Ghost Bites (BHP – Anglo American | Clicks | Coronation | Standard Bank)

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BHP looks to change the mining landscape (JSE: BHG | JSE: AGL)

Does Anglo American’s underperformance make it a sitting duck?

Get the corporate finance notebooks out for this “unsolicited, non-binding and highly conditional combination proposal” that BHP has made to Anglo American. This is the kind of deal that investment bankers dream of, with names like Goldman Sachs and Morgan Stanley on the announcement.

It’s worth saying right up-front that although BHP is listed on the JSE, the company actually wants nothing to do with South African mining risks. For this deal to go ahead, BHP would require Anglo American to unbundle its shares in Anglo American Platinum and Kumba Iron Ore to shareholders.

As Anglo is a UK-domiciled company, that takeover law will apply to this situation. This means that BHP has until 5pm on 22nd May to either announce a firm intention to make an offer, or announce that it doesn’t intend to make an offer.

It didn’t take BHP long to respond, with an announcement that was clearly ready to go. Just two hours later, BHP noted that this is an all-share offer based on the ratio of 0.7097 BHP shares for each ordinary share in Anglo American. Plus, each Anglo shareholder would get the shares in Amplats and Kumba in proportion to the effective interest in those companies.

They do the hard work for you in terms of the maths, showing that this is a premium to the market value of Anglo’s unlisted assets (i.e. excluding Amplats and Kumba) of 31%. It’s a premium of 78% based on the 90-day VWAP.

If this deal goes ahead, Anglo and BHP shareholders would be invested in a very large combined entity that has iron ore, metallurgical coal, potash and copper. BHP’s various global listings (including on the JSE) would be retained. BHP also notes that Anglo shareholders would be able to determine how much exposure they want to Amplats and Kumba, unlike the current situation where you can’t own Anglo’s copper and diamond assets without also getting exposure to the PGMs and iron ore.

Speaking of diamonds, BHP doesn’t sound very keen on De Beers. They note that it would be subject to a strategic review post completion. One wonders if we could see a separate listing of De Beers at some point.

Notably, there is still no firm intention to make an offer at this stage. There will need to be a due diligence process first.

Yet another solid period at Clicks (JSE: CLS)

The valuation is always a debate, but this is a quality company

Clicks is one of the most solid retailers you’ll find in South Africa. The health and beauty category is a particularly great place to play, with the pharmacy offering ensuring there is footfall in the stores, while the small appliances also play an important role for group sales and margin.

For the six months to 29 February 2024, Clicks group retail turnover by 12.4%. Wholesale wasn’t nearly as exciting (UPD has strategically stepped away from certain contracts that are less profitable), so group turnover growth came in at 9.0%. I must also point out that UPD had certain systems implementation considerations to manage at the distribution centre, but the platform is apparently now ready for growth.

Underpinning this growth is a footprint of 900 stores and 11 million Clicks ClubCard loyalty programme members. You may also recall that Clicks acquired Sorbet, with that business contributing solid franchise fees to the Clicks group.

Operating profit increased by 13.5% and operating margin expanded by 30 basis points to 8.5%, primarily due to the increased mix of retail vs. wholesale. Retail costs were up 14.8%, but 300 basis points was due to acquisitions and there was also a considerable contribution from new stores. Comparable retail costs grew 8.7%. Distribution costs were up 10.8% due to the systems implementation and associated employment costs.

By the time you reach the bottom of the income statement, diluted HEPS was up 13%. Share buybacks were a great help here, as headline earnings (total, not per share) increased 10.5%. Those buybacks are made possible by Clicks having such a cash generative business, with cash from operations of R1.1 billion vs. capital expenditure of R314 million. They are ramping up heavily for 2024, with planned capital investment of R920 million. Although Clicks highlights the risk of a return of load shedding, they are accelerating their store expansion plan to between 50 and 55 stores for the 2024 financial year.

On the working capital front, overall group net working capital days improved from 47 days to 44 days. Retail inventory days improved from 85 days to 82 days, but UPD increased from 48 days to 61 days due to an increase in stock ahead of the single exit price increase. In other words, this is strategic buying of stock.

There is an aggressive push underway by Clicks. They’ve invested in the wholesale business and they are planning a lot of new stores. This is going to hurt the grocery chains, as Clicks products are some of the juiciest margin categories in retail.

Coronation releases earnings for the March period (JSE: CML)

They really put in the minimum required effort with this disclosure

I find lazy disclosure on the market very frustrating. For example, Coronation notes that assets under management were R631 billion as at the end of March 2024. The announcement doesn’t give the comparable number a year ago, so you have to go digging for it. The March 2023 number was R623 billion. Perhaps growth of just 1.1% in 12 months is the reason they make you go digging.

Then, instead of reminding the market of the per share impact of the tax provision in the comparable period, they simply point out that earnings across all metrics will be vastly higher because of the base effect. How much work would it have been to just show the comparable number without the tax problem?

I went back into the old report and found that fund management earnings per share (their preferred metric) excluding the tax charge was 191.5 cents. For this period, it’s expected to be at least 175 cents. In other words, even with adjusting for the tax charge, the business is going backwards.

Standard Bank gives a quarterly update (JSE: SBK)

Currency movements led to flat headline earnings

Each quarter, Standard Bank has to disclose financial information to the Industrial and Commercial Bank of China to assist that entity with its reporting on its investment in Standard Bank. To ensure all shareholders have the same level of information, Standard Bank also releases a quarterly earnings update on SENS that includes some important commentary.

Earnings in the banking activities grew by mid-single digits for the first quarter of the period. Although credit impairment charges were higher as expected, there was solid growth in the lending activities in particular. Operating expenses were flat year-on-year, leading to margin expansion.

In the Insurance and Asset Management segment, earnings fell year-on-year due to losses linked to market movements.

Group headline earnings ended up flat year-on-year, with the good news story in banking offset by the insurance and asset management result as well as negative movements in average currencies relative to the rand.

The group remains committed to positive jaws this year (i.e. income growth ahead of expenses growth) and return on equity inside the target range of 17% to 20%.

Little Bites:

• Director dealings:
  • Adding to the recent purchases in the company, another director of OUTsurance (JSE: OUT) has bought shares – this time to the value of R14.9 million.
  • A director of Italtile (JSE: ITE) has sold shares worth R112k.

• In news that doesn’t come as a surprise if you’ve been following the recent corporate activity around MC Mining (JSE: MCZ), Nhlanhla Nene (yes, the ex-Minister of Finance) is stepping down as chairman of the company.

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