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Ghost Bites (Heriot REIT | Hudaco | Implats – RBP | MC Mining | Nampak | Nictus | PBT Group | Primeserv | RMB Holdings | SA Corporate Real Estate)

The Finance Ghost
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Ghost Bites (Heriot REIT | Hudaco | Implats – RBP | MC Mining | Nampak | Nictus | PBT Group | Primeserv | RMB Holdings | SA Corporate Real Estate)

Heriot REIT is keeping it in the family (JSE: HET)

Heriot is selling assets to its controlling shareholder and using the proceeds to reduce debt

The first transaction saw Heriot REIT sell R8.8 million worth of shares in listed property group Safari Investments to Heriot Investments (the controlling shareholder of Heriot REIT). This was executed on 30 June.

The second transaction is the disposal of Hagley (owner of a property in the Western Cape) for R40.3 million, also to Heriot Investments. This property carries development risk and so the listed company is moving that risk to its controlling shareholder. Importantly, the listed group has the option to acquire Hagley’s equity at a price equal to the current selling price plus additional development costs, less liabilities. This means that if Heriot REIT and its shareholders really want that property back, it will be possible for a period of time.

The proceeds of both disposals will be used to reduce debt at Heriot REIT.

Hudaco suffers margin contraction (JSE: HDC)

Not every industrials group can enjoy positive operating leverage in this environment

For the six months ended May, Hudaco increased turnover by 12% and operating profit by only 3%. HEPS was up by 8% and so was the interim dividend.

Nobody is going to cry into their soup over 8% growth in the dividend, but it’s a pity that operating margin contracted from 12% to 10.9%. Also keep an eye on the balance sheet, where borrowings rose by around 27% in response to working capital pressure and greater investment in inventories.

In the consumer-related products segment (which has twelve different businesses contributing 53% of group sales and 59% of operating profit), sales were up 13.2% and operating profit fell by 2.8%. This segment faced the worst of the margin pressure, with operating margin of 13.1%.

The engineering consumables segment (47% of sales and 41% of operating profit) grew sales by 11.8% and operating profit by 4.3%. Operating margin was 10.1%.

The major acquisition currently underway is the Brigit group of companies, operating in the fire safety space. The initial payment is R143 million and the maximum price is R315 million based on a two-year earn-out structure. They’ve paid a meaty multiple for this business, but the earn-out does give some protection.

Hudaco is also very critical of government in the prospects section, although it sounds like sensible people wrote the announcement rather than the wild tirade at Argent Industrial. Unlike Argent, Hudaco is still investing in the South African economy.

Implats: finally, the love for RB Plats is unconditional (JSE: IMP | JSE: RBP)

This love story had more twists and turns than a Shakespearean classic

After a tale of courtship and no shortage of bitterness in the rivalry with Northam Platinum, we have finally reached an outcome where the Impala Platinum offer to Royal Bafokeng Platinum shareholders has met all required conditions.

I think we are all pretty happy to see the end of SENS announcements extending the long stop date. Long, indeed.

The last date to trade the Royal Bafokeng Platinum shares in order to participate in the offer is 18 July.

MC Mining has good news for shareholders (JSE: MCZ)

The Life of Mine and coal reserve estimates for Makhado have improved

In junior mining, it’s all about projections for a specific mine and how successfully funding can be raised. The happy news for shareholders of MC Mining is that key estimates have been revised upwards.

At the Makhado Project, mine life is up 27% vs. previous estimates and the annual mine production rate is estimated to be 25% higher, which would help bring the mine down the cost curve (i.e. make it more efficient and more profitable). However, the time to first production has increased from 12 months to 18 months, with the payback period (3.5 years from date of construction) unchanged because of the improved characteristics of the site.

The project is believed to offer a post-tax return of 37%.

MC Mining owns 67.3% of the Makhado Project.

Nampak is one step closer to a rights offer (JSE: NPK)

A 250-for-1 share consolidation is seen as an important first step

It tells you something about the future pricing of the rights offer that Nampak is worried about a share price of 75 cents per share and what that might mean for the offer. To create more room for the pricing to play out, a 250-for-1 share consolidation has been almost unanimously approved by shareholders.

This literally means that every 250 shares in issue will become 1 share. In other words, the price should end up roughly 250 times higher because the number of shares in issue will change. The market cap (price multiplied by shares in issue) theoretically isn’t affected.

Nictus is a good reminder of furniture retail economics (JSE: NCS)

Only the insurance segment was profitable this year

Nictus is surely the smallest listed company that is a genuine operating entity that makes an effort to report decently to shareholders. Despite a market cap of R30 million, this little group conducts itself properly.

In the year ended March, revenue only increased by 4.1% but HEPS was up by 66%. The dividend increased by a similar percentage to 5 cents per share.

Looking at the segments, furniture retail made a loss of R0.9 million off revenue of R37 million. The insurance segment did far better, with profit of R5.2 million off revenue of just R9.8 million.

The shares don’t trade very often, with the last trade at 55 cents and a bid-offer spread wide enough to fit an entire furniture store into it.

PBT Group is coming under margin pressure (JSE: PBG)

In a consulting business, margins are very important to watch

When you are selling time, there are only two ways to increase margin: charge more per hour or improve the utilisation rate of staff. And of course, that has to happen without the added value being paid to staff to retain them.

It’s not easy. Globally, businesses like Accenture manage to get it right. PBT Group has done exceptionally well over the past few years, but the results for the year ended March 2023 show that these pressures eventually come through the system.

Organic revenue growth of 11.8% is very strong after an excellent FY22, but EBITDA only grew by 2.5%. HEPS actually fell by 6.3%, or 0.9% on a normalised basis.

In South Africa, revenue was up 13.5% and EBITDA was 8.3% higher, with margin pressure attributed to cancellation of two large-scale projects and general cost pressures. The successful redeployment of staff does say something for the resilience and adaptability of the business model.

The European and UK business is only 3% of group revenue. It delivered 15.3% revenue growth and EBITDA growth of only 1.3%, with sales team incentives paid for the first time in this financial year. The goal here is to sell services in euros and pounds while providing that service with a rand cost base. It’s not hard to see why that is lucrative.

