Ghost Bites Vol 84 (22) – Bidvest | RCL Foods | AVI | MTN

Corporate finance corner (M&A / capital raises)

• Castleview Property Fund is in the process of a reverse takeover by I Group, a related party. This means that so many assets are being injected into the entity in exchange for shares that it materially changes the business of the listed company, which necessitates the release of detailed documentation, known as revised listing particulars. If you’re curious about this documentation, you’ll find it all at this link.

• Old Mutual Insure (a subsidiary of Old Mutual) is acquiring 100% of Genric Insurance Company, a non-life insurer that owns equity interests in various specialist underwriting management agencies and other entities. This includes all sorts of insurance like equine, marine, cash in transit and even shack insurance! I didn’t even know that such a product exists, though it makes sense as any property can technically be insured. RH Bophelo is one of the sellers, with a 30% stake in Genric. That 30% stake will improve RH Bophelo’s bank account by just under R90 million, which means that Genric has been valued at R300 million. The business made a profit after tax of R27.8 million in the year ended June 2022. Importantly, RH Bophelo has a 60% stake in Wesmart, an underwriting business that Genric holds the other 40% in, so the parties will still work alongside each other going forward. The proceeds from this sale will be used to continue RH Bophelo’s strategy in the healthcare sector. As RH Bophelo is classified as an investment entity under JSE rules and this disposal is in line with the investment policy, no shareholder approval is needed.

• Ascendis Health has received a further dispensation regarding the timing of the circular for the Pharma-Q / Imperial Pharma disposal and the Austell Pharma disposal. The circular must be issued before 30 September, though the company hopes to issue it by 13 September.

• Impala Platinum keeps nibbling away at Royal Bafokeng Platinum, with its shareholding now up to 39.19%.

• Keep an eye on Salungano Group – in a revised AGM notice, the company added a special resolution to double the authorised share capital, to allow for possible acquisitions and capital raisings. It could be nothing, or it could be something.

Financial updates

• Trellidor’s terrible financial results were explained in detail in a trading update, so the market was well aware of the collapse in headline earnings per share (HEPS). It has fallen by 99% to nearly breakeven, with a Labour Court judgement and operational pressures almost equally to blame. Unsurprisingly, there’s no final dividend. The share price has lost over 30% this year. There are some good news stories here despite the overall horror show. For example, Trellidor UK grew revenue by 26.2% and Trellidor’s branches only saw sales drop by 1.3% after growing by 46% in the prior year. The gross margin decrease in Trellidor from 48.4% to 44.2% ruined the result. The Taylor segment saw revenue decrease by 8.3% and gross margin drop from 32.7% to 28.2%. The business was cash flow negative, a nasty swing from positive cash generation of R15.6 million in the prior year. The senior management team at Taylor has been restructured “in response to continued underperformance of the business” – I guess the blind were leading the blinds. If you are thinking about a punt at Trellidor, keep an eye on input costs like steel. Along with other cost pressures, this is where the gross margin problems came from.

• Bidvest released results for the year ended June 2022. Revenue was up 13%, trading profit jumped by 23% and HEPS was 22% higher. The total dividend of 744 cents is 24% higher, so the cash return to shareholders followed the earnings. The company notes that it has reached the same level of profitability as in 2016 before it unbundled the food service business, Bidcorp. Cash flows are actually R0.5 billion higher than those levels. The announcement talks about this being a “remarkable achievement” and I certainly can’t argue that point. Bidvest operates an array of businesses with exposure to numerous sectors. The disappointment was in the financial services division, which means there is room for the group result to get even better! The share price is up more than 14% this year.

• RCL Foods released its results for the year ended June 2022. The business has worked hard to diversify away being a poultry business, thereby giving shareholders a smoother ride. Although revenue is up 10.2%, EBITDA only increased by 7.7%. Underlying EBITDA (which excludes material once-offs and accounting adjustments) only increased by 2%. Commodity input cost pressures have clearly hurt margins. Sugar achieved its second higher profit ever (take that, health enthusiasts) and Rainbow (the poultry business) has returned to profitability. The Grocery result was strong but the Baking business suffered from elevated wheat and fuel costs. Vector Logistics did well as the food service industry saw a return in volume to almost pre-Covid levels. HEPS increased by 9.9% and the dividend was consistent with the prior year. RCL closed 9.5% higher, taking the year-to-date drop in share price to 15%.

