

Clicks has caused many a local professional investor to scratch his or her head, as the company seems to trade on an impossibly high valuation when you consider the South African backdrop. The share register is well known for having a large proportion of international shareholders, so it makes it even more surprising that Clicks can command a premium valuation.

There was more head scratching on Thursday, with the share price closing 6% higher at R261.75 based on adjusted diluted HEPS growth of 11.5%. Diluted HEPS was R10.45, so that’s a Price/Earnings multiple of 25x. Put differently, this is an earnings yield of just 4%! You don’t even get a particularly high payout ratio, with a dividend of 679 cents per share representing a dividend yield of 2.6%.

In case you’re wondering, the adjusted HEPS growth of 11.5% is based on adjusting for insurance recoveries in the prior year. Without that adjustment, HEPS would only be up 0.8%. Adjusting for insurance is perfectly reasonable though as that’s clearly a once-off.

To deliver this result, Clicks grew group turnover by 8.2%. Retail turnover was up 12.2%, so pressure in the wholesale business remains with distribution turnover at UPD up by just 1.5% because of systems implementation issues in the first half of the year. Nevertheless, operating margin moved 30 basis points higher to 8.7%. An improved product mix in terms of higher margin items helped drive the operating margin performance.

If you’re wondering why the dividend payout ratio isn’t higher, you can look to the extent of capital expenditure (a record this year at R930 million) and strategic acquisitions (R320 million). For context, dividends were R1.6 billion and share buybacks were R704 million.

Capital expenditure is expected to slow down a bit in the new financial year, with R880 million planned across new stores and pharmacies, store refurbishments, supply chain, technology and other infrastructure. R487 million is going into stores and the rest sits in supporting the business.

Is it a good result? Sure. Does the company offer meaningful returns to shareholders at this valuation? Not really. I struggle to see why international investors bother with a roughly 33% return over 5 years in rand terms. Convert that to dollars and they aren’t being rewarded for taking risk on South Africa.

Kibo Energy sells some MED shares to keep it going (JSE: KBO)

It sounds like alternative sources of funding are thin on the ground

Kibo Energy is a penny stock of note, usually trading at 1 or 2 cents per share. This is basically a call option now, because if there is any degree of success from this point onwards then the current punters will be sitting on what is lovingly referred to as a “multibagger” – a position which gives multiple times the original investment as the return.

Much still needs to happen to achieve that outcome.

After receiving further shares in Mast Energy Development (MED) in lieu of cash for partial settlement of the outstanding loan due by that entity, Kibo sold nearly £260k worth of those shares to fund ongoing group expenses and reduction of debt. The total shares received in settlement were worth £469k at the time. Kibo now holds 48.35% in MED.

Mantengu locks in a complicated equity funding line (JSE: MTU)

An investor has committed to invest up to R500 million

Mantengu Mining has put together a complicated deal with an international investor called GEM Global Yield. This is part of the Global Emerging Markets (GEM) group, an alternative investment group with operations in Paris, New York and the Bahamas. This group has completed over 500 transactions in 70 countries.

The short version of this story is that the company has committed to invest R500 million in Mantengu over time. GEM Global Yield has also been issued warrants for 20 million shares (options to subscribe for shares) and will be paid a commitment fee of R10 million, which can be settled in cash or shares.

The commitment period is three years. During that time, Mantengu can give notice to GEM Global Yield of an intention to issue shares. The pricing for any such subscription is a complicated calculation, best described as a 15-day average with the exclusion of a “knockout day” which is a day on which the closing bid price is less than 90% of the minimum floor price at which the company is prepared to issue shares. If I understand it correctly, this protects Mantengu against the kind of crazy moves that can plague illiquid shares.

The warrants also aren’t straightforward. The strike price is R4.00 per share, which is miles above the current price of R1.41. Before you think that the warrants are therefore useless, there’s a clause that if the market price on the first anniversary is less than 90% of the strike price, then the strike price is changed to be 105% of the current market price. There is also a mechanism for GEM to be paid out based on the option value of the warrants using a Black Scholes model, which is a commonly used methodology for valuing options.

As a final sting in the tail, Mantengu won’t be able to deliver a subscription notice (i.e. a request for money) if the issuance of shares would result in GEM holding more than 29.9% of shares in issue, excluding warrants. With a market cap of only R217 million, they are clearly hoping for a share price miracle to avoid a R500 million subscription over 3 years being less than 29.9% of the market cap.

Nu-World, same old South African pressures (JSE: NWL)

Consumer discretionary in South Africa isn’t where you want to be

Nu-World has released results for the year ended August. They aren’t pretty, with the company referred to a “severely distressed South African economy” and a “slowly recovering global economy” – not what you want when operating in discretionary consumer goods.

South African revenue fell by 23.1% due to weak volume growth and a dip in selling price inflation. As a silver lining, the group notes that the second half of the year was significantly better than the first half.

In the offshore business, revenue was up 25%. Some of this is rand weakness, of course.

Overall, revenue fell 11.6% and HEPS was 16.3% lower, with the dividend per share dropping by 16.4% to 125.3 cents. On a Price/Earnings multiple of 7.7x, it feels like there are better opportunities out there.

Oceana counts its lucky stars (JSE: OCE)

The group has released an encouraging trading statement

Oceana Group has released an updated trading statement for the year ended September 2023. The good news is that HEPS is expected to be between 24% and 34% higher, which suggests a range of 751.6 cents to 812.3 cents. At a closing price of R69.95, this means that the company isn’t exactly at a bargain Price/Earnings multiple, especially given how risky the fishing game is.

The performance this year was driven by higher volumes in Lucky Star canned pilchards and improved global pricing for fish oil. The group also came into this year with higher opening inventory levels than usual, which allowed it to respond to increased demand.

As a final note, the profit on disposal of Commercial Cold Storage was recognised in this period. The gain is excluded from HEPS though (and is instead recognised in EPS), which is why I only ever focus on the former and ignore the latter.

Little Bites:

• Director dealings:
  • An executive director of Santova (JSE: SNV) sold shares worth R2.8 million.
  • The company secretary of Sasol (JSE: SOL) sold shares worth R377k.

• City Lodge (JSE: CLH) is implementing an odd-lot offer to clean up the shareholder register and significantly reduce costs. On a share price of only R4.16, a holder of 100 shares is sitting with a position that barely buys dinner for two in a restaurant. There are a whopping 20,947 shareholders with positions this size, which is 58.22% of the total shareholder base when measured by shareholder numbers rather than value of holding. You can see why cleaning this up is worth the 5% premium to 30-day VWAP that the company is offering.

• Zeder (JSE: ZED) has received SARB approval for the special dividend, with a payment date of 13 November.

• Tjaart Kruger has resigned from the board of Nampak (JSE: NPK) to take up the role of CEO at Tiger Brands (JSE: TBS). You may recall that the change of management at Tiger Brands was announced a week or so ago.

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