Australia is a problem, as is so often the case for South African companies. Revenue fell by 15.3% and EBITDA swung horribly from positive R5.3 million to negative R3.3 million. This is small in the context of group EBITDA of R142 million, but it’s big enough to have ruined the group year-on-year growth rate.

Overall, this environment is going to be tougher for PBT than over the past couple of years. Clients are pushing back against pricing increases and staff are demanding increasingly higher remuneration packages, so margins get squeezed in the middle.

The company has declared a gross dividend of 16.50 cents and a capital reduction distribution of 16.50 cents.

You can engage directly with the management team by registering for the next Unlock the Stock event on 13 July. Find the link here>>>

Primeserv achieves solid dividend growth (JSE: PMV)

Modest revenue growth of just 4% wasn’t the star of this show

Although Primeserv could only grow its revenue by 4% for the year ended March, there were significant non-recurring costs in the base year and this meant a 27% increase in operating profit. HEPS increased by 28% to 23.42 cents, so the current share price of R1.30 is a Price/Earnings multiple of 5.6x.

The dividend increased by 20%. It helps that the group is ungeared, as debt in this environment is where dividends go to die. Instead, shareholders get to enjoy the spoils here.

RMB Holdings: updating its “orderly monetisation” (JSE: RMH)

Following the disposal of Atterbury Europe, the biggest component of value is Atterbury

RMB Holdings has nothing to do with investments in FirstRand or RMB anymore. All that is left in this legacy structure is property assets, which will be wound down on an orderly basis. In other words, shareholders should at some point be repaid all the value in the company. These things are easier said than done.

The disposal of Atterbury Europe to Brightbridge Real Estate was concluded in September 2022. There was also a large special dividend in October, with these events being the main reason why the net asset value (NAV) per share has fallen by 64% to 100.3 cents.

The current share price is 49 cents, so there is a sizable discount to NAV.

The relationship with Atterbury is a little awkward at the moment. There is a facility in place with RMB (the bank – which RMB Holdings no longer has a stake in) and if Atterbury feels that it doesn’t have sufficient cash resources to repay the debt, it can elect to issue ordinary shares instead. This would presumably dilute the RMB Holdings stake. Atterbury wants to take that route and RMB Holdings wants to avoid it, with the parties going through arbitration.

The other legal distraction is a s164 dissenting shareholder fight, with a group of shareholders with 1.3% of the company’s share capital demanding to be paid out at fair value. The use of s164 remains contentious in South Africa, with several examples of what can best be described as an opportunistic use of the legislation to unlock profits.

Finally, RMH is going to change its year-end to September. Atterbury’s year-end in June and this allows RMH to use the Atterbury year-end financials in the preparation of its own results.

SA Corporate Real Estate expects earnings to fall (JSE: SAC)

A pre-close update suggests a 12% to 14% drop vs. H1 of last year

In a pre-close update for the interim 2023 period, SA Corporate Real Estate flagged modest growth across most of the portfolio and a nasty further drop in the office portfolio.

In the retail portfolio, vacancies are down but so is the retention rate. Reversions have gone negative again, reflecting pressure in this sector. The group expects a return to positive reversions by the end of the year.

The industrial portfolio is small but working well, with steady occupancy and positive reversions.

The same certainly can’t be said for the office portfolio, where vacancy rates are up and reversions are still negative at -3.7%. The only good news is that the reversion is far less negative than it was in the prior financial year.

In the residential portfolio, the group is managing to put through 3% increases on rentals.

In Zambia, vacancies have dropped and reversions are positive 3%.

The loan-to-value ratio is around 37%, down from 38.1% at the end of 2022.

Strategically, the group is in the process of trying to acquire all the shares in Indluplace, which would create a much larger residential property platform overall.

Little Bites

  • Director dealings:
  • Altron (JSE: AEL) has finalised the disposal of the ATM Hardware and Support business in Altron Managed Solutions to NCR. The purchaser needed to finalise a VAT registration with SARS as the final step in the transaction.
  • In case you wondered what happened to Conduit Capital (JSE: CND), the group is still dealing with the liquidation of Constantia Insurance Company Limited. As this represents 94.4% of group revenue, this has clearly made it difficult to audit the group financials. Nonetheless, they are expected to be released during August 2023. As part of this, the group is changing its accounting policy to apply investment entity rules.
  • Salungano Group (JSE: SLG) has added its name to the list of companies that can’t release results within three months of period end. Results for the year ended March will only be released by the end of July due to delays in finalisation of the audit, specifically relating to funding refinancing agreements.
  • You can also add Acsion Limited (JSE: ACS) to that list of companies that can’t cope properly with being listed, with results due on 7 July. The year ended was February, so this is quite late now. No reason is given for the delay.
  • The underwriters for the Choppies (JSE: CHP) rights offer have taken up a big chunk of shares, as only 51.36% of the total shares to be issued were subscribed for by existing Choppies shareholders. This includes excess applications. Ivygrove subscribed for 37.65% of the offer and Export Marketing for 11%.
  • The unbundling of AYO Technology (JSE: AYO) by African Equity Empowerment Investments (JSE: AEE) has been approved by the AEEI shareholders. Separately, AYO renewed its cautionary announcement related to engagement with the JSE regarding implementation of the settlement agreement with the PIC.
  • Encha Properties has made it through almost 4 million of the intended sale of 5.5 million to 6 million Vukile Property (JSE: VKE) shares as part of a loan arrangement with Investec bank.
  • In a rather offensive abuse of my brand colour, I found out on Friday that Steinhoff (JSE: SNH) referred to the WHOA Restructuring Plan as Project Purple. Not all purple things are good for you, I’ll tell you that much.

Ghost Wrap #31 (AECI | Argent Industrial | Hudaco | PBT Group | Invicta | Hyprop | Advanced Health | Naspers + Prosus)

The Finance Ghost
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Ghost Wrap #31 (AECI | Argent Industrial | Hudaco | PBT Group | Invicta | Hyprop | Advanced Health | Naspers + Prosus)

Welcome to Ghost Wrap. It’s fast. It’s fun. It’s informative.

