AECI has stabilised its normalised EBITDA (JSE: AFE)
The mining business is where the pressure currently sits
AECI describes 2024 as a year of transition. They’ve released an update for the ten months to October, which tells you that they want to keep the market informed on how things are going. This is typical behaviour when a company is going through a turnaround.
Turnarounds come with all kinds of non-recurring expenses as groups reshape themselves and make changes. It’s therefore also typical to see the use of normalised profit measures, as management teams try to tell the story excluding the once-offs.
For the ten months, AECI’s revenue is down 4%. Mining is the biggest part of the business and was down 5%, while the Chemicals side saw revenue fall 4%. Despite this, normalised EBITDA fell 1% and normalised profit from operations is down 4%.
In case you’re curious, profit from operations without the normalisation adjustments fell by 29%.
On the balance sheet, the good news is that net debt fell from R5.2 billion to R4.8 billion. Gearing is therefore within the guided range. Free cash flow is a far less encouraging story, falling dramatically from R1.47 billion to just R82 million. It’s still positive, at least.
The noise in the numbers isn’t over yet. They expect to recognise some substantial impairments on businesses like AECI Schirm and AECI Much Asphalt.
Although normalised profits may have stabilised, the AECI share price is down 16% this year. That performance looks even worse when you compare it to the general exuberance in the market.
Growthpoint is reworking its property exposure – especially in South Africa (JSE: GRT)
Focusing on the right sectors is key to success
Growthpoint has always been the scale player in the local property game, with a portfolio that gets you as close as possible to a view on property in South Africa as a whole. They also have substantial offshore interests. Thanks to the pandemic and the general trends in South Africa in particular, a broad portfolio needs to become a more focused portfolio to drive shareholder returns.
The strategy in South Africa is to decrease exposure to the office sector, sell older industrial assets and get out of non-core retail assets in deteriorating CBDs. Sounds sensible, doesn’t it? I wouldn’t want to own any of those things either. They have targeted R2.8 billion in disposals and they expect to invest R2.2 billion (both numbers are references to FY25) in the core local portfolio, focusing on modern logistics and retail investments, especially in the Western Cape. Again, that’s very sensible.
The V&A Waterfront is so important that it gets a separate mention, with Growthpoint predicting “significant growth” in the next 3 to 5 years. As someone who absolutely loves living in Cape Town, I couldn’t agree with this more.
Internationally, Growthpoint is simplifying and optimising. A good example is the Capital and Regional deal that is being implemented in early December, giving Growthpoint exposure to a larger UK platform through NewRiver.
The announcement also gives some numbers for the three months ended September. Vacancies have improved in South Africa from 8.7% to 8.2%. Renewal rates improved from -6.0% to -0.4%, so the negative reversions are nearly a thing of the past. This has come at the expense of the lease renewal success rate, though. Rental escalations are at 7%, so that protects Growthpoint against inflationary impacts in property operating costs.
It says something about the long tail of unappealing properties in the Growthpoint portfolio that the retail portfolio had negative reversions of -0.5%. They’ve had some non-renewals as well as major malls in Gauteng. They have lots of cleaning up to do here.
In the office portfolio, they note that this is the first quarter post-COVID where tenants haven’t reduced space. The return of traffic in the mornings certainly suggests that people are no longer Staying Home and Staying Safe from Monday to Friday. Rent reversions in the office portfolio were -4%, a significant improvement from -14.8% in FY24. They do expect this to worsen in coming months though to mid- to high-single digits, so be careful of getting excited about seasonal improvements here.
In the logistics and industrial sector, vacancies are down to 4.5% overall. The coastal regions are popular, with extremely low vacancies. Here’s a great statistic for you: the Western Cape achieved positive reversions of 8.8%, while Gauteng and KZN are running at negative reversions of -1.8%!
There are many more details in the announcement for those who want to read everything. I only have space for one more stat: a spectacular 20% growth in EBIT at the V&A Waterfront. The area is booming, with average daily rates at hotels in the area up 35% vs. the same period last year.
Despite all the positive momentum, Growthpoint still expects distributable income per share to decrease by between 2% and 5% for FY25. They attribute this to prevailing high interest rates. Of course, the not-so-pretty parts of the Growthpoint portfolio aren’t helping either, but at least they are doing something about that.
