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Ghost Bites (AngloGold | Ascendis Health | Eastern Platinum | Lewis | Richemont)

The Finance Ghost
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Ghost Bites (AngloGold | Ascendis Health | Eastern Platinum | Lewis | Richemont)

AngloGold reaches for the passport (JSE: ANG)

With no South African assets anymore, this primary listing is headed for New York

Before you panic, AngloGold is not getting rid of its JSE and A2X listing. Even the listing in Ghana survives! The point is that the primary listing is moving to the New York Stock Exchange (NYSE), which means that the US regulations become the primary regulatory environment.

Get ready for quarterly results from the company!

It’s fascinating to note that the American Depository Receipt (ADR) programme in the US already accounts for two-thirds of daily liquidity in the stock, despite US investors holding only 35% of the share register. The pools of capital in the US are deeper than anything we can imagine in South Africa and AngloGold isn’t blind to that fact.

Of course, what the company is really hoping to achieve is a higher valuation multiple in line with international peers. That’s a nice way of saying that the company is trying to shed the South African image, which isn’t doing the multiple any favours even though there are no remaining assets here.

And in case you’re wondering, there’s also a change to domicile on the cards. The new listed structure will have its holding company in the UK, but “key corporate functions” will still be provided from Johannesburg.

The cost of this transaction is huge, with the announcement noting an expected cost of 5% of the market cap because of taxes payable in South Africa. That’s a nice payday for the fiscus, but AngloGold will then be out of the tax net forever.

The company also announced an update for the quarter ended March, with cash costs per ounce up 16% to $1,204/oz due to inflationary pressures. All-in sustaining cost (AISC) was up 15% to $1,619/oz. EBITDA fell from $438 million in Q1 2022 to $320 million in Q1 2023, a drop of 27%.

Guidance ranges for 2023 have been confirmed.

Ascendis puts Surgical Innovations into business rescue (JSE: ASC)

Legacy tax and creditor issues have been compounded by a new SARS assessment

When Ascendis Health released its interim results for the six months to December 2022, shareholders were advised of the dispute between Surgical Innovations and SARS regarding VAT for 2018 – 2020, with a total provision of R67 million raised in those results.

The company engaged with SARS on this amount but to no avail, with SARS requiring almost immediate repayment. Along with another legacy creditor, this has put the directors in a position where they needed to voluntarily commence business rescue proceedings.

The intention is for the business to continue while the disputes with SARS and the other non-operational creditor are resolved. The board of Surgical Innovations believes that there is a “high likelihood” that the company will exit this process as a solvent and commercially viable operations.

The announcement came out shortly before the close and the price moved 4.8% lower, but I wouldn’t see this as true price discovery on this matter as the bid-offer spread tends to be wide on small caps like this.

Eastern Platinum’s Q1 report is out (JSE: EPS)

The company is focused on the Zandfontein underground restart plan

In the first quarter of 2023, Eastern Platinum grew revenue by 26.7% year-on-year. The key driver was an increase in chrome sales on the open market, offset to some extent by pressure on PGM prices.

Mine operating income increased by 53.8% to $5.2 million. Net income attributable to equity holders was $1.3 million vs. $3.0 million in the comparable period, with forex losses as the major reason for the drop.

The balance sheet is where the attention needs to be, with a working capital deficit (current assets less current liabilities) of $35.2 million and short-term cash resources of only $3.8 million.

Lewis updates the market on its share buybacks (JSE: LEW)

These buybacks are core to the investment thesis

I wouldn’t usually give share buybacks this much airtime, but at Lewis the situation is a little different. The furniture industry in South Africa isn’t exactly a bastion of hope at the best of times, yet Lewis has managed to generate decent returns at times for shareholders because of the clever use of buybacks. Having said that, the share price has rolled over recently:

What you aren’t seeing on this chart is the all-important dividend yield that makes the total return look far better than the chart suggests. The key learning from Lewis isn’t related to cash dividends, but rather the use of share buybacks when a share is trading at a modest multiple.

This strategy has continued, with shareholders giving authority back in October 2022 for the company to repurchase up to 10% of shares in issue. Lewis has announced that 3% has been repurchased, leaving 7% to go.

The price volatility comes through here, with repurchases executed at prices between R38.00 and R50.00 per share. The average price is R47.23 per share and R83.7 million worth of cash has been invested in these buybacks,

With the current price at R38.39 and seemingly dropping, the company needs to get on the accelerator pedal with the remaining buybacks.

Richemont closes off its best-ever year (JSE: CFR)

The direct-to-consumer business now contributes nearly 75% of group sales

€20 billion is a big number. Although Richemont’s sales came in slightly short of that level, a 19% increase vs. the prior year was enough to make FY23 Richemont’s strongest ever year based on revenue. Operating profit also reached an all-time high of just over €5 billion and operating margin expanded from 22.4% to 25.2%.

Profit for the year from continuing operations was €3.9 billion, up 60% for the year. If you look a level lower on the income statement though, you’ll see some ugly numbers. The loss from discontinued operations was a huge non-charge of €3.4 billion on the transfer of YNAP net assets to being classified as held-for-sale. Non-cash or otherwise, the reality is that Richemont didn’t have a good time with this online initiative.

Still, the direct-to-consumer business has been a strategy that has paid dividends in other ways for Richemont. Sales in directly-operated stores contributed 68% of group sales. When combined with online sales, that number is close to three quarters of group sales.

If you look at the underlying business units, the Jewellery Maisons (like Cartier) increased sales by 16% at constant rates and achieved a 35% operating margin. A substantial 83% of revenue is generated through direct-to-consumer sales. Total sales in this segment were €13.4 billion.

The Specialist Watchmakers achieved 56% of sales through direct channels. Revenue grew by 8% at constant exchange rates and operating margin of 19% was achieved. This segment contributed €3.9 billion in revenue.

The Fashion & Accessories segment is the smallest with a revenue contribution of €2.7 billion, up 19% vs. the prior year. This business unit is profitable but not by much vs. the rest of the group, with an operating margin of around 3.5%.

There still isn’t much of an Asia Pacific growth story in these numbers, with sales up by 6%. The rebound in China etc. only came through in the final quarter of the year. This should be a significant driver of sales growth in the new financial year.

If you’re interested in the luxury sector, our report and podcast on LVMH (the global giant that is surprisingly different from Richemont) is fresh out the oven in Magic Markets Premium. Together with my partner Mohammed Nalla, we put out a report every week on a global stock and a subscription only costs R99/month. You can subscribe here>>>

Little Bites:

  • Director dealings:
    • Guess what? Des de Beer has bought more shares in Lighthouse Properties (JSE: LTE), this time worth R4.49 million.
    • The Chief Growth Officer of British American Tobacco (JSE: BTI) has bought shares worth £21.8k (note the currency).
  • Nedbank (JSE: NED) has repurchased 3.1% of its shares (based on the number in issue at the last AGM) at a total investment of R3.36 billion. The average price paid per share is R212.91 and the current share price is around R209.
  • While we are on buybacks, this is a reminder that Glencore (JSE: GLN) and South32 (JSE: S32) are both busy with share buyback programmes and are making daily announcements on the progress.
  • I’m not sure how they got this wrong, but Octodec (JSE: OCT) had to release a correction to its trading statement. The guidance for distributable income per share for the six months to February was given as between 81 and 99 cents per share. It should’ve been between 85 and 89 cents per share, which is thankfully within the originally disclosed range rather than outside of it. The percentage changes in the first trading statement are correct.
  • I’m never quite sure how much we can read into updates like these, but Vodacom (JSE: VOD) has constituted a standing investment committee. Such committee meetings were previously convened on an ad-hoc basis. This suggests that Vodacom is putting increased focus on how capital is allocated, which certainly makes sense to me.

