Positive jaws at Investec (JSE: INP | JSE: INL)
And no, this has nothing to do with sharks in a good mood
The banking industry uses the term “jaws” quite frequently. It’s a measure of the difference between growth in income and the increase in expenses. If income is growing ahead of expenses, you have positive jaws and margins are increasing. If expenses are growing faster than income, you have negative jaws and margins are shrinking. The ominous nature of the term becomes very real in a negative jaws scenario.
Thankfully, there is no such issue at Investec. In the year ended March 2025, they grew revenue by 5% vs. an increase in operating costs of 2.8%. This drove growth of 7.8% in pre-provision adjusted operating profit, taking it above the £1 billion milestone for the first time in the group’s history. The contribution to income growth was from a broad range of sources in the group, which is encouraging.
The credit loss ratio increased from 28 basis points to 38 basis points. Although that’s well within the through-the-cycle range of 25 to 45 basis points, it did take the shine off the growth in pre-provision profit. Translating the numbers into rand also impacts growth, which isn’t something that South Africans are able to say very often!
Adjusted operating profit was up just 2.8% in ZAR. HEPS was down 1.6% in ZAR. The dividend per share tells a more pleasant story, up 5.8% (that’s in GBP as they declare it in pence) vs. a HEPS decline of 0.4% (also in GBP), so the payout ratio has moved higher.
Return on equity dipped by 70 basis points to 13.9%, with a gain recognised on the combination of Investec’s UK wealth business with Rathbones contributing to a higher equity base (the denominator).
Another metric worth noting is tangible net asset value per share, which grew by 6% in GBP or 5.1% in ZAR. Over time, this is a key driver of the share price.
Here’s a fun fact to finish off: Investec is targeting mid-sized corporates, with the goal being to take the Investec private client experience (which is objectively excellent) to these companies. They plan to triple the current client base and achieve market share of 8% by 2030. Companies like Investec grow by finding specific verticals where they can win share.
Amazingly, despite plenty of volatility over the past year, the share price is now perfectly flat over 12 months! And I mean perfectly, to the cent.
Double-digit growth in Life Healthcare’s dividend (JSE: LHC)
Operating leverage is in their favour at the moment
Hospital groups are well known for earning returns that are below their cost of capital. It’s very much a game of inches, as a modest improvement in the revenue growth rate can tip the scales in the direction of positive operating leverage, which means that margins improve and investors are healed along with the patients. And vice versa, of course.
For the six months to March 2025, Life Healthcare grew revenue from continuing operations by 8.1%. This was achieved through a combination of pricing increases and a 2.0% increase in paid patient days. The interim cash dividend increased by 10.5%, so we have a rare example of double-digit growth. Having said that, normalised earnings per share was up by 9.1%, so a more aggressive payout ratio helped dividend growth sneak into the teens.
If you look at HEPS though, you’re in for a big surprise. It came in wildly negative for the period. This is because although HEPS is designed to capture as many non-recurring items as possible, there will always be stuff that falls outside of its defined exclusions. In this case, HEPS was impacted by a large negative fair value adjustment on contingent consideration liabilities.
What on earth does that mean? Well, because of the price achieved on the sale of Life Molecular Imaging (LMI) on its disposal, Life needed to pay an “agterskot” of sorts to the previous owners of the business. This is a payment that happens down the line on an old deal, depending on how the asset performed and exactly what the terms of the original deal were.
This has led to a situation where current liabilities exceed current assets at Life, which makes it look as though the company is at risk of not funding its operations. The good news is that the payment on the contingent consideration is going to be paid from the proceeds related to the disposal. Accounting rules are forcing Life to account for the provision now and the proceeds on disposal only when the LMI deal closes. The balance sheet is actually in decent shape, with net debt to normalised EBITDA of 0.65x.
The LMI transaction is expected to close in the second half of the financial year, which will then lead to a much simpler balance sheet in the full-year numbers. From an operational perspective, Life expects paid patient days to grow by 1.5%, which does imply a slight slowdown in the second half vs. the first half.
