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Can donations be used as a mechanism to avoid the solvency and liquidity test?

Tevin Ramalu and Leonard Bilchitz
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Can donations be used as a mechanism to avoid the solvency and liquidity test?

Against the backdrop of economic stagnation and a predicted recession, a plethora of South African companies are hard at work, searching for innovative strategies to create value and liquidity for their shareholders.

One such strategy is an endeavour to pay its shareholders a donation instead of a dividend, to avoid the mandatory solvency and liquidity test enshrined in section 4 of the Companies Act No. 71 of 2008, as amended (Companies Act).

In terms of Section 46(1) of the Companies Act, a company must not make any proposed distribution unless (i) it reasonably appears that the company will satisfy the solvency and liquidity test immediately after completing the proposed distribution; and (ii) the board of the company, by resolution, has acknowledged that it has applied the solvency and liquidity test, as set out in section 4 of the Companies Act, and reasonably concluded that the company will satisfy the solvency and liquidity test immediately after completing the proposed distribution.

Section 4 of the Companies Act provides that a company satisfies the solvency and liquidity test at a particular time if, considering all reasonably foreseeable financial circumstances of the company at that time (i) the assets of the company, as fairly valued, equal or exceed the liabilities of the company, as fairly valued; and (ii) it appears that the company will be able to pay its debts as they become due in the ordinary course of business for a period of 12 months following that distribution. Accordingly, cash-strapped companies, aware that they may not pass the solvency and liquidity test, may perceive the payment of a donation to its shareholders as a strategy to evade the solvency and liquidity test. However, this strategy will not be permissible in our corporate law framework, as indicated below.

Companies should be mindful that a “distribution” as defined in section 1 of the Companies Act is far wider than the generally assumed concept of a payment by a company of a cash or in specie dividend to its shareholders, as contemplated in subsection (a)(i) of the definition. Boards, therefore, need to ensure that other qualifying transactions, such as a donation, are not overlooked for the purposes of compliance with section 46.

In terms of the Companies Act, the formulation of a “distribution” encompasses, in the first instance, a direct or indirect transfer by a company (paying company) of money or other property to or for the benefit of (i) one or more holders of any of the shares in the paying company or (ii) to the holder of a beneficial interest in shares of the paying company or (iii) in any other company in the same group of companies as the paying company (para (a) of the definition of distribution in the Companies Act). In Henochsberg on the Companies Act 71of 2008, P Delport et al. notes that an “indirect” transfer is a transaction of whatever nature if the substance is the transfer of company property or money to a shareholder without any consideration received by the company.

Donations as a distribution

A company makes a donation by paying money or parting with other assets in instances where the entity is not legally obliged to do so. A donation can also occur in instances where a company enters into a unilateral undertaking with only obligations and no rights; for example, a contract of donation. For the sake of brevity, all such donations are herein referred to as “gifts”.

In Commentary on the Companies Act, 2008, J Yeats et al. posits that gifts made by companies fall into two categories:

a) Category 1: this category refers to gifts that further, realise or are incidental or conducive to a business object (business gifts). Category 1 is extrapolated from Commissioner for Inland Revenue v Pick ‘n Pay Wholesalers (Pty) Ltd (1987(3)SA 453(A) 469), where Nicholas AJA referred to donations made with a ‘business object’; and
b) Category 2: this category refers to gifts that are not made in pursuit of a business object and is a gratuitous transaction motivated by benevolence (pure gifts).

In the context of the definition of “distribution” in the Companies Act, it is clear that the making of both business gifts and pure gifts to shareholders would be considered a “distribution” for the purpose of the Companies Act, and the company would be required to comply with section 46 to provide such gifts to its shareholders.

In Commentary the Companies Act, 2008, J Yeats et al. raises the question of whether pure gifts to persons other than in their capacity as shareholders should be regulated by the Companies Act. Based on the above, it is clear that section 46 would not apply, because such gifts would not be “distributions”, as defined in the Companies Act.

They also note that directors would ordinarily have the power to make gifts in accordance with their general powers to operate a company (subject to any restrictions in a company’s memorandum of incorporation). The questions that are raised in such commentary are whether the exercise of such powers by the directors to make a gift is indeed unconditional, and why should the solvency and liquidity standing of the company not be taken into account by the directors before making any gifts? On the basis of insolvency legislation, it would stand to reason that a gift should only be made using the company’s net assets, but what about the liquidity test? The authors note that it would seem improbable that the legislative safeguards offered by the solvency and liquidity test for a “distribution” would not likewise be applicable to the provision of gifts by a company. Therefore, further clarification by legislation is necessary.

