Ghost Bites (Alexander Forbes | Collins Property | Coronation | Finbond | HCI | Salungano | Tharisa | Transaction Capital)

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Double-digit growth in earnings at Alexander Forbes (JSE: ADR)

The strategic focus in recent years is paying off

Alexander Forbes has released a trading statement for the year ended March 2024. It has happy news for shareholders, with HEPS from continuing operations up by between 10% and 20%. In this environment, double-digit growth is admirable.

Including discontinued operations i.e. if we look at total operations, HEPS is up by between 23% and 33%. Although that’s no indication of the go-forward position, it’s always better when discontinued operations were a positive contributor rather than a mess as we so often see in large corporates.

In this case, the discontinued operations reflect the impact of the close-out of insurance liabilities and assets relating to the sale of the AF Life business to Sanlam, with remaining reserves released as well.

Detailed results are due on 10th June and the market will watch them closely, especially with the share price having been stuck in a stubborn range this year:

Collins Property Group now reports as a REIT (JSE: CPP)

And the distribution per share is much higher

Collins Property Group (previously Tradehold) was granted REIT status in February 2024 and has adopted distribution per share as its key performance metric for trading statement purposes. In other words, when that metric will differ by the prescribed percentage in the JSE rules, the company must give the market advanced warning with a trading statement.

There’s a nuance here in the rules. For a property entity using distribution per share as the metric, the percentage difference that triggers a trading statement is 15%. For all other entities, the percentage is 20% and they would typically apply this to HEPS.

At Collins, the distribution per share is now ramping up by between 33.33% and 53.33% to between 80 and 92 cents per share. It looks like the company waited for REIT status to be granted before pushing the payout ratio higher, so this likely isn’t a reflection of the growth rate in underlying earnings.

Detailed results are due on 24 May.

Coronation is back to paying an interim dividend (JSE: CML)

This doesn’t change my concerns about the recent trend

Before we dig into the latest numbers, I’m going to remind you of Coronation’s fund management earnings per share trend (excluding the impact of the dispute with SARS):

• March 2022: 214.8 cents
• March 2023: 191.5 cents
• March 2024: 194.7 cents

Although the number has at least moved higher in the latest period, you can see that they are treading water here. This is exactly why Coronation trades on a modest valuation that assumes all or most of the return will come from the dividend rather than growth in the share price.

Digging into the numbers, revenue increased by 4.3% for the six months to March and assets under management (AUM) were flat over 12 months. Net outflows for the period came in at 4% of average AUM, which Coronation blames on the South African savings industry. I think it’s more to do with lack of distribution, as the likes of PSG Financial Services are bringing in plenty of assets.

With total operating expenses up 5% for the period (excluding the tax issue), operating margins have moved the wrong way. They will need to look for efficiencies here.

The all-important tax matter was heard by the Constitutional Court on 13 February 2024 and the judgment is pending. It will obviously do wonderful things for the Coronation share price if they get a court victory here.

In the meantime, Coronation has declared an interim dividend of 185 cents per share.

If you do look at the detailed financials, just remember that the impact of the tax assessment was severe in the comparable period, crushing profitability and making the year-on-year movements look silly without adjusting for that impact.

Finbond might have positive full-year HEPS (JSE: FGL)

The mid-point of the guided range does suggest a small loss, though

Finbond is on the up, with share price growth of around 48% in the past year and now the potential for plenty of action on the market this week after the release of full-year numbers after the close of trade on Tuesday.

The big news is that HEPS might be positive, with a trading statement suggesting a range of a -2.4 cents loss to a profit of 1.5 cents. The mid-point of that is still a loss, so they might not be in the green just yet. Either way, it’s a whole lot better than the restated loss of -19.1 cents for the comparable year.

Investors will want to pay attention to results when they are released on 31 May, including some significant accounting changes in how they are accounting for Americash Group and Cashback Group, moving from being consolidated to being equity accounted as joint ventures.

HCI takes a knock in oil and gas and casinos (JSE: HCI)

For investment holding companies, valuations of the portfolio companies make all the difference

After we saw positive news from HCI group companies Deneb and Frontier Transport, the trading statement from the mothership is less enjoyable to read. HEPS is down between 24.1% and 34.1% and basic earnings per share has dropped by between 74.7% and 84.7%.

It’s far more useful to understand where the pressure points are in the portfolio, as investment holding companies can report wild swings in profitability that are no reflection whatsoever of underlying cash movements. This is the case here, with the big movers being fair value adjustments and impairments.

Africa Energy Corp reported $135 million in negative fair value adjustments on the investment in the Block 11B/12B prospect based on a change to the valuation model. This flowed all the way up, first to Impact Oil and Gas and then to HCI. Equity losses of R528 million were recognised in relation to Impact Oil and Gas.

In the gaming business, HCI has impaired casino licences by a substantial R2.7 billion, with property and equipment impairments taking the total closer to R2.8 billion. This is because of higher interest rates and slower than previously forecasted income growth.

Salungano releases a truly horrible set of numbers (JSE: SLG)

And they are well over a year late

I debated whether to put this in the Little Bites section or not, as the latest numbers from Salungano are for the year ended March 2023. They are a full year behind, which is why the share is suspended from trading. Upon seeing how awful the numbers were, I decided to include them here.

