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Corporate finance corner (M&A / capital raises)

• Fortress REIT looks set to become engrained in the history of the JSE for potentially being the first listed property company to lose REIT status. At the all-important meeting of shareholders to approve a scheme of arrangement to repurchase all of the Fortress A shares through the issuance of 3.01281 B shares for every A share, the vote went against the scheme. It therefore cannot be implemented and failed by quite some margin actually, with only c.60% approval (a special resolution requires 75%). Even a promotional video with Bruce Whitfield couldn’t save this one, unfortunately. The company has previously warned that failure to pass the resolution would likely lead to loss of REIT status as the requirements related to distributions of income won’t be met.

• Aveng has renewed the cautionary announcement related to the potential disposal of Trident Steel. The value is expected to exceed Trident Steel’s net asset value as reported in the 2022 interim financials. The proceeds would be used to settle remaining debt in South Africa, significantly improving the balance sheet in the process. Although I’m not close to the numbers on Aveng, I would imagine that shareholders are really hoping this deal goes through!

• Texton Property Fund is pushing forward with its strategy to invest in the US. Texton has committed $5.5 million to GIM Investments PCC for investments in the manufactured housing real estate sector in the US. These are the mobile home parks that represent an interesting asset class (those who listened to Episode 87 of Magic Markets would’ve learnt about this asset class from the team at Westbrooke Alternative Asset Management). The capital will be deployed over two years as and when investments are identified. This makes sense for Texton, as South Africans cannot gain access to this asset class through any other listed vehicles on the JSE. It brings USD-based earnings that are far more resilient to cyclical fluctuations than other property types. With a target net IRR of 14.5%, it also offers returns that are appealing to local investors. This is a category 2 transaction under JSE Listings Requirements and does not require a shareholder vote.

• Orion Minerals Limited has closed its Share Purchase Plan, an initiative to raise capital from existing shareholders to supplement the capital raise currently underway with strategic investors. $1.35 million was raised through this initiative, with strong support from South Africa – a reminder that the retail investor base and smaller asset managers shouldn’t be ignored by listed companies. Commitments for around $6 million from other investors had previously been received, with discussions continuing for the remaining $14 million. Discussions are also taking place with banks and development finance institutions, with Orion noting “very positive progress” with a leading development financing agency following a period of due diligence and negotiations.

• SilverBridge has announced that the offer from ROX Equity Partners of R2.00 per share for all the shares in SilverBridge has become unconditional. This means that shareholders can go ahead and accept the offer without wondering whether any regulatory or other conditions will be met. The offer closes at midday on Friday, 2nd September.

Financial updates

• DRDGOLD has released a trading update for the year ended June 2022. Production was ahead of guidance (183,902 ounces vs. guided 160,000 – 180,000 ounces) and the cash operating cost was only slightly above guidance as well (R600,875/kg vs guided R600,000/kg). Capital investment was R584.1 million vs. guidance of R600 million. Due to the rather tepid performance of the gold price over the past year, headline earnings per share (HEPS) has fallen by between 13% and 33%. This brings it down to 113.6 cents – 147.2 cents vs. a share price of around R10.40. The balance sheet is strong, with no debt at all and cash of over R2.5 billion. During the period, the group generated free cash flow of R871.6 million and paid dividends of R513.3 million. I sold my DRDGOLD position at the start of the year if I recall correctly, which was the right decision as the share price is down more than 20% this year. As the company has thin margins (it reclaims gold rather than mines it), inflationary pressures on costs really hurt the investment thesis unless the gold price performs strongly.

• Sibanye-Stillwater released a trading statement for the six months ended June 2022. HEPS is expected to be between 47% and 52% lower than in the comparable period. This has been impacted by factors like the strike at the South African gold operations, suspensions of operations at the Beatrix tailing storage facility for a quarter, flooding at the US PGM operations and lower precious metal prices vs. the comparable period. Production at Stillwater in the US was down by 23% due to the floods. That sounds like a walk in the park vs. the impact on gold production in South Africa, which fell by 77% during the period. The share price was down by around 6% for the day.

