Ghost Bites Vol 88 (22) – Transaction Capital | MTN | Bell | Caxton

Corporate finance corner (M&A / capital raises)

• In an unusual outcome, Transaction Capital’s share price closed 0.78% higher on Friday despite a significant capital raise that saw shares in issue increase by approximately 5%. Having originally intended to raise R1 billion, the company raised R1.28 billion at a price of R35.50 per share, a 4.7% discount to Friday’s closing price. Usually, the share price drops when a capital raise is executed, as investors are diluted at a discount. The fact that the bookbuild was oversubscribed is another strong show of faith in the company.

• As we’ve seen with a few banks, FirstRand has made the move to acquire its preference shares from shareholders. This is no longer an attractive source of funding under new banking regulations. FirstRand took the route of a scheme of arrangement, as the ideal outcome was to acquire all the outstanding shares. Having been approved by shareholders, the final amount of R100 per share plus a pro rata dividend will be paid on 26th September.

• There’s action on the shareholder register at Fortress REIT. After Allan Gray increased its stake in Fortress A shares to over 5%, we now see Peresec holding 5.4% of Fortress B shares. This is the prime broking business at Peresec, which means it is probably linked to structures put in place with hedge funds or similar institutional players. There are going to be intriguing movements in this share register as we get closer to Fortress losing REIT status.

• MTN has upsized its debt capital markets bond auction, which means that investor demand was strong. The initial plan was to raise R2 billion, with an option to increase it to R2.5 billion. The notes on offer varied in tenor (three, five and seven years) with a preference for longer dated notes. The auction on 6 September was massively oversubscribed, with R5.431 billion in investor interest, all within or tighter than price guidance. MTN decided to issue R2.565 billion in notes as follows: R540 million in three-year, R1.04 billion in five-year and R984 million in seven-year notes. This has improved MTN’s ratio of non-rand to rand debt and has improved the debt maturity profile, all while achieving better pricing along the curve. Post-settlement holding company leverage is unchanged at 0.8x and non-rand debt will only be 33% of group debt vs. 42% when interims were released.

• Value Capital Partners has sold shares in Super Group and now only holds 0.33% of shares outstanding.

• Having underwritten the recent capital raise, Calibre Investment Holdings now holds 11.7% in Ascendis Health.

• At PPC’s annual general meeting, the company withdraw the resolution that would give the directors a general authority to issue shares for cash. The board has noted that any potential issue of shares will be put to shareholders for a vote. After an incredible recovery run in 2021, the share price is down over 51% this year.

Financial updates

• FirstRand released a further trading statement for the year ended June 2022. The range for headline earnings per share is between 576.6 cents and 600.6 cents, representing an increase of between 20% and 25%. The share price has been very volatile this year, currently showing a 6% gain in 2022. Full results will be released on 15th September.

• Bell Equipment released its interim results for the period ended June 2022. Revenue is up 10%, operating profit is up 15% and net profit has increased by 20%, a perfect example of how leverage works in a business (a percentage change in revenue drives a larger percentage change in profits). HEPS has increased by 19%. The number that sticks out is the net cash flow for the period, which has gone from a R264.2 million inflow in the prior period to a R176.7 million outflow in this period. The biggest swing in cash was in working capital, with the business absorbing nearly R1.1 billion in working capital in this period. The company attributes the higher inventory levels to a planned increase in production volumes, as well as poor performance from certain component suppliers that has now forced Bell to hold higher levels of components. This sounds to me like a structural increase in working capital. No interim dividend has been declared.

• Caxton and CTP Publishers and Printers released its results for the year ended June 2022. This is a complicated group with several investments in addition to its operating entities, so one has to be quite careful in choosing which lines to use in assessing financial performance. Although HEPS has more than doubled to a 10-year record high of 157 cents, the net asset value per share is only 9.9% higher at R18.87 per share. A major driver of revenue was the return of retailer advertising spend in local newspapers, which creates demand for advertising brochures. The packaging side of the business also did well, as the alcohol and quick-service restaurant industries recovered. There has been a deliberate move in recent years to replace declining publishing earnings with the growing packaging business. The business maintained its margins despite pricing pressures, though it notes that this required a “transparent and flexible approach” with customers and that pricing reviews took place on a more regular basis. As for the strained relationship with Mpact, Caxton notes that it “continues to persevere in efforts to obtain clarity regarding competition related issues as between Mpact and Golden Era, Mpact’s major customer and competitor and co-accused in a cartel case still pending before the Competition Tribunal” – a far more mature statement than the drivel put out by Caxton in its last announcement on this matter. As a reminder, Caxton holds a 34% stake in Mpact and has made noise about working towards control of the company, though nothing formal has happened in that regard. Caxton has declared a dividend of 50 cents per share. The share price closed 5.6% higher at R9.94.

