Ghost Bites (British American Tobacco | Burstone | De Beers | EOH | Growthpoint | Hyprop | Momentum | Orion | Quantum Foods | The Foschini Group)

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British American Tobacco banks £1.5 billion (JSE: BTI)

The block trade of shares in the Indian business is complete

As noted earlier in the week, British American Tobacco decided to reduce its stake in ITC Limited in India by selling 3.5% of that company to institutional investors. It certainly didn’t take long to achieve, with £1.5 billion worth of shares placed in a matter of days.

The proceeds will be used to buy back shares in British American Tobacco, starting with £700 million in 2024. The group is trying to balance this against the need for ongoing investment and share buybacks, as well as the deleveraging towards the new target range of 2x to 2.5x adjusted net debt to adjusted EBITDA.

Burstone to acquire Neighbourhood Square from Investec (JSE: BTN)

The deal is part of a right of first offer that Burstone has over certain properties

Those with good memories may recall that Investec Property Fund was rebranded Burstone some time ago. The management team of Burstone was also internalised, at great cost I might add. As part of this, Burstone was granted a right of first offer over certain properties held by Investec. This lasts for 24 months after the closing of the internalisation transaction.

Investec is selling Neighbourhood Square and Burstone has exercised the right of first offer along with Flanagan and Gerard Frontiers Property Limited, who will buy it on a 50-50 basis from Investec for a total purchase price of R380 million.

With Checkers and Woolworths as anchor tenants along with Dis-Chem, this bodes well. The property is located in Linksfield, which is an upmarket suburb of Johannesburg. The net property income for the half-share is R15.3 million, which is a yield of 8.5%. The cost of debt is assumed to be 9.35% at the moment so the property would be loss-making if fully funded by debt.

That’s just how it is for property in this market.

De Beers reports further momentum in rough diamond sales (JSE: AGL)

This is encouraging news for Anglo American

De Beers, part of the Anglo American stable, has announced the rough diamond sales value for the second sales cycle of 2024. Sales came in at $430 million, up from $374 million in the first cycle of 2024.

Cycle 2 in 2023 was $497 million, so this number is still down year-on-year.

Demand is growing in India but remains a concern in China, with the narrative across those two massive emerging markets continuing to be in favour of India in most contexts. Overall, De Beers expects a gradual ongoing recovery throughout the year.

I don’t see many silver linings at EOH (JSE: EOH)

Just because a company has survived, doesn’t mean it is a good investment

EOH has been quite the story, hasn’t it? After fighting back from the brink of death because of widespread corruption, EOH eventually had to do a rights issue to sort out the balance sheet (something I was worried about at the time, leading to me selling my speculative position before the rights issue happened).

In the post-rights issue world, it’s also not rocket science to see that EOH is unlikely to do exciting things for a portfolio. What exactly is appealing about providing technology solutions to the public sector and large corporates? This is a bright red ocean of competition, which means margin pressure is almost unavoidable.

I’m unfortunately being proven correct once more with this company, as results for the six months ended 31 January reflect a drop in continuing revenue of between 2% and 4% year-on-year, along with operating profit collapsing from R142 million to between R5 million and R15 million. If adjusted EBITDA is a metric you’re willing to use, that fell from R171 million to between R90 million and R105 million.

The headline loss per share is between 10 cents and 12 cents, which is at least an improvement vs. the headline loss per share of 17 cents in the comparable period. This is thanks to having far less debt on the balance sheet than before, a direct result of the capital raising activities. The interest charge was down from R102 million to R68 million.

Weirdly, despite the drop in operating profit, cash from operations jumped from R5 million to between R190 million and R210 million. Once you read all the way through the announcement, you find that it was because of the early receipt of a large amount in the foreign operations, with the payable only settled after year-end. You have to be very careful with cut-off issues in working capital. The company did a good job around explaining this, noting that cash from operations would’ve been between R28 million and R34 million without that distortion.

If we consider momentum instead of year-on-year movements, then EOH’s six-month performance is better than the immediately preceding six months. The poor trading at the end of the last financial year continued into this half for three months or so before improvements came through.

For me, it’s all just too difficult with no obvious catalyst for major upside in performance. Those who supported the rights issue at R1.30 are in the red, with the share price currently at R1.19.

The V&A is still the jewel in Growthpoint’s crown (JSE: GRT)

Tourism in Cape Town is flying

Growthpoint released results for the six months to December 2023 and they reflect pressure on distributable income per share, with that metric down by 8.6%. The dividend followed suit in terms of percentage movement, coming in at 58.8 cents per share.

As the largest of the JSE-listed REITs, Growthpoint boasts a portfolio in which only 53.7% of total assets are found in South Africa. The offshore stuff takes the form of strategic stakes in listed funds like Growthpoint Properties Australia, Capital & Regional (also on the JSE) and Globalworth Real Estate Investments in London, with exposure to properties in Poland and Romania.

On top of all this, they have Growthpoint Investment Partners. This section of the group effectively serves as an incubator for specialist funds in areas like healthcare and student accommodation.

One of the challenges at the moment is that the loan-to-value has moved higher for both the South African calculation (34.8%) and the group calculation (42.0%). This comes at a time when debt is expensive, putting pressure on distributable income.

The V&A Waterfront remains the superstar in terms of growth, achieving a 13.7% increase in distributable income. Another positive is that the South African portfolio vacancy rate has decreased from 9.2% to 8.8%, with the office portfolio improving from 19.2% to 17.8%. That’s still very high of course, but it’s slowly getting better.

