Ghost Bites Vol 67 (22)

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Corporate finance corner (M&A / capital raises)

• Data-only network rain has gotten itself into trouble with the Takeover Regulation Panel (TRP). The company released a press release noting that it wants to propose a merger with Telkom. The Telkom board hasn’t received any offer or proposal, based on a Telkom statement quoted by Bloomberg. This is exactly why the TRP is so annoyed: this type of news can’t just play out in the press. With MTN’s potential offer for Telkom already on the desk of the TRP, any further announcements need to be approved by the TRP. To make it worse, it seems as though the TRP specifically told rain not to issue the announcement, yet they went ahead anyway! I’m not sure what the potential ramifications are, other than rain being ordered to retract the announcement. That seems like barely a slap on the wrist though, as rain has gotten all the press coverage that it would’ve wanted. Will there actually be an approach to the Telkom board? We just don’t know.

Financial updates

• The news of the day was undoubtedly the earnings release by MTN for the six months to June 2022. As I recently wrote in Ghost Mail, I took a position in the company based on the strong results released by the subsidiaries. It has worked beautifully, with MTN closing 9% higher after this result. Group service revenue grew by 12.8% and EBITDA was up 13.7%, so there was even EBITDA margin expansion in this result! Group margin is at 45.3%, with many of the African subsidiaries running north of 50%. Holding company net debt has decreased from R30.1 billion to R28.4 billion. Return on equity increased by 460 basis points to 24.2%. HEPS jumped by a beautiful 46.5% to 567 cents. Despite all this, there’s still no interim dividend. Nonetheless, MTN has indicated a minimum dividend per share of 330 cents for FY22. Nigerian liquidity issues aside, I am bullish on this story.

• Bidcorp closed 4.9% higher after releasing a strong trading statement. The company talks about how “positive trading has continued” across “almost every geography” – what more could shareholders want? The Northern Hemisphere summer has dished up a strong performance for this food service group. HEPS for the year ended June 2022 is expected to be between 75% and 80% higher than the comparative year, smashing through the previous all-time high achieved in the pre-Covid 2019 year. The earnings range is between R15.197 and R15.631 per share. The closing price of R324.48 is a Price/Earnings ratio of around 21x, a rather fulsome valuation. The share price is down slightly this year, reflecting a scenario where the growth was already baked into the price.

• ADvTECH released a trading statement for the six months ended June 2022. HEPS is expected to be between 20% and 25% higher than the comparable period. This is another example of a share price where the earnings needed to catch up to the multiple, with a 7% drop in the price year-to-date.

• Lighthouse Properties has released its results for the six months to June 2022. There’s not much growth to write home about, with the interim dividend only up 0.9% year-on-year. This is despite revenue being around 3x higher than in the comparable period. The loan-to-value ratio jumped from 11.32% to 31.38% and the net asset value per share fell by 11.32% to 36.43 EUR cents. Lighthouse also announced a small related party transaction related to the portfolio of four French properties that were being jointly acquired by Lighthouse and Resilient on a 75%-25% basis. Resilient will be taking a bigger piece of that pie, buying 15% from Lighthouse. This will take the parties to a 60%-40% split. The rationale put forward is that Lighthouse wants to do more deals in France through this investment vehicle, so allowing Resilient to hold 40% means that Lighthouse can grow that portfolio without needing to put in as much capital as if Resilient only held 25%.

• Italtile released a sales update and voluntary trading statement for the year ended June 2022. Headwinds have included inflation and a shift in consumer spending away from home improvement to other recreational activities, like drinking beer in pubs while watching the Springboks. Supply chain issues and intensified competition haven’t helped either. Higher interest rates aren’t good news for home renovations, as many South Africans have had to prioritise putting fuel in the car and paying down the bond. Having successfully created an incredibly depressing mood in the first part of the announcement, Italtile then noted only a “marginal decline in turnover” vs. a very high comparable base. Like-for-like store turnover even managed to grow by 1.2% and total store turnover was up by 2.8%. The integrated supply chain manufacturers increased by 1.8%. These growth numbers were mitigated by integrated supply chain importers, with a 2.4% decline in sales. I must say, it is impressive that HEPS grew by between 7.5% and 9.7% against this backdrop.