Ghost Bites (enX | MTN | Octodec | RFG Holdings | Sappi | Trematon)

The Finance Ghost
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Ghost Bites (enX | MTN | Octodec | RFG Holdings | Sappi | Trematon)

A mandatory offer for enX Group is on the table (JSE: ENX)

Don’t get excited: there’s no premium here

If you followed the Takeover Regulation Panel’s investigation into various transactions involving enX, Extract Group, Zarclear Holdings and African Phoenix, then you’ll know that part of the settlement is that African Phoenix and its concert parties need to make a mandatory offer to all enX shareholders.

enX currently trades at R6.40 and the offer price is R6.41 per share, so there’s no real excitement here. Where this could be useful is for holders of large blocks of shares who would otherwise not be able to sell at the prevailing price due to liquidity constraints.

The concert parties hold 48.80% in the company and shareholders holding 19.6% have given an irrevocable undertaking not to accept the offer.

There’s a difference between concert parties for an offer and parties acting as a voting bloc. It’s likely that the concert parties will collectively move through a 50% holding, which would normally be relevant to the Competition Commission. I assume that the parties don’t have a formal voting agreement that would trigger a merger filing. I am sure that African Phoenix is pretty tired of regulators as it is!

enX also released a trading statement for the six months ended February 2023, reflecting an increase in HEPS from continuing operations of between 26% and 38%. Total HEPS is down between 51% and 55%.

Interestingly, revenue from continuing operations is up 20% and profit before tax is expected to be between 20% and 24% higher, so margins have expanded slightly.

There are bad signs at MTN (JSE: MTN)

I’m glad I sold at the start of this year

Telecoms companies don’t do well during load shedding. Battery backup power is incredibly expensive and consumer activity in general is subdued. Increased security costs don’t help either.

To compound MTN’s problems, the macroeconomic picture in key African subsidiaries is back to being messy. Due to difficulties in upstreaming cash, MTN Group is opting for scrip dividend alternatives from MTN Nigeria and potentially MTN Ghana as well. This increases the stake in those companies (as not all minority shareholders in those countries choose the scrip option) but does nothing to bring cash to where it is needed most: the mothership to reduce debt.

For now at least, there is also cash being upstreamed from subsidiaries. Whether or not it can continue remains to be seen.

Speaking of debt, group leverage of 0.3x is well with the limit of covenants. The holding company debt is what really counts, as MTN cannot move cash around in the group at the moment without major costs and problems. This has increased to 0.9x from 0.8x at the end of December. This is within target for now and the balance sheet looks alright, but you only need to look back a few years to see what can go wrong.

Moving to financial performance in Q1, I could only shake my head at MTN noting 90 days of load shedding during the quarter. In other words, there was load shedding basically every day vs. 14 days in Q1 2022. I assume that people making WhatsApp calls over fibre rather than voice calls on their network contributed to voice revenue falling by 16%, with overall service revenue up by 1.3%. An average prepaid subscriber uses 2.7GB per month and a contract subscriber uses 13.8GB per month.

South African EBITDA margin contracted by 370 basis points, so EBITDA fell by 6.5%. They hope for a recovery in the second half of the year based on improved network resilience during load shedding.

EBITDA pressure is being felt elsewhere as well, like Nigeria down 130 basis points, Southern and East Africa down 10 basis points and West and Central Africa down 170 basis points. EBITDA margin increased by 560 basis points in Middle East and North Africa but that’s by no means the most important region in the group.

In strategic news, the company is considering an exit of three operations in West Africa over the medium-term. These include the bustling economies of Guinea-Bissau, Guinea-Conakry and Liberia. They contribute just 0.7% to EBITDA, so I don’t think anyone will miss them.

It’s not obvious to me that things will improve anytime soon.

Octodec flags a significant jump in its dividend (JSE: OCT)

This REIT is unusual on our market, focusing on urban residential property

If you can imagine buy-to-let at scale, you’re on the right track when it comes to Octodec. The company has released a trading statement for the six months to February 2023 that reflects an increase of between 8% and 12% in distributable income per share.

With better operating conditions, the cash payout ratio has increased as the distribution is expected to be between 16% and 24% higher. This is an interim distribution of between 58 cents and 62 cents. For reference, the share price is trading at R9.82.

Money for jam at RFG Holdings (JSE: RFG)

There have been improvements across several food categories in the group

There are very few good news stories on the local market. Closing over 14% higher on Thursday, RFG Holdings flew the flag on an otherwise dark day. Of course, it’s the export business that did particularly well, with the local business growing thanks to inflation outpacing the drop in sales volumes as consumers tightened their belts. Literally.

The weakening of the rand contributed to a better international operating profit margin, so RFG is making a case for itself as a rand hedge that nobody talks about. International selling prices are also key, so it’s certainly not a pure-play view on the currency.

Locally, there were success stories in the Today acquisition (pies), fruit juice, dry foods and meat categories.

The HEPS increase of 35% to 40% is made even more impressive by the different reporting calendars, we are looking at a 26-week period vs. a 27-week period. In other words, this was achieved despite an extra trading week in the comparable period.

Sappi rallied 6.4%, but not because of these results (JSE: SAP)

On a day that was strong for rand hedges, Sappi reported a big drop in profits

Cyclical business are wild things and you’ll struggle to find a more cyclical business than Sappi. The market fell away from the company in the latest quarter, with “downstream inventory destocking” – a fancy way of saying that customers significantly slowed down on orders. This led to production curtailment and associated pressure on margins.

Just how badly can profit drop in these businesses, I hear you ask?

Year-on-year sales revenue fell by 22% this quarter and EBITDA crashed by 50%. HEPS fell by 67%. See? Badly.

The good news is that net debt was 32% lower at $1.225 billion, with $1 billion as the stated objective. I therefore find it rather strange that the group recently executed share repurchases of $23 million, representing 1.62% of shares in issue. I appreciate that the share price has lost a third of its value in the past year and that buybacks make sense when the price has come off, but reading this announcement makes me feel like reducing debt should be the only focus.

Trematon reports a double-digit drop in INAV (JSE: TMT)

If you read carefully, you’ll see the real reason for the drop

Trematon holds a fascinating portfolio of investments, ranging from Club Mykonos in Langebaan to Generation schools. With such a varied set of interests, the right measure to evaluate performance is intrinsic net asset value (INAV) per share, commonly used by investment holding companies.

