Ghost Bites Vol 86 (22) – Discovery | The Foschini Group | Conduit Capital

Corporate finance corner (M&A / capital raises)

• There’s big news from Orion Minerals, with the IDC coming on board to fund 43.75% of the pre-development costs at Okiep. The total budgeted pre-development costs of the New Okiep Mining Company are just over R49 million, with Orion on the hook for R44.5 million and the IDC providing the rest. The IDC will then facilitate B-BBEE ownership by selling 22.22% to a B-BBEE Entrepreneur entity led by Lulamile Xate. Thereafter, Community and Employee Trusts will each acquire a 5% economic participation interest in the company, taking B-BBEE ownership above 30% in line with the objectives of the Mining Charter. When all is said and done, my understanding is that Orion will hold 50.63% economic participation in the asset, the IDC will hold 19.38%, the entity led by Xate will hold 20% and the trusts will hold 5% each. The plan is to finalise the agreements for draw-down on the IDC funding by the end of October.

• Mpact released an important announcement in the context of its sour relationship with Caxton. I must say, Caxton really hasn’t behaved well in my view, releasing all kinds of inflammatory or odd announcements along the way. Mpact complained to the TRP about elements of Caxton’s conduct and the regulator ruled in favour of Mpact. This means that Caxton is prohibited from making further public announcements in any form about a potential acquisition of Caxton.

• Etion Limited has released an update on its process of unlocking shareholder value, i.e. selling assets for more than the market price suggested they were worth and then returning that cash to shareholders. For example, the disposal of Etion Connect for R71.5 million has now been finalised. Another disposal underway is the sale of Etion Create to Reunert, for which Competition Commission approval has now been obtained. The sale is still subject to shareholder approval at a general meeting to be held on 21 September. Assuming that goes ahead, proceeds of between R197 million and R210 million should be received in October. Etion has also sold its investment in the Etion Create building for an equity amount of R6.91 million (i.e. net of debt associated with the building). A dividend of R1.5 million was received from the property company before the sale. There’s also a deal to exit the lease for the Etion head office building that expires in October 2027, for which a once-off exit fee of R12 million is payable. The value unlock strategy has been extremely profitable for shareholders thus far.

• RMB Holdings (unrelated these days to the bank with a similar name) has announced that all conditions have been met for the disposal of the stake in Atterbury Europe to Brightbridge Real Estate for R1.75 billion. The transactions will now be implemented in line with the timetable in the circular. This is a classic example of a managed wind-down of a legacy listed structure that still had solid assets in it.

Financial updates

• Discovery has released results for the year ended June 2022. The share price closed 10.1% lower, so that gives you an indication of how the market felt about the lack of a final dividend. The year-on-year growth rates are all very high of course, as the base period was impacted severely by Covid. Annualised new premium growth was 6%, which sounds tame compared to growth in normalised headline earnings of 71%. This is because profits in Discovery Life were up by 200% as the mortalities normalised and existing provisions were found to be adequate, so the magic happened further down the income statement. Discovery Insure slipped into the red from the floods in KZN, but this is thankfully a relatively small part of the group. Looking at the more exciting side of the business, Discovery wants spending on new initiatives (Discovery Bank / Amplify Health) to revert to 10% of operating profit. In this period, the rest of the group made R11.5 billion in operating profit and new initiatives posted R2.1 billion in operating losses, so that’s way above the long-term target. Discovery Bank’s loss was R990 million in this period. The bank now has over 470k clients and grew deposits by 30% and advances by 14%. They are working towards having 1 million clients by 2026. The focus is on high quality clients, bringing strong levels of non-interest revenue and a low credit loss ratio of 1.56%. I also want to highlight that Vitality is now in 35 global markets, a truly remarkable export of South African intellectual property. Finally, something to keep in mind is that Discovery is looking to raise equity capital for the Ping An Health Insurance business, an overhang for the stock that is also raising question marks around the dividend prospects. The share price is down more than 22% this year.

