Ghost Bites (Altron | Dis-Chem | Fortress | Gemfields | Massmart | South32)

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In case you missed the big news on Friday, Massmart’s shareholders voted almost unanimously in favour of the scheme of arrangement for the Walmart buyout. You can get the full details at this link>>>

Altron reports a sharp recovery in profitability

Despite these numbers, the share price closed over 2% lower

For the six months ended August, revenue increased by 15% and operating profit jumped by 57% as operating leverage had the desired effect. When revenue increases faster than expenses, the impact on operating profit is amplified. This also works in the opposite direction with disastrous results.

At net profit level, Altron is profitable again. Headline earnings per share (HEPS) came in at 34 cents and the interim dividend per share has more than doubled to 16 cents.

The numbers look even better in continuing operations, with revenue up 21% and HEPS rocketing to 41 cents. This tells you that discontinued operations are loss-making overall, with a substantial operating loss in Rest of Africa.

Looking deeper, you may be interested to learn that Netstar’s revenue is up 8.7% year-on-year. Profitability has gone the wrong way because of sales mix and higher GSM costs to counter the impacts of loadshedding. Karooooo’s international expansion makes sense when you see numbers like these. In case you have no idea what I’m talking about, Karooooo is the owner of rival group Cartrack.

For those interested in the group, the announcement goes into plenty of detail on underlying segments.

Overall, Altron expects a “solid second half performance” and notes that some parts of the group will face tricky conditions. Most of the businesses are heading in the right direction and the balance sheet will be further strengthened. Net debt : EBITDA has been brought down to 0.35x which is relatively low already.

Dis-Chem achieves another strong result

The group keeps winning market share

Even without reading the trading statement, a 5.8% rally in the share price tells you what you need to know.

Yet, because Dis-Chem trades at a multiple that gives value investors a stomach ache that even the dispensary can’t help with, the year-to-date share price performance is -4.5%. So much growth is already priced in.

Without any adjustments, the anticipated HEPS growth for the six months to August 2021 is between 43.1% and 45.4%. With a once-off gain excluded from the wholesale segment, the growth is between 30.4% and 32.6%. This is a better view of sustainable growth and is still a huge number!

This result was driven by market share gains and an increase in income margin across core categories. Growing revenue and margin simultaneously is the Holy Grail for any retailer.

The group notes a focus on return on invested capital (ROIC), an important metric that combines the income statement and the balance sheet. This is a fancy way of saying that the group is keeping a close eye on the cash, with an improved net working capital position.

Detailed results will be released on 2 November.

The year-to-date performance vs. Clicks is deserving of a chart:

Could Fortress avoid losing REIT status?

A group of shareholders has demanded that a general meeting be called

If you’ve followed this story in any detail this year, you’ll know that Fortress has a problematic dual-share structure that is forcing the company to fall foul of REIT requirements regarding distributions. In what would be the first example of such an issue on the JSE, Fortress is set to lose its REIT status. This is uncharted territory.

At the eleventh hour, a group of institutional shareholders controlling 59% of FFA share voting rights and 16% of FFB share voting rights has demanded that a general meeting be called. They are proposing an amendment to the company’s Memorandum of Incorporation (MOI) that would allow for a split dividend over the next two financial years (80:20 in favour of the FFA shares).

This has set hares running, as Fortress needs to get a circular out to shareholders as quickly as possible. Even then, the current distribution deadline will be missed and Fortress needs dispensation from the JSE to meet the distribution requirement by January 2023.

This story isn’t over yet. If the required shareholder approval (75%) is achieved, then Fortress may yet hang on to REIT status. With holders of 59% proposing this structure, there’s a good chance here of success.

Watch this space!

Gemfields resumes operations in Mozambique

The share price closed 5.8% higher, recouping some of the recent losses

Last week, Gemfields delivered the news that the market didn’t want to hear: disruptions to the ruby mining operations in Mozambique because of the insurgency in the wider area. As a reminder, Gemfields holds 75% in Montepuez Ruby Mining Limitada.