As at February 2023, this measure has decreased by between 10% and 11% year-on-year. The INAV is between 418 cents and 422 cents. Importantly, 40 cents of the drop (i.e. most of it) is because of a capital distribution in December 2022.

In other words, the value of this Western Cape focused investment portfolio is largely flat year-on-year.

The share price is trading at R2.43 per share, a discount to INAV of around 42%.

Little Bites:

  • Director dealings:
    • Here’s arguably the most important one of the week: Sabvest (JSE: SBP) has bought R770k worth of shares in Transaction Capital (JSE: TCP) at an average price of around R7.70. In case you don’t know, Sabvest is the investment holding company of respected investor Chris Seabrooke who sits on the board. I would’ve liked to see a much larger purchase, though!
    • There’s a nice payday for a director of AfroCentric (JSE: ACT), whose associates have accepted the partial offer from Sanlam to the tune of nearly R142 million.
    • A director of DRDGOLD (JSE: DRD) has sold shares worth nearly R3.4 million.
    • Des de Beer seems to have found the loud pedal with his share purchases, buying R21.5 million worth of shares in (you guessed it) Lighthouse Properties (JSE: LTE).
    • A director of KAL Group (JSE: KAL) has bought shares worth R99k.
  • Newpark REIT (JSE: NRL) has a bid-offer spread the size of the moon, with bids at R4.50 and offers at R6.25. When you see the dividend, you’ll understand the offer price. For the year ended February 2023, the total dividend was 67.19 cents per share of which the final dividend was 42.19 cents per share. At the current market price of R4.50, this tiny property fund with a R450 million market cap is on a trailing yield of 14.9%!
  • Montauk Renewables (JSE: MKR) is one of those oddball listings on the JSE where the company doesn’t even bother writing a SENS announcement to accompany quarterly results. They simply provide the link to the filing in the US. I therefore won’t give this much airtime, other than to point out a loss before tax of $15.8 million vs. a loss of $1.4 million in the comparable quarter.
  • Kibo Energy (JSE: KBO) is holding an extraordinary general meeting to get authority to increase the authorised share capital of the company as part of a transaction to issue warrants and “reprofile” the institutional investor bridge loan facility. If you’re a shareholder here, I suggest you read carefully and make sure you understand what is being proposed by management..
  • Due to a conflict of interest as the auditor of both Grand Parade Investments (JSE: GPL) and Sun International (JSE: SUI), Deloitte and Grand Parade have mutually agreed to part ways. Moore Cape Town is the happy winner here, recommended as the new auditor of Grand Parade. Shareholders will be asked to approve this at the company AGM.

South African M&A Analysis Q1 2023

Marylou Greig
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South African M&A Analysis Q1 2023

Challenging conditions – both of a global nature and those of SA’s own making – have severely curtailed the number of mergers and acquisitions recorded by DealMakers for the first three months of this year. However, though there is still much uncertainty (with rising interest rates and the risk of a total grid collapse a very real possibility), M&A activity has gained some momentum since the quarter close, where companies carrying strong balance sheets and having the ability to move quickly have taken advantage of opportunities and distressed situations.

Deal activity by corporates listed on one of the local exchanges declined 61% on levels reported in Q1 2022, with the aggregate value of deals at R31,72bn from 59 deals (2022: 94 deals valued at R81,82bn). The largest deal by value for the quarter, and the only BEE deal for the period, was Absa’s disposal of a 7% stake valued at R11,6bn.

The most active sectors were Real Estate (30% of the quarter’s deals) followed by the tech and energy sectors. Deal size fell typically in the R50m to R200m bracket reflecting c.30% of deals recorded for the period. SA-domiciled companies were involved in 18 cross border transactions, notably in Australia (5) and Europe (5), followed by Africa (4).

Share issues and repurchases characterised the general corporate finance activity for the quarter, with R212,59bn raised from the issue of shares and R109,54bn the value of shares repurchased. The repurchase programmes of Prosus, Naspers and Glencore account for most of this value, while the aggregate value of Richemont’s issue of A shares (conversion of depositary receipts) was R196,56bn.

In March, the International Monetary Fund cut its growth forecast for SA to just 0.1% for 2023, warning that the country risked economic stagnation unless it acted with urgency. The solution for economic reforms to tackle fiscal and structural challenges, and so boost growth, is to involve business. The longer it takes for this to be realised, the greater the risk of further deterioration in business and consumer confidence and levels of fixed investment.

DealMakers Q1 League Table – M&A activity by the top South African advisory firms (in relation to exchange-listed companies).

DealMakers Q1 League Table – General Corporate Finance activity by the top South African advisory firms (in relation to exchange-listed companies).

The latest magazine can be accessed as a free-to-read publication at www.dealmakersdigital.co.za

DealMakers is SA’s M&A publication.
www.dealmakerssouthafrica.com

Who’s doing what this week in the South African M&A space?

Marylou Greig
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Who’s doing what this week in the South African M&A space?

Exchange-Listed Companies

Following the April announcement by the Takeover Regulation Panel on its findings into the investigation into companies including African Phoenix Investments and the settlement reached, African Phoenix Investments has made a mandatory offer to all shareholders of R6.41 per share for the remaining 51.2% stake (excludes concert parties) in enX. Shareholders holding 19.6% of the total shares in issue (again excluding concert parties) have provided irrevocable undertakings not to accept the offer. The offer price reflects a discount of R0.06 (0.877%) to the 30-day volume weighted average price of the enX share prior to the announcement.

Absa has acquired a minority stake in Khula! a local agri-tech startup founded in 2016. The app’s platform connects farmers to the retail, wholesale and export markets creating an ecosystem to address challenges across the agricultural value chain.

Through its subsidiary Alexander Forbes Financial Services, Alexander Forbes has concluded a binding agreement with TSA Administration to acquire a 60% stake in the risk insurance administrator for an undisclosed sum. TSA will operate as an independently managed unit within the group and Alexander Forbes has the option to acquire the remaining 40% of TSA over a period of five years. The purchase consideration will be settled in cash.

Steinhoff International is to dispose of its 50.1% stake (an economic interest of 45% on a fully-diluted basis) in the Mattress Firm to Tempur Sealy International. Under the terms of the agreement, Tempur Sealy will acquire 100% of the equity in the Mattress Firm for an enterprise value of c. $4 billion. The consideration will consist of c.$2,7 billion in cash and 34,2 million shares in Tempur Sealy. Following the transaction, which is expected to close in the second half of 2024, Steinhoff will indirectly own c.7.5% of the combined company. The share consideration received will be subject to a three month lock up. Proceeds from the sale will be used to repay financial indebtedness.

The Futuregrowth Community Property Fund (Old Mutual) has acquired Sam Ntuli Mall for an undisclosed sum. The acquisition of the property brings the Comprop portfolio to 24 shopping centres valued in excess of R7,3 billion.

The deal announced in July 2022 between Vukile Property Fund and the City of Johannesburg (COJ) for the acquisition by Vukile of the Pan Africa Shopping Centre has been terminated. Shareholders were advised that the COJ ‘failed to review and grant the amendment to the notarial head lease and to consent to the cession and assignment of the lease to Vukile”.

