Ghost Bites Vol 57 (22)

Corporate finance corner (M&A / capital raises)

• In a really interesting move, Afrimat has announced an accelerated bookbuild equivalent to around 5% of current market capitalisation (a raise of around R420 million). In this process, capital is raised from institutional investors based on their willingness to take shares and at what price. The “book is closed” once the raise has been achieved at pricing that is acceptable to Afrimat. The proceeds will be used for the Gravenhage manganese mining right and the Glenover project. The Gravenhage acquisition was announced in May 2021 and these things take a long time to conclude. Total project peak funding is estimated at R1.5 billion and earnings from this investment should come through in the 2024 financial year. The Glenover mine transaction was announced in December 2021 and has a total deal value of R550 million. This is a phosphate, rare earths and vermiculite mining right. Again, peak funding is estimated at R1.5 billion. Afrimat is trading well in the rest of the business and has a strong balance sheet, which is why this equity raise just needs to supplement current cash resources rather than cover the full cost of the projects.

• Onelogix Group has renewed the cautionary announcement related to a potential take-private of the company. This has been going on since December 2021 and initial price guidance was R3.30 per share. The KZN floods caused a wobbly in the process and the latest renewal announcement doesn’t give any indication of pricing.

• Despite the independent board of Silverbridge not recommending the offer from ROX Equity Partners to shareholders, another executive director of Silverbridge isn’t hanging around. With the top executives having accepted the offer, I’m really not sure that shareholders can afford not to accept the offer. It may be “unfair” but it is reasonable and this is how life goes in microcaps – nobody pays you what the shares are actually worth.

Financial updates

• AECI Limited has released results for the six months to June 2022. Although revenue jumped by 31%, Headline Earnings Per Share (HEPS) only increased by a modest 8% to 573 cents. The interim dividend is also 8% higher at 194 cents per share. Of the R748 million invested in capex, 59% is for growth capex. This group is clearly trying to stay on a growth path, with the latest result representing record revenue and earnings. As we’ve seen across the market, working capital is putting pressure on the balance sheet, having increased from 17% to 22% of revenue. This is cash tied up in inventory and debtors, offset to some extent by creditors. There’s also pressure on margins in general, with EBITDA margin down from 12% to 10%. Despite all of this, cash conversion actually improved, with cash generated from operations up 9%. The share price has lost more than 11% this year and is down nearly 10% over 5 years, so there hasn’t been much to get excited about here. As you’ll note further down, there’s also a change in CEO coming in the next 12 months.

• Gemfields has released a brief financial update for the six months ended June 2022. This emerald, ruby and jewellery business is one that I find interesting, as the traded multiples are low and the risks of operating in Africa are significant. Just recently, the company noted that violence in Northern Mozambique was uncomfortably close to the ruby mine. The operations themselves are flying though, with auction revenue breaking records over the past six months and 12 months. The cash balance is $111.4 million and there’s another $81.1 million still to be received from one of the auctions. Debt is just $29.7 million. Jewellery business Faberge only needed $1.5 million in cash from Gemfields over the past 12 months and didn’t draw any cash at all in the six months to June. Cash capital expenditure in the six-month period was $14.1 million. Interim results will be released on 22 September and investors will examine them closely, as the net cash balance seems to be around R2.75 billion and the market cap is only R3.4 billion.

• AVI Limited has released a trading statement for the year ended June 2022. In a difficult period, the consumer goods business grew revenue by 4.3%. Revenue growth was achieved across all categories except for I&J (due to lower fish volumes and a stronger rand for most of the period, which impacted exports). Personal Care grew revenue by 17.7% in the second half of the year and Footwear and Apparel grew by 14% in that period. AVI managed to protect gross margins to a large extent with price increases and hedging strategies, though there was still a small drop in gross margin for the year. AVI responded to a tough environment by being even tougher on costs, with selling and administration costs up just 1.5% this year. Again, I&J is the smelly fish in this story, with a substantially higher fuel cost for the fishing fleet hitting profitability at a time when revenue was also under pressure. Consolidated HEPS will increase by between 5% and 7%, coming in at between 524.8 cents and 534.8 cents. With a closing price of R71.00 the share is trading on a Price/Earnings multiple of 13.4x.