• Northam Platinum has released a voluntary trading update for the year ended June 2022. It’s been a very busy year of corporate actions for the company, with the acceleration of the Zambezi BEE transaction and the acquisition of a strategic shareholding in Royal Bafokeng Platinum. Although there was a 12.8% increase in sales volumes, there was a 13.4% decrease in the 4E US dollar basket price. Thanks to a weakening of the rand, sales revenue growth ended up in the green, up 4.4%. The group unit cash cost per refined platinum ounce has increased by 18.9%, driven by inflation, more employees in service and lower concentrator feed grades. HEPS is expected to vary by between -7.9% and +2.1% vs. the prior period, so the midpoint is a slight drop. Net debt : EBITDA is at 0.97x, in line with the group’s target of below 1x. Interestingly, the value of net debt is similar to the value of the 34.52% stake in Royal Bafokeng Platinum. Full results will be released on 26th August.

• Aspen Pharmacare released a trading statement for the year ended June 2022. Normalised HEPS is expected to increase by between 20% and 25%. This was achieved despite very little revenue growth (1% – 3% as reported or 4% – 6% in constant currency). The HEPS performance has been achieved by higher EBITDA margins (i.e. better operating profits per unit of revenue) and lower net finance charges (if you pay less interest to the bank, you have more earnings left for shareholders). The share price has had a nasty year, down nearly 29%.

• Emira Property Fund released financial results for the year ended June 2022. This fund has a portfolio that is diversified across the various types of properties (including residential) and also has a US component to bring an offshore flavour. Distributable earnings were up 3.8% for the year and the final dividend decreased by 5.2%, so the full-year dividend was only 1% higher. The group notes a strong performance in industrial and retail properties, offset of course by the office properties. Although growth in income from the residential portfolio has been marginal, the good news is that vacancies are down significantly. Net asset value (NAV) per share as increased by 7.3% to R16.286, so the share price of R10.70 is a discount to NAV of over 34%. Based on the full year dividend of 119.79 cents, Emira is trading on a yield of 11.2%.

• Here’s one for the diaries: Lesaka Technologies (previously Net1) will release results after US market close on 9th September.

Operational updates

• None today!

Share buybacks and dividends

• It seems like some of the cross-holding between Naspers and Prosus might be reduced. The lock-up on the Prosus shares held by Naspers expired on Wednesday and Naspers has indicated that it intends to dispose of some Prosus shares to fund ongoing repurchases of Naspers shares. Approval from the SARB is required first. If that is obtained (as expected in the coming weeks), it looks like a portion of this odd structure may be unwound.

• British American Tobacco has continued with its daily share buybacks.

Notable shuffling of (expensive) chairs

• The chairs stayed put today.

Director dealings

• A director of Santova in Australia exercised share options and promptly sold those shares and a few more, with a total value of nearly R2.9 million.

Unusual things

• Mpact has now formally responded to Caxton’s allegations (and insinuations, as Mpact puts it) via SENS. The first point that Mpact confirms is that the Competition Commission is not seeking to impose a penalty against Mpact and that the company has been cooperating transparently since 2016. Mpact goes on to remind the market that Caxton applied to the Commission to file a separate merger notification before an offer was even being made to the Mpact board. I had found that to be a really weird step from Caxton and I wrote about it at the time. Mpact felt that it couldn’t support a joint or separate merger filing decision as the company hadn’t even received an offer. The Commission agreed with Mpact, Caxton took this on review before the Competition Tribunal and the outcome is pending. In that process, a third party made representations that Caxton has tried to get access to. The representations were made available to Caxton chairman Paul Jenkins on a strictly confidential basis. Furthermore, Caxton sent a letter of demand for a shareholders’ meeting that Mpact has rejected as unlawful. One thing is for sure – lawyers are making plenty of money here for the hours of advice. I must be honest, the Mpact announcement reads like it was written by adults whereas the Caxton announcement was like listening to an angry teenager. As for where this will end, that is anyone’s guess. It has become a terribly unhealthy relationship.

• Renergen initiated a process to change its auditor, reflecting a desire to have an audit firm that brings more international experience. After a tender process, the audit committee has recommended the appointment of BDO South Africa. Shareholders will be asked to approve this at the AGM.

• If you are a shareholder in Jasco Electronics, you should note that the circular for the related party lease agreement has been distributed by the company.