Unlisted Companies

Oakantswe Construction and Projects, a Pretoria-based, black women owned and managed electrical contracting firm, has received funding from the Abadali Equity Equivalent Investment Programme (EEIP) administered by Edge Growth. The funding will be used to enhance service delivery by reducing equipment hire costs and improving turnaround times and to establish an inhouse qualified team.

Mineworkers Investment Company through its venture capital initiative Khulisani Ventures, has announced a R25 million investment in healthcare technology company Quro Medical. The startup provides premium healthcare solutions at affordable rates such as the Hospital at Home Program, the first of its kind in Africa.

Black-owned and managed investment holding company Sithega has acquired a 62% stake in Legal Expenses Group Africa for an undisclosed sum. The remaining stake is held by Hollard. This is not the first time that Hollard and Sithega have stitched a deal together – in April 2019 Sithega acquired a controlling stake in Prescient from Hollard and anchor investors.

Afrihost, a South African Internet Service Provider, has acquire a majority stake in Home-Connect from CipherWave as consolidation of the local fibre market continues. Financial details were undisclosed.

DealMakers is SA’s M&A publication.
www.dealmakerssouthafrica.com

Weekly corporate finance activity by SA exchange-listed companies

Marylou Greig
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Weekly corporate finance activity by SA exchange-listed companies

Go Life International is to issue 475 million shares to raise cash to settle creditors. The company will issue 232,5 million shares each to Novanod and DVN Family office and a further 10 million shares to Yusuf Sooklall. Novanod and DVNFO have also agreed to provide additional funds of R3 million (R1,5 million each) as additional loan funding towards the settlement of remaining creditors amounting to c.R2,8 million.

PSG Konsult is proposing to change the company’s name to PSG Financial Services Limited. The reason given by the Board for the proposed name change is that it believes it to be a more descriptive name for the comprehensive services the company offers. Shareholders will be asked to vote on the proposition at the next annual general meeting.

A number of companies listed on one of South Africa’s Stock Exchanges have initiated share buyback programmes and each week update shareholders. They are:

South32 has increased its share repurchase programme by c.$50 million in anticipation of a stronger outlook for commodity prices in the second half of its financial year. This will enable the company to return $158 million to shareholders before September 2023. This week the company repurchased a further 1,093,372 shares at an aggregate cost of A$4,55 million.

Glencore this week repurchased 11,600,000 shares for a total consideration of £52,22 million. The share repurchases form part of the second phase of the company’s existing buy-back programme.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 2 to 5 May 2023, a further 2,261,846 Prosus shares were repurchased for an aggregate €150,68 million and a further 337,954 Naspers shares for a total consideration of R1,07 billion.

Two companies issued profit warnings this week: Efora Energy and Quantum Foods. And one company issued or withdrew a cautionary notice: PSV.

DealMakers is SA’s M&A publication.
www.dealmakerssouthafrica.com

Who’s doing what in the African M&A space?

Vanessa Aitken
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Who’s doing what in the African M&A space?

DealMakers AFRICA

Acasia Ventures has led a seven-figure pre-seed investment in Egyptian fintech startup, Balad. Launch Africa, Future Africa, V&R, Magic Fund, First Circle, Sunny Side and several family offices also participated in the remittance-focused, fintech’s first funding round. Founded in 2022, the company will use the investment to launch the remittance platform, develop platform technology, hire new staff, obtain licenses and complete integrations with its banking partner.

Canadian miner Fortuna Silver Mines has offered to acquire 100% of ASX-listed Chesser Resources in a share swap deal that equates to a fully diluted equity value of c.A$89 million. The addition of Chesser’s Diamba Sud Gold Mine will expand on Fortuna’s existing African footprint in Burkina Faso and Côte d’Ivoire.

Egypt’s Helpoo has received an undisclosed investment from Saudi Arabia’s Morni. The deal forms part of a planned US$10 million investment in the Egyptian market by 2030, announced last year. Helpoo is a tech-enabled service app that provides motor vehicle insurance inspections, insurance claim management and road assist services.

The Central Bank of Kenya announced that Cactus Cantina Investments, a Kenyan subsidiary of Delaware-based fintech Shara Inc, had acquired a 55.8% controlling stake in Maisha Microfinance Bank. Financial terms were not disclosed.

The UAE’s Khazna Data Centers and Egypt’s Benya Group have announced a joint venture to build Egypt’s first hyper-scale data centre at the Maadi Technology Park. The new US$250 million state-of-the-art data centre is expected to have 25 MW of IT load capacity.

MG Health has raised US$18 million from international investors. The Lesotho based cannabis cultivator plans to increase its production and scale up exports to countries such as Germany, Australia, Poland and Israel.

Orascom Investment Holding has invested in e-mobility platform, BluEV. The company manages a smart network of battery swapping stations which enables sustained urban transportation by promoting the decarbonisation of two- and three-wheel vehicles. The value of the investment was not disclosed.

DealMakers AFRICA is the Continent’s M&A publication.
www.dealmakersafrica.com

The sale of business interests

Angelique Stronkhorst and Bobby Wessels
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The sale of business interests

In the current economic environment, and in pursuance of various commercial goals, business owners frequently sell their business interests.

The sale of shares in a business, whether to reinvest in a more profitable business, withdraw one’s interest from the business sector, or simply sell the interest to one’s best advantage, can be structured in various ways.

From a tax perspective, the capital gains tax consequences arising from the disposal of a business interest (i.e., the disposal of shares) become relevant. Several variations of sale agreements can be entered into with the consideration being received by the seller at different stages of the transaction, depending on its nature and content. This article will focus specifically on the tax consequences that will be incurred depending on the timing of the receipt of the consideration.

Receipt of proceeds on the date of sale

From a tax perspective, the disposal of a business interest will typically be deemed to take place once all the suspensive conditions have been lifted. Therefore, where a business interest is sold and the seller receives the full proceeds (the consideration) in the same year, capital gains tax will be payable in the year of assessment in which the asset is disposed of.

In considering the amount of tax to be paid, the identity of the holder of the shares should be considered. The sale of capital assets by a company attracts capital gains tax at an effective rate of 21.6%, which is slightly higher than the effective rate of 18% applicable to individuals but lower than the effective rate of 36% pertaining to trusts. Typically, however, in the context of a trust, the capital gain can be distributed to the beneficiaries of the trust and, therefore, taxed at the marginal tax rates of those beneficiaries, which in the case of natural persons will, again, be 18%.

Receipt of proceeds over time

The sale of shares that is subject to a suspensive condition can only be said to be disposed of once the underlying conditions are all met. Where all the conditions are met in year one but the consideration is payable in annual instalments over a period of, for example, four years, tax will remain payable on the full amount in year one. This is so because the suspensive conditions underlying the agreement would have been met and, therefore, irrespective of when the consideration for such disposal is received, the full tax amount will be due in the first year of assessment.

