Ghost Bites Vol 89 (22) – Brait | Metrofile | Lesaka

Corporate finance corner (M&A / capital raises)

• DRA Global has successfully completed the sale of the G&S business to KAEFER Integrated Services. The net proceeds are A$3.4 million and DRA will recognise a pre-tax loss of A$4.1 million on the assets and liabilities sold. There is existing litigation against G&S and DRA has retained this exposure, which is why KAEFER bought the assets and certain liabilities of the business rather than the shares in the entity. Buying the entity vs. buying the business is a key consideration in any acquisition.

• Have you ever wondered about the documentation involved in raising debt capital on a public market? If you want to flick through the 121 page thriller that is the Anglo American Euro Medium Term Note Programme offering circular, you’ll find it at this link.

Financial updates

• Construction group WBHO’s share price is down nearly 32% this year and almost 45% over five years, so this isn’t a happy story. The share price chart is remarkable, with periods of range trading followed by regular drops that Red Bull would organise an extreme sports event around. In a trading statement covering the year ended June 2022, the group reminded the market of an announcement back in June about the enormous losses in the discontinued Australian operations. It will cost them A$135 million just to shut that business down. From continuing operations (i.e. excluding Australia), HEPS will be between 0% and 5% lower. For total operations, the picture is hideous – HEPS will be between 695% and 700% lower. You won’t see that every day. Full results are expected on Tuesday this week.

• Metrofile Holdings released results for the year ended June 2022. The share price is 6.7% lower this year, so there hasn’t been much excitement. This is reflected in the results, with revenue up just 5% (and only 1% if you exclude the acquisition of IronTree) and EBITDA up by a paltry 1%. Although HEPS was only 3% higher, the dividend per share was 20% higher. The company experienced destruction of higher priced boxes when POPIA was implemented, so that didn’t help things. Since the second quarter, the company experienced an increase in intake and reduction in destructions. The largest revenue contributor outside of South Africa is MRM Middle East, which has grown nicely over the past 18 months. The problem is that MRM South Africa revenue decreased by 2% to R539 million and MRM Middle East grew 10% to just R86 million, so it’s a cute business but doesn’t save the group result. The group margin pressure is something to keep a close eye on, as the company attributes this to a higher mix of digital services vs paper services. The paper business carries a higher margin, so this feels like a structural decline in margin. Net debt increased 3% to R446 million after acquiring IronTree for R66 million. HEPS for the year of 30.7 cents puts the group on a Price/Earnings multiple of 10.4x. The dividend yield is 5.6%. In my view, the only reason that anyone buys Metrofile at this valuation is that there is the ongoing possibility of someone swooping in and making an offer for the business.

• Lesaka Technologies (previously Net1) has announced fourth quarter and thus full year 2022 results. If you strip out the Connect group, the business only achieved similar revenue to the comparable quarter. It’s actually worse than that, as Connect contributed $86.2 million directly (out of $121.8 million this quarter) and grew the existing business by 23%. In other words, revenue would be lower without Connect, though currency also plays a big role here as on a constant currency basis, the ex-Connect business grew revenue by 35%. Lesaka reports in dollars and earns in rands. The group operating loss of $10.1 million is an improvement on $13.6 million in the comparable quarter but is still nasty. “Segment adjusted EBITDA” (typical of tech companies – splitting out inconveniences like corporate costs and inter-company eliminations) improved to $6.1 million from a loss of $6.7 million. As you can guess, the full-year numbers reflect substantial losses, especially as Connect group was only included from mid-April. To give you an idea of how expensive M&A is, Lesaka spent R65.9 million on the acquisition of Connect. The share price closed 4.4% lower, though there is very little liquidity.

• Choppies Enterprises released a trading statement for the twelve months ended 30 June 2022. HEPS will grow by between 81% and 101%, a strong recovery after a highly disrupted Covid year. The share price is down more than 10% this year.

• ArcelorMittal South Africa has agreed a payment plan with the Competition Commission, provided for in the 2016 settlement agreement. The remaining portion of the settlement will be payable from 2022 to 2028. The company has put in numerous controls to ensure compliance with competition law going forward.

• WG Wearne Limited has been suspended from trading since 2016, so you can forgive yourself for having never heard of the company. The same rules apply as the company catches up on results. It looks very silly, but the company has released a trading statement for the 2018 financial year. The HEPS range hardly matters. The good news is that the company is catching up on its financials.

