Ghost Bites (Altron | Calgro M3 | Dipula | Dis-Chem | KAP | Pan African Resources | Raubex | Stefanutti Stocks | Vodacom)

Altron is all about the adjustments (JSE: AEL)

These are messy numbers for shareholders to work with

Whenever a company releases adjusted numbers, you have to read very carefully to figure out exactly what those adjustments are. In the case of Altron, there are many in the market (like me) who thinks that there are some business-as-usual items in here that don’t justify adjustment.

For example, you can’t do work in the public sector and then expect the market to ignore bad debts in that space. If you work with government, there will be pain. Being surprised by that is like being shocked that a scorpion stung you.

If we look at continuing operations, revenue increased by 19% but EBITDA only grew by 2%. HEPS fell by 8% to 47 cents. You can now see why the company tries to convince the market that the adjustments are reasonable, as adjusted HEPS is miraculously 19% higher at 89 cents.

A language that we all speak is cash. Interestingly, the dividend has been declared based on adjusted HEPS rather than reported HEPS. That does go some way towards justifying the adjustments, although the board would’ve been well aware of that when proposing this dividend. I’m still skeptical of using adjusted HEPS here.

Calgro releases detailed annual results (JSE: CGR)

There’s no dividend, but HEPS is up sharply

For the year ended February 2023, Calgro reported a juicy 45% increase in HEPS. This was driven right from the top, with a 15.4% increase in group revenue.

Metrics have moved in the right direction, with gross profit margin up by 220 basis points to 23.5% and the net asset value (NAV) per share up by 19.8% to R9.51. Calgro trades at a huge discount to NAV, with a share price of R2.96.

The group expects consistent delivery of the residential property development pipeline over the next year, which in turns means an expectation of consistent cash flows. In the memorial parks business, the group is still experimenting with the model but seems to be making progress in achieving product market fit.

Calgro M3 has been on Unlock the Stock a couple of times before and will return on 25 May to talk through these numbers and take your questions. Attendance is free and anyone is welcome, as we seek to open up the market to retail investors. Brought to you by A2X, you can register for the event here>>>

Dipula flags a drop in total distributable earnings (JSE: DIB)

The significant change in capital structure drives a major move in the dividend per share

In June 2022, Dipula Income Fund implemented a scheme of arrangement that saw all the A shares repurchased in exchange for the issue of 2.4 B shares per A share. In other words, there are now only B shares in issue vs. a mix of A shares and B shares as at February 2022.

So for the six months ended February 2023, it makes a lot more sense to look at the total distributable earnings in the company rather than the earnings per share, as the number of B shares in issue has changed drastically and there are no A shares left.

Distributable earnings have decreased by 6.92% to R256.6 million, which equates to almost 28.72 cents per B share. The interim dividend is nearly 25.85 cents per share and the share price closed at R3.90.

Ivan Saltzman hands over the reins at Dis-Chem (JSE: DCP)

Rui Morais is given the keys to a high performing castle

Ivan Saltzman co-founded Dis-Chem with his wife Lynette back in 1978. From a single store, they grew the business into South Africa’s largest retail pharmacy chain by market share. That’s quite a legacy to leave.

Although it sounds like Ivan won’t be able to resist spending time in the stores, he is now stepping down as CEO and handing over to CFO Rui Morais, who has been developed for this role for years now. Julia Pope takes over as CFO, having been in the finance team for six years. As succession planning goes, this is about as smooth as it gets.

The new team inherits a business that is still cooking. Excluding COVID vaccines, group revenue is up 9.0% and HEPS for the year ended February should be between 115.6 cents and 118 cents, an increase of between 16.5% and 19.0%. This puts the share price on a trailing Price/Earnings multiple of around 20.5x.

To achieve further alignment with the new team, the Saltzman family will sell a 3.75% stake in Dis-Chem to the executives and senior management team over time. No details are given of the structure to achieve this.

The announcement ends off with a clue that growth isn’t slowing down, with Dis-Chem acquiring a new distribution centre in Gauteng for R502 million. This will increase group warehouse space by 75%! The group indicates a “step change” in the pace of store rollout. Watch this one carefully, especially after a sell-off in the share price of 33% in the past year.