The receipt of consideration in instalments over time does not suspend the capital gains tax consequences where all the underlying conditions of the agreement are met. Accordingly, because the tax is triggered on the entire proceeds in the first year, it could potentially lead to cashflow problems for the seller while the balance of the proceeds remain outstanding.

On the contrary, where a portion of the proceeds of the transaction is subject to a suspensive condition which will be fulfilled over time, the capital gains tax will likely become payable in differing parts. For illustrative purposes, let’s assume that some conditions are required to be met in year one, after which 70% of the consideration is payable, with the remaining 30% to be paid in year two, upon fulfilment of further conditions. In this scenario, capital gains tax will be payable on 70% of the consideration upon fulfilment of the stipulated conditions for year one, with capital gains tax being payable on the remainder in year two, provided that the remaining conditions are met. In this scenario, typically, the cashflows and the tax liability will be aligned.

Receipt of proceeds: initial and contingent consideration

Where the sale of shares is subject, in part, to an earn-out-clause, the capital gains tax consequences could be spread over multiple years of assessment. In such instances, a portion of the proceeds will be fixed, with the remainder portion being subject to variable metrics.

Should the fixed consideration received in year one be less than the base cost of the shares, a capital loss will be realised; however, the remainder portion of the proceeds does not accrue to the taxpayer in the same year of assessment. Accordingly, the capital loss determined must be disregarded and can only be taken into account in future years of assessment, once a capital gain is realised on the disposal of the asset as a whole. If, after all the proceeds have been settled, no capital gain is realised, then the capital loss can be utilised in the same year of assessment against other capital gains.

As is demonstrated by the above examples, there is often a mismatch between commercial and tax considerations underlying transactions. Often, there is a general misunderstanding that the payment of the tax will coincide with the receipt of the sale proceeds. This is not always the case and, therefore, care needs to be taken in the conclusion of sale transactions to ensure that there is no mismatch between the tax payment and the receipt of the cash proceeds. Alternatively, where such a mismatch cannot be avoided commercially, planning for the cashflow to settle the tax liability timeously will be extremely important.

Angelique Stronkhorst is a Consultant and Bobby Wessels a Manager in Corporate and International Tax | AJM.

This article first appeared in DealMakers, SA’s quarterly M&A publication
DealMakers is SA’s M&A publication
www.dealmakerssouthafrica.com

Ghost Bites (Harmony Gold | Lesaka Technologies | Southern Sun | The Foschini Group | Transaction Capital | Universal Partners)

The Finance Ghost
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Ghost Bites (Harmony Gold | Lesaka Technologies | Southern Sun | The Foschini Group | Transaction Capital | Universal Partners)

These numbers are in Harmony (JSE: HAR)

Nine months into the financial year, Harmony is on track to meet full year guidance

In the latest quarterly result, Harmony focuses on the year-to-date numbers as there are now three quarters out of the way. Although gold revenue is only partially in the company’s control, it increased by 11% year-on-year. A 13% increase in the average gold price was the magic here, with a 2% increase in production if we allow for the closure of Bambanani at the end of FY22.

With only an 8% increase in group all-in sustaining costs (AISC), group operating free cash flow increased magnificently by 49%. This biggest driver was a 94% increase in South African underground operating free cash flow that enjoyed higher recovered grades.

Net debt to EBITDA has improved to 0.5x from 0.6x at the end of the prior quarter.

The company is on track to meet FY23 production, cost and grade guidance.

When looking at Harmony, don’t forget that the company has strategically decided to increase exposure to copper. One wonders if the name Harmony Gold will be changed at some point in future.

Lesaka Technologies is still loss-making (JSE: LSK)

There’s a long way to go here, as profits aren’t sufficient to cover finance costs

Lesaka is in the process of a turnaround, which included the recent acquisition of the Connect Group. Although such a large acquisition obviously did wonderful things for revenue, the reality is that there is still an attributable net loss. In fact, it is bigger in the latest quarter ($5.8 million) that it was a year ago ($3.3 million).

If you make several adjustments, including casually ignoring the net interest expense, you’ll arrive at a positive operating income number. In other words, the group doesn’t have sufficient profits to cover the debt on the balance sheet after the acquisition of Connect Group.

With a market cap of R3.5 billion, the market seems to still believe in the long-term story of taking FinTech services to mass market consumers.

A little ray of sunshine (JSE: SSU)

Southern Sun released solid numbers and fell 1.8% anyway in the market sell-off

Nothing with substantial exposure to South Africa was spared on Wednesday. As commentators on Twitter lamented the volumes on the market, South African equities were wiped out amid concerns about our country. It’s hard to argue at this point.

Southern Sun tried its best to cast some light on a dark day, releasing numbers that reflect a strong return to profitability. There is noise in the numbers (a separation payment this year from Tsogo Sun Gaming and an insurance payout in the prior year), so adjusted HEPS is probably the most sensible measure here. For the year ended March, that metric has increased to between 27.0 and 32.0 cents vs. the prior period headline loss of 8.0 cents.

Obviously, this was driven by improved conditions in the travel industry. It’s also exciting to note that demand for conferencing and events has increased. The one exception is Sandton, which is performing below pre-Covid levels as companies adopted a hybrid working culture during the pandemic and have stuck with it.

Net debt is down at R1.3 billion. For reference, the group market cap is R6.6 billion.

The share price has fully recovered to pre-Covid levels, though it does seem to be running out of steam:

TFG lost R1.5 billion in turnover this year to Eskom (JSE: TFG)

Where else could the R200 million in power backup capex have been spent?

The Foschini Group (TFG) achieved retail turnover growth of 14.3% in the fourth quarter of 2023. It’s important to understand where the group makes its money, so here’s a snippet with TFG Africa optimistically highlighted in yellow as a symbol of my desire for electricity:

As we dig into the South African numbers, turnover growth was 6.0% excluding Tapestry Home Brands, which reflects a likely drop in volumes based on where inflation has been. So, it makes sense to see such high revenue growth at group level when you take the major acquisition into account, as South Africa was up 15.6% without that adjustment.

That’s still an impressive number when you consider the substantial impact of load shedding, something that is only getting worse. Significant power cuts over the festive period led to markdowns of inventory as sales didn’t meet expectations, so gross margins fell 2.1% in TFG Africa for the full year compared to the prior year.

Good news in my view is the split between cash and credit sales growth, with the former up 17.8% in TFG Africa and the latter only up by 9.6%.

At first blush, it looks like TFG London performed poorly with a turnover decline of 5.2% in the fourth quarter. The group expected this, as a strategic decision has been made to make the business smaller and more profitable. The profits are what actually count.

TFG Australia managed 6.7% growth in local currency in the fourth quarter.

I was quite pleased to see online retail turnover increasing its contribution to group turnover. I firmly believe that many of the consumer habits created during the pandemic will stick around, so this supports my thesis. Online sales contributed 10.8% to group turnover vs. 10.5% a year ago. The country-level contribution still varies wildly, with TFG Africa at 3.5%, TFG London at 49.6% and TFG Australia at 6.4%.

TFG loves a good bolt-on acquisition and the latest example is the acquisition of Street Fever, a group operating through the Sneaker Factory brand. All conditions have been met and the deal has closed.