• British American Tobacco has released a half-year report to June 2022. The focus is on New Categories, as the cigarette business is seen to be ex-growth (combustible revenue only increased by 0.6% in this period). New Categories grew revenue by 45% in this period after growing 51% in FY21. Non-combustibles are now 14.6% of revenue. The target is £5 billion revenue by 2025, which would result in profitability for this currently loss-making segment. At group level, adjusted operating margin improved by 90 basis points, assisted greatly by another £275 million in savings under the Quantum efficiencies project. The group is aiming for £1.5 billion in annualised savings under this project by the end of the year. Reported results are way down (earnings per share (EPS) has fallen 42.9%) due to impairments in Russia, a charge related to historic breach of sanctions and once-off costs related to Quantum, like the exit from Egypt and a factory closure in Singapore. “Adjusted constant currency EPS” is up 5.7%, with management wanting you to see this as a more sustainable view of earnings growth. Over the next five years, the company is aiming to generate £40 billion of free cash flow. To drive further value for shareholders, the company is busy with share buybacks (as regular Ghost Bites readers will know), with £1.3 billion already repurchased as part of the £2 billion programme for 2022. The company has reiterated its full year 2022 guidance, which means constant currency revenue growth of 2% – 4% and mid-single digit constant currency adjusted EPS growth.

• Anglo American has announced rough diamond sales for De Beers’ sixth sales cycle of 2022. Sales came in at $630 million, down from $657 million in the fifth cycle but higher than $514 million in the fourth cycle. Although the management team talks about a “watchful approach” based on “macroeconomic challenges” it seems as though there are still plenty of people with money for expensive jewellery.

• Transnet is a debt issuer on the JSE rather than an equity issuer. The results for the year ended March 2022 are still relevant though, as Transnet’s financial health has a considerable knock-on impact on other industries like mining. Things are looking vastly better, with revenue up 1.8%, EBITDA up 20.5% and net profit finally swinging into a the green (R5 billion vs. a loss of R8.7 billion in the prior year). Of course, it could’ve been even better if the freight rail business was performing properly. The company is currently negotiating new contracts with the Coal Export Parties. Transnet is still dealing with theft and vandalism but at least there now seems to be money in the kitty to help fix the problems. In a major step forward, the Auditor-General of South Africa issued an unqualified audit opinion. This means there were no major issues, unlike in the four previous years where qualified opinions were issued based on irregular expenditure. Is the tide finally turning in our beautiful country?

• Make a note: Capital & Regional will announce its interim results on 11th August.

Operational updates

• RECM and Calibre (RAC) released the prepared comments from its AGM over SENS. The main asset is alternative gaming business Goldrush, which the group notes is trading well and has achieved rolling 12-month EBITDA of over R380 million. The removal of mask mandates has been a win for the bingo operations, as nobody wants to sit there all night with a mask on. Limited Pay-Out machines are still being rolled out and retail sports betting continues to grow both in-store and online. RAC has distributed all the Astoria shares it still owned to shareholders, removing the cross-holding between the two investment holding companies. The group has also renegotiated its banking arrangements to reduce the cost of funding and achieve more flexibility with the balance sheet.

Share buybacks and dividends

• British American Tobacco has continued its share repurchase programme.

Notable shuffling of (expensive) chairs

• AECI Limited’s CEO Mark Dytor is retiring from the top job with effect from 31 July 2023, having been with the company for a whopping 39 years. He has been the CEO since 2013. That kind of institutional knowledge is tough to replace, with no successor named as yet. This would explain why a year’s notice has been given.

• Rex Trueform has announced an interesting change of CEO. Catherine Lloyd is resigning as CEO and will still be involved as a legal and strategic advisor. Marcel Golding is moving from the Chairman role to the CEO role, thereby taking on executive responsibility for the group. Patrick Naylor has been appointed as Chairman.

Director dealings

• An associate of the CEO of Invicta has bought shares in the company worth around R307.5k. The share price has been trading at 52-week lows, so this example of “buying the dip” by the CEO will send a welcome message to the market.

Unusual things

• Sea Harvest Group wants to wind up the Viking Staff Share Scheme which matured in March 2022. To do this, there would need to be a specific repurchase of shares under JSE rules. A circular has been distributed to shareholders to meet the regulatory requirements for this transaction.

• Vukile Property Fund’s credit rating has been upgraded by GCR. The upgrade is based on Vukile’s geographically diversified portfolio (Spain and South Africa), the anchor tenants being grocery or essential services businesses and the “commitment to maintaining balance sheet and liquidity strength” that GCR is happy with.

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