• York Timber released a trading statement for the year ended June 2022. Detailed results are coming on 20 September. In the meantime, investors can chew on the news of HEPS decreasing by between 73% and 80%. Ugly, isn’t it? Cash generated from operations is expected to be between 50% and 55% lower than the previous year, which is worse than the drop in EBITDA of between 30% and 35%. So not only are earnings significantly down, but there’s pressure on cash flow generation as well. The share price is 33.5% lower this year.

• The ARC Fund Partnership is returning nearly R20 million in capital to listed group ARC Investments. This will meet the operational cost requirements of the listed company for the next three years. Structurally, ARC Investments is a limited partner in the ARC Fund, which is an en-commandite partnership (typical of private equity structures).

• For shareholders in Blue Label Telecoms, here’s one for the diary: the webcast of the Cell C annual results for 2021 and interims for the six months to June 2022 will take place on 14 September at 2pm. Here’s the link to register.

• In the very unlikely event that you are a shareholder in suspended company WG Wearne Limited, you should note that the financial results for 2017 have been restated. This is because the 2018 audit is currently underway (that isn’t a typo). It never ceases to amaze me how messy things can get among the worst companies on the JSE. Don’t ever make the mistake of assuming that an investment in a publicly listed company is always less risky than a private company.

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Operational updates

• None today!

Share buybacks and dividends

• Having now sold its stake in Atterbury Europe Holdings for R1.75 billion and as part of a strategy to realise its entire portfolio over the next four to five years, RMB Holdings has declared a dividend of R2 billion. This equates to 141.67283 cents per share, of which 17.98676 cents is a return of capital (and therefore not subject to dividends withholding tax) and the rest is a normal dividend on which tax is payable. The share price closed at R1.94. Yes, 74% of the market cap is going to be returned to shareholders through this distribution.

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

Notable shuffling of (expensive) chairs

• Anna Dimitrova will join the board of Vodacom as a non-executive director. From 1 November, she will take the role of Group Financial Controller for Vodafone Group plc, having worked in the group for over 20 years. Vodafone is the controlling shareholder of Vodacom.

• Kathleen Bozanic has resigned as an independent non-executive director of DRA Global. The reason given is that she has been appointed as the CFO of another company.

• Anthony Ball did not make himself available for re-election at the PPC AGM.

• Simon Fifield has been appointed as an independent non-executive director of Redefine. He is currently the CEO of Newpark REIT, a role he will relinquish on 1 November 2022.

• Linda de Beer is stepping down from the board of Tongaat Hulett after three years, with effect from 30 September. The reason given is that there are increasing demands on her time from other roles.

Director dealings

• One of Dr Christo Wiese’s investment entities has acquired shares in Brait worth R22.4 million after the close out of a single stock futures contract. The share price is down by around 16% this year.

• Entities related to Wiese have piled into Shoprite exposure, buying shares in the open market worth R1.75 million and single stock futures contracts with exposure of over R224 million!

• A non-executive director of CA Sales Holdings has acquired shares in the company worth over R560k.

• Calibre Investment Holdings (an associate of two of the directors of Astoria) has acquired shares in the company worth over R41.5k.

Unusual things

• The JSE has paved the way for actively managed ETFs (like Cathie Wood’s ARK structures in the US). This would allow fund managers to have a collective investment scheme structure that is listed on the JSE rather than accessible as a unit trust. It will be very interesting to see what happens here, as it could make life a lot easier for retail investors! If you’re interested, you’ll find the approved amendments to the JSE Listings Requirements at this link.

• The trading halt on MC Mining shares on the Australian Stock Exchange has been lifted, after being put in place in response to substantial share price action despite no new updates being in the market.

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