Tevin Ramalu is a Candidate Legal Practitioner and Leonard Bilchitz is an Executive in the Corporate-Commercial Department | ENSafrica

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

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

Ghost Bites (Astoria | Bytes | CA Sales | Calgro | OUTsurance | Nampak | Master Drilling | RFG Holdings | Transaction Capital)

The Finance Ghost
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Ghost Bites (Astoria | Bytes | CA Sales | Calgro | OUTsurance | Nampak | Master Drilling | RFG Holdings | Transaction Capital)

A great story at Astoria (JSE: ARA)

A 15.4% rally in a single day is always a pretty thing

Astoria is an investment holding company that is focused on growing its net asset value over time. The current management team of well-known investors took over in December 2020 and they have done a solid job of growing the NAV ever since. The overall gain in NAV under their watch is just under 130%.

Looking at recent performance, between December 2021 and December 2022 the NAV per share grew by nearly 42%.

Half the trick here is that Astoria’s portfolio includes a number of companies that you can’t get anywhere else. This helps reduce the discount to NAV, as investors hate pyramid structures that feature one listed company holding most of its exposure in other listed companies. This just creates layers of costs and discounting. For reference, see Naspers / Prosus.

For example, 43.2% of the NAV is related to Outdoor Investment Holdings, a niche retailer that has performed very nicely in South Africa. 14% of the NAV is in gaming business Goldrush (through RAC preference shares – admittedly a listed instrument), 11.9% is in Marine Diamond Operations, 10.6% is in Trans Hex and 6.5% sits in ISA Carstens, a tertiary education business.

To round off the portfolio, 6.3% is in Vehicle Care Group (a finance house in the used car industry) and 5.6% is in Leatt Corporation, a home-grown hero that trades over-the-counter in the US.

The NAV per share is R14.06 and the share price closed 15.4% higher at R8.25. That’s still a significant discount to NAV.

Bytes inside your Bites (JSE: BYI)

The company released a short and sweet trading update

Bytes Technology Group gave a light-touch update for the year ended February 2023 as a precursor to the release of detailed earnings.

Gross profit and adjusted operating profit will be approximately 20% higher year-on-year. Interestingly, headline earnings presumably isn’t up by 20% or more, as this would’ve triggered a formal trading statement. It would be a little weird if the company issues a trading statement subsequent to a trading update like this. Weird, but not impossible.

Cash conversion improved in the second half of the year. For the full year, cash conversion was 85% and the group had £73 million in cash. Take careful note of that currency.

CA Sales Holdings is a mid-cap worth watching (JSE: CAA)

How does HEPS growth of 31.2% grab you?

There are some companies on the JSE that are criminally overlooked. CA Sales Holdings is a new kid on the block that has registered share price growth of 29% in the past six months. With the release of results for the year ended December, we can clearly see that the performance supports the share price move.

This is a particularly interesting business that operates in the FMCG industry, helping its clients move goods through the retailers and into the hands of consumers. That sounds ridiculous, unless you have experience in this industry. Trust me, it’s not as easy as you think to navigate retail supply chains and store channels.

With revenue growth of 18.2%, the group’s leverage was on fine display with operating profit up by 32.4%. HEPS increased by 31.2% and the dividend increased by 30.4%, so the cash followed the earnings. That’s perhaps the most important thing to look for.

If you want to learn more about this interesting and clearly successful company, register for the upcoming Unlock the Stock event on 30 March. Management will be giving a presentation on the company and will then take your questions. Attendance is free but you must sign up here>>>

Calgro achieved a substantial share buyback (JSE: CGR)

Mopping up this many shares isn’t easy

Liquidity in Calgro’s stock has always been a challenge unfortunately, something that so many JSE-listed companies can relate to. For some reason, Calgro managed to get R15 million worth of share buybacks away between 15 March and 20 March 2023. The price paid was R2.50 and almost all the volume went through on 20 March, presumably after someone in the market with a meaty position saw the bids at that price.

This represents 4.28% of the company’s issued ordinary share capital and Calgro has authority to repurchase up to 20% of its shares. The share price has lost over a third of its value in the past year.

How bad is Nampak’s balance sheet? (JSE: NPK)

So bad that they need to announce the sale of some equipment

You can tell a lot about a company based on the news that it releases over SENS. At Nampak, the balance sheet is broken. This is why the company has excitedly announced a sale of equipment for cash. At this stage, shareholders will be thrilled to see any improvement to the debt.