• Old Mutual released a trading statement for the six months ended June 2022. The numbers are complicated, with a number of distortions causing HEPS to be higher by between 52% and 72%. Old Mutual discloses an adjusted HEPS number that shows a movement between -17% and 3%. When a management team tones things down with an adjusted number, you can probably trust that number.

• Textainer Group has renewed its revolver facility and extended the term. The facility has been increased from $1.5 billion to $1.9 billion. The spread is 1.475% over the daily Secured Overnight Financing Rate (SOFR), which is the reference rate that has replaced LIBOR.

• Capital & Regional Plc has released its interim results for the six months to June 2022. The big story has to be the improvement in the loan-to-value ratio from a totally unsustainable 72% at June 2021 to 40% at June 2022. This has led to the resumption of dividend payments, with an interim dividend of 2.5 pence per share. Occupancy is up to 93.7% and lettings / renewals during the period were achieved at an average premium of 34.1% to the previous rent. Adjusted earnings per share increased by 25%. The stock is quite illiquid, so I wouldn’t read too much into a positive 7.2% move on the day.

• Deutsche Konsum REIT has released results for the first nine months of the financial year. Rental income is up 9% and Funds From Operations (FFO) – a key metric in REITS – increased by 3%. Another key measure is aFFO, which is FFO net of capitalised modernisation measures (i.e. investment in the properties themselves). This metric is up 26%. The loan-to-value has decreased to 48.8%, helped along by a valuation increase in the properties of around 7.5%. Over this period, the fund has acquired 24 retail properties for an aggregate value of €98 million with an average initial yield of 8.2%.

• Montauk Renewables has released results for the six months ended June 2022. Revenue is up 59%, EBITDA has swung sharply into the green and so has HEPS, coming in at $0.13 per share vs. a loss of $0.13 per share in the comparable period. It’s unusual to see matching positive and negative numbers like that! Despite the obvious improvement in fortunes, no dividend has been declared.

Operational updates

• Sibanye-Stillwater has released a new operational plan for the US PGM operations. This business has already paid back the original investment (with the management team not-so-modestly pointing out their “impeccable acquisition timing”), so the focus is on how to optimise the remaining expected return. Recent weather events resulted in a knock to the business, with production suspended for 7 weeks. The bigger issue is the outlook for the palladium market, which has prompted Sibanye-Stillwater to defer capital investment and re-engineer the operations to protect margins and long-term value. You’ll find the detailed presentation at this link.

Share buybacks and dividends

• As a reminder of how varied the shareholder register in a company like Glencore is, the Qatar Investment Authority now holds 8% in the company as a result of share buybacks by the company. This is also a useful reminder that when a company undertakes share buybacks, every remaining shareholder’s stake in the company increases as sellers are mopped up.

• Industrials REIT has announced the outcome of the scrip dividend alternative. Treasury shares representing 0.71% of shares in issue will be used to settle the scrip dividend.

• British American Tobacco has continued its daily share buybacks.

Notable shuffling of (expensive) chairs

• Professor Tshilidzi Marwala will step down from the board of Nedbank in 2023. There’s a good reason for this – the professor has been appointed by the United Nations as the next Rector of the United Nations University in Tokyo. As “good leavers” go, that’s right up there. It’s wonderful to see South Africans making waves on the global stage.

• At Delta Property Fund, Siyabonga Mbanjwa has served as CEO since February 2022. Bongi Masinga has assisted with the transition in an executive role and will now move to being a non-executive director of the company.

• Although no directors have joined or left the board as part of this update, Astral Foods’ establishment of an ESG Committee is a sign of the times and how important this has become.

• Rex Tomlinson has joined the board of Investec Property Fund as an independent non-executive director, bringing with him a whopping three decades of experience at board level.

Director dealings

• None!

Unusual things

• The listing of New Frontier Properties looks set to disappear. The company is behind on its accounts going as far back as the year ended August 2020. After attempts to recapitalise the company have been unsuccessful, the Stock Exchange of Mauritius (where the primary listing is held) is considering the termination of the listing. There’s a long list of listed companies that somehow end up in this zombie state.

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