• The Foschini Group has released a trading update for the first 23 weeks of the 2023 financial year. This covers the period from 27 March to 3 September. Group turnover is up 21.6%, with a solid performance in TFG Africa (14.7%), a strong result in TFG London (up 23.5%) and incredibly high growth of 42.3% in TFG Australia. At group level, online sales grew 5.1% and contributed 9.2% of total turnover. Notably, these results exclude the Tapestry Home Brands acquisition. Growth looks really strong in the core TFG Africa categories of clothing (up 17.3%) and homeware (up 15.7%), which contribute a combined 83.8% to TFG Africa turnover. Cellphones only grew by 0.8%, which isn’t great as this category contributes 9.1% to turnover (more than homeware). Cash turnover is 70% of TFG Africa’s total turnover and grew by 13.6% vs. 17% growth in credit turnover. Acceptance rates for credit turnover are lower due to overall economic conditions i.e. the group is being more cautious with credit. Online turnover grew by 19.8% and contributes 3.2% to TFG Africa turnover. This online growth rate is much higher than in the UK and Australia which have a much higher base of online sales participation (37% and 6.7% respectively). The share price is up around 10.5% this year.

• The show is practically over at Conduit Capital, as the company will not be opposing the liquidation of Constantia Insurance Company Limited. The prohibition on writing of new business and the adverse publicity associated with the provisional curatorship led to brokers and underwriting managers taking the insurance portfolios elsewhere, which has effectively killed off the business. This subsidiary represents 94.4% of Conduit Capital’s revenue. The market cap of the group is now just R46 million and the share price was down 50% by afternoon trade. If there is anything left here for shareholders, it will be tiny.

• SA Corporate Real Estate released a trading statement for the six months ended June 2022. The group has mostly sold off its office exposure, leaving a portfolio with a focus on convenience-oriented retail centres, logistics and “quality residential” properties. Although distributable income per share is only up 5% vs. the prior period, the improved financial position and operating environment means that the distribution per share will be between 17% and 27% higher.

• Chrometco Limited released an update on the business rescue process at the Black Chrome Mine, a material subsidiary of the company. The business plan is expected to be published by 14 October, an extension of around six weeks vs. the previously communicated deadline.

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Operational updates

• Capital Appreciation Group released a business update for the five months to 31 August 2022. The release was driven by the AGM being held on Wednesday. The group notes strong demand from local and international customers for the products and services in the Software division. The digital offering was enhanced by the acquisition of Responsive, with those financial results to be included in full for the first time in the reporting period covering for the six months to September. Headcount in the Software division is up 50% year-on-year including a number of recently qualified graduates, so that gives an indication of growth. In the point-of-sale terminals business, the comparable period saw growth of 68% as the economy emerged from Covid and that level won’t be repeated in this period. Still, growth is expected on a full-year basis. The Android devices offer solid functionality at attractive price points, so economic challenges are driving sales mix in favour of these terminals. The group describes the balance sheet as “very strong” and the divisions are highly cash generative. The share price is down around 20% this year as valuation multiples have cooled off, even though it trades at a modest multiple by tech company standards.

• I would normally put this in the “unusual things” section but these disasters happen so regularly at Tiger Brands that I’ve started treating them as operational risks. The latest problem is a recall of Purity Essentials Baby Powder after trace levels of asbestos were detected. The share price closed more than 6% lower, bringing to an end a recent rally in the price. The best thing about this is that Tiger Brands is in the JSE Responsible Investing Index, further proof that ESG as it exists today is absolute garbage that gives almost no indication of good corporate citizenship.

Share buybacks and dividends

• British American Tobacco, Glencore and South32 are still busy with daily share buybacks.

Notable shuffling of (expensive) chairs

• Clientele Limited’s company secretary has resigned after 17 years of service. The current Head of Group Legal has been appointed to replace her.

Director dealings

• A couple of directors of Woolworths sold shares to cover the tax on vested share incentives, which I usually ignore as this is ordinary course of business stuff. As I worked further down the announcement, I noticed that there were other chunky sales. The CFO of Woolworths South Africa sold R1.48 million in shares, the interim CEO of David Jones sold a whopping R5.3 million in shares and the CFO of Country Road Group banked R1.09 million from selling shares.

Unusual things

• MAS Plc is the latest company to list on A2X, offering an alternative place to trade to the JSE. The primary listing on the JSE is unaffected by this secondary listing.

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