In this week’s episode of Ghost Wrap, we cover these important stories on the local market:

  • AECI is all about good chemistry, but the German business truly is the wurst.
  • Argent Industrial has officially reached gatvol status, with scathing commentary of government in the latest results and a strategy focused on offshore growth.
  • Hudaco has taken a more mature response in its criticism of government, with ongoing investment in South Africa.
  • PBT Group shows that margin pressure isn’t just found in the industrial sector, with the “sale of time” proving to be more difficult in this environment.
  • Invicta has a significant disparity between HEPS growth and dividend growth, warranting a closer look at the income statement.
  • Hyprop owns some of the best malls in the country and is doing a great job of recouping load shedding costs, with exposure to Central and Eastern Europe as a strong bonus.
  • Advanced Health is headed for the exit, with the controlling family looking to take the company private via a scheme of arrangement that has delivered a lovely return for those who recently invested.
  • Naspers and Prosus are masters at the art of distraction, papering over poor results by giving shareholders good news about the cross-holding structure.

The Ghost Wrap podcast is proudly brought to you by Mazars, a leading international audit, tax and advisory firm with a national footprint within South Africa. Visit the Mazars website for more information.

Listen to the podcast below:

Ghost Bites (AECI | Argent Industrial | Crookes Brothers | Kibo Energy | MAS | Remgro | Safari Investments)

The Finance Ghost
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Ghost Bites (AECI | Argent Industrial | Crookes Brothers | Kibo Energy | MAS | Remgro | Safari Investments)

AECI achieved a juicy jump in operating profitability (JSE: AFE)

A pre-close update looks good for shareholders

In a pre-close update covering the five months to May, AECI flagged a 22% increase in revenue and a 25% increase in EBIT. The improvement in profitability and margins is particularly impressive when you consider that AECI Schirm Germany posted a R154 million loss, significantly worse than the loss of R57 million in the prior year.

Working capital levels are higher, which is a function of higher sales volumes and related pressure on debtors and inventory requirements. Net gearing increased from 45% at 31 December 2022 to 50%, with net debt to EBITDA of 1.7x (well within the loan covenant threshold of 2.5x).

The group is focusing on reducing debt and refinancing long-term debt, which makes sense in this environment.

Looking at segmental performance, AECI Mining grew revenue by 35% and EBIT by 45%. AECI Water grew revenue by 15% and EBIT by over 100%. In AECI Agri Health, the results excluding Germany showed revenue up by 10% and EBIT by 24%. With Germany included, the segment made a loss despite revenue being 15% higher.

Importantly, the R154 million loss in Germany included R89 million in retrenchment costs.

AECI Chemicals is the largest segment and didn’t have a good year, with flat revenue and EBIT down by 39%. The EBIT margin of 5% is not what investors want to see.

The company also noted that the B-BBEE employee share scheme was a failure, wound up with no value at the maturity date. Participants received dividends during the period and an ex gratia payment from the company to help keep the peace. A new scheme is being considered.

Interim results will be released on or about 26 July.

Argent signs off on an excellent year (JSE: ART)

Excellent offshore, at least – the local businesses didn’t do quite so well

If you remember nothing else from 2023, at least remember that industrial groups did a much better job of withstanding inflationary conditions than retailers. Higher prices drive better returns on assets, with many industrial groups sitting with fully depreciated assets that can still churn out products.

At Argent Industrial, the year ended March 2023 saw revenue increased by just 1.1%. That sounds very sad, until you see EBITDA up by 12.8% and profit up by 23%. Diluted HEPS increased by 22.5%.

The total FY23 dividend of 95 cents is significantly higher than 42 cents in the prior year. This was greatly assisted by a jump in cash from operating activities from R113 million to R163.5 million.

The overall story here is that the overseas operations had a very strong year, including offshore businesses and South African subsidiaries expanding into global markets. Predictably I suppose, one of the wins has been the export of security doors and related products!

However, Argent Industrial easily wins the award for the single most outrageous comment I’ve ever seen in listed company results:

I promise you, that is a screenshot from the actual report. One might argue that “Fun” is an autocorrect for something else that starts with an F.

They go on to talk about how international expansion is an ongoing priority. As this table shows, they are still heavily dependent on the “perfect Fun Show” of South Africa:

Crookes Brothers releases awful results (JSE: CKS)

The ridiculous bid-offer spread means that the share price isn’t reflecting them – yet

Crookes Brothers as a bid-offer spread that you could park an entire farming operating in. The bid is R7.50 and the offer R32.00. Sadly, based on the current results, I can understand why there aren’t any bidders at a decent price.

In the year ended March 2023, revenue increased by 7%. That’s literally the only good news. Operating loss after biological assets was a huge deterioration from R42.7 million profit last year to a R149 million loss this year.

Headline earnings swung from a R35 million profit to a R108 million loss.

And in case you think these are all impairment and depreciation losses, cash generated from operating activities fell from positive R14.5 million to an outflow of R46 million.

The net asset value (NAV) is just over R66, which means that even the R32 price (at which there are absolutely no bidders) is a big discount to NAV.

Kibo Energy releases full year results (JSE: KBO)

Firmly in build phase, the company’s losses are at least lower

For the year ended December 2022, Kibo Energy posted just over £1 million in revenues and made an operating loss of £10.6 million. Around £7 million of that loss is attributable to impairments on coal to power projects.

Still, group net debt has increased from £404k to over £5 million.

There’s been a lot of activity around renewable energy contracts for the company, but these don’t mean much until they convert into profits.

MAS benefits from Eastern European retail conditions (JSE: MSP)

Although interest rates are rising, real GDP growth is driving consumer spending

If you own retail malls, you ideally want them to be in a fast-growing economy where consumers have money in their pockets that they are willing to spend. This is the case in Central and Eastern Europe (CEE) at the moment, which is why MAS has reported strong growth in footfall and trading density.

In the five months to May, footfall was 11% above the same period in 2019. Tenant turnover per square metre was 29% ahead of pre-pandemic levels, with inflation obviously playing a big role here.

Occupancy cost ratios were stable at 10.7%, as the property owners have been able to push through inflationary pressures due to indexation clauses in leases.

The group is currently disposing of properties in Germany and the UK.