KAP’s share price is still getting klapped (JSE: KAP)

Another 3.4% drop takes the year-to-date move to -37%

The lift just keeps going down for KAP and there’s no sign of the basement level yet. This share price chart has been one way traffic this year:

The company has released an operational update for the ten months to 30 April 2023 and the dreaded words “load shedding” don’t take long to appear. This is causing havoc for KAP, driving issues like lower downstream demand at customers and higher wear and tear due to damaged equipment.

The macroeconomic environment is also putting pressure on the group, with higher raw material costs and of course higher finance as rates have increased.

Although the company has tried to navigate this environment, performance has come in below expectations. Headline earnings per share (HEPS) from continuing operations for the year ending June 2023 is expected to drop by at least 30% to a maximum of 52.1 cents. This puts the group on a trailing price/earnings multiple of 5.4x, which is cheapish but not bargain basement stuff.

Debt serviceability ratios are expected to remain within range, which means net debt to EBITDA of below 2.5x and interest cover of more than 3.5x.

If we look at divisional performance, PG Bison gained market share and even managed to increase prices, but the timing of the increase couldn’t save the operating margin for this period which fell year-on-year. Restonic suffered a drop in volumes and lower demand particularly in rural areas. Feltex (the automotive components business) had a much better time as new vehicle assembly volumes recovered.

Moving on to Safripol, usually the most important profit contributor to the group, we find a really tough result with lower margins and weaker domestic demand for polymers. Plant breakdowns as a result of load shedding were also a problem. Exports should help make up the demand gap from local challenges but they come at lower margins, so operating margin has dropped below the through-the-cycle target of 7% to 9%.

There are also margin pressures at Unitrans, with an operating margin below the prior period. This business is being restructured into a single operation with dedicated sector focus.

Finally, Optix (previously called DriveRisk) is a very small contributor that was acquired in December 2021. The weakening of the rand against the dollar had a major negative impact in the latest period.

Importantly, KAP is busy with renewable energy investments for Safripol and PG Bison, the largest energy users in the group and the most important divisions. The announcement doesn’t indicate the extent to which these projects can meet total energy needs.

Some sunshine at Pan African Resources (JSE: PAN)

The mining group is making significant progress on renewable energy opportunities

Eskom really has given ESG a boost, making renewable energy a business imperative if nothing else. Pan African Resources is investing heavily, with a significant project at Barberton Mines’ Fairview operation and a power purchase agreement with Sturdee for a 40MW solution available at any of the facilities.

Pan African was an early adopter of solar technology in the industry, as the first South African mining company to commission a utility scale, grid-tied solar PV project with the Evander Mines facility.

Across the existing projects and current feasibility studies, Pan African would be able to generate 28% of its power requirements once completed. That’s still going to take a while though.

A year to remember at Raubex (JSE: RBX)

You won’t see many local companies reporting record earnings at the moment

There are a couple of trends that Raubex is bucking. The first is the general mood in South Africa, with the company releasing record earnings for the year ended February 2023. The second is the usefulness of Australia, with a significant positive contribution to operating profit from a region that has claimed many South African corporate scalps.

Revenue is up 32.2%, HEPS is up by 32.1% and cash generated from operations jumped by an enormous 145%. The final dividend has jumped by almost 41% to 76 cents per share.

With a major contributor being the completion of the Beitbridge Border Post project, I would be careful extrapolating these numbers into the next year.

There are still large losses at Stefanutti Stocks (JSE: SSK)

But at least they are smaller than in the prior period

In a trading statement for the year ended February, Stefanutti Stocks has given guidance for total earnings and earnings from continuing operations, as there are important restructuring activities underway.

For continuing operations, the headline loss per share is expected to be between -37.30 cents and -20.72 cents, a significant improvement on -82.88 cents in the prior period but clearly still a loss.

For total operations, the headline loss per share range is -48.54 cents to -24.83 cents vs. a loss of -248.27 cents in the prior period.

The share price closed 7.6% lower at R1.10.