HCI sees a huge knock to earnings – and the oil and gap business is only part of it (JSE: HCI)
The group hasn’t enjoyed the SA Inc returns that were on offer this year
Hosken Consolidated Investments is the mothership for a portfolio that touches many different sectors. Some of the underlying exposures are listed, like eMedia, Frontier Transport, Deneb and Tsogo Sun. Others are unlisted, like the oil and gas prospecting business.
The six months to September won’t go down as a happy time for HCI. HEPS tanked 46% from 971 cents to 529 cents. Even a dividend of 50 cents per share (vs. nothing in the comparable period) won’t make anyone feel better. HCI’s share price is down 12% this year, missing out on the upswing that many local groups have enjoyed.
The major culprits? Well, oil and gas prospecting is certainly the worst segment in this period, with a headline loss of R264 million vs. a loss of R31 million last year. That’s obviously an extremely risky business that will either lose a lot of money or make an absolute fortune. It’s more of a gamble than the gaming business itself, with Tsogo Sun’s results having prepared the market for a drop in that segment at HCI. Leaving aside the other listed exposures, the other drop worth noting is in coal mining, with headline earnings of R38 million vs. R133.5 million in the prior year.
I must highlight that HCI’s share price is up 93% over five years, which means vs. a pre-pandemic base. You just wouldn’t say so by looking at these specific numbers. They are playing the long game.
Nampak gives further details after its trading statement (JSE: NPK)
Major shareholders requested more information ahead of full results
Nampak released a trading statement earlier this week that indicated a substantial swing into profitability for the year ended September. It was light on any other details though, which seems to have frustrated major shareholders.
After major shareholders put in a request to Nampak to release more information before the results presentation on 2 December, the company has put out another announcement that gives more information on the second half of the year in particular.
The first half included a once-off gain of R290 million on a restructure of post-retirement medical aid benefits, so that obviously flattered the first half relative to the second half. There were also some non-recurring costs in the second half, ranging from cybersecurity costs and financing fees through to the delay in commissioning of the Springs Line 2. Whilst some of the costs are non-recurring in nature, others sound very much like the risks of doing business as a complicated group across several countries.
The share price has been on quite the rollercoaster ride, initially dropping sharply based on the trading statement and then clawing much of it back after this announcement. Any investors who expect a smooth path at Nampak with no major operational issues need to do some serious thinking about how unrealistic that expectation is, given the complexities involved in manufacturing.
Pick n Pay’s two-step recapitalisation is complete – now they have to stop losing money! (JSE: PIK)
The hard work starts now
In the past nine months, Pick n Pay has tried to fix several years worth of mistakes. The thing is, nothing is actually fixed yet – they’ve simply raised enough money to give them a fighting chance.
Step one in the plan was the rights offer, which was strongly supported by the market. I must point out that when institutional investors are that deep in the hole, persuading them to roll the dice one more time isn’t the most difficult task. People thrive on hope.
Step two was the Boxer IPO, which was a resounding success because the shares in Boxer were priced in such a way that the IPO couldn’t possibly fail. This is proven not just by a common sense look at the implied multiples, but by the sheer demand for the shares from institutional investors in the pre-IPO raise and the general market on the first day of trading. Things have played out in line with what I’ve been writing in Ghost Bites since the IPO pricing was first announced.
I did enjoy Pick n Pay commenting that they can now repay all their long-term debt and “convert interest costs to interest earnings” – investors definitely didn’t put in capital in the hope of earning interest. They want to see the capital deployed into the business in a way that generates an adequate return on capital.
My view remains that the easy part of the turnaround is behind them at Pick n Pay. The real work starts now. It will not surprise me to see Pick n Pay selling more shares in Boxer once the initial lock-up period concludes. On the plus side, they need to achieve this turnaround in a vastly more favourable macroeconomic environment in South Africa than anything we’ve seen in the past decade, so at least they have a chance.
Sanlam and Santam: each playing to their strengths in the MultiChoice insurance transaction (JSE: SLM | JSE: SNT | JSE: MCG)
Sanlam is taking the life insurance side and Santam the general insurance
Back in June this year, Sanlam announced that its subsidiary Sanlam Life would be acquiring 60% in MultiChoice’s insurance business NMS Insurance Services for R1.2 billion in an upfront payment and R1.5 billion in potential earn-outs. The earn-out is based upon the gross written premium that will be generated in the year ending December 2026.