It’s not all good news, with the company reworking its forecasts out to 2026 and being more conservative about the likelihood of achieving an investment grade credit rating and enjoying the associated benefits. For this reason, the dividend payout ratio may need to be reduced. More information will be given when full-year results are announced.

As frustrating as that may be, I applaud the management team for the transparency and clear planning ahead.

Diluted adjusted distributable earnings per share guidance for the year to June 2023 is between 8.85 and 9.34 euro cents per share. 4.36 cents of this was already earned in the six months to December 2022.

Remgro voluntarily announced the Mediclinic results (JSE: REM)

The delisting date was very close to when full year numbers would’ve been released anyway

Kudos to Remgro for keeping the market well informed on the Mediclinic performance here, as the easy thing to do would’ve been to never release these full year results.

As reported, revenue increased by 12% and operating profit fell by a whopping 72%. But on an adjusted basis, revenue was the same as on the reported basis and operating profit increased by 8%. To make it more confusing, HEPS was up by 75%.

The biggest difference between HEPS and EPS is usually impairments, which is the case here as well. This is also the reason why adjusted operating profit is so different to operating profit as reported. The group recognised £228 million worth of impairments in Switzerland, based on weaker performance and higher discount rates. There were some other impairments as well.

Average revenue per case fell in this period and tariff increases were below inflation, demonstrating once more that hospitals aren’t the most lucrative businesses around. Even on an adjusted basis, the drop in EBITDA margin from 16.1% to 15.8% reflects higher employee costs due to general nurse shortages in Switzerland and other factors.

Cash conversion was strong, which is why the leverage ratio decreased from 3.9x to 3.6x despite an increase in capital expenditure from £178 million to £203 million.

Hospitals aren’t high on my list of businesses to own, as they tend to produce a return on capital that is far from inspiring. In an environment where investors demand higher returns because of the cost of capital, it’s not surprising to see the impairments here.

Safari Investments improves on almost every metric (JSE: SAR)

Mostly good news for shareholders in the latest results

For the year ended March 2023, Safari Investments grew property revenue by 7%. Although the cost to income ratio increased from 35% to 39%, the group still managed to grow HEPS by 7.8%.

A positive reversion rate of +3.6% is helpful, although occupancy did drop from 98.1% to 96.75%.

Net asset value per share increased by 7% to 915 cents. The loan-to-value ratio improved from 37% to 35%.

In property funds, investors tend to pay the most attention to the distribution per share. This was 14% higher at 65 cents per share.

As the bulk of this portfolio is in the retail sector, this is another example of solid performance from shopping centres.

Little Bites:

  • Director dealings:
    • An associate of ex-Investec CEO Stephen Koseff has disposed of shares in the company worth £334k (JSE: INL).
    • An executive director of Cognition Holdings (JSE: CGN) has retired and sold R1.4 million worth of shares in an off-market trade.
    • The chairman of Sibanye-Stillwater (JSE: SSW) has bought shares worth R744k.
    • Associates of two directors of Ascendis Health (JSE: ASC) collectively acquired R236k worth of shares.
  • Life Healthcare (JSE: LHC) has renewed the cautionary announcement related to the potential disposal of the Alliance Medical Group.
  • In an ironic turn of events considering its name, Accelerate Property Fund (JSE: APF) announced a delay in the reporting of financial results for the year ended March 2023. They will not be announced by the deadline of 30 June and no date has been given yet. The company merely references a delay in finalisation of the audit and annual financial statements.
  • Speaking of delays, Sebata Holdings (JSE: SEB) is also running late due to valuations for current B-BBEE deals. The results will be released on or about 14 July 2023.
  • The big day has finally come for Impala Platinum (JSE: IMP) and Royal Bafokeng Platinum (JSE: RBP), with the Takeover Regulation Panel issuing the all-important compliance certificate for the transaction. The only remaining condition is JSE approval for listing the shares that Implats wants to offer to Royal Bafokeng shareholders, but that is literally a formality. With ongoing efforts to acquire shares, Implats now holds 56.41% in Royal Bafokeng.
  • Sappi (JSE: SAP) has announced that Global Credit Ratings has upgraded its long-term debt from AA+(ZA) to AAA(ZA), with a stable outlook. The short-term rating of A1+(ZA) has been affirmed.

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

Eenhede Konsultante, the majority shareholder (57.64%) in Advanced Health has made a firm intention to make an offer to acquire all the issued shares of the company other than those held by the VC Family Trust, the Carl Grillenberger Family Trust and Pres Medical Witbank, for an offer consideration of 80 cents per Advanced Health share. Prior to the announcement, the shares were trading at 40 cents per share, 50% of the offer price. Since listing in 2014, the company has struggled to attract significant institutional interest and as a result management says it difficult to justify the costs associated with being listed on the JSE.

Pick n Pay Stores has announced an acquisition to enhance the Group’s fresh meat offering to customers. The R340 million acquisition of Tomis group of companies includes a state-of-the-art abattoir and meat processing and packaging business, situated near Wellington, which supplies lamb, beef and other quality fresh meat products to wholesalers and retailers. The purchase consideration will be split with an upfront cash consideration of R323 million payable and the remaining R17 million on the third anniversary of the deal.

Castleview Property Fund has, through its wholly-owned subsidiary Interurban Willowbridge (RF), signed an agreement with Mirlem IP to dispose of the Makhaza Shopping Centre. The centre, situated in Khayelitsha will be sold for a cash consideration of R140 million. The deal is a related party transaction as the beneficial owners of Mirlem also form part of the beneficial ownership of I Group Investments, a material shareholder in Castleview.

In a cost cutting exercise, Cognition, a subsidiary of Caxton and CTP Publishers and Printers, is to dispose of its Ferndale property known as Cognition House to Luma for R11,87 million. The company’s infrastructure is hosted within the Caxton facilities and as a result current Johannesburg employees will be accommodated in the Caxton building.

Unlisted Companies

Rainbow Rare Earths, an LSE-listed mining company focused on producing the separated rare earth oxides required to drive the green energy transition, is to acquire an 85% stake in the joint venture that holds the rights to Phalaborwa rare earth project in Limpopo. This updates the original co-development agreement which envisaged Rainbow earning a 70% interest. Rainbow will pay Bosveld US$5 million in cash. Under the agreement, Rainbow has been granted a call option to acquire the remaining 15% of the joint venture held by Bosveld in return for US$17 million of equity in the company.