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Operational updates

• Brait released a voluntary update to the market based on the upcoming presentation at the RMB Morgan Stanley Conference. The share price closed nearly 6% higher, so the market liked it. The happiest news is in Premier, the FMCG business that seems to be bucking the trend in a market that has seen the likes of Tiger Brands come under pressure. Premier is achieving the holy grail for food manufacturing: volume growth while passing on input price increases to customers. Revenue and EBITDA growth are ahead of budget, with double digit increases for FY23. A recent decrease in key commodity prices is encouraging for inflationary pressures. This business is being prepared for a separate listing, so the good news needs to keep coming. In Virgin Active, clubs in residential areas are performing strongly and inner-city clubs are underutilised, which makes sense given the shift to hybrid work. Overall, the business remains under pressure, especially as consumers in Europe and the UK have been impacted by rising living costs and the clubs in that region are dealing with severe inflation. The South African gyms are achieving membership sales above 2019 levels, though I must point out that many people would’ve cancelled during the pandemic. Finally, at clothing retailer New Look, a shift towards an omnichannel model has helped the business perform in line with expectations since January, after Omicron significantly impacted trading at the end of 2021. Brait needs to pump more money into New Look as part of a deal to extend an operating facility with HSBC, so another R182 million will flow into this business. It carries a 16.5% coupon and ranks ahead of the existing payment-in-kind (PIK) facility. This is essentially a glorified shareholder loan, which isn’t worth much if the business fails. Thankfully, it seems to be turning the corner.

• Fairvest released a pre-close presentation for the period ended 30 September 2022. The fund is moving out of industrial, office and residential assets and into retail assets, which is quite the pivot! The entire strategy is built around simplifying the business and reducing risk. In the office portfolio, vacancies have decreased to 15.4% from 16.7%. The industrial portfolio has seen vacancies rise to 4% from 1%. Vacancies in the retail portfolio are stable at 4.8%. Loan-to-value is expected to be below 40% by year-end. 59% of debt is expiring in the next 12 months, so there will be a major focus on the balance sheet.

Share buybacks and dividends

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

• South32 has announced the dividend that will be payable to investors on the JSE. The final dividend is 241.91510 cents and the special dividend is 51.83895 cents.

• With its migration to the Netherlands now achieved, NEPI Rockcastle has declared an interim dividend. The dividend is 22.83 euro cents per share, which at current exchange rates would be around R3.95 per share. The share price closed at R93.27, just over 2% higher.

Notable shuffling of (expensive) chairs

• On a day to forget for WBHO after the release of a trading statement reiterating the financial damage from the Australian business, the resignation of an independent director was also announced.

• The CEO of Libstar has retired and a new CEO has been appointed. Andries van Rensburg is stepping down from the company he co-founded in 2005, no doubt with many stories to tell. The current CFO, Charl de Villiers, will take the top job from 1 January 2023. He has been with the group since 2017. Cornel Lodewyks has been promoted from managing executive of Lancewood to an executive director position of Libstar. A new CFO will be announced in due course.

Director dealings

• The ex-CEO of The Foschini Group, Doug Murray, has “rebalanced a portfolio” in his trust by selling nearly R28 million worth of shares in the company. The share price is up more than 13% this year. What’s the opposite of buying the dip again…?

• A director of a subsidiary of Blue Label Telecoms has sold shares worth over R640k. A director of a different subsidiary sold shares worth R578k.

• Des de Beer is still mopping up shares in Lighthouse Properties, although this time he could only get his hands on nearly R40k in shares.

• A director of recent JSE addition CA Sales Holdings has bought shares worth nearly R20k.

• A non-executive director of Capital & Counties Properties now holds 0.04% of shares in issue, having added to the position with further purchases of around £118k.

Unusual things

• Here’s something cool: Industrials REIT will be added to the FTSE All-Share Index from 19 September, having now met the eligibility criteria. This is important because it means that index funds will need to buy the stock in order to correctly track the index. The share price closed 2.66% higher, though it should be noted that it was a green day overall on the JSE.

• RCL Foods announced a “small related party transaction” in terms of which it has extended the provision of management services to Siqalo Foods for a further three years. Siqalo is a subsidiary of Remgro, hence the related party designation.

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