The group is treating 2024 as a year of “consolidation and focusing on improving operating leverage” – in other words, taking a defensive approach in response to local operating conditions. There is also a high base effect in both offshore businesses, with sales down year-on-year in April in both London and Australia.

The share price is down 14.6% this year, reflecting the broader problems in our economy.

The only transaction in Transaction Capital was the sell button (JSE: TCP)

A 35% drop in the share price says as much about SA Inc. as it does about the company

The last time we were this upset as a country, Donald had dropped the bat and we walked away empty-handed from a Cricket World Cup. That trauma feels very mild compared to the current cocktail of doom being served up by Eskom and its effect on our economy. It’s like a cancer that is growing in intensity by the day, with many victims along the way.

Having been smashed by 35% on Wednesday after releasing results, Transaction Capital is now way down at R7.11. For reference, my average in-price is R12.23 and that was after adding to my position at a similar level to where the directors recently bought shares. I would also point out that if you show me someone who has never suffered a loss in the market, I’ll show you a liar. I’ll take this one (and of course several others) on the chin.

This is where the “be greedy when others are fearful” approach really gets put to the test. It’s also where a banking concept called “value at risk” becomes extremely important. Adding to a position is great if you believe in the long-term story, but you also have to be aware of exposure in relation to the rest of a portfolio. Until Transaction Capital settles and starts delivering meaningful and sustained share price gains, I can’t see myself buying more.

With that out of the way, Transaction Capital’s results for the six months to March reflect a 355% decrease (not a typo) to a loss of 183.3 cents per share vs. earnings of 71.9 cents a share in the comparable period.

Even if you use core earnings (management’s view on things), this dropped by 48% and return on equity came in at a paltry 7.3%. This is officially lower than Sasfin’s levels and that’s quite the benchmark for underperformance.

The market is panicking about the balance sheet and whether we are headed for another Ascendis / EOH situation. Management has made strong statements like the balance sheet being “sufficiently capitalised” and “debt covenant levels remaining intact” – the first part being the key.

There are no cross-default clauses at subsidiary level, so the real question is whether SA Taxi could go to zero and what value would then be left in the rest of the group. The group has thrown the kitchen sink at the SA Taxi numbers, taking huge restructuring provisions in one shot. Another big claim is made that “Mobalyz” (the new name for SA Taxi) should settle into “sustainable and predictable profitability during the 2024 financial year” – management won’t say things like this lightly.

Of course, as Shakespeare reminds us, that by which we call a rose by any other name would still smell as kak. We need more than a rebrand here.

With core attributable earnings at Nutun up by 15% and core attributable earnings at WeBuyCars down by 22%, it’s not like the combined impact in the rest of the business is fantastic either. In case you’re wondering, the WeBuyCars issue is a margin problem rather than a volumes problem, with Transaction Capital noting a high base effect.

Here’s what a very painful ride looks like:

Universal Partners reports a drop in NAV per share (JSE: UPL)

Transaction Capital may be in the toilet, but this crowd has reinvented it

The JSE is nothing if not an entertaining place. One of the investments in the Universal Partners stable is a business called Propelair. It makes some pretty bold claims:

Jokes aside, Universal Partners has an incredibly interesting portfolio that includes various growth businesses in Europe and particularly the United Kingdom.

One of the them is Dentex Healthcare Group, a dental practice consolidation group focused on the UK. Through a merger with Portman Dental Care, Universal Partners has taken cash off the table and now holds a stake in a much larger business.

There’s also an accountancy and payroll company in the UK called Workwell, which Universal Capital has supported in executing a couple of bolt-on acquisitions. None of the services are sexy, but they are effective.

A more exotic business is SC Lowy Partners, a specialist financial group covering high-yield and distressed debt market-making and investment management. This literally couldn’t be more different to a vanilla accounting business.

That’s not all, folks. There is also Xcede (a global recruitment specialist) and of course Propelair, the toilet innovators mentioned at the start.

This investment holding company’s net asset value (NAV) per share has decreased year-on-year from GBP 1.458 to GBP 1.420. That’s roughly R33.80 per share, with the price currently trading at R24.00 per share. This is a discount of below 30%, which is actually rather good for a group like this.

Little Bites:

  • Director dealings:
    • An associate of a director of Ascendis Health (JSE: ASC) has bought shares in the company worth just over R92k.
  • In a move that might be more interesting than it sounds, PSG Konsult (JSE: KST) wants to change its name to PSG Financial Services Limited. This is a nod to the existing service offering and might be a clue to ambitions to broaden that offering further.
  • Go Life International (JSE: GLI) is the penny stock you’ve probably never heard of. You haven’t missed out, since it spectacularly destroyed shareholder value and trades (very rarely) at one cent per share. The company has announced a specific issue of shares for R4.75 million, the proceeds of which will be used to settle creditors. Management reckons there are “sound prospects” yet when I tried to access the website link they provided, I found a GoDaddy domain parking page. There really are some inexplicable zombies on the JSE. PS: I eventually found the right website.

Ghost Bites (Equites | Industrials REIT | Karoooo | Quantum Foods | Sibanye | Steinhoff | Vukile)

The Finance Ghost
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Ghost Bites (Equites | Industrials REIT | Karoooo | Quantum Foods | Sibanye | Steinhoff | Vukile)

Equites joins Redefine in the property naughty corner (JSE: EQU)

A sell-off in the share price greeted the news of a nasty drop in net asset value per share

Sentiment in the property sector isn’t great at the moment. Property valuations are under pressure in this environment and that’s not good for the share prices, which are usually valued on a combination of yield and a reference to net asset value (NAV) per share.

After Redefine released results that upset the market, Equites Property Fund followed suit and fell nearly 6.5% on the day. Despite distribution per share growth of 4.1%, the market looked at the drop in NAV per share of 10.5% and acted accordingly.

The pain was especially felt in the UK portfolio, where values fell by 21.4% on a like-for-like basis because logistics yields shifted outwards by a huge 175 basis points from 3.25% to 5.00%. An increase in the South African portfolio value of 4.3% looks a little odd in that context (shouldn’t our yields also be higher?), but that local performance managed to turn a gaping wound into a bad scratch instead.

I’ve written on this topic a few times in Ghost Mail, but it is worth repeating here: property funds may offer inflationary protection in cash distributions as rentals increase, but they don’t help you with property values as the yields move higher and the values come down accordingly.

In a much simpler explanation that brings it closer to home (literally): what happens to the price of your house when interest rates have moved higher? If you aren’t sure, pour yourself a strong one before phoning an estate agent.

Industrials REIT releases the circular for the Blackstone deal (JSE: MLI)

As we already knew, the board is recommending the cash offer

An acquisition process is highly regulated and full of paperwork. You can expect to see several complicated announcements as Blackstone’s buyout offer for Industrials REIT goes through the motions.

This is especially true as the process is playing out in English law, which from my observations is even more complicated than our local takeover law. If they can go to such lengths in that country to recognise a new king, then you can imagine what a takeover process looks like.