Huaxin Cement, a Chinese, Hong Kong-listed company, is to acquire the Africa-based business of InterCement in a deal which includes the assets in Mozambique and South Africa. The transaction value is estimated at US$231,6 million based on an enterprise value of $265 million.

Blue Sky Publications has acquired website SAPeople, a site for South Africans abroad looking for local news, advice and content.

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

Naspers and Prosus are to unwind the complex cross-holding structure implemented (against public opinion) in 2021 which aimed at reducing the weighting of Naspers on the JSE and to reduce the discount at which the stocks trade to their respective net asset value. The structure, implemented by way of a share swap, saw Prosus issue shares to acquire c.45% of Naspers. However, reducing the discount continued to prove difficult with management launching an open-ended share repurchase programme which proved more successful. There is, however, a limit under the South African Companies Act as to the amount of Naspers shares that can be acquired. The proposed unwind will result in Naspers owing 43% of Prosus N ordinary shares with a voting interest of 72%. This will remove the limitation and enable the repurchase of shares to continue at the Naspers level – the limitation does not apply at the Prosus level.

As part of its capital optimisation strategy, Investec Ltd acquired on the open market a further 624,947 Investec Plc shares at an average price of 432 pence per share (LSE and BATS Europe) and 419,003 Investec Plc shares at an average price of R105.82 per share (JSE).

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:

Mantengu Mining has announced its intention to buy-back up to 10 million of its listed ordinary shares through its wholly-owned subsidiary Langpan Mining. The share which was trading at R1.70 at the time of the announcement is, according to the Board, significantly below the intrinsic value of R5.55 the share is worth.

Afrimat has repurchased 2,828,790 shares at a price of R53.03 per share from Afrimat Management Services (AMS). The shares were acquired by AMS in anticipation of the issuance of Afrimat shares for partial settlement of the Glenover acquisition. The shares have been delisted from the JSE.

Despite a difficult year, PPC’s operations in South Africa and Botswana reached an optimal level of gearing allowing for the implementation of a new distribution policy. The board has, as a result, approved a distribution in the form of a share repurchase of up to R200 million.

Sanlam has repurchased 31,305,943 shares at a repurchase price of R59.71 per share for an aggregate R1,8 billion. The company has applied to the JSE for the cancellation and delisting of the treasury shares.

Investec’s share repurchase programme has been renewed and commenced on May 30. The programme will end on or before September 29. This week 412,754 shares were repurchased at an average price per share of R106.22. Since November 21 ,2022, the company has repurchased 11,903,329 shares at a cost of R1,27 billion.

This week Glencore repurchased a further 14,700,000 shares for a total consideration of £64,49 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 19-23 June 2023, a further 2,144,444 Prosus shares were repurchased for an aggregate €140,8 million and a further 532,426 Naspers shares for a total consideration of R1,7 billion.

Two companies issued profit warnings this week: PPC and Crookes Brothers.

Four companies issued or withdrew a cautionary notice: Attacq, African Equity Empowerment Investments, Life Healthcare and Chrometco.

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

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

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

DealMakers AFRICA

Italian oil and gas major ENI has signed an agreement with Perenco, a French hydrocarbon producer, to dispose of its participation interests in several permits in the Congo. The US$300 million transaction aligns with ENI’s strategy to diversify its business portfolio and prioritise low-carbon energy resources.

Appian Capital Advisory, the investment advisor to private funds investing in mining and mining-related companies, has acquired an 89.96% interest in Rosh Pinah Zinc mine located in southern Namibia. The stake was acquired from Canadian Trevali Mining. Financial details were undisclosed. The remaining shareholding is owned by Namibian Broad-Based Empowerment groupings and an Employee Empowerment Participation Scheme.

UK-based Galileo Resources has exercised its option to enter a joint venture and be issued with a 51% interest over the Shinganda Copper-Gold Project in Zambia, after incurring direct exploration expenditure costs of US$500,000. The stake in the joint venture was earned from its partner UK mining company, Garbo Resource Solutions.

Huaxin Cement, a Chinese, Hong Kong-listed company, is to acquire the Africa-based business of InterCement in a deal which includes the assets in Mozambique and South Africa. The transaction value is estimated at US$231,6 million based on an enterprise value of $265 million.

Taifa Gas, a Tanzanian liquefied petroleum gas (LPG) company is to join forces with Zambian Delta Marimba to establish Zambia’s first LPG plant. Taifa will invest US$100 million in power generation in Zambia.

Accelerator startup Saudi-based VMS has acquired a minority stake in Cash Cows, its Egyptian counterpart as part of a strategic partnership agreement aimed at bridging the gap between the Saudi and Egyptian start up sectors and entrepreneurial ecosystem. The partnership includes the launch of a joint platform for exchanging ideas, collaboration and mutual learning. Financial details were undisclosed.

French multinational hospitality company Accor has reached an agreement with Mutris, a Moroccan investment company, to sell its 33% stake in Risma, Morocco’s publicly listed hotel operator, at a price of 130 dirhams per share. The company will, in addition, sell its Risma bonds on the market. The transaction will have no impact on current contractual agreements between Accor and Risma which remain unaffected.

ShopZetu, a Kenyan fashion e-commerce startup, has raised US$1 million in pre-seed funding to drive its expansion beyond Kenya and include more product categories on its platform. The round was led by Chui Ventures with participation from Launch Africa, Roselake Ventures and Logos Ventures.

Accra- and London-based health startup Berry Health has raised an undisclosed sum in a pre-seed round from Lightspeed and angel investors.

OH Ecosystems, a Nigerian coco processing company, has received US$12 million in investment from Norfund, the Norwegian Investment Fund for developing countries. The funds have been earmarked to revive FTN Cocoa Processors, a processing company in which OH Ecosystems has a majority stake.

Kubik, an environmental technology company with operations in Kenya and Ethiopia has raised US$3,34 million in a seed investment round from investors which included Plug and Play, Bestseller Foundation, GIIG Africa and Satgana among others. The startup turns hard-to-recycle plastic waste into affordable building materials and intends to use the investment to scale production at its operations in Ethiopia.

