Ghost Bites Vol 79 (22)

Corporate finance corner (M&A / capital raises)

• I’ve been writing for a long time about Walmart’s incredible patience with the attempted turnaround of Massmart. If you read about the latest interim results in the financial updates section of Ghost Bites today, you’ll see why I call it an “attempted” turnaround. Sure enough, the Americans are tired of trying to save this business in the public environment, particularly after they had to inject R4 billion in financial support to help the group survive Covid lockdowns and the riots. It is much easier to make really tough choices when a company is private, particularly with the financial disaster that is Game. Walmart bought 51% of Massmart in 2011 for R148 per share when the USD:ZAR was around the R7 mark. The potential offer of R62 per share at a time when the rand is struggling to stay below R17 means that the 49% could be acquired for around $3.60 vs. the original deal at $21 per share. Talk about averaging down! It is very important to note that this is only a potential offer at this stage, not a firm intention announcement that commits Walmart to making an offer.

• Grindrod Shipping is the other big name that looks set to disappear from the JSE, after Taylor Maritime Investment Limited (listed in London) made a non-binding indicative proposal to acquire all the shares in Grindrod Shipping not already held by the group. The potential offer price is $26 (over R436) per share, comprising a $21 cash purchase price and a $5 special dividend. The rand amounts will vary with the USD/ZAR exchange rate. The board of Grindrod Shipping has entered into exclusive discussions with Taylor Maritime but has not agreed definitive terms at this stage. The share price of Grindrod Shipping closed nearly 20% higher on the day at R397.

• Zeder has announced the disposal of Zeder Africa, which holds a 55.62% stake in Agrivision Africa. This business produces and mills agricultural grain in Zambia and has been problematic for Zeder, as agriculture is hard enough before you take into account African economies that are notoriously volatile. The acquirer is ForAfric Forestry, a company registered in Zambia but with South African shareholders based on the names of the beneficial owners. The price is R160 million, a decent premium over the R146 million value at which the investment was recognised in the financials at the end of February 2022. This is a Category 2 transaction, so Zeder shareholders will not be asked to vote on it.

• Master Drilling acquired just over a 25% interest in A&R Group back in 2021 and the deal included a call option to take that stake above 51% within a period of two years. A&R Group focuses on technology to improve the safety and operational performance of miners globally, so this is a diversification play for Master Drilling. A call option gives Master Drilling the right (but not the obligation) to increase its stake. The strike price on the option (the amount payable for the shares) is calculated using a formula that references recent financial performance. The estimated amount is R129.4 million. A&R’s profit after tax for the year ended February 2021 (now an outdated number) is R26.5 million, but there are distortions from payments on shareholder loan accounts etc. This is a Category 2 Transaction, so shareholders won’t be asked to vote.

• Huge Group has renewed its cautionary announcement. The company is considering a series of discussions that would be a Category 2 Transaction in aggregate. There are no further details at this stage. Based on what I saw when Googling the website, I wouldn’t be surprised if a name change is coming soon and their SEO person jumped the gun:

Financial updates

• Aside from the huge news of the Walmart offer, Massmart also released interim results for the 26 weeks ended 26 June 2022. Revenue was almost identical to the comparable interim period but gross profit margin contracted by 100 basis points. Combined with inflationary pressure on costs, the impact on trading profit was highly negative – it tumbled by 27.2%. The headline loss per share worsened by 45.7%. Even from continuing operations, the group registered a headline loss of R903.5 million. The group headline loss was R942.5 million, so the discontinued operations can’t be blamed for this. To put the financial nightmare into perspective, trading profit was R323.5 million and insurance proceeds for business interruption were R270 million. At the time of the terrible looting of the Game warehouse, I tried to make light of the situation by joking that it was possibly the only way to move that stock. A lot of truth is said in jest. Walmart man Mitchell Slape is moving on from the CEO role at the end of 2022, with current COO Jonathan Molapo moving into the top job. Personally, I wonder whether Walmart will ever learn that the “American Way” doesn’t necessarily work in other regions. It’s good to see a South African taking the reins again, though it is going to be a really tough job as Massmart likely moves into a private environment.

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• Steinhoff has released a trading update for the nine months ended June 2022. Steinhoff still has debt of €10 billion, which must be why the team is far too busy to write a decent short-form announcement, instead sending you to the website to go hunting for the report. Credit markets aren’t great at the moment and interest rates are rising, so restructuring the debt is critically important and far from easy. Moving from group level into the operations, we see minimal growth on a constant currency basis, other than in Pepco Group. With Europe facing economic headwinds of note, operating a discount retailer is probably the right strategy in the region. It still won’t be easy.