The important point is that the directors of Industrials REIT unanimously recommend the deal to shareholders in the circular. It would be a surprise if it doesn’t get approved by shareholders.

Karooooo is growing, but not as quickly (JSE: KRO)

The world’s most stubborn traded range continues

If ever you wanted an illiquid stock where you could just patiently sit on the bid or offer to try and capture the spread, you could do far worse than Karooooo:

With more sideways action in the share price than a Monster Energy drifting competition, Karooooo has released its results for the quarter and year ended 28 February 2023. The numbers aren’t going sideways even if the share price is, with subscribers up 13% year-on-year.

There’s a concern about the rate of growth, with subscriber growth in Q4 2023 coming in 31% slower than in Q4 2022. This is measured based on the number of net new Cartrack subscribers (38,471 in this quarter vs. 55,587 a year ago).

Total revenue increased by 22% on a constant currency basis and subscription revenue only increased by 16% on a constant currency basis, as the group has increasingly moved away from the focused model that made me buy shares in the first place.

The core business (Cartrack) grew operating profit by 28% for the full financial year and expanded its operating margin from 27% to 30%. That is the gem in this group.

Sadly, management continues to be distracted by the Carzuka project, a used car business that should’ve been called bazooka as a fairer reflection of what it does to group profits. The loss this year was R38 million vs. R13 million the prior year as that business scales up.

Record free cash flow for the year of R547 million was achieved vs. R379 million a year before.

Interestingly, there’s been a change in the accounting policy that sees 56% of costs of acquiring a subscriber capitalised rather than 66% a year before. This is a more conservative approach. Although there is no impact on free cash flow, it does mean that adjusted EBITDA is lower than it would’ve been under the old policy.

Can it get any worse for Quantum Foods? (JSE: QFH)

Load shedding, meet bird flu

The poultry industry is seeing absolute flames at the moment. Even Nando’s Peri-Peri isn’t a fair reflection of what’s going on out there.

Back in February, Quantum Foods released a trading statement that reflected an expected decrease in HEPS of at lest 100% for the six months ended March. In other words, the company expected to be loss-making.

An updated trading statement reflects a decrease of between 76% and 87%, which is still horrible but obviously better than expected. Load shedding and consumer pressures are causing havoc for this business and the broader industry.

Just when things were looking up, the second half of April 2023 saw an outbreak of highly pathogenic avian influenza (HPAI) at Lemoenkloof layer farm in the Western Cape. This resulted in 420,000 layers being culled at a cost of R34 million. Competitor farms in the region were also affected, so eggs are likely to be more expensive in the fairest Cape for the rest of the year.

This industry literally cannot catch a break at the moment.

Sibanye is still a rollercoaster (JSE: SSW)

Many hearts (and wallets) have been broken by this stock

If you’re looking for a steady, safe investment that won’t keep you up at night, Sibanye-Stillwater should be at the very bottom of your list. If the company isn’t dealing with a gold strike, it’s dealing with floods. When those disasters are finally gone, PGM prices fall over. It’s wild.

At least the “green” metals are starting to show signs of promise. The Finnish government is supportive of the Keliber project, having agreed to increase their equity stake to 20%. The Rhyolite Ridge JV has received support from the United States Department of Energy through a conditional $700 million loan.

The South African gold operations have returned to profitability, thankfully. It couldn’t have come at a better time, as the PGM operations have suffered a dip in production and a nasty drop in average basket prices.

With all said and done, adjusted EBITDA for the quarter ended March 2023 is down to R7.8 billion from R13.7 billion a year ago. Yikes. It even looks bad compared to the quarter ended December 2022, which came in above R10 billion.

The culprit is the local PGM business, where production was impacted by Eskom load curtailment and copper theft of all things. Adjusted EBITDA fell 43% year-on-year (admittedly vs. a record base period) and the company believes that the outlook for the second quarter is more positive.

The share price closed 11.3% lower on the day.

Steinhoff: what the FAQ? (JSE: SNH)

This frequently asked questions list makes for entertaining (and rather sad) reading

I don’t know how many more times the Steinhoff board needs to tell investors that the thing is worthless. A frequently asked questions (FAQ) list is the latest attempt, which you can find here.

To save you the time, here’s a pretty blunt answer to this ongoing debate:

The document even includes perhaps the most important question of all:

Jokes aside, there is some important deal news from the company. Mattress Firm and Tempur Sealy International have reached a deal that would see Tempur Sealy acquire all the shares in Mattress Firm in a cash and share transaction valued at $4 billion. Steinhoff holds an economic interest of 45% on a fully-diluted basis in Mattress Firm.

$2.7 billion of the price is payable in cash and the rest is in shares in Tempur Sealy. This will give Steinhoff a 7.5% stake in the combined company, which I’m sure makes the debt holders happy. As per the FAQ, this doesn’t exactly help the equity holders, as the price doesn’t differ materially from Steinhoff’s recent disclosures. Sorry to disappoint.

The deal is only expected to close in the second half of 2024 as there is an extensive regulatory process to be followed. The Federal Trade Commission (FTC) has requested additional information and documentary material, so this won’t be a slam dunk.

Vukile chooses more Spain vs. local pain (JSE: VKE)

And City of Joburg is living up to expectations

Let’s start with the bad news, although some on Twitter felt it might be good news.

Vukile Property Fund’s deal to acquire the Pan Africa Shopping Centre is dead. One of the conditions precedent was for the seller to obtain a written amendment to the notarial head lease from City of Joburg (COJ). It’s hard enough to renew a driver’s licence with those people or pay a traffic fine, so I have no idea why anyone thought this would be successful. Unsurprisingly, the initial deadline of November 2022 was pushed out to April 2023 and then missed again.

The deal is off and I wish the seller luck in ever successfully selling this property. Relying on COJ for something is a horrible position to be in.

Perhaps reminded of just how poorly run parts of our country are, Vukile has exercised its call option to acquire more shares in the Spanish subsidiary, Castellana Properties. This is for a meaty amount, coming in at €63.9 million (note the currency). When this is finalised, Vukile will own 99.6% of Castellana.

Little Bites:

  • Director dealings:
    • GMB Liquidity (an associate of newly minted Grand Parade Investments (JSE: GPL) director Greg Bortz) is still mopping up shares in the company, this time buying R2.67 million worth of shares.
    • Two prescribed officers of Capitec (JSE: CPI) have bought shares worth R2.15 million in total.
    • An associate of Gareth Ackerman has bought shares in Pick n Pay (JSE: PIK) worth R627k as the price has continued to slide.
    • A director of KAL Group (JSE: KAL) has bought shares worth R22.7k.
  • OUTsurance Group (JSE: OGL) has completed the acquisition of 50% in Youi Holdings (the Aussie business) from Willem Roos, co-founder of the business. Minority shareholdings are a feature of the OUTsurance structure, as OUTsurance Group only owns 89.7% of OUTsurance Holdings, which in turn has bought the 50% stake.
  • Octodec (JSE: OCT) has announced a new asset and property management agreement with City Property Administration (CPA). As a reminder of how incestuous the property industry actually is, this is a related party deal as the chairman and managing director of Octodec are also shareholders in CPA and directors of that company. CPA also holds shares in Octodec. With more surprising related parties running around than at a hillbilly’s birthday party, an independent expert will need to opine on the agreement and a circular will be released to shareholders.
  • Investors in Ethos Capital (JSE: EPE) should note that an investor update presentation will be made available on Wednesday morning as part of an event scheduled for 9am. I’ll revisit it in Ghost Bites this week.
  • PSV Holdings (JSE: PSV) is suspended and in business rescue. The updates are always a bit of a soap opera, with the latest news being that DNG Energy will put forward a proposal to recapitalise the company during the next 3 months.