The Namibian Business Angel Network has made an undisclosed investment in Moonsnacks, a Namibian youth-owned snack food company. The investment will be used to expand its production capacity to meet increased demand for its flagship product.

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

Does the failure to attach an annexure to your agreement render your agreement void for vagueness?

Daniel Hart and Faheema Rahim
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Does the failure to attach an annexure to your agreement render your agreement void for vagueness?

This article is intended for any company that concludes agreements which refer to annexures which are required to be attached to the agreement. It uncovers the reasoning of the Supreme Court of Appeal in its determination on the validity of an agreement which refers to annexures that are not actually attached to the agreement.

In G Phadziri & Sons (Pty) Ltd v Do Light Transport (Pty) Ltd and Another (765/2021) [2023] ZASCA 16 (20 February 2023), the Supreme Court of Appeal (SCA) held that an agreement that refers to annexures which are not attached to the agreement is still valid and enforceable, despite the missing annexures.

The appellant G Phadziri & Sons (Pty) Ltd (Phadziri) and the first respondent, Do Light Transport (Pty) Ltd (Do Light), are bus companies offering public transport services in Vhembe, Limpopo. Phadziri provided public transport services on specific routes for which it was granted licences by the second respondent, the Limpopo Department of Transport (DoT).

Phadziri subsequently became unable to provide effective and reliable public transport services for, amongst other reasons, its aging bus fleet.

Phadziri, Do Light and the DoT subsequently concluded a tripartite agreement (the Agreement) in terms of which Do Light would act as a subcontractor to Phadziri, and provide public transportation services on certain routes identified as “Vleifontein and Maila to Makhado (Louis Trichardt) in terms of the timetable as attached as annexure 1, or as amended by agreement between the Department and Do Light” (Affected Routes). Annexure 3 of the Agreement was also incorporated by reference, which contained a fare timetable for cash journey tickets to be sold to passengers on the Affected Routes.

The Agreement was implemented for eight years until a dispute arose between the parties, in terms of which Phadziri argued, amongst other things, that annexures 1 and 3 were not attached to the Agreement and that the omission resulted in the Affected Routes not being identifiable, thereby rendering the Agreement void for vagueness.

The SCA, therefore, had to determine whether the omission of the annexures rendered the agreement not capable of implementation. In arriving at its decision, the SCA considered a number of previous judicial decisions, which gave rise to the following principles:

• when interpreting a contract, the court must consider the factual matrix; its purpose; the circumstances leading up to its conclusion; and the knowledge at the time of those who negotiated and produced the contract;

• our law inclines to preserving instead of destroying a contract which the parties seriously entered into and considered capable of implementation; and

• the conduct of the parties may provide clear evidence on how reasonable business persons construed a disputed provision in a contract; however, that this must not be understood as an invitation to harvest evidence of the conduct of the parties on an indiscriminate basis.

Having regard to the aforementioned legal principles, the court held that:

• Phadziri and Do Light were competitors, and Phadziri was at risk of losing its licences due to its inability to deliver effective services. It was, therefore, to Phadziri’s benefit that the Agreement was concluded;

• Phadziri was aware of the timetable and the Affected Routes that the licences applied to, and it was conceivable that Do Light would have known of the scheduled times and the Affected Routes when it was invited by Phadziri to be appointed as a subcontractor;

• the purpose for concluding the Agreement was to provide commercial efficacy to Phadziri, and to avoid the collapse of the public road transportation services on the Affected Routes;

• there is no doubt that the parties seriously entered into the Agreement and considered the Agreement capable of implementation; and

• the evidence of how the parties conducted themselves in implementing the Agreement for eight years without a dispute is relevant to determining how they understood their obligations, despite the missing annexures, and illustrated that the parties had a meeting of minds.

The SCA held that the Agreement was not void as a result of the missing annexures.

It is important to note that, in this case, the missing annexures referred to a timetable for the Affected Routes. The SCA held that these timetables were known to both parties because Phadziri had a timetable which it used in conjunction with its licences at the time that the Agreement was concluded. The SCA held that Phadziri knew of the ‘origin and destination points and significant intermediate locations along the route’, and that its suggestion that the routes were not known because the timetable was not attached to the Agreement was contrived.

This case is distinguishable from agreements which are unrelated to licences and which include references to annexures that contain information material to the agreement between the parties. It is, therefore, important for contracting parties to ensure that any written contracts are drafted clearly, and to address any elements of vagueness in a contract as soon as these become apparent. This is to avoid any allegation from a counterparty that the agreement may be void for vagueness.

Daniel Hart is a Partner and Faheema Rahim an Associate | Fasken

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

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

Approaching The Market With A Fresh Market Strategy, Will Kroger Company Reel In Investors?

Trive South Africa
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Approaching The Market With A Fresh Market Strategy, Will Kroger Company Reel In Investors?


Wall Street’s forecasts for Kroger’s first-quarter profit and same-store sales were surpassed due to consistent demand for basics and lowering supply chain expenses.

Refinitiv IBES statistics show that Kroger’s first quarter net sales climbed by 1.3% yearly to $45.17 billion, although they fell short of analysts’ forecasts of $45.24 billion.

The first quarter performance of Kroger Company (The) (ISIN: US5010441013) was strong due to the application of its “Leading with Fresh and Accelerating with Digital” strategy. As more consumers experience the effects of inflation and economic uncertainty, Kroger has increased its reach to customer homes by delivering fresher items at reasonable prices with tailored rewards.

The “Leading With Fresh” campaign now recognises 1,738 stores, and Kroger accelerated their Fresh Produce Initiative. This led to higher sales without fuel in some locations. By extending Alternative Farming offers to 1,094 merchants, it successfully linked more communities to locally produced fresh goods.

Due to its delivery solutions, which include Kroger Boost and Customer Fulfilment Centres, delivery sales have climbed 30% over the previous year. Kroger also developed a connected TV relationship between Disney and Kroger Precision Marketing in order to increase its digital reach. According to the group, the number of households with digital involvement increased by 13% over the previous year.

