Ghost Bites (Equites | Ninety One | Renergen | Stor-Age | Transaction Capital)

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Equites announces a R1.245bn deal with Shoprite

In line with its strategy, Equites will develop a logistics facility for Shoprite in Gauteng

One of the metrics that investors love looking at is return on equity. There are other metrics like return on invested capital that do a similar (but not quite the same) job.

For a group like Shoprite, the best use of capital isn’t to tie it up in large new properties, as that capital cannot earn the same return that the store operations are able to achieve.

For Equites, the mandate is to invest in property that offers investors a hybrid return between debt and capital. It therefore makes sense for a retailer like Shoprite to use a property fund like Equites to develop its warehousing. With a defensive tenant like Shoprite, the risk profile is appealing for income-focused investors who also want protection against inflation.

The initial lease is for 20 years, with the right to renew for three additional 10-year periods. The contracted initial yield is 7.75% and the rental will escalate by 5% per annum. You can now see how property funds deliver income to investors along with some inflation protection. A loan-to-value ratio of 30% is assumed by the company in its forecasts and the marginal cost of debt is assumed to be 9%.

These things take time to build, with the lease only expected to commence on 1 July 2024. The construction cost is R979 million and it will increase the group loan-to-value ratio by 2.3%. This is a Category 2 transaction, which means shareholders won’t be asked for their opinion on whether they think the deal should go ahead or not.

Ninety One takes a knock to earnings

They say it best: a risk-on business operating in a risk-off environment

Asset management firms simply don’t perform well when markets are heading in the wrong direction. Assets under management (the basis for charging fees) falls as the market falls, with client inflows as a potential mitigating factor.

Ninety One couldn’t even rely on that, with net outflows of £3.2 billion at a time when assets under management fell by 8% in the six months to September. That’s not good, as client flows are usually seen as the best way to assess the performance of an asset manager. Ninety One attributes the outflows to lower levels of new business volumes and clients choosing to derisk their portfolios.

Unsurprisingly, HEPS fell by 7% to 9 pence per share.

The group anticipates that challenging markets will persist for the foreseeable future. The share price has lost nearly 26% of its value this year.

Renergen switches LNG back on

But there is growing impatience for the helium module to be turned on

The market seems to be a little nervous about Renergen. In the past 90 days, the share price has dropped over 23% as jitters have crept in about the helium module being activated.

Recent issues with the liquefied natural gas (LNG) plant did nothing to calm those fears, with Renergen announcing that the LNG system has at least been repaired and turned back on.

To give investors something to hold onto, Renergen noted that the helium separation and recovery module is providing “high levels of confidence with recovery exceeding design parameters” – yet the share price only increased by 0.5% on this news.

Another solid result from Stor-Age

The share price drifting lower this year is a function of valuation, not the business model

For the six months ended September, Stor-Age achieved a dependable 6.1% increase in distributable income per share. It won’t set your hair on fire but won’t set your portfolio on fire either, with Stor-Age known for being a solid business.

The group owns 86 self storage properties, of which 56 are in South Africa and 30 are in the UK. The UK portfolio (branded Storage King) is worth R5.8 billion and the local portfolio is worth R5.1 billion. Growth in the portfolio is achieved through developments (eight new properties are scheduled to open in the next 18 months) and acquisitions of existing storage parks.

Same-store occupancy in South Africa increased from 87.6% to 89.4%. In the UK, that metric decreased from 94.1% to 91.8%. Overall portfolio vacancy is lower because new properties take a while to fill up. It’s interesting to note that commercial tenants contribute 38% of total tenants in South Africa and only 22% in the UK. The average length of stay for existing tenants is 24.4 months locally and 29.2 months in the UK, so churn is surprisingly low.

In a move reminiscent of how hotel groups like Hyatt operate, Stor-Age is now offering third-party management contracts to independent operators, developers and private equity owners. This is helping Stor-Age earn revenue in various European countries without deploying capital. This is a tiny part of the group (less than 1%) but looks like an interesting source of future returns.

The balance sheet is strong, with a loan-to-value (LTV) ratio of 30%. Over 85% of net debt is subject to interest rate hedging.

Growth in headline earnings per share (34.77%) and net asset value per share (10.17%) has far outpaced the dividend per share (6.1%). The net asset value per share of R14.79 is higher than the current price of R13.69, which is what an investor wants to see in a property fund before taking a position.

The share price is down 6% this year and the annualised dividend yield is around 8.8%. I made good money on Stor-Age during the pandemic and then sold as the share has looked fully priced to me since then. It turned out to be the right decision.

Transaction Capital gives the market a scare

I’m keeping a close eye here to potentially add to my position

The Transaction Capital share price is down nearly 16% this year, with a rude awakening for those who got way too carried away with the valuation earlier this year. If you bought at the peak, this is an ugly chart:

With results for the year ended September now available, we see an increase in core earnings per share from continuing operations of 17%. Notably however, return on average equity has dropped from 15.1% to 14.0%, although return on assets is steady at 4.4%. The dividend per share increased from 52 cents to 70 cents.

The issues this year were felt in the SA Taxi business, as the floods in KZN that shut the Toyota factory had a knock-on effect on a business that makes money from financing taxis. Core earnings in this business fell by 26%.

I found it very interesting that the SENS announcement deals with the Nutun division first, previously called TCRS. This division was all but ignored over the pandemic, yet it now features right up front. I guess that with earnings growth attributable to the group of 28%, that position has been earned.