With the group currently dealing with the Elandspruit and Khanyisa operations in care and maintenance, as well as Keaton Mining in court processes around a business rescue vs. liquidation issue, things really are tough there. These numbers show how they got into this mess.

In the 2023 financial year, revenue fell by 6.8% to R4.79 billion and there was a hideous operating loss of R745 million vs. operating profit of R138 million in the prior year. The headline loss per share was 58.64 cents. With the share price currently at 50 cents, Salungano is looking more like an ongoing concern than a going concern. Although it was still solvent as at March 2023, that was a long time ago.

Tharisa takes a knock from lower PGM prices (JSE: THA)

A trading statement for the six months to March reflects a drop in earnings

Mining houses, especially those with little or no diversification, are firmly at the mercy of commodity prices. In the six months to March 2024, Tharisa notes that there was nearly a 40% drop in PGM prices received. On top of this, there were inflationary cost pressures for the mining activities. The combination is clearly a problem.

Against that backdrop, it’s pretty impressive that HEPS only fell by between 23.3% and 29.0% to US 12.5 cents to US 13.5 cents. Take careful note of the currency there.

Still plenty of uncertainty at Transaction Capital (JSE: TCP)

It would make a lot of sense to shift this to an investment holding company structure now

With WeBuyCars now out of the group, it’s a bit simpler to understand what’s going on at Transaction Capital. There is still great uncertainty around the SA Taxi business, now restructured and renamed as the Mobalyz division. At least Nutun is a relatively stable thing, giving the group something to anchor itself to.

With a net cash position at holding company level and two completely unrelated investments in the group (100% in Nutun and 75% in Mobalyz), this group is itching for a shift to investment holding company accounting. The reduction in head office size is a further step in this direction.

Instead, we are still in a place where the headline loss per share from continuing operations is the favoured metric, with the loss decreasing from 224.6 cents to 164.9 cents. That’s obviously still a hideous number, especially on a share price of R2.60.

Mobalyz remains a huge problem, with a core loss of R1.8 billion in the first half of the year. There was a once-off net loss of R966 million from a reduction of cover in the insurance business. The group has now achieved a sustainable insurance business, so that pain has been taken. More importantly, a detailed business plan has been presented to funders. If they accept it, then the group can keep originating loans and reduce the losses on the existing loan portfolio. Obviously, if the lenders don’t accept it, then all bets are off around the future of this business. They cannot continue at the current low levels of origination, so at some point there needs to be confidence in the rebuilding of this business in order for it to survive.

Over at Nutun, the Australian business has been sold and Nutun Transact is in a sales process. They are busy with a major restructure to streamline the remainder of Nutun into two distinct businesses, a process that comes with short-term costs. It feels like they are trying to just get the worst of the mess out of the way. Although revenue increased by 2% for the period in Nutun, core earnings from continuing operations fell by 22%.

The holding company balance sheet has cash of R521 million against the debt programme of R451 million due in two tranches in February 2025 and February 2027. Most importantly, there are no debt covenants at holding company level after the removal of the WeBuyCars put option liability and the SANTACO obligation. This puts them in a net cash position at head office level.

With the heavy-hitting founding team highly involved now, the battle is underway to clutch the best possible outcome from the jaws of defeat. There has clearly been severe, permanent value destruction here. The question is around what might emerge from the flames, if anything worthwhile.

Little Bites:

• Director dealings:
  • Michael Georgiou has sold nearly R57 million worth of shares in Accelerate Property Fund (JSE: APF) pursuant to a lending arrangement.
  • A director of Motus (JSE: MTH) has sold shares in the company worth R1.78 million.
  • A director of Altron (JSE: AEL) has bought shares in the company worth R1.64 million.
  • The spouse of a prescribed officer of Attacq (JSE: ATT) has bought shares worth R1.2 million.
  • The rather odd day trading by a director of Italtile (JSE: ITE) continues. We saw sales on the 15th, 16th and 17th of May, then a purchase and sale both on the 20th of May. It’s really not encouraging that the numbers in the announcement don’t seem to add up. A sale of 1,090 shares at R9.38 per share is not a value of R12,973! I can’t recall seeing anything quite like this before.

• 4Sight Holdings (JSE: 4SI) has released a trading statement dealing with the 14 months ended February 2024. That isn’t a typo; the financial year-end was changed from December. Naturally, this ruins comparability with the prior period. Still, an increase in HEPS of 141.4% to 157.6% is huge even with the extra two months of trading considered. Keep an eye out for results on 24 May.

• Lighthouse (JSE: LTE) is in the process of disposing of up to 634,479,018 Hammerson shares in on-market trades. This was approved by Lighthouse shareholders earlier in May. Since then, Lighthouse has disposed of 168,240,252 shares in Hammerson to the value of R1.1 billion.

• Kibo Energy (JSE: KBO) has released a business update from subsidiary Mast Energy Developments. When you’re trading at R0.01 per share, I guess any attempt to give the share price some love through regular SENS updates makes sense. The announcement goes into a lot of detail on the Pyebridge project, with news that is little more than an update on an advance from RiverFort under the debt structure that was then paid to the site contractor. The more interesting part of the announcement is the fight with Proventure after it breached the joint venture agreement and never paid the agreed money across to Mast. They are taking legal advice on how they can pursue the money and perhaps damages. They barely have enough spare money to pay attention, so I’m not sure a protracted legal process is a realistic course of action here.

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