Technical

  • The share price has consistently trended lower and now converged with the 100-day moving average after falling 25% from its peak last year. In 2023, a rectangle pattern developed as the share price consolidated, and bears could not push it below the support level set during the consolidation period. At $43.00 and $50.50 per share, respectively, support and resistance were identified.
  • A Doji candle developed during the week of the company’s earnings, indicating market indecision in the wake of the earnings report at the 61.80% Fibonacci Retracement Golden Ratio. Given that positive momentum favours the move higher, the $50.50 per share level may be in play if bulls prevail in the current battle.
  • In contrast, if bears prevail, the share price could decline. Long-term investors may become more interested at the support level of $43.00 per share. If downside volumes start to decline as the share price gets closer to its support level, it could be a sign that the downside momentum is waning and a turnaround is about to happen.

Fundamental

  • Sales for the corporation increased to $45.2 billion in the first quarter from $44.6 billion in the same period last year. When fuel purchases are not included, sales rose 3.5% over the same period the previous year. Due to its efforts to source some products closer to its distribution hubs and reduce supply chain costs, Kroger’s gross margins climbed 21 basis points to 22.3% from a drop a year earlier.
  • The improvement in the gross margin rate was principally brought on by the success of Kroger’s Brands, sourcing benefits, decreased supply chain expenses, and the effects of a terminated contract with Express Scripts. Increased promotional price investments have largely offset this improvement. Additionally, it profited from consumers picking its store-brand products over more pricey national brands, particularly higher-income shoppers looking for less expensive alternatives amid continuous inflation.
  • Given the increased levels of liquidity, Kroger’s net total debt to adjusted EBITDA ratio declined from 1.68 to 1.34 from a year earlier, showing a reasonably healthy balance sheet. There has been a $1,460M decrease in total net debt during the last four quarters. The company’s net total debt to adjusted EBITDA ratio should fall between 2.30 and 2.50 as per its guidance.
  • After taking into consideration the effect of Express Scripts, it is anticipated that sales without fuel will have an underlying growth of 2.5% to 3.5%. Adjusted Free Cash Flow is predicted to rise to$2.5 to $2.7 billion.
  • After discounting for future cash flows, a fair value of $49.00 per share was derived.
  • Over five years, Kroger has outperformed the S&P 500 stock market as a whole. Compared to the S&P500, Kroger saw a return of 98.02%. Despite the stock price’s positive correlation with the index and notable outperformance, the market has generally favoured it.
  • With an operational income per unit of sales of 3.09%, Kroger has the lowest operating income among its main rivals. It still lies within the sector range, nevertheless, and has improved since 2021, whereas the profitability of its rival declined.

Summary

Given the sector’s steady demand for vital goods, the consumer staples market is one that can often survive economic setbacks. After a year of tightening, consumers can see the light at the end of the tunnel as interest rates are about to peak following the Federal Reserve’s pause.

The medium to long-term outlook most likely shows a softer climate that encourages consumer expenditure. As the existing economic restrictive policy loosens, the share price could converge with its $49.00 per share fair value.

Sources: Kroger Company (The), Reuters, Nasdaq, TradingView, Koyfin

Ghost Global: The Power of Omnichannel

The Finance Ghost
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Ghost Global: The Power of Omnichannel

Ghost Global is brought to you in collaboration with Magic Markets Premium. For detailed weekly research into global stocks and a library with over 80 reports, subscribe here for just R99/month.

Click. Pay. Move on.

Consumers love shopping online. This has become a crucial strategy for retailers both globally and in South Africa, effectively turning a traditional shopping experience into a digitally enhanced festival of convenience.

Well, almost. Have you dealt with courier companies before? “Convenience” doesn’t feature for some of them.

Enter the store footprint

This is where omnichannel retail becomes important. Nobody describes omnichannel retail better than the management team at Home Depot ($HD – see our research here) and their comment that there are “thousands of varying paths” where physical and digital assets work in harmony to deliver a great experience to customers.

Or, even more simply, this is the process where you browse online and collect in store. Alternatively, try it out in the store and order online once you’ve made your mind up.

Whatever.

Home Depot doesn’t care which route you take, as long as you buy from them.

Nobody talks about Home Depot as an eCommerce giant, yet the company is the fifth-ranked eCommerce retailer in the US. That’s the overall ranking, not the ranking just in home and building materials.

With a network of over 2,300 stores in North America that can serve as fulfilment centres for orders, it’s little wonder that omnichannel is working out well for Home Depot.

Small stores, big revenues

Back in May, we covered an excellent little company called Lovesac ($LOVE – see our research here). If you’ve ever bought a Fatsak (now called Vetsak) in South Africa, you’ve got the idea. These are premium beanbags and modular couches that are thoroughly modern and extremely comfortable, aimed at a high income consumer market.

The magic in this omnichannel strategy is high trading density – a measure of sales per square metre of trading space. You see, Lovesac has small showrooms that allow customers to at least see and touch a few examples of the products, with all the customisation decisions made using online tools. The showrooms are exactly that: showrooms. This is different to the Home Depot approach of using the retail stores as a glorified warehouse.

In fact, the “big box” approach of a Home Depot means that the retail stores usually are warehouses. They were always built to maximise in-store stockholding and sell bulk goods rather than optimise the customer experience. A showroom is the polar opposite approach to this.

Either approach can work, though a premium strategy with high margins will often carry a premium valuation.

Luxury plays in this space, too

The Magic Markets Premium library has over 80 reports in it, so there are several examples that we can use to make this point. One of them is Farfetch ($FTCH – covered here), an online luxury goods retailer.

You might recognise the name based on a deal that Farfetch concluded with local hero Richemont to take a stake in YOOX NET-A-PORTER, a very strangely named online luxury goods platform. Richemont experimented with this business and didn’t manage to get it right.

It’s not like Farfetch is exactly a gold mine, either. There isn’t much of a moat here and it’s difficult to see a path to real profitability, as is the case for so many online retailers. Farfetch has a particularly confusing business model, as there are some physical stores in the group but not many.

There are at least two lessons from Farfetch: (1) there is demand for luxury goods online and (2) omnichannel is more profitable than pure online retailing, even at this end of the market.

Safe as (ware)houses?

Have you ever wondered what this push into eCommerce and omnichannel means for the property sector?