• MAS plc has released results for the year ended June 2022. This group is focused on property in Central and Eastern Europe and achieved adjusted distributable earnings per share of 6.83 euro cents, up 15.2% year-on-year. At the end of June, shareholders approved important transactions related to the relationship with developer Prime Kapital. One was for the acquisition of six Romanian commercial centres and the other was to extend the duration of the joint venture and the funding commitment. Tangible net asset value of €1.40 per share is 12.9% higher vs. June 2021, reflecting a combination of improved performance and higher asset valuations. A dividend of 3.82 euro cents per share has been declared. It’s fascinating to note that open-air malls saw a footfall recovery vs. pre-pandemic levels whereas enclosed malls are still lower. Has there been a permanent shift in shopper preferences?

• ADvTECH has released results for the six months ended June 2022. Revenue increased by 18% and operating profit was up 19%, so there was limited operating leverage in this result. When you see a larger percentage change in operating profit vs. revenue, you know that operating leverage is at play (the impact of fixed costs in the structure). Headline earnings per share was up 23% and the interim dividend of 23 cents per share is 21% higher than in the comparable period. It’s worth noting that operating cash flow before capex was only 8% higher due to a similar working capital result in this period vs. the prior period. The schools division achieved 9% growth in enrolments year-on-year and tertiary (full qualifications) was only 4% higher.

• Sea Harvest Group released results for the six months ended June 2022. Although revenue jumped by 29%, a contraction in gross margin from 32% to 25% means that gross profit was flat year-on-year, wiping out the benefit of higher revenue. With inflationary pressure on expenses, EBIT (earnings before interest and taxes) was down 10% and so was headline earnings per share. Fishing is an incredibly tough industry, with unique challenges like fishing quota volumes. You also have to remember pressures like fuel costs, as the fishing vessels aren’t cheap to run. I also found it interesting that although the Aquaculture (abalone) segment grew revenue by 55%, the business is still loss-making (R18 million).

• Hulamin released results for the six months ended June 2022. Although sales volumes were fractionally higher, revenue was up 45%. Operating profit increased by 144%, with the massive increase relative to revenue growth as a result of operating leverage and the structurally low margins in this business. Headline earnings per share increased by 147% to 47 cents. No dividend was declared for this period or the comparable period.

• Sun International Limited has released results for the six months ended June 2022. Here’s the really big news: the company has declared its first dividend payment since 2016! Income was up 37% year-on-year, with adjusted headline earnings swinging wildly from a loss of R7 million to earnings of R438 million. As the group was forced to find cost savings to survive during the pandemic, the adjusted EBITDA margin improved from 26.8% to 29.1%. Debt has been reduced from R6.4 billion to R5.9 billion, which helps justify the return to paying dividends. Headline earnings per share was 93 cents and the interim dividend is 88 cents per share.

Operational updates

• Southern Palladium has announced the commencement of the Phase 1a drilling programme at the Bengwenyama project. 31 boreholes will be drilled in this phase, with a further 32 boreholes planned for Phase 1b. The goal is to increase confidence in the orebody and convert a portion of the Inferred Resource and Exploration Target into Indicated Mineral Resources. I repeat these terms verbatim because I know they are important in the world of junior mining, a sector that I leave to the geologists to invest in (although I always enjoy reading the updates).

• Orion Minerals released a critical update, making it a big day for junior mining. The South African Department of Mineral Resources and Energy has granted a mining right for the Flat Mines Area of the Okiep Copper Project in the Northern Cape. The right lasts for 15 years and can be renewed on application for a maximum of a further 30 years. The next steps are final engineering studies, Mineral Resource upgrade, drilling and bulk sampling for metallurgical optimisation. An updated feasibility study is targeted for completion in early 2023.

Share buybacks and dividends

• Glencore has confirmed the exchange rate applicable to the $0.24 dividend per share, of which $0.11 is an additional distribution alongside the H2 distribution. South African shareholders will be paid R4.03351 per share on 22nd September.

• Similarly, Textainer has confirmed that the dividend of 25 US cents per share will be converted to a rand equivalent of R4.1725 per share.

Notable shuffling of (expensive) chairs

• After 32 years of service, including nearly five as CEO, Pepkor CEO Leon Lourens has advised the board of an intention to take early retirement. Pieter Erasmus will move back into the top job that he held from 2001 to 2017, going full circle in his relationship with the group.

• Woolworths has announced the appointment of Robert Collins as an independent non-executive director. Collins served as managing director of Waitrose until 2020, so he brings plenty of retail experience to the table.

• Salungano Group has announced the appointment of Kabela Maroga (currently a non-executive director of the company) as CFO. Ms Maroga has experience in banking and in the mining industry, with a very unusual combination of a CA(SA) professional designation and a post-graduate diploma in mining engineering.

• Adcock Ingram has appointed Ms Busisiwe Mabuza as independent non-executive director. Ms Mabuza is the chair of the IDC and the lead independent director of Tsogo Sun Gaming, in addition to being an independent non-executive director of Ninety One Limited. Professor Matt Haus will retire from the board in May 2023.

Director dealings

• A director of a subsidiary of Nu-World has sold shares in the company worth nearly R20k.

• An entity related to Christo Wiese has purchased debt instruments in Brait worth £3.8 million.

• The company secretary of Afrimat has bought shares in the company worth R52k.

Unusual things

• For once – none!

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