Ghost Bites (Bowler Metcalf | DRDGOLD | Lesaka | MTN | MultiChoice)

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Bowler Metcalf with an operating leverage masterclass (JSE: BCF)

Investors love seeing this shape on the income statement

When you invest in a manufacturing business, the hope is that price and volume increases in the products will drive much better manufacturing margins thanks to the large fixed component of the cost base. In practice, this means that earnings growth should be higher than revenue growth, a concept known as operating leverage – the revenue growth is leveraged up into higher earnings growth.

When revenue drops, that works against you by the way. This is why industrials groups tend to struggle in difficult times or periods of low pricing power.

For the six months to December 2023, there are no such problems at Bowler Metcalf. In fact, the business did exactly what investors want to see. Revenue increased by 21% and profit from operations was up 47%, thanks to an increase of just 9% in the staffing cost.

A decrease in load shedding helped this result, along with the various contingency plans that the company had put in place. This is a classic South African story of resilience.

DRDGOLD only gets the tail end of a better gold price (JSE: DRD)

Literally!

DRDGOLD is a tailings business, which means it processes mining dumps and gets the last bit of gold out. This means the margins are far lower than for gold miners that get the stuff out the ground the first time. This makes DRDGOLD very sensitive to a change in the gold price (lower margin businesses are impacted more by price changes than high businesses), but also to the impact of inflation and what this does to operating costs.

For the six months ended December 2023, HEPS will only be 5% to 15% higher. This is despite a 12% increase in revenue, driven by a 22% increase in the rand gold price received. Gold sold decreased by 8% due to various issues ranging from lower yields through to community interference. This is a tough, tough business.

Cash operating costs were up 14%, with various inflationary pressures around energy and machinery costs. This is why the revenue increase hasn’t translated into a terribly exciting HEPS increase.

Capital expenditure skyrocketed by 177% but there’s a good reason at least, with a solar power plant scheduled for completion at one of the facilities this year.

DRDGOLD has no bank debt but has experienced a significant free cash outflow in this period. It was R1.5 billion in the bank.

Production guidance for the year ended June 2024 has been maintained, with the company warning investors that it is likely to only come in at the lower end of an admittedly tight range (165,000 to 175,000 ounces). Cash operating cost guidance has unfortunately been increased from R770,000/kg to R800,000/kg.

There was a time when I held DRDGOLD because I hoped to capture a really sensitive move to the gold price. This was a couple of years ago. I learnt two hard lessons from it. The first is that the gold price doesn’t behave in a predictable way, at all. The second is that mining houses aren’t great inflation hedges and tailings businesses are even worse.

Lesaka takes a step into the tavern industry (JSE: LSK)

This feels like a smart, complementary play

Lesaka Technologies is all about taking payments solutions to merchants in lower income areas, often serviced by more informal traders. Taverns are a feature of that landscape, serving as critically important outlets for fast-moving consumer goods companies.

Leska is acquiring 100% of a business called Touchsides from Heineken International. This is complementary with Kazang, bringing another 10,000 active POS terminals into the ecosystem. Tavern owners benefit from analytics like real-time sales activity, stock management levels and pricing. There are 45,000 licensed taverns in South Africa, so the growth opportunity is substantial.

Naturally, part of the business model here is to monetise the data with tavern suppliers, with Heineken having agreed to a long-term renewable contract with Touchsides as part of the deal. There are many opportunities here.

The deal value hasn’t been disclosed and the acquisition will be funded by internal cash generation of the group.

MTN and Mastercard finalise a Fintech deal (JSE: MTN)

The market was perhaps expecting something more impressive

The good news is that MTN has put together a deal with Mastercard that will see the payments giant take a minority stake in MTN Group Fintech, with obvious synergies around the commercial relationship and potential use of technology and infrastructure.

The less exciting news is that this is a relatively modest investment for Mastercard of just $200 million, based on a valuation of MTN Group Fintech of $5.2 billion on a cash and debt-free basis. Although this helps the market put a value on MTN Group Fintech and it suggests some alignment between the parties going forward, the reality is that this is a rounding error for Mastercard.

The TRP fires a warning shot at MultiChoice (JSE: MCG)

The regulator is bringing things back in line here

The Takeover Regulation Panel (TRP) is not to be messed around with. Takeover regulators are powerful thanks to the Companies Act, playing a very important role in the market to protect minority shareholders who can quite easily be steamrolled in the absence of regulation.

When announcements are made regarding takeovers, the TRP is generally involved. In an announcement released on Tuesday morning, the TRP confirmed that it had neither sanctioned or approved the announcements made by MultiChoice regarding the initial non-binding offer and the subsequent withdrawal of a cautionary announcement.

I did wonder about the aggressiveness of withdrawing the cautionary and it seems that the TRP didn’t love it either, advising the public to exercise caution regarding these announcements and shares in MultiChoice. The TRP is investing this matter on an urgent basis, with the focus surely being on whether Canal+ needs to make a mandatory offer to shareholders of MultiChoice.

Little Bites:

• Director dealings:
  • The company secretary of Datatec (JSE: DTC) has sold shares worth R1.1 million.
  • Sean Riskowitz (acting through Protea Asset Management) has bought yet more shares in Finbond (JSE: FGL), this time worth R319k.
  • A director of Schroder European Real Estate Investment Trust (JSE: SCD) has bought shares worth around £7k.

• Fresh off the news of the Capespan disposal closing, Zeder (JSE: ZED) has announced a special dividend of 20 cents per share. For reference, the current share price is R1.78.

• There’s a most unusual SENS from Argent Industrial (JSE: ART) that discloses a 5.09% stake held by an investor named Jason Holzer. We have no other confirmed details about him and a Google search is inconclusive. With a market cap of R907 million, this is a stake of less than R50 million. It’s easy for a high net worth individual to hold a stake this size with no intentions of any corporate activity around it.

• Sable Exploration and Mining Limited (JSE: SXM) has agreed to put an additional R1 million worth of funding into the Dens Medium Separation beneficiation plant, structured as a joint venture with IPace. This gives Sable an additional 2.5% stake in the joint venture. IPace has the option to buy back that stake for R1.3 million before 31 October 2024. IPace has committed to fund the rest of its obligation to complete the plant and commence production on 15 March 2024.

• Novus (JSE: NVS) has received exchange control approval for its special dividend. The payment date is 19 February.

• At Tongaat Hulett (JSE: TON), the application launched by Powertrans (and subsequently joined by RGS Group Holdings) to interdict the business rescue practitioners from implementing the approved plan was struck off the roll for lack of urgency. Powertrans also has to pay the costs of the application, including the costs of the respondents. That’s an expensive and unsuccessful day in court.

• Ellies (JSE: ELI) has appointed a business rescue practitioner and a notice of commencement of proceedings has been filed.

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