Ghost Bites (AVI | MultiChoice | Purple Group | Sappi | Transaction Capital)

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AVI inches forwards despite tough conditions

After a rollercoaster year in the share price, performance is flat year-to-date

AVI released the chairman’s comment that was made at the AGM on Tuesday. It starts with the usual bad news (consumer pressure / load shedding / Transnet) and ends off with a positive, albeit modest story at operating profit level.

Revenue for the quarter ended September increased by 9.7% year-on-year, a strong result driven by price increases. Revenue growth was achieved in all categories except I&J which was impacted by poor catch rates and an unfavourable abalone sales mix. The group focused on protecting margins even where volumes were impacted, which is the mature (and painful) approach to take.

In the footwear and apparel business, the year-on-year numbers were flattered by the disruption from civil unrest in the base period.

Group gross profit margin fell slightly as not all cost pressures could be recovered. Operating expenses increased at a rate above inflation, mainly because of exposure to fuel prices among other costs. Consolidated operating profit increased by just 2.1%. If we exclude I&J, the branded consumer business grew operating profit by 9.5%.

The share price closed 2.5% higher on a day where the ALSI closed 1.5% higher.

MultiChoice reports results ahead of the FIFA World Cup

Sport is big business and the group has invested heavily ahead of the soccer

In the six months ended September, MultiChoice reported growth in the user base of 5%. There are now 13 million households in Rest of Africa and 9.1 million households in South Africa that have DSTV. Both segments are still growing, although the average revenue per user (ARPU) is much higher in South Africa (R290) than in Rest of Africa (R183).

Subscription revenues were up 8% year-on-year, with Rest of Africa growing far more quickly with 27% growth. Advertising revenue only increased by 5%, which isn’t bad in this consumer environment. As we can see from tech company results in the US, there has been a normalisation of advertising spend as sport has returned. Advertising contributes around 7% of MultiChoice’s revenues.

Irdeto reported a 13% decline in revenue, which was more than offset by 19% growth in insurance premiums and other revenue.

Earnings and cash flow were impacted by the investment ahead of the FIFA World Cup. With significant anticipated subscriber growth, the group isn’t taking any chances with global chip shortages. The investment in decoder subsidies reduced trading profit by R0.7 billion and free cash flow by R0.8 billion, particularly in Rest of Africa. The opportunity is clear though: SuperSport is the only place to watch every match of the FIFA World Cup in an African time zone across 50 markets.

With a reduction in losses in Rest of Africa, group trading profit increased 2%. The impact on margin of the decoder investment is expected to unwind in the second half of the year, delivering even more positive operating leverage.

Consolidated free cash flow fell by 44% because of the investment in decoders. The balance sheet is still strong, boasting R7.5 billion in net assets including R7 billion in cash.

A key competitive advantage for MultiChoice vs. the likes of Netflix is the investment in local content. 48% of general entertainment spend was on local content, something that international streamers really struggle to compete with.

A challenge faced by the company lies in repatriation of cash from African countries and especially Nigeria. This is something that investors keep a close eye on.

Purple Group is still profitable in a tough market

The share price has lost 40% this year as markets cooled down

For the year ended August, Purple Group expects to report a drop in earnings per share of between 10% and 20%. This includes substantial fair value adjustments. Most investors look at headline earnings per share (HEPS) to ignore these adjustments, in which case the drop is between 67% and 77%.

This is a year-on-year movement and markets were absurd during the pandemic, so I’m not surprised to see a drop. The announcement came out after market close, so the share price hasn’t had an opportunity to react to this news. Selling pressure is likely on Friday.

If we look at EasyEquities specifically, the group’s operating profit before tax of between R29.8 million and R33.0 million demonstrates that a sustainable business has been built. This is a drop of between 31.3% and 38.0%, which is as expected in this market. Client numbers increased but so did expenses, up by 56.5% in the development of future revenue opportunities.

EasyEquities is still a startup at heart and needs to invest in the future. Leaving aside my appreciation for what they’ve done for South African investors, I think being profitable in this environment is an achievement of note.

The fair value gain relates to the shareholding in the RISE business. EasyEquities previously held a 50% stake and then acquired the remaining 50%, leading to a revaluation of the original stake to a value in line with the price paid for the rest. This led to a positive fair value adjustment of R48.9 million. The company paid for the stake by issuing shares at R2.50, which looks like a good deal based on the current traded price.

In the prior period, there was a fair value adjustment of R50 million related to EasyCrypto. This means the fair value adjustments are consistent year-on-year.

Looking at other business units, GT247.com achieved an incredible turnaround. After a loss of R8.7 million in the prior period, profits are now between R13.4 million and R14.8 million. This is a huge swing achieved through a revenue recovery to historic levels.

Emperor Asset Management went the other way, with a loss of between R5.6 million and R6.2 million vs. a profit of R0.9 million in the prior period. The loss includes an impairment adjustment of R3.8 million.

The head office and investments segment recorded a significantly lower loss of between R3.4 million and R3.8 million, an improvement of 54% to 59%. This includes the investment in Real People Investment Holdings.

My view hasn’t changed. Purple Group has a great business and a very overvalued share price. I’ve been consistent in that view throughout the pandemic and the chart this year supports it. At the right price, I can’t wait to invest in Purple and get exposure to the global expansion of EasyEquities.

Sappi reports another record quarter

Take note: the company has given a sobering market outlook

In a cyclical industry, you have to be very careful in extrapolating earnings. A great quarter can become a distant memory if things turn quickly enough.