Pick n Pay is still making losses (JSE: PIK)
Retail turnarounds are no joke
I’ve been pretty bearish on the overall turnaround at Pick n Pay, as regular readers will know. It’s an extremely difficult thing to get right, particularly when up against a competitive juggernaut like Shoprite (and others in the sector).
Although there have been some helpful changes to local operating conditions, like the near-disappearance of load shedding, Pick n Pay’s business still has major structural challenges. I don’t know about you, but I still see far more turquoise motorbikes on the road than anything else.
In a trading statement for the 53 weeks to 2 March, they’ve confirmed that the core Pick n Pay segment is still making losses after deducting lease costs. Thanks to how utterly daft the modern accounting standard for leases is, you actually have to specify whether lease costs are in or out of operating profit, as those costs are recognised as part of net finance costs. Sigh.
At group level, they’ve certainly made progress in reducing the losses. The headline loss per share has reduced by 55% to 75%, which means an expected range for the 53-week period of -77.49 to -43.05 cents.
Funnily enough, having the extra trading week in a 53-week period is a drag on earnings when you’re a loss-making business. There’s an extra week of losses, rather than an extra week of profits. The 52-week vs. 52-week disclosure in the detailed results will be interesting, as it will allow the market to isolate the final week and see exactly how loss-making the group still is based on the latest numbers.
I must point out that a major driver of the reduction in losses is that Pick n Pay tapped shareholders for equity capital so that they could reduce debt, thereby reducing finance costs as well. The real question here is around return on capital, which at the moment is still negative.
Despite the obvious risks, the share price is up 44% in the past 12 months and even closed 3.5% higher on the day of this trading statement.
Shaftesbury: London’s West End keep working (JSE: SHC)
Focused property funds can do very well, provided they focus in the right place
If you’ve ever had the joy of walking around London on a bright summer’s day (that part is very important), then you’ll know just how impressive areas like the West End are. Wealthy people from all over the world want to live and shop there, which is great news for property funds like Shaftesbury who specialise in the area.
They are having no problem with demand, with an update at their AGM noting that recent leasing transactions have been 8% ahead of their December 2024 Estimated Rental Value (ERV) and 9% ahead of previous passing rents. There’s 3% growth in the like-for-like annualised rent roll. Vacancies are down from 2.6% to just 1.7%.
At the beginning of April, Shaftesbury announced a long-term partnership with NBIM, the Norwegian sovereign wealth fund. This sees NBIM acquire a 25% stake in the Covent Garden estate, unlocking £570 million in capital for Shaftesbury.
This gives them plenty of money to deploy into new opportunities. Heck, they can even afford to shop at Harrods with that kind of money!
With a loan-to-value ratio of 17% after taking into account all the recent activity (way down from 27% at the end of 2024), I expect to see deal announcements from them in the coming months. I just hope they don’t lose their strategic focus.
Ever heard of Shuka Minerals? (JSE: SKA)
The company quietly listed a couple of days ago
Some companies list with a bang. Others sneak in, like a ghost in the night (of the non-finance variety). Shuka Minerals was certainly the latter. I thought I was hallucinating when I saw this new name come up on SENS!
Shuka is a junior African mining group that is listed on the AIM in London and now on the JSE as well. Their first update to the local market is about the restart of the Rukwa Coal mine in Western Tanzania. This will be needed to bring operational cashflow to Shuka, so that already gives you a flavour of where they are in their journey.
They anticipate a rather astonishing internal rate of return (IRR) of 80% on the staged ramp-up of the mine. All I can really say is that if every junior mining house always hit its targeted IRR, investors in the sector would have had a very different experience in years gone by.
Good luck to them – I look forward to following this story.