Vodacom reports on a major year in its history (JSE: VOD)

The R43.6bn acquisition of 55% in Vodafone Egypt was the biggest deal in Vodacom’s history

The Egypt deal was completed in December, so numbers for the year ended March are significantly impacted by the consolidation of this business into the group. For that reason (and in an effort to adjust for other distortions like currency movements), Vodacom reports several key metrics on a normalised basis.

This is helpful, because group revenue growth of 16% is a very different story to normalised revenue growth of 4.9%. Normalised EBITDA grew by 3.6%, so normalised EBITDA margin has deteriorated in line with the theme we are seeing in the telecoms industry at the moment.

This is a capital intensive business model, with Vodacom planning to spend between 13% and 14.5% of overall revenue on capital expenditure. Load shedding means that a great deal of “investment” goes into keeping the existing infrastructure alive rather than expanding it, with R4 billion spent on backup power solutions since 2020 and R300 million in the last financial year on diesel, security and maintenance. Net profit for the year is R18.1 billion, so this is less than a 2% impact on profit but is still very irritating, particularly when profit only grew by 2.1% year-on-year.

You may recall that Vodacom is in the process of completing a major fibre transaction with CIVH, which owns the Vumatel and Dark Fibre assets. ICASA approval was obtained in October and Competition Commission approval is still pending. To allow for the delay in this regulatory approval, Vodacom and Remgro (JSE: REM) announced an extension of the longstop date to 30 November 2023 and a few other revised terms to make allowance for the timeline.

Notably, Vodacom has moved to a payout policy that will see 75% of headline earnings paid out as a dividend. This is well down from the old policy, as the group looks to retain more capital for growth. This is why the full-year dividend of 670 cents per share is lower than 850 cents in the prior year, a 21.2% decrease despite a drop of “only” 6.4% in HEPS.

If you’re wondering why HEPS is down when profits are up, the higher number of shares in issue is the answer. This is due to the acquisition of the business in Egypt.

If we look a bit deeper, we find a predictably lethargic performance in Vodacom South Africa (EBITDA up 2.6% and capital expenditure just 0.2% higher) and a more exciting performance elsewhere, like Egypt posting EBITDA growth of 9.4% and the rest of Vodacom’s operating regions achieving 6.6% EBITDA growth. Safaricom was under pressure, with EBITDA down by 6.2% because of startup losses in Ethiopia that more than offset 4% growth in EBITDA in Kenya.

Net debt has increased from R35.2 billion to R48.3 billion. Of the R13.1 billion increase, the bulk (R10.7 billion) is related to the acquisition of Vodafone Egypt. Net debt to EBITDA has moved from 0.9x to 1.1x but if Egypt was consolidated for the full year, it would’ve actually dropped to 0.8x.

Vodacom is now trading on a trailing dividend yield of just under 6%. Considering that Vodacom’s share price is at a similar level to a decade ago, that dividend is the bulk of the return to shareholders – or the only return, depending when you bought! With this new payout ratio, Vodacom will have to convince shareholders that the reinvestment of more capital is a lucrative use of funds.

A year-to-date chart of arch-rivals Vodacom and MTN is fascinating when you consider the completely different major underlying exposures to Africa (East and North Africa at Vodacom and West Africa at MTN):

But the real fun is to draw it over 5 years, so you get the full effect of how wild MTN is in comparison to Vodacom:

Little Bites:

• Director dealings:
  • The CEO of Calgro M3 (JSE: CGR) has bought shares worth R589k

• There’s a change of leadership at British American Tobacco (JSE: BTI). Jack Bowles steps down as CEO immediately, with such a sudden change never being a good sign. He’s responsible for the A Better Tomorrow strategy, which I think helped keep the entire ESG consulting industry in business. Those consultants will be pleased to know that his successor, CFO Tadeu Marroco, wants to continue the progress made in distracting the market from the health issues of the core product range by marketing colourful “non-combustible” products instead.

• City Lodge Hotels (JSE: CLH) has had a big month, with the share price turning higher and delivering a 14.4% return. At least some of that momentum must’ve been helped along by a company called HSS Investments, which now holds a stake of 5.0% in the company.

• Attacq (JSE: ATT) is still busy negotiating legal agreements with the Government Employees Pension Fund regarding the 30% acquisition by the GEPF of Attacq Waterfall Investment Company.

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