Distributable income per share fell 13.4% at Hyprop (JSE: HYP)

As we learnt earlier in the week, there’s no interim dividend

The six months to December 2023 marked an unhappy time for Hyprop shareholders. This is despite metrics that really don’t look too bad at face value, like decent growth in tenant turnover and a positive rent reversion for the period – even for offices attached to the malls!

The office vacancy, by the way, is 32.8%. The retail vacancy rate is just 1.3%.

Despite encouraging metrics, distributable income for the South African portfolio fell from R459 million to R448 million.

In the Eastern European portfolio, tenant turnover growth was in the double digits and the vacancy rate was just 0.3%. Despite what sounds like a great story, distributable income was also lower. It came in at R229 million vs. R243 million in the comparable period.

We then get to Sub-Saharan Africa, where the devaluation of the naira has worked the same magic that has hurt the likes of MTN. Distributable income collapsed from R26 million to -R8.6 million.

So, at group level, distributable income fell 8.3%. Due to the dividend reinvestment programme that led to many more shares being in issue, distributable income per share was down 13.4%. Ouch!

The full-year guidance is a drop of between 10% and 15%, so it’s an unpleasant year for shareholders like yours truly.

Based on this guidance, the risks to the naira and the group’s worries around Pick n Pay as the anchor tenant in its properties, there is no interim distribution. I assume that the worry is Pick n Pay needing to renegotiate rentals. Hopefully Hyprop holds firm, as these are high quality malls and I can’t imagine why rental concessions would be needed for those stores.

The acquisition of Table Bay Mall should be implemented before 1 April 2024, with R500 million in cash and R250 million of bank facilities earmarked for that acquisition. They paid a hefty price for Table Bay Mall and I hope it will work out.

IFRS changes make it trickier to understand Momentum’s numbers – but the direction of travel is up (JSE: MTM)

Higher interest rates have helped them

Momentum Metropolitan has been applying the new Insurance Contracts accounting standard from 1 July 2023, so this limits the comparability of the numbers for the six months to December 2023 to the prior period. To address this, the company shows restated comparable numbers.

On that basis, HEPS is up by between 46% and 51% – a very large jump indeed! If it wasn’t for the restatement, they would’ve been up by between 18% and 21%. A period with a new accounting standard is always a major distortion.

The performance was driven by better investment income (thanks to higher interest rates) and other improved operational performance metrics like persistency and sales volumes.

Orion releases its half-year financials (JSE: ORN)

This is very much still a development company

Orion’s interim report kicks off with the Prieska Copper Zinc Mine, where this period saw an update to the Mineral Resource Estimate and the commencement of trial mining and dewatering. There are 166 on-site employees already!

At the Okiep Copper Project, a drilling programme is underway with the goal of completing the bankable feasibility study by the third quarter of 2024.

There are other projects in the group as well, but they are sitting on the fringes in comparison to those two major opportunities.

Development is expensive, with an operating loss of AUD5.65 million for the period.

Ongoing drama at Quantum Foods (JSE: QFH)

The “feathers fly” pun is hard to avoid here

The Quantum Foods shareholder register is quite the hotbed of activity at the moment. After Country Bird bought the shares held by JSE-listed Astral Foods, crazy things happened to the share price and Quantum Foods had to release an announcement giving the market some idea of what was going on.

The drama continues, with one of the three major shareholders (Braemar Trading) demanding a shareholders meeting to propose the removal of the chairman of the board and two directors, with a Braemar’s nominee to be appointed as director.

Quantum Foods has taken legal advice and the view is that the demand is not legally compliant. The board will therefore not convene a shareholders meeting.

Whatever is going on here, it’s big.

In a separate announcement, Quantum announced that Country Bird Holdings has issued a letter to the board of Quantum confirming that the company has no intention of making a takeover bid for the company.

The Foschini Group is bringing a new retail brand to SA (JSE: TFG)

A franchise agreement with JD Sports Fashion has been agreed

The Foschini Group has signed an agreement with JD Sports Fashion to be the company’s exclusive retail partner in South Africa. As the name suggests, JD Sports Fashion focuses on sports and casual wear (so, yet another seller of Nike and Puma etc.) and has strong private labels as well.

One wonders how many sports retail brands a market possibly needs, as The Foschini Group already owns Sportscene, Totalsports and Sneaker Factory. Small tweaks in the style of the store, the music being played etc. seem to make a difference.

More than 40 stores will be opened over the next five years in South Africa, so that’s good news for retail mall owners!

Little Bites:

• Director dealings:
  • The company secretary of Truworths (JSE: TRU) sold shares worth R1.6 million. This seems to mostly relate to taxes and loans due under legacy share schemes, but there’s also a comment about a desire to rebalance the personal portfolio and so that counts as a sale in my books.
  • The CEO of Sirius Real Estate (JSE: SRE) bought shares in the company in a self-invested pension. The value was £6.5k.
  • The non-executive chairman of Primary Health Properties (JSE: PMR) has reinvested dividends into shares in the company worth £2k. His wife did the same to the value of £1.2k.

• Cognition Holdings (JSE: CGN) announced that the comments made by Caxton and CTP Publishers and Printers (JSE: CAT) regarding an offer having been made for Cognition are incorrect. Although an offer has been lodged with the board of Cognition, the TRP still needs to approve it.

• As if the situation around disgraced ex-Bytes CEO Neil Murphy (JSE: BYI) couldn’t get more ridiculous, his very long list of undisclosed trades in the company’s shares can now be added to be Alison Murphy, a close associate. There were many acquisitions from 2021 to 2023, followed by disposals. It’s truly mind-blowing.

• Southern Sun (JSE: SSU) has repurchased shares representing 3% of issued share capital since the general authority granted in September 2023. The average price per share paid is R4.97, which is slightly below where the share is currently trading.

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