The company has been acquiring non performing loan portfolios more frequently in South Africa this year and has sold its Australian book. Nutun is focused on providing services internationally (including the new push into customer engagement services that clients can outsource to South Africa) rather than buying books abroad.

WeBuyCars is up next as the largest contributor to the group (43% of earnings), growing earnings by 41% and earnings attributable to Transaction Capital by 100% as the stake in the business has been increased. All metrics are heading in the right direction, with F&I penetration (the percentage of sales with finance and insurance products in addition to the car) increasing from 13.6% to 18.2%.

Overall though, the market is worried about WeBuyCars in this environment. The contribution to group earnings is huge and if used car prices drop in anywhere near the same fashion as in the US, things could get ugly. On the plus side, SA Taxi is likely to have a better year after such a terrible 2022.

I’m holding my shares and chewing on whether to add to the position.

Little Bites:

• Director dealings:
  • The CEO of Grindrod bought shares in the company worth R1.3 million.
  • The CEO of Altron has acquired shares worth R16k (one of several recent purchases).
  • A director of AB InBev exercised options for 140,000 shares and sold all of them.
  • Two directors of Impala Platinum have sold shares worth R6.9 million. That sends a pretty strong message about how Impala has been outgunned by Northam Platinum on the Royal Bafokeng Platinum deal.
  • A director of ADvTECH exercised share options and then sold all the shares received.
  • A director of Delta Property Fund has acquired shares worth R28k.
  • Directors of Santova exercised share options worth an aggregate of nearly R1.6 million.

• Of concern in the context in the director dealing above, Delta Property Fund announced the disposal of the Standard Bank Greyville building in Durban for R44 million. This will reduce the fund’s loan to value by 20 basis points from 58.2% to 58%. Vacancy levels will reduce by 40 basis points to 33.5%. The property has a vacancy rate of 64.4% so the buyer (a private individual) will have to work hard to make this asset a success. This is a category 2 transaction as it is significant for Delta, which is why I’m surprised to see a director buying shares just days before this announcement.

• Trematon released a trading statement for the year ended August 2022 and the company wants you to focus on intrinsic net asset value (INAV) as the most sensible financial metric. INAV is expected to be between 485 cents and 495 cents, between 8% and 10% lower than the comparable period.

• In the Tongaat Hulett business rescue process, the first meetings of employees and creditors have taken place. Post commencement finance has been advanced by lenders and will be used to pay salaries and critical suppliers. Naturally, funding operating costs through further debt won’t do any favours to whatever equity value might still be left in this thing.

• With terrible news coming out of Poland, I suspect the NEPI Rockcastle share price is going to take a dive. This is such unlucky timing, as the company has announced an agreement to acquire 100% of the Atrium Copernicus Shopping Center in Torun, Poland. The deal value is €127 million, which is too small to even be a Category 2 deal under JSE rules. The acquisition will be funded by existing cash resources.

• Premier Fishing and Brands released a trading statement for the year ended August 2022 that shows a strong swing back into profitability. After posting a headline loss per share of -3.39 cents in the comparable period, headline earnings per share is up to 5.65 cents.

• Deneb Investments released a trading statement for the six months ended September 2022 that anticipates HEPS growth of between 49% and 69%, with an expected range of between 15 cents and 17.1 cents per share. The story looks very different if you exclude the insurance claim received in this period for Covid business interruption, as HEPS would then be down by between 30% and 50%.

• Safari Investments released a trading statement for the six months ended September 2022 that reflects growth of between 28% and 36% in the distribution per share. The distribution will be between 32 cents and 34 cents per share and the share price closed at R5.60.

• African Media Entertainment, owner of several major radio stations among other assets, has released a trading statement for the six months ended September 2022. HEPS will be between 140 cents and 160 cents per share, an increase of between 43.9% and 64.4%. The share price closed 6.7% higher at R37.25.

• In a complicated restructure of its treasury function, Invicta needed to announced the steps in detail as one of them triggers a Category 2 announcement under JSE rules. Ultimately, a wholly-owned subsidiary is disposing of a R2.355 billion preference share to a part of the group that has 25% B-BBEE ownership. This is like selling off 25% of the preference share and the value is high enough to trigger the Category 2 announcement. Invicta’s group structure has always been complicated, so a restructure isn’t anything surprising.

• Trustco is busy with a deal related to the Meya business that would give SJSL an option to become a 70% shareholder in Meya for up to $50 million. There are now discussions around a larger deal and Trustco believes that definitive agreements may be concluded by the end of December 2022.

• Mantengu Mining is looking to raise R15 million through a fully underwritten, renounceable rights offer. There are several underwriters who have agreed to underwrite the rights offer in a way that would reduce or settle their loan balances.

• Sebata Holdings has lifted its cautionary announcement as negotiations related to the potential disposal of one or more businesses have been terminated. Predictably, the website isn’t even working.

• Nutritional Holdings has been a soap opera for ages now, with a liquidation court date set for 20 January 2023 and the JSE at advanced stages of considering a delisting of the company. In the meantime, a new firm of auditors has been approached to assist with audits and accounting consultants have been engaged for the consolidation of certain subsidiaries.

• If I understand the legal position correctly, it looks like PSV Holdings may yet be saved in a business rescue process. A material shareholder appears to have secured enough funding to keep the lights on.

• I always include the Naspers and Prosus share repurchase numbers because they are so utterly enormous. Between 7 November and 11 November, Naspers shares worth R1.74 billion and Prosus shares worth $276 million were repurchased.

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