Even with omnichannel, a shift from retail stores towards warehouse space means that property funds have been experiencing different levels of demand. An omnichannel strategy still requires retail space but the companies can get away with having less space if more sales are taking place online.

Enter Prologis ($PLD – covered here), the world’s largest owner of logistics and warehouse property. Not only is tenant demand strong, but Amazon as the largest tenant is only around 5% of annualised base rent. There are many people knocking on Prologis’ doors for warehouse space, which is good news for pricing power and income growth.

With well over 80 research reports on global stocks available in the library, a subscription to Magic Markets Premium for just R99/month gives you access to an exceptional knowledge base that has been built since we launched in 2021. There is no minimum monthly commitment and you can choose to access the reports in written or podcast format, or both of course – in true omnichannel fashion!

Ghost Bites (Advanced Health | Pick n Pay | Schroder European REIT | Stefanutti Stocks)

The Finance Ghost
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Ghost Bites (Advanced Health | Pick n Pay | Schroder European REIT | Stefanutti Stocks)

Advanced Health shareholders are celebrating (JSE: AVL)

Another small listing is on its way out

When you see a share price move 87.5% higher in a single day, it usually means that a buyout offer has come in. This is the case at Advanced Health, where the controlling family is tired of operating in the listed space.

It’s not as though they didn’t try, either. The company listed back in 2014 and failed to attract sufficient institutional investor interest to justify the listing. This problem is pervasive across JSE-listed small- and even mid-caps.

Because the share price then tends to trade at a significant discount to what it is worth, it also becomes very difficult for a company to raise capital.

Under the proposed scheme of arrangement, shareholders other than the controlling family will be able to receive 80 cents per share if all goes ahead. The controlling family owns 71% of the shares in issue and irrevocable undertakings in favour of the deal have been received by shareholders of 6.6% of the company’s shares.

If you express those irrevocable undertakings as a percentage of the shares eligible to vote on the deal, it comes to 22.9% of the total. There’s still a long way to go to get to the approval percentage required for a scheme.

The share price was 40 cents before the deal announcement, closing at 75 cents as it moved close to the price under the scheme.

BDO has been appointed to act as independent expert in providing a fair and reasonable opinion to the independent board. The recommendation by the independent board will be included in the circular issued to shareholders.

Pick n Pay acquires a meat processing business (JSE: PIK)

This is a rare move further up the value chain for a grocery retailer

Now this is interesting. Really interesting, actually. As part of the Ekuseni strategy at Pick n Pay that is basically an attempt to improve the fortunes of the core Pick n Pay grocery business, the group is acquiring the Tomis group of companies for R340 million.

That’s not the biggest deal around by any means, so this update is more about Pick n Pay’s strategic thinking rather than something that will immediately move the dial.

By owning this large feedlot, abattoir and meat packaging plant near Wellington, Pick n Pay will have more control over its red meat value chain and offer to customers. This could make the group more competitive on price, while ensuring more regular supply. And of course, as Pick n Pay includes a substantial franchise component in the group, there is the opportunity to supply franchisees and pick up a greater share of the economic profit pool.

No disclosure has been made on the profitability of the Tomis business, so we don’t know what multiple has been paid. The criticism I have is that that price is heavily front-loaded, with R323 million payable upfront and R17 million payable after three years. That earn-out (assuming it even comes with any conditions) is barely worth bothering with.

Schroder European REIT releases interim results (JSE: SCD)

Property valuations are still under pressure

Schroder European REIT (JSE: SCD) is an incredibly useful example of why property funds aren’t always great inflation hedges. You see, it doesn’t help much if you earn a dividend on one hand but suffer a devaluation in property prices on the other, unless you’re an extremely long-term holder and all you care about is cash.

The net asset value total return of -4.7% is a direct result of decreases in property valuations because of higher rates in the market, which means the yield on which the properties are values is higher.

So even though underlying earnings were 50% higher, there was an IFRS loss because of downward revaluations.

The group remains in good shape though, with a strong balance sheet and a loan-to-value ratio of 32% gross of cash and 23% net of cash. The average cost of debt is 2.5%.

The company has announced its second interim dividend for the year ending 30 September 2023 of 1.85 euro cents per share. Unfortunately, higher rates are putting pressure and the company will see its quarterly dividend drop by roughly 20% in the next quarter.

Even caring only about cash doesn’t work in this environment.

Stefanutti Stocks on the right side of a settlement (JSE: SSK)

With a market cap of just R235 million, R30 million plus interest is material

They didn’t make much of an effort to highlight this fact, but Stefanutti Stocks (JSE: SSK) has settled with the client regarding the contract mining project termination.

Stefanutti Stocks will receive R20 million by February 2024 and a further R10 million by April 2024, with interest calculated from June 2023.

Although the share price closed 15% higher, that trade took place before the announcement and is more a reflection of the bid-offer spread than the market response to this news.

Little Bites:

  • OUTsurance Group (JSE: OUT) previously held 89.73% in OUTsurance Holdings, with the rest held by management and directors. The listed company is trying to increase its stake through issuing shares to those minority shareholders in OUTsurance Holdings, effectively flipping them to the top. One of the directors followed this process and received R20.2 million worth of listed shares, taking OUTsurance Group’s stake from 89.73% to 89.77%. This is technically a director dealings announcement, but the circumstances are different and so I included it here.
  • Montauk Renewables (JSE: MKR) has announced a renewable natural gas landfill project in Orange County in the US. They already have one project in the region. The targeted commission date is 2026, with expected capital investment of between $85 million and $95 million.
  • Impala Platinum (JSE: IMP) must be running out of patience by now. The compliance certificate from the Takeover Regulation Panel for the Royal Bafokeng Platinum (JSE: RBP) deal is still outstanding, so the longstop date has been extended once more to Friday, 28 July.
  • The business rescue practitioners at Rebosis (JSE: REA | JSE: REB) have extended the deadline for binding offers under the Public Sales Process to 17 July 2023.
  • If by some unlikely outcome you are a shareholder in Deutsche Konsum REIT (JSE: DKR), be aware that a dividend of 12 euro cents per share has been proposed by the board. There is literally never any trade in this stock on the local market.
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