Ghost Bites (ArcelorMittal | Coronation | Kore Potash | Indluplace | Sebata | Tsogo Sun)

ArcelorMittal gets smoked (JSE: ACL)

There’s nothing quite like a 42.7% drop in one day with the next best bid at 1 cent per share

Investing in cyclical businesses requires a strong stomach. If they look cheap based on the Price/Earnings (P/E) ratio, it’s usually for a good reason. A low trailing P/E is a widowmaker of note in cyclical stocks.

ArcelorMittal is the latest example, with a huge drop in the price after releasing a trading statement for the six months to June 2023. Headline earnings swung wildly from R2.71 per share to a headline loss of between -R0.38 and -R0.46 per share. I can understand now why the CFO left with immediate effect before this result was released. I would also rather find something else to do!

At the start of the year, the outlook was reasonable with positive movements in international steel prices. Globally, de-stocking and lower energy prices were tailwinds for the sector. ArcelorMittal saw none of those benefits in South Africa, with load shedding and negative growth in key steel consuming sectors (like manufacturing and construction) having a substantial effect on the business.

The company simply couldn’t respond to the extent of load shedding. Aside from the obvious impact on earnings, the company also struggled to release working capital. That’s just a way of saying that the balance sheet also came under strain, evidenced by net borrowings remaining too high.

With the company talking about a “weaker-for-longer steel trading environment”, the market ran for the exit.

A slight uptick in AUM at Coronation (JSE: CML)

And I mean slight…

Each quarter, Coronation releases its assets under management. The company never gives comparatives in the announcement, forcing me to go dig through the archives to find the history.

Here it is, with the latest number included:

• 30 Jun 2023: R627bn
• 31 Mar 2023: R623bn
• 31 Dec 2022: R602bn
• 30 Sep 2022: R574bn
• 30 Jun 2022: R580bn
• 31 Mar 2022: R625bn
• 31 Dec 2021: R662bn

If you’ve been paying attention, you’ll know that Coronation was recently in trouble with SARS and got hit with a major penalty. Along with the pressure on AUM, that’s why the five-year share price chart looks like this:

Coronation is historically a strong dividend payer, so a total return chart would be a fairer reflection. The tax issue wiped out the dividend temporarily, so investors are waiting for the yield play to return.

Kore Potash still needs to finalise the EPC contract (JSE: KP2)

The focus remains on the Kola Project

Way back in 2021, Kore Potash signed a Memorandum of Understanding with the Summit Consortium for the Kola project. By 2022, an optimisation study had been concluded, with heads of agreement signed with SEPCO for the construction of Kola.

A year later, Kore Potash and SEPCO are still trying to finalise the Engineering, Procurement and Construction (EPC) contract. As part of this, Kore looked to SEPCO’s parent company (PowerChina) to provide guarantees, including performance and retention bonds. With PowerChina’s involvement in the project, some design improvements have been suggested that would reduce the cost and shorten the construction time.

Within six weeks of the EPC terms being finalised, the Summit Consortium will provide the necessary finance.

The company also needs to manage impatient government officials in the Congo, so there’s a lot of pressure on getting this across the line.

Kore Potash spent $1.08 million on exploration this quarter. It has $2.6 million remaining in cash.

Indluplace declares its clean-out distribution (JSE: ILU)

This is part of the buyout by SA Corporate Real Estate (JSE: SAC)

Indluplace and SA Corporate Real Estate released a joint announcement confirming that the buyout of Indluplace is now unconditional, with the Takeover Regulation Panel (TRP) having issued a compliance certificate.

The transaction structure includes a clean-out distribution to Indluplace shareholders to reward them for recent earnings before the shares are sold to SA Corporate Real Estate. This distribution has been confirmed as 7.73562 cents per Indluplace share.

For reference, the Indluplace share price is R3.45 and the cash offer from SA Corporate is R3.40. The share price started the day at R3.39, so it moved higher after the distribution was confirmed.

Sebata reported another operating loss (JSE: SEB)

The cash outflow from operating activities has been consistent

In the previous financial year, Sebata recognised some large impairments and fair value losses in operating profit, leading to a substantial loss. This year, there is still a loss but it is much smaller at R21.6 million instead of a whopping R939 million.

Although that sounds much better, the reality is that the company has seen an outflow of cash from operating activities of around R21 million for two years in a row. It only has R4.7 million in cash on the balance sheet, with a potential receipt of cash for the disposal of assets to Inzalo Capital Holdings as the major asset. It’s very touch-and-go whether this amount will be received. If not, the sold businesses come back to the group.

Based on this balance sheet, they need the cash a whole lot more than they need the underlying assets.

Tsogo Sun is the latest odd-lot offer (JSE: TSG)

At the current share price, there isn’t an exciting arbitrage opportunity here

Odd-lot offers can sometimes dish up free money, if the price offered by the company to holders of fewer than 100 shares ends up being significantly higher than the prevailing market price. In that case, you buy up the shares in the market and then wait for the automatic offer to kick in.

Tsogo Sun only trades at R12.34 per share, so you’re dealing with only R1,234 as the maximum value off which to earn an arbitrage profit. At best, this is McDonald’s money. It probably won’t cover the trading fees even if there is an arbitrage available.

In case you’re curious, the price will be the 10-day VWAP calculated on 23 August 2023, plus a 5% premium.

Little Bites:

• Dipula Income Fund (JSE: DIB) announced that Global Credit Ratings affirmed its rating and maintained the stable outlook. The ratings agency noted “solid gearing metrics” and “improved financial flexibility” as part of the decision.

• Look out for a big change in the Nampak (JSE: NPK) share price (but theoretically not the market cap unless the price does something crazy in response to this) as the share consolidation is due to take place on 26 July. Don’t get a fright when you see the price that day, as this is a 250-to-1 consolidation.

• All conditions precedent for the unbundling by African Equity Empowerment Investments (AEEI) of its shareholding in AYO Technology (JSE: AYO) have been met. The unbundling will take place on 31 July.

• Although not specifically related to a local listed company, Transnet announced that International Container Terminal Services Inc. (ICTSI) is the preferred bidder for the 25-year joint venture with Transnet Port Terminals to develop and upgrade the Durban port. This should improve Transnet’s biggest container terminal, which handles 46% of South Africa’s port traffic. ICTSI trades on the Philippine Stock Exchange and over-the-counter in the US.

• Deutsche Konsum REIT (JSE: DKR) issues more SENS announcements than the number of its shares that ever change hands on the JSE. I ignore most of them because there is truly no liquidity, but I did find it interesting that the company is on the wrong side of a tax dispute in Germany to the value of €16.2 million. The company had fully provided for this amount previously and is considering further options after the latest court blow.

• Go Life International (JSE: GLI) is another penny stock zombie on the JSE, trading at one cent per share. The auditors haven’t finalised the audit, so the company has received approval from the Stock Exchange of Mauritius (its primary regulator) to extend publication of the financials for the year ended February 2023 to 31 July 2023.

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