Ghost Bites Vol 87 (22) – Capitec | Transaction Capital | Tongaat Hulett

Corporate finance corner (M&A / capital raises)

• With a market cap of R26 billion, Transaction Capital is now raising R1 billion through a placing with institutional investors. The group currently holds 74.9% in WeBuyCars and is looking to acquire another 15%. This brings the put and call arrangement forward, as Transaction Capital is keen to deploy more capital into a business that it knows and loves. Interestingly, the remaining 10% is held by the founders (5% each) and they will defer their put options (the right to sell) to the 2027 and 2028 financial years, but not later than 2030. Transaction Capital will forego its call option on the remaining shares, so these shareholders could technically elect to remain in WeBuyCars forever. The capital will also be used for the GoMo business that will be housed in SA Taxi (refer to the snippet in the operating updates section below for more details). Some capital will be leftover for general group purposes. The announcement came out after market close, so you can expect to see share price pressure on Friday morning.

• As part of its repurchase programme to try and undo some of the discount to net asset value that the management team so successfully created over time, Prosus has sold 1,115,000 shares in Tencent, reducing the total ownership in the Chinese tech giant to 27.99%. Another 192 million shares are being moved from certificated form into the dematerialised format in Hong Kong, which would pave the way for further sales in an “orderly way” over time. Whilst it makes sense from a finance theory perspective to sell the Tencent shares and repurchase the discounted Prosus and Naspers shares, it also increases the concentration of non-Tencent assets in the group, most of which really aren’t attractive in my view.

• Absa has confirmed that Barclays holds just 0.02% of the issued share capital of our local bank. As for why there is still a small shareholding left, I can only assume that the bank holds it on its balance sheet as part of a hedge for a derivative structure somewhere or perhaps in a securities-related book. Either way, the strategic stake is gone.

• The potential take-private of OneLogix is really dragging on now. The first announcement about a potential deal came out in December 2021. Since then, “negotiations have been in progress” and there’s still no guarantee of any kind of offer on the table. The financial performance of the company deteriorated sharply in recent times and of course the conflict in Ukraine came as a shock, so there are some reasons why it should be taking this long. Still, this is a case of you-know-what or get off the pot.

• If you are a tax professional or you are interested in this field, you’ll want to read PSG’s announcement about the apportionment of tax cost for the unbundled shares. If you don’t fit into those categories, watching your grass grow will be a more entertaining use of time.

Financial updates

• Tongaat Hulett released an update that ticked practically every box: debt restructuring, trading statement, operational update and further cautionary! I decided to put it in the financial section, as Tongaat’s terrible financial situation is driving all this news. There is R6.3 billion of excess debt in the South African operations, which is simply unsustainable. This number is R800 million worse than a year ago, as 2022 saw a significant cash outflow due to operating conditions. Net debt is R6.6 billion, of which R5.4 billion is owed to South African lenders and the balance is trade finance owed to the South African Sugar Association. There’s another R1 billion in debt in the African operations. To make it worse, there is a working capital shortfall in the 2023 financial year as existing headroom on the debt isn’t enough to fund the milling season. The board is currently considering options including an equity capital injection at various levels in the group or a disposal of some or all of the African operations. To keep the lights on while everyone figures this out, the lenders are working with Tongaat to structure a suitable facility. The banks are clearly scared here, as they haven’t invoked the interest rate ratchets on the debt (a penalty rate for breaching covenants). Tongaat is also negotiating with other potential lenders to secure a further R750 million. Although HEPS hardly matters right now, the range for the year ended March 2022 is -676 cents to -632 cents per share. The prior period was originally reported as -631 cents but was subsequently restated to -440 cents per share.

• There was finally something to smile about for the long-suffering punters who have been short Capitec throughout its period of being “overvalued” – one of the most highly debated valuations on the market. In a trading statement for the six months to August 2022, Capitec noted that HEPS will be between 15% and 18% higher. That sounds ok until you consider that it has been trading on a Price/Book of higher than 8.5x at times. For reference, a really good bank can trade closer to 2x book if it is delivering outstanding Return on Equity (ROE). This kind of growth just doesn’t justify the Capitec growth rate and was below market consensus. If you are priced for perfection, you just can’t afford to slow down. The share price closed 9.4% lower!

• In stark contrast, Sasfin closed 2.8% higher, thanks to guided HEPS growth in the year ended June of between 19.1% and 27.3%. Unlike Capitec, the market doesn’t put much faith in Sasfin and it trades at a modest valuation. When things improve, the share price can be rewarding!