• AVI Limited released results for the year to June 2022 and they were in line with what the market is used to seeing from this company: tepid revenue growth (just 4.3%) and HEPS growth of 6.1% – a positive earnings result despite little to get excited about on the top line. The dividend is 6.2% higher, so the payout ratio is consistent. I&J was a drag on earnings, as operating profit would’ve increased by 8% without I&J vs. 5.4% as reported. You may find it interesting that rooibos revenue was lower this year but black tea performed well! As I’m firmly Team Coffee, I noted that coffee increased by 5% whereas tea was down 0.4% overall. Biscuits were up 9.9%, so people are clearly eating their troubles away.

• CA Sales Holdings is the FMCG business that was recently unbundled from PSG and migrated to the JSE. It focuses on route-to-market services, which means helping brands achieve shelf space. That sounds easy until you know a thing or two about retail buying and supply chain considerations. Revenue was up 20% and operating profit increased by an enormous 47%, driving HEPS growth of 44%. There’s no dividend, as the company only declares full-year dividends. The share price closed more than 11% higher, though I must note that it is highly illiquid.

• MTN has dropped all the way down to R128 per share and my trigger finger to buy this dip is itching. In August, MTN invited holders of the $750 million 4.755% notes due 11 November 2024 to tender their notes for purchase by MTN. In other words, the company wanted to reduce its non-rand debt and was willing to do so up to a value of $250 million. As the response was so strong ($482.7 million in valid tenders), the company increased the acceptance amount to $300 million. This is funded through existing cash balances, so it doesn’t change the leverage calculation (net debt – debt minus cash – hasn’t changed). What has changed is the ratio of non-rand to rand denominated debt, which will improve to 35:65 after this settlement.

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Operational updates

• Renergen has finally flicked The Big Switch at the Virginia Gas Project. The group is officially a producer rather than an explorer, operating South Africa’s first commercial liquefied natural gas plant. The share price closed over 4% higher in appreciation.

• Europa Metals released drilling results from the 100% owned Toral led, zinc and silver project. Although I’ll never understand all the geological jargon, I do understand the chairman and acting CEO commenting that “the high-grade nature…is hugely pleasing” – this is good news, giving the team “confidence in the deposit’s tenor and continuity at depth.”

• In another junior mining update, Jubilee Metals announced that the Project Roan copper project has achieved “nameplate capacity” – I Googled this and learn that it means the rated output of a facility i.e. what it was built to achieve. In other words, the copper concentrator has been ramped up to its design throughput rate. This has been a £40 million investment to deliver 12,000 tonnes per annum of copper cathode production capacity, an investment which the CEO describes as being a “fraction of the industry norm” in terms of investment per unit of copper.

• Southern Palladium joined a busy day of mining updates with news of its PGM drilling programme intersecting the first UG2 reef. You’ll be thrilled to know that drillhole E062 has a downhole length of 87cm, with a pegmatoidal pyroxenite as footwall underlain by a poikilitic pyroxenite. You know, that’s always been my favourite kind of footwall. Jokes aside, the management team seems to be happy with the outcome.

• Have you ever wondered what a governance report looks like? Well, wonder no more. At this link, you’ll find a presentation from Exxaro that deals with everything from ESG through to remuneration policies.

Share buybacks and dividends

• Naspers has received approval from the SARB to embark on the sale of Prosus shares to fund repurchases of Naspers shares. This is apparently going to help in reducing the traded discount to underlying net asset value. Essentially, Naspers is going to unwind some of the cross-holding that was put in place for supposedly the same purpose – reducing that discount. If this confuses you, I assure you that you aren’t the only one.

• Our regular trio of Glencore, South32 and British American Tobacco are still executing daily share buybacks.

• BHP has confirmed the exchange rates applicable to its final dividend. Shareholders on the JSE will receive R29.7094875 per share.

Notable shuffling of (expensive) chairs

• After 24 years of service, Brian Frost has resigned from the board of Bowler Metcalf. He will be replaced by Debbie van Duyn.

Director dealings

• Here’s one to take note of: David Kneale (ex-CEO of Clicks and currently a non-executive director of Woolworths) has bought R512k worth of shares in Woolworths. Kneale is largely credited with building Clicks into the business that it is today, making use of his prior experience at Boots in the UK. This is a significant show of faith in Woolworths.

• At the same time that Naspers has been buying back its own shares in the market (a sign to investors that the shares are undervalued), CEO Bob van Dijk has been dumping enormous amounts of Naspers shares (which suggests the exact opposite). To add to the recent sale of over R1 billion in shares, there’s another R370 million that has found its way into his bank account.

• Sirius Real Estate CEO Andrew Coombs has acquired £15.6k worth of shares in a family trust.

• A trust linked to a non-executive director of NEPI Rockcastle has acquired shares in the company worth over R1.76 million.

Unusual things

• None today!

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