There are two separate classes of shares. The ordinary shares are linked to the life insurance products and the A1 ordinary shares are linked to the general insurance products.
It therefore makes sense that Santam (in which Sanlam is the controlling shareholder) has agreed to acquire Sanlam’s 60% interest in the A1 ordinary shares for an initial amount of R925 million and a potential earn-out, although the expectation is that the earn-out on this part of the book will be limited. This leaves Sanlam with the life insurance exposure only, which is sensible, while allowing Santam to focus on device insurance into the MultiChoice subscriber base.
This is a small related party transaction, so an independent expert needed to opine that the terms are fair to Santam’s shareholders. Ernst & Young has provided such an opinion.
What is the true cost of the SAP disaster at SPAR? (JSE: SPP)
At least the business (excluding Poland) is heading in the right direction
Spar has released results for the year ended September 2024. They have been impacted by a number of underlying factors, ranging from own-goals like the SAP implementation disaster in KZN through to macroeconomic shifts like the stronger rand the impact this has on translation of offshore results.
Focusing just on continuing operations for now (i.e. excluding Poland), group turnover was up 4%. Operating profit thankfully jumped 15.1% and HEPS came in 11.1% higher. Despite the obvious improvement here, there’s still no dividend. This tells you something about the struggles being faced.
The big win is that group net borrowings reduced by R2 billion from R11.1 billion to R9.1 billion. This includes the R2 billion bridge facility needed to get the Poland disposal across the line. In case you’ve forgotten, they are basically paying someone to drag that business away. When you consider that Poland made a loss before tax of R1.27 billion for the year, it makes a lot more sense.
To give context to the sizes of the other businesses in the group, Southern Africa made profit of R1.1 billion, Ireland came in at R925 million and Switzerland is much smaller at R84 million.
Switzerland is the next worry for me. There’s debt of R2.8 billion in that thing, which looks huge compared to profits. For context, Ireland is over 10x bigger in profit and has R2.15 billion in debt. The Swiss business has been under pressure and I hope it doesn’t turn into the next Poland. A drop in turnover of 6.2% in local currency isn’t encouraging.
Southern Africa is being impacted by the SAP issues, with gross margin down from 8.7% to 8.5%. At least market share has stopped going backwards, impacted by stock availability issues and of course the strength of a key competitor like Shoprite. At a time when SPAR should’ve been feasting on the carcass of Pick n Pay, they’ve been worrying about their own system issues. The true cost of the SAP implementation must be enormous.
Will there be further corporate activity to simplify the group? They are busy with a strategic review in Europe where they are focused on return on capital, so anything is possible here.
Tharisa’s earnings are nearly flat despite the agony in the PGM sector (JSE: THA)
The exposure to chrome really helps
To understand Tharisa’s results for the year ended September 2024, you need to view them in the context of PGM price movements: platinum -3.9%, palladium -37.1% and rhodium -50.3%. In contrast, chrome price increased 13.6%. These price movements are all quoted in US dollars.
Miners focused purely on PGMs have had an horrendous time, whereas Tharisa saw HEPS drop by just 0.7% to US 28.1 cents. This is thanks to the exposure to chrome, which generated $133 million in gross profit in this period vs. just $43.2 million from PGMs. Fascinatingly, the gross profit margins are similar: chrome at 27.1% and PGMs slightly higher at 28.0%!
This shows how lucrative PGMs can be if things improve. It’s just very helpful to have the buffer of chrome along the way. Tharisa is also seen as a solid mining operator, with PGM production relatively flat year-on-year and chrome sales volumes up 15.7%. They are growing in the right commodity.
Transaction Capital has flagged challenges at Nutun (JSE: TCP)
This is worrying – Nutun is all they have left!
After the collapse of Transaction Capital, my brokerage account reflects my highly enjoyable stake in WeBuyCars (and long may that good news continue), as well as the Transaction Capital shares as an eternal hangover in my portfolio. I’m keeping them as reminder of why I do sometimes need to sell things at silly valuations, although it really is hard to walk away from such a winner. I think the trick is a simple business model, something that WeBuyCars has and Transaction Capital certainly doesn’t have. When a simple model runs hard, you can see whether that run is justified. On the trickier stuff, the risks get exponentially higher.