• Sanlam has now released its detailed results for the six months ended June 2022. It’s been a tough period, with HEPS down by 7%. The top line story is negative, with a 7% drop in life insurance new business volumes, a 2% decrease in net client cash flows and a significant 17% decrease in value of new covered business. The swings are rather wild at net earnings level, with life insurance up 23%, investment management up 25% and credit operations up 22%. This means that core demand for services was down (hence the decrease in revenue) but the impairment and mortality environment was much better than in the comparable period. Those earnings increases were more than offset by a 57% decrease in the general insurance earnings. The company has acknowledged the investigation by the Competition Commission regarding pricing practices in the life insurance industry and has reiterated that “all pricing practices within Sanlam Life are in the best interests of customers” – investors will watch this one closely! The share price is down by around 10% this year.

• Advanced Health released its financial statements for the year ended June 2022. This group operates in the South African and Australian markets, with over 40% of the population of Australia having private healthcare cover. Advanced Heath operates in that country through Presmed Australia, a business which recently increased its shareholding in the Metwest business by a further 10% to 57%. It also acquired 40% in a day surgery in Tasmania. The group notes that South African medical schemes are aligning themselves to the day hospital model as a cost-effective alternative. In this period, the Australian business generated profit after tax of R62.6 million and the South African operations generated a loss of R41.1 million before tax (the tax issue becomes tricky when there are losses). The group has cash flow issues in South Africa because of the losses, which isn’t great. At group level, the headline loss per share is 5.82 cents, a small improvement on last year’s loss of 6.82 cents per share. Advanced Health’s ability to continue as a going concern depends on the directors managing to procure funding for the local operations or selling strategic investments. This illiquid stock has lost over 62% of its value in the past five years.

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Operational updates

• Anglo American Platinum has revised its production guidance. Sub-standard materials were delivered for the Polokwane smelter rebuild, which will cause a two month delay to the completion of the project as well as a built-up in work-in-progress inventory. Without doubt, it is better to be delayed than to rebuild the smelter at lower quality than planned, so it’s just as well that the quality control processes picked this up. It’s a significant knock though, with production and sales guidance for 2022 revised down to 3.7 million – 3.9 million PGM ounces (vs. 4.0 – 4.4 million previously). The share price closed 4.6% lower on this news.

• As part of the news of an accelerated bookbuild to increase the stake in WeBuyCars, Transaction Capital also released an operational update. Overall, the group is expecting HEPS for FY22 to grow at a rate in line with historic rates, driven by Transaction Capital Risk Services (TCRS) and WeBuyCars. The latter is now the group’s largest business, generating almost half of headline earnings. The business continues to outperform on key metrics and the higher penetration of finance and insurance (F&I) products is a core driver of growth. I am a shareholder in Transaction Capital and certainly a fan of the business, so I found it pretty weird that a product called GoMo offers F&I solutions and will form part of the SA Taxi segment, even though the service is being offered within WeBuyCars. That just sounds like they are trying to make the SA Taxi segment look a lot better, as it has been the pressure point for the group (FY22 earnings will be down on FY21). Even if the business will benefit from SA Taxi’s fundraising capabilities, why build this business in an entity that has outside shareholders like SANTACO? I’ve included the excerpt from the SENS announcement below so you can decide for yourself:

• The business rescue process at Rebosis is well underway, with the first meeting of creditors scheduled for 13 September. Lenders and creditors will be asked to prove their claims and will be updated on the process going forward. It will be held online, thereby reducing the risk of fists being shaken.

Share buybacks and dividends

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

Notable shuffling of (expensive) chairs

• Altron announced the resignation of FluidRock Governance Group as Interim Company Secretary and has appointed Ms. Mbali Ngcobo as the new Interim Company Secretary. The placement of a permanent company secretary will hopefully be concluded in due course!

• SilverBridge Holdings announced a couple of director changes related to the offer by ROX Equity Partners, as at least one major shareholder has sold out (hence the appointed representative on the board is leaving) and ROX has appointed its own representative.

Director dealings

• A director of a major subsidiary of Tharisa has acquired shares in the company worth R418k.

Unusual things

• MC Mining’s share price has gone insane, up over 300% in the past six months. In the last few days alone, it has jumped over 35%. A trading halt has been put in place on the Australian Stock Exchange where the real liquidity is, with trade allowed to continue on the JSE and London Stock Exchange. The company also reiterated that there is no new news, with the previously disclosed position still applicable: MC Mining is advancing the funding process for the Makhado hard coking coal project and there is no guarantee that a capital raising will be completed. Further to this, the company also took the opportunity to renew its cautionary announcement.

• Kibo Energy issued convertible instruments to directors and management in settlement of outstanding fees. As this is a related party transaction, an external advisor had to opine on whether the issue is fair and reasonable. This opinion has now been given.

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