Influential local ownership of the other 25% can only help in this situation. The Mozambique police force responded quickly and the military arrived later that day. They will maintain a presence for the foreseeable future.

These are hardly the kind of working conditions that Silicon Valley types are accustomed to. Mining in Africa is no joke whatsoever.

Under armed guard, key operational personnel have returned to the mine and basic operations have resumed. The company notes that employee safety is the highest priority and the evacuation last week supports that notion.

Despite Monday’s rally of 5.8%, the share price is still down 7.6% over the past week.

South32’s quarterly report is promising

Production is higher across all commodities other than coal

In the three months to September, South32 achieved solid production numbers in aluminium, copper and other base metals, including a strong start to the year in manganese which is tracking ahead of production guidance.

Production guidance has been revised lower at Illawarra Metallurgical Coal, attributed to asset-specific issues that have negatively impacted the mine. The group has decided not to proceed with an investment in this asset, allocating the capital elsewhere in the operations including development options in North America.

The sale of four non-core royalties for up to $200 million was achieved in this quarter.

South32 has a strong balance sheet that can support the strategy of focusing on metals that are critical to a low-carbon future.

This is a massive operation and the quarterly updates go into great detail. If you’re a shareholder, it’s worth reading the full announcement.

Little Bites:

• If you are a Gold Fields shareholder, then make yourself a strong coffee. There’s a 158-page circular for your attention. The proposed merger with Yamana Gold is a landmark deal and there’s a lot in the circular for you to absorb. Gold Fields believes this deal makes sense because of the increasing maturity of existing productive assets and a decline in the quality of new gold discoveries. If this persists, global gold production is expected to contract by 35% between 2022 and 2030. You’ll find the circular at this link>>>

• RECM & Calibre released a trading statement noting that the net asset value (NAV) per share will increase by between 22.4% and 25.7% to between 1,740 and 1,788 cents. The share price jumped by nearly 15% to R14.40 in response to this update.

• Spear REIT has agreed to dispose of 15 on Orange for R246 million. The buyer is not The Capital Apartments and Hotels Group, despite that group having a call option to purchase the property. The option hasn’t been exercised and the option will be cancelled upon implementation of this deal. The purchase price is 7% lower than the call option price and the buyer is Zimbali Coastal Resort, owned by Resrev Malta Limited. This transaction is Spear’s final step to get out of the hospitality sector, which is part of why it is an attractive deal despite the lower price. The proceeds will be used to reduce debt and the loan-to-value (LTV) after this transaction will be 38%. The disposal yield is 8.13% and the value of the net assets at 28 February was R265 million, in line with the strike price of the option that was held by The Capital Apartments and Hotels Group. Although recycling capital at a value below the balance sheet carrying amount is usually frowned upon, there’s a solid strategic rationale here.

• There’s bad news for Trellidor, hopefully bringing to a close a period in the group’s history that won’t be remembered fondly. Trellidor had fully provided for the R32.1 million labour dispute based on the Labour Appeal Court’s judgement. The company needs to reinstate 42 employees of the 132 dismissed in 2013 and must make limited back-pay payments to these employees. After applying to the Constitutional Court for leave to appeal the Labour Appeal Court decision, Trellidor has been notified that the leave to appeal was refused. The company will now engage with the labour union regarding implementation of the judgement. The share price is down more than 37% this year.

• Tharisa has announced a loss of life incident involving a mechanic who had been with the group for eleven years. It’s always awful to read these stories. Mining companies do their very best when it comes to safety, yet it remains a job with real risks.

• Impala Platinum has acquired another 0.17% in Royal Bafokeng Platinum, taking the total holding to 40.66%.

• Transcend Residential Property Fund announced the results of the general offer by Emira. The offer was accepted by holders of 22.98% of Transcend shares in issue. This takes Emira’s stake to 68.11%.

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