Ghost Bites (Mondi | MTN | Netcare)

Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:

Mondi’s Q1 was in line with company expectations (JSE: MNP)

The benefit of price increases will only truly be felt in the next quarter though

Mondi has released an update on trading for the three months to March, representing the first quarter of Mondi’s financial year. They compare this to Q4 of 2023 i.e. the immediately preceding three months, as they are focused more on the trend than the year-on-year numbers. Welcome to cyclical businesses.

EBITDA came in at €214 million vs. €260 million in Q4 2023. This includes a once-off €32 million loss from the devaluation of the Egyptian pound. The overall story is that costs were broadly in line with the preceding quarter and although average selling prices were lower, price increases have been announced and that will come through as a boost to Q2 numbers. The major driver of this result was thus an increase in sales volumes, seen across Corrugated Packaging and Flexible Packaging.

The company also reminded the market that it paid a €1.60 per share special dividend to shareholders from the net proceeds of the Russian asset disposal.

MTN Nigeria has a lot of work to do (JSE: MTN)

For now, there’s breathing room for initiatives to fix the business

If you followed the recent updates on MTN, you would know that MTN Nigeria is in a negative equity position thanks to massive forex losses in the group and other operating pressures. The company held an extraordinary general meeting to explain its plan to rectify this to shareholders.

Firstly, MTN Nigeria needs regulated tariff increases. This is a matter of lobbying the relevant regulators to put through the increases to support ongoing investment in the industry. Relationships with regulators aren’t always easy as they work to balance the needs of services providers and consumers.

Within the business, MTN Nigeria will focus on improving margins through stricter cost control. They will also optimise capex, which is a nice way of saying that it will be reduced over time without compromising network quality (in theory).

Perhaps most importantly, they will reduce exposure to the US dollar. This goes hand-in-hand with the plan to slow down on capex, as the letters of credit obligations are related to capex and add to the forex problem.

Finally, they will review tower lease contracts. It’s not exactly clear what this will entail, but they make reference to forex exposure as well, so perhaps some of the leases are priced with reference to the US dollar.

It’s a good plan and hopefully one that will work. Breathing room to implement it will be important here, with MTN Nigeria’s lenders being supportive for the time being.

At least Netcare’s margins are going the right way (JSE: NTC)

Return on capital metrics remain unexciting for me

Hospital groups are capex-intensive businesses that struggle to generate appealing returns on capital.

They are seen as defensive stocks, but my view remains that there are many discretionary services in the business model and the juicy stuff isn’t as defensive as people think. This is similar to a grocery store, where the defensive categories aren’t what deliver the best returns to shareholders. Within any hospital group, there are higher margin and lower margin services, with the proportion of each type creating the final return to shareholders.

Even though Netcare’s normalised EBITDA margin has improved from 17.5% to between 17.8% and 18.2% for the six months to end March 2024, return on invested capital (ROIC) is only 10.9%. It’s going the right way at least (up from 10.6%), but is that a remotely strong enough return to justify equity risk in an environment where there are many ways to get yield? The market is saying no, with the share price down 29% in the past year.

At least Netcare is showing positive operating leverage, with EBITDA up by 7.3% to 7.7% thanks to revenue growing between 4.2% and 4.4%. There are hospital groups that can’t even get margins going in the right direction, let alone return on capital.

Group net debt is up from R5.0 billion to R5.8 billion (excluding IFRS 16 lease liabilities), with Netcare sending cash in the direction of shareholders (dividends and buybacks) instead of paying down debt. The net debt to annualised EBITDA ratio was 1.3 times for this period, up from 1.2 times in the comparable period.

And here are two pieces of information that tell you so much about modern society: maternity cases are in decline and mental health demand is strong.

Little Bites:

• Director dealings:
  • The chairperson of Mondi (JSE: MNP) bought shares in the company worth £77.3k.
  • A director of Italtile (JSE: ITE) has sold shares worth just under R24k.

• Harmony Gold (JSE: HAR) announced its second loss-of-life incident in just one week, after a rock drill operator lost his life at Doornkop after a fall of ground incident. This is being investigated internally and by the regulator.

• Zeder Investments (JSE: ZED) has obtained SARB approval for it special dividend of 10 cents per share. It will be paid on 20th May to shareholders.

• Numeral (JSE: XII), the renamed Go Life International, announced that it has bought the South African shared services and management company. This is really just a structural thing. They also announced that they are the 210th company in South Africa to be awarded Google Partner status, which seems like an odd thing to be excited about given how many other partners there are. Then again, this is a group that describes itself as follows on the website in the about us section: “Numeral XII is not just a company; it’s an exploration of the boundless possibilities that arise when creativity meets resilience. We thrive on the delicate dance between chaos and order, seamlessly blending innovation with timeless principles. Our commitment is to harness the energy within these opposing forces, transforming challenges into opportunities.” As a rule, I don’t invest in fluff like that.

INVEST IN SHARES