Personal learnings and the benefit of hindsight aside, the latest news from Transaction Capital is a trading statement for the year ended September 2024. The numbers are all over the place, with multiple corporate transactions in this period and loads of restructuring costs. They’ve guided a headline loss from continuing operations of between -R147 million and positive R9 million. The midpoint of that range is clearly negative, so we can safely assume a loss here.
Including all operations (like catastrophe SA Taxi), the headline loss is R2.3 billion to R2.5 billion. I will never stop being astounded by how that business collapsed.
What worries me more than these numbers is the narrative around Nutun, the core business process outsourcing business that will be the only thing of any value left behind in Transaction Capital. They’ve had a poor year it seems. There’s a new management team in place and they have great ambitions for this business, but we’ve heard that before from Transaction Capital and we all know how that turned out.
A poor year for Trematon – and a significant drop in value at Generations (JSE: TMT)
The intrinsic net asset value per share has decreased substantially
Trematon is an investment holding company with a wide range of business interests. The right metric to look at is therefore the intrinsic net asset value (INAV) per share, or management’s view on what the group is worth. This is far more useful than metrics like revenue or operating profit, which are impacted by the size of the underlying stakes and how they are accounted for.
Of course, you can always just follow the cash. The total distribution per share is down 28% for the year ended August. That gives you a clue about what might be coming next.
The INAV per share has dropped by 19%. One of the contributing factors is that a large distribution to shareholders was paid in December 2023, contributing to a R42.5 million decrease in cash. For context, the INAV in 2023 was R992 million. We still have to explain almost another R160 million worth of decrease, so there are clearly challenges in the underlying businesses.
The largest contributor to INAV is Generation Education, where the INAV dropped by R60 million due to lower student number growth estimates in the valuation. Ouch. ARIA Property Group is down R35 million to align to the price at which that stake is being sold. There are negative moves in other businesses as well, generally due to diminished valuations based on performance.
The INAV per share is R3.55 and the current share price is R2.20. Although there’s still a significant gap there (as is typical of investment holding companies), the trajectory is a concern.
Nibbles:
- Director dealings:
- A director of Capitec (JSE: CPI) exercised options and received 923 shares in the process. This works out to over R3 million in shares. They are net equity settled and the option strike prices were way below the current market price. Capitec has created many rich employees along the way!
- Brikor (JSE: BIK) has released its results for the six months to August. Although revenue increased by 18.1%, EBITDA fell by 37.6% and HEPS took a 59.3% knock. The problem is the coal segment, which slipped into a slight loss-making position vs. operating profit of R9.8 million in the comparative period. The bricks segment also went backwards, with operating profit of R16.5 million vs. R17.1 million in the prior period.
- Altvest (JSE: ALV) has released its first set of interim results as a listed company, dealing with the period ended August. Revenue was just R3 million and the loss attributable to ordinary shareholders was R6.2 million. These are early days, with the company aiming to list between two and four new investment instruments annually. There are currently three classes of issued preference shares in addition to the ordinary shares.
- AYO Technology (JSE: AYO) has released a trading statement for the year ended August. The bad news is that the company is still making losses. The good news is that the losses have gotten smaller. For the year ended August, the headline loss per share is expected to be between -89.46 and -54.16 cents, compared to -176.46 cents in the prior year. They attribute this to cost-cutting initiatives and better margins. Alas, on a share price of R0.49, this puts the company on a P/E of worse than -1x!
- At a general meeting to vote on the proposed B-BBEE deal, Coronation’s (JSE: CML) shareholders gave an almost unanimous approval for the transaction. They will therefore move forward with meeting the remaining conditions and implementing the deal.
- Murray & Roberts (JSE: MUR) chairman Suresh Kana has resigned, as has Jesmane Boggenpoel. Clifford Raphiri has been appointed as interim chairman of the board. Given the path that Murray & Roberts now needs to walk, that’s going to be a challenging role.
- After the latest cancellation of shares that were repurchased over the past 18 months or so, Sabvest (JSE: SBP) has pointed out to the market that the current number of shares in issue is 26.7% off the peak number of shares in issue. Buyback strategies can be powerful things when they are executed properly.