Ghost Bites (Barloworld | DRDGOLD | Eastern Platinum | Orion | Redefine | South32)

The Finance Ghost
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Ghost Bites (Barloworld | DRDGOLD | Eastern Platinum | Orion | Redefine | South32)

Barloworld trading statement: look closely (JSE: BAW)

The difference between continuing and discontinued operations is critical

At first glance, Barloworld’s results for the year ended March 2023 don’t look good. HEPS fell by between 4.5% and 6.3%, which suggests that the core operations are struggling.

You need to dig deeper, particularly after the mobility business Zeda was unbundled to shareholders and the Logistics business was sold. When earnings have been sold off or simply passed on to shareholders, then group earnings obviously move lower.

This is why the concept of “continuing operations” is so important, as it tells you about what is left in the group. On that measure, HEPS increased by between 28.5% and 31.0%. That’s more like it!

DRDGOLD reports a huge positive swing in EBITDA (JSE: DRD)

The company has enjoyed a higher gold price

DRDGOLD gives punters an exceptionally leveraged play on gold. This chart of DRDGOLD vs. competitors will show you that if you believe gold is going higher, then picking the company with the highest operating leverage (i.e. DRDGOLD) is the way to go:

The reverse is also true, in case you’re wondering. Get it wrong and DRDGOLD will bite your head off.

The reason for this is that DRDGOLD is a tailings business, so it processes ore that was previously mined to get more gold out of it with modern techniques. This isn’t exactly the most efficient way to find the yellow stuff, so the production cost is high and margins are very thin unless the gold price moves higher. You can see where this is going.

Quarter-on-quarter production increased by 4% and the average gold price received was 11% higher in rand. With all-in costs per kilogram only up by 2% over the same period (thanks to improved yield in the process of extracting the gold), the net result is a 54% jump in adjusted EBITDA!

There is no debt in this business, which is why investors see it as a cash cow during a period in which gold prices are rising.

Eastern Platinum completed a rights offering (JSE: EPS)

Most of the capital was raised in Canada

Eastern Platinum has raised roughly R96.5 million through a rights offering, with the vast majority of the capital (around R94.5 million) being raised on the Toronto Stock Exchange.

Ka An Development Co now owns 49.9% in the company after following its basic rights and exercising what the announcement refers to as a subscription privilege.

Orion gets a step closer to unlocking funding (JSE: ORN)

A crucial condition precedent has been met

Orion Minerals rallied 16.7% on the news that the company managed to repay the Anglo American sefa Mining Fund loan facility. The loan dates back to 2015 and was used for exploration and development of the Prieska Copper-Zinc Project.

Thanks to the share placement with Clover Alloys and major existing shareholders, the company settled the loan and has released the shares held as security against the loan. This is the key in unlocking the IDC convertible loan facility and Triple Flag Precious Metals Corp early funding arrangement, as those shares are needed as part of the related security package.

Drawdown on those packages is expected imminently, with the initial capital earmarked for trial mining, dewatering and feasibility studies.

Redefine gets a bloody nose from the market (JSE: RDF)

A significant drop in the dividend never puts a smile on the faces of REIT investors

Redefine (JSE: RDF) finds itself in the unfortunate position in which a large proportion of its portfolio is in the Office sector, which is still a horrible place to be. 38% of the South African portfolio is Office, with a 14.3% vacancy rate and -12.4% rental reversions in the six months to February 2023.

The fair value movements in the Office portfolio make for sad reading regardless of the grade of the property:

In the South African Retail portfolio, reversions were also negative at -3.7%. In other words, new leases are being concluded at lower rates than the expired leases. The vacancy rate of 4.4% is steady year-on-year and the portfolio’s fair value moved higher by R139 million – nowhere near enough to offset the Office move.

Enter the Industrial portfolio: an asset class that is still doing very well. Although vacancies increased from 3.1% to 4.9%, reversions were positive at +1.3% and the total fair value was R141 million higher. In case you’re keeping score, that still doesn’t make up for the Office move.

We can’t just look at the R59.4 billion South African portfolio, as there’s also the R34.7 million portfolio in Poland as part of the Redefine story. 82% of that portfolio is in the Retail sector and only 3% is in Office, with the rest in Industrial – a much better split than in the local business. Metrics are mixed in the overseas business, with reversions still negative as a headache for investors.

If we look at the balance sheet, the SA REIT loan-to-value increased from 40.2% to 40.9% and the weighted average cost of debt in South Africa moved from 8.7% to 9.2%. This really isn’t the right time for debt to be going up, which is part of what the market didn’t like. Although 81.2% of group debt is hedged for an average term of 1.7 years, these hedges can’t be achieved for free and the cost is becoming increasingly more expensive.

With all said and done, distributable income per share was down by 9.2% and the dividend per share fell by 14.2%. The market punished Redefine with a 6.6% drop in the share price.

South32’s Hermosa project gets FAST-41 status (JSE: S32)

Zinc and manganese are of strategic importance

South32 is the proud owner of 100% of the Hermosa project, the only advanced project in the US that could supply two federally designated critical metals: zinc and manganese. With the project now given FAST-41 status, South32 expects a more efficient and transparent process in achieving the federal permits required as the development of the Taylor and Clark deposits continues.

The feasibility study for the Taylor zinc-lead-silver deposit is expected to be completed in the second half of the calendar year and early stage work is underway at the Clark battery-grade manganese deposit, with the focus on moving to a pre-feasibility study.

Little Bites:

  • Director dealings:
    • Des de Beer has bought another R2.75 million worth of shares in Lighthouse Properties (JSE: LTE).
    • An associate of a director of Ascendis Health (JSE: ASC) has bought shares in the company worth R211k.
  • Sanlam’s (JSE: SLM) partial offer to AfroCentric (JSE: ACT) shareholders is now wholly unconditional, with regulatory approvals having been met.
  • Claims filed by market purchase claimants in relation to Steinhoff’s (JSE: SNH) global settlement will be settled through the Stichting Steinhoff Recovery Foundation on a rolling basis from 10 May 2023.
  • Jasco Electronics (JSE: JSC) has received the necessary compliance certificate from the Takeover Regulation Panel (TRP) that will enable the offer and delisting to go ahead.
  • Efora Energy (JSE: EEL) is suspended from trading and released a trading statement noting a headline loss of between 33.51 cents and 34.51 cents. With a suspended price of 12 cents per share, that doesn’t sound good.
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