Modest growth at Spear REIT, but the direction of travel is still up (JSE: SEA)
The sector is taking a breather this year
Spear has announced results for the year ended February 2025. With the share price up more than 22% over 12 months despite growth of just over 3% in the distribution per share, we don’t need to look much further for evidence of how market sentiment towards South Africa has improved. With a portfolio focused on the Western Cape, Spear is seen in a particularly positive light.
Trading on a dividend yield of 8.3%, Spear’s yield is currently over 200bps lower than the SA 10-year bond yield. This implies that (1) the market is willing to pay up for focused Western Cape exposure and (2) Spear still needs to achieve strong growth over time to make up the differential to the “risk-free” return on offer with bonds.
Where does this growth come from? One source is positive reversions i.e. new leases being at better rates than the expired lease. Spear achieved positive reversions of 4.18% in FY25, so that’s decent. They’ve also been busy with major transactions, something that they should keep doing if the market is willing to pay up for their equity. You want to raise equity when your shares are expensive, not when they are cheap. Recycling capital (selling existing properties at great prices to then reinvest in properties at cheaper prices) is first prize of course, but if you run out of assets that you want to sell, then raising equity is the next port of call.
There are a few other metrics that are worth touching on. The industrial portfolio has an occupancy rate of 98.85% and in-force escalations of 7.3% – in short, the Western Cape is firmly open for business. The retail portfolio managed positive reversions of 8.53% and in-force escalations of 7.25% – the Western Cape is also open for shopping. And finally, the office portfolio had negative reversions of just -3.17% and occupancy of 92.99% – the Western Cape is increasingly open for people to do meetings in person rather than over Zoom while persuading their cat to stop meowing*.
The group expects distributable income per share to grow by between 4% and 6% for the year ending February 2026. The payout ratio is expected to remain at 95%.
When I read results like this, I remember why I semigrated 10 years ago.
*references to cats are based on my lived experience
A period to forget for Tharisa (JSE: THA)
In mining more than any other sector, there are good times and bad times
And this, dear reader, was a bad time. For the six months to March 2025, Tharisa suffered a drop of 23.9% in revenue and 45% in EBITDA. Net profit after tax tanked by 78.9%. Yikes.
Cash from operating activities fell by 58.2%. It’s just as well that capital expenditure was 46% lower, as this helped protect the overall strength of the balance sheet in a difficult period.
And despite all this, the interim dividend was identical to the comparable period at US 1.5 cents per share. Companies would sooner sell off their first-born child than cut their dividends.
So, what went wrong in this period? One of the issues was that PGM production fell at exactly the wrong time, as this was a rare example of a period in which average PGM basket prices actually moved higher. Chrome output was also negatively impacted, in both cases due to an inconsistent ore mix. This is why PGM gross profit margin more than halved from 15.2% to 6.2%, while chrome gross margin also took a serious knock from 26.5% to 17.4%.
They seem confident that they can make up for it, as they are maintaining their guidance for FY25.
Nibbles:
- Anglo American (JSE: AGL) announced the results of their dividend reinvestment plan. Shareholders didn’t exactly surge to the front when it came to this opportunity, with holders of just 1.77% of shares on the UK register and 0.89% of shares on the SA register electing to receive shares instead of cash.
- I generally don’t comment on non-executive director appointments unless I see something that really catches my eye. Santam (JSE: SNT) announced that Richard Wainwright will be appointed as an independent non-executive director. The reason that this is interesting is that Wainwright was the CEO of Investec’s banking business until as recently as 2024.
- Schroder European Real Estate (JSE: SCD) certainly can’t be accused of not keeping the market updated on operational news. They’ve renewed a lease with DIY group Hornbach, which contributes 11% of income in the Schroder portfolio as the second largest tenant. The new lease is for 12 years and is a triple net lease that is subject to indexation, which is a fancy way of saying that Schroder has great certainty over the amount they will earn and it will increase by an inflation-linked amount each year. They note that the new lease is ahead of the Estimated Rental Value (ERV), but they don’t indicate by how much.
