Ghost Bites (AH-Vest | Sirius Real Estate)

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AH-Vest is profitable, although the share price suggests otherwise (JSE: AHL)

When last did you see something trading on a Price/Earnings multiple of 0.5x?

AH-Vest operates the All-Joy brand, which means it processes tomatoes and turns them into tasty things to put on your hotdogs or in your pastas. It’s a lot harder than it sounds, with issues like trying to manage the risks of import-heavy supply chains and supporting local farmers.

Although related party transactions do make this company trickier to understand than most people would like, the reality is that the share price is R0.02 and HEPS for the six months to December 2023 came in at R0.0259 – so this is on an annualised Price/Earnings multiple of below 0.5x. Another helpful data point is net asset value per share of 48.24 cents per share, which is over 24x higher than the share price.

Goodness knows this isn’t the most lucrative business model around. Revenue was up just 1.9% for the period and the gross profit margin deteriorated sharply from 36.6% to 32.4%, so there are challenges. The impact was largely offset by a 7.6% drop in operating expenses, driving a 35% increase in profit before tax.

The percentages sound interesting but the actual numbers are tiny here. Profit before tax increased from R2 million to R2.7 million. When you compare this to the trade receivables balance of R56.6 million, you can see that the working capital burden of this business model is concerning relative to profitability.

This seems to be a perfect example of a company on the JSE that is so tiny that very few in the market even read its SENS announcements, let alone buy it. It doesn’t help that the lowest offer in the market is R0.40, which is a lot closer to net asset value per share. The best bid is just R0.04.

Tomato spreads might be tasty, but bid-offer spreads like these are not.

Solid rental growth at Sirius Real Estate (JSE: SRE)

This is a good story to tell alongside recent acquisitions

Sirius Real Estate released a trading update for the year ended March 2024. The overall rent roll is up 8.2%, or 7.2% on a like-for-like basis. Sirius points out that this is the tenth consecutive year of like-for-like rent roll growth in excess of 5%. This is particularly impressive when you remember that this is in hard currency, as the portfolio is in Germany and the UK.

Inflation has come down in Germany in the past year, so growth in that market has been mainly achieved through a reduction in vacancies. This does good things for the portfolio valuations. The same is true for the UK, which is why like-for-like rent roll growth has been at similar levels across the two countries.

It sounds like there’s more pressure on valuation yields in the UK than Germany, so watch out for that. Despite the challenges, Sirius expects a positive movement at group level at year-end.

Sirius has been on the acquisition trail recently, having raised €165 million in the market for that purpose. €96 million has been invested in UK acquisitions and €55 million in acquisitions in Germany. The UK acquisitions were on a weighted average net initial yield of 8.9% and the German acquisitions on 9.3%.

The fund is also happy to recycle capital, which is so important in this sector. There were disposals of €51 million in the second half, all completed at or above book value. The disposal process has focused on mature properties in Germany, with Sirius taking the approach of acquiring underperforming properties and selling them once vacancies etc. have improved. This active approach is why the market is prepared to put a premium valuation on Sirius, even if that premium got way too high during the pandemic.

The weighted average cost of debt is 2.1% and there are no major maturities until June 2026. We do seem to be in a higher-for-longer environment though, with Sirius acknowledging the risk of higher future funding rates as debt is refinanced. For reference, last year’s refinancing activities were at rates around 4.25%, which is obviously well above the weighted average across the book.

Ever the optimists, Sirius also points out that the higher interest rates create opportunities for acquisitions due to pressure on property valuations!

Little Bites:

• Barloworld (JSE: BAW) closed more than 10% higher after starting the day with the release of a cautionary announcement. It gives absolutely no information on the type of thing being considered or even which segment it relates to, but that didn’t stop speculators from hitting the “buy” button!

• Trustco (JSE: TTO) has renewed the cautionary announcement related to various potential transactions, which are in the final stages of being submitted to the board for approval.

• Holders of around 6.25% of shares in BHP Group (JSE: BHG) elected to participate in the dividend reinvestment plan. I’m surprised to see just how many BHP investors are clearly in this for cash dividends rather than capital growth.

• Conversely, the result of the dividend capitalisation issue (a similar structure) at Fortress Real Estate (JSE: FFB) had a very different outcome, with holders of 33.79% of the FFB shares electing to receive more shares instead of a cash dividend.

• As a further scrip-versus-cash data point, it looks like holders of around 35% of Lighthouse Properties (JSE: LTE) shares elected to receive shares in lieu of a cash dividend.

• As a reminder of how enormous British American Tobacco (JSE: BTI) is, the company is casually busy with debt security repurchases of up to £1 billion as part of general management of the balance sheet.

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