In the quarter ended September, Sappi reported a 35% jump in sales and 121% increase in EBITDA excluding special items. HEPS was 311% higher, although “special items” means that reported profit was 26% lower.

Importantly, net debt is down 40% year-on-year and the net asset value is up by 19%.

Excluding special items, this was a record quarter for EBITDA, driven primarily by improved profitability for the pulp segment and a strong performance in North America that offset the cost challenges in Europe.

Graphic paper sales saw order activity slow down towards the end of the quarter, with Sappi noting that this is an industry in terminal decline. At the end of the quarter, Sappi agreed to sell three European mills to Aurelius Investment Lux One, reducing exposure to this market. Proceeds will be used to reduce debt.

To give you an idea of how cyclical this industry is, net cash generated for the year of $506 million is vastly higher than just $29 million last year. This is how the business managed to reduce debt to such a large extent.

The strong balance sheet will be needed, as the outlook section notes that macroeconomic uncertainty has increased considerably in recent weeks. Order activity in dissolving pulp and graphic paper has declined, with destocking across the vale chain. On the plus side, demand for packaging and speciality papers is more resilient in a downturn.

Further good news is that North American demand is robust and Sappi is investing $418 million at Somerset Mill to respond to this demand, with an expected completion date in 2025. Capital expenditure for FY23 is estimated to be $430 million, of which $70 million relates to next year’s spend on Somerset.

Despite rising input costs that are a concern for production efficiencies, Sappi expects EBITDA for Q1’23 to be ahead of Q1’22.

A dividend of 267.28155 cents per share will be paid in January.

Transaction Capital is growing in the high teens

It’s tricky to know which earnings measure to focus on

Having studied accounting, I can tell you with certainty that most of it is ignored by the market. People look at key metrics and ignore the noise, as many accounting standards have become so complicated that they just aren’t useful.

One of the big wins on the JSE is that companies need to report headline earnings per share (HEPS), a standardised metric designed to improve comparability. It works well.

In Transaction Capital’s trading statement for the year ended September, my favourite local company reported HEPS growth of 49% to 54% from all operations and 51% to 55% from continuing operations. To show you how distorted numbers can become, basic earnings per share (EPS) is down 34% to 30%.

To help make sense of it all, the company suggests using core EPS from continuing operations to assess performance. This metric excludes adjustments on put and call option structures, once-off transaction costs and other non-core items.

With an increase of 15% to 19%, this means that the group is growing in the high teens.

I look forward to the release of full results on 15 November so that I can see how things are going at SA Taxi in particular.

Little Bites:

• Director dealings:
  • Des de Beer has bought another R2.4m worth of Lighthouse Properties shares
  • A prescribed officer of Impala Platinum has disposed of shares worth nearly R996k
  • Associates of Piet Viljoen and Jan van Niekerk have acquired Astoria shares worth R1m and R66k respectively
  • The family trust of the CEO of Altron has bought more shares in the company, this time worth over R50k
  • An associate of directors of Octodec has acquired shares worth R1.06m
  • An associate of Jacob Wiese has bought shares in Shoprite worth R695k

• Sephaku Holdings released a trading statement for the six months ended September 2022. The group expects headline earnings per share to jump by between 58% and 66%, coming in at between 11.11 cents and 11.67 cents. There’s a slight timing complication in the group results as one of the subsidiaries as a different year-end to the holding company.

• There’s yet more drama in the Northam Platinum / Royal Bafokeng Platinum story. Back in April, the CEO and COO of Royal Bafokeng retired and the company concluded new fixed term contracts with those executives. This led to accelerated vesting of shares, a move which Northam complained about to the TRP as a frustrating action under the Companies Act. After the TRP dismissed Northam’s claim, a subsequent appeal to the Takeover Special Committee (TSC) was successful. The TSC found that the share issuance contravened the Companies Act and that Royal Bafokeng must correct this contravention. Royal Bafokeng believes that the ruling is “legally and factually flawed” and will be consulting with advisors re: next steps. Interestingly, the TSC further ordered the TRP to investigate Northam’s full complaint in its entirety as expeditiously as possible.

• In further platinum news, Eastern Platinum announced a pipeline finance agreement with Investec. The credit facility was reduced from R150 million to R110 million and will be used for working capital purposes and the restart of the Zandfontein underground section of the Crocodile River Mine. This renewable 12-month revolving commodity finance facility is secured by PGM production from the tailing storage facility at the mine. A hedging structure on the underlying minerals means that the commodity pricing is guaranteed.

• Montauk Renewables released quarterly results for the period ended September. Net income increase from $8.9 million to $11 million. If you are keen to see what US reporting looks like (as the company has a secondary listing on the JSE and reports under US rules), you’ll find it at this link.

• If you are a shareholder in BHP, you may be interested in the presentation and the speech from the AGM that you’ll find at this link.

• Advanced Health Limited reminded the market that a strategic review of the business is still ongoing. Approaches from several parties re: a potential acquisition of Presmed Australia have been received. The board is evaluating the proposals with its advisors.

• I quite enjoyed the outcome of the Quilter vote on the resolution authorising political donations or expenditure. The company says that the resolution is to avoid inadvertent breaches of the law, as it doesn’t actually make donations. Still, shareholders on the South African register only gave it 63.77% vs. 99.94% support on the UK register. We are well aware in SA of what “political donations” actually means.

• Libstar has announced that the acquisition of Cape Foods has become unconditional.

• Safari Investments has been granted an extension until 23 November to post the response circular re: the Heriot Properties transaction.