Having shut down the crate manufacturing business, the corporate equivalent of a garage sale managed to attract a subsidiary of Mpact to swoop in and buy the equipment. This includes injection moulding and recycling equipment amongst other bits and bobs.

The price is R40 million, so this isn’t exactly a bucket of screws. The book value is only R4.5 million, a reminder that the book value of industrial businesses is largely useless as it is measured on an historical cost basis. Nampak will bank a profit of R35.5 million on this sale.

To put that amount in perspective, the group made a loss of R25.7 million in 2022. Perhaps it should become an equipment trading business?

The R40 million is payable over three months based on certain delivery milestones. Of course, Nampak will put that money straight into the interest-bearing debt that is busy choking the company.

Master Drilling confirms a juicy jump in earnings (JSE: MDI)

In the commodities rush, sell shovels (or drills)

Master Drilling has done very nicely since the lows of 2020. Up over 64% in three years, it is quite literally the shovel in the gold rush. As global commodity prices have supported increased investment in mining exploration, Master Drilling has been a beneficiary.

For the year ended December 2022, HEPS is expected to be between 229.50 cents and 248.60 cents. This is between 20.3% and 30.3% higher than the prior year. The company also mentions its USD earnings, which will be between 8.2% and 18.2% higher. Of course, the rand range looks better because the rand has lost ground over this time.

The share price closed 3.4% higher at R13.90. This is trailing Price/Earnings multiple of 5.8x at the midpoint of the earnings range.

Yes, OUTsurance shareholders get something out (JSE: OUT)

You need to read these numbers carefully

I’m not usually one for normalised numbers, but there’s little choice here. The base period for OUTsurance Group was literally a completely different business. It included Hastings, Discovery and Momentum Metropolitan when the listed company was called Rand Merchant Investment Holdings.

Those businesses are now out of the system, so investors can invest in an entity that is almost entirely comprised of OUTsurance’s insurance businesses. There’s still some legacy stuff in there as well, but it’s minor.

Normalised earnings from continuing operations jumped by 77.7%, driven by gross written premium growth of 17.4%. It’s certainly worth highlighting a strong performance in Australian business Youi, a rare example of South Africans getting it right in Australia.

Insurance is volatile of course, as that’s exactly why people have insurance in the first place. A lower claims ratio was a driver of performance in this period. Steps taken to offset inflationary impacts of claims include higher excesses on power surge and dip claims (thanks Eskom) and pro-active price increases in premiums.

Normalised ROE increased from 23.6% to 29.1%. This shows just how lucrative this industry is.

In major strategic news, the group is looking to expand to the Republic of Ireland. The business interests in Namibia were disposed of. Guinness beats Windhoek, I guess.

An interim dividend of 56.8 cents per share was declared and the share price closed at R33.83.

RFG Holdings seems to be coping with inflation (JSE: RFG)

The focus is on financial performance, not winning market share

This is a wonderful way to learn about price elasticity of demand, which is the way that volumes respond to a change in price. What a company should be doing is trying to find the optimal balance that generates maximum profits. In practice, companies sometimes absorb the pain in their margins just to grow or even maintain market share.

Not so at RFG Holdings, where revenue increased by 7.4% in the 21 weeks ended 26 February 2023 and price inflation was 14.7%. This means that volumes fell sharply, with group volumes down by 11%. The numbers don’t balance because of the Today acquisition which wouldn’t be included in like-for-like numbers.

In terms of market share, the company notes that the volume declines are largely in line with the market movements in those categories. In other words, consumers are buying less from everyone because of pricing pressures.

To make ourselves feel better, we seem to be eating pies. Lots of pies. RFG highlights the pie category as a winner in this period, with a turnaround in the Today business to sweeten the outcome, or perhaps to make it more savoury?

Like all of us, RFG is hoping for a reduction in load shedding. The diesel cost is currently R2 million per week.

Overall, the group seems to be coping with inflation, although packaging (cans and paper) and meat costs are continuing to cause pressure. Despite this, the share price has taken a dive of over 30% this year.

Transaction Capital shareholder movements (JSE: TCP)

The market is desperate for signals at the moment

After the capitulation of the Transaction Capital share price, the market is watching every bit of news very closely. Traders and general punters are looking for institutional investors and insiders buying the shares, as this is a sign that perhaps things will be ok.

For that reason, I’ve included these trades in the main section of Ghost Bites and repeated them in the director dealings section for those who refer back to Little Bites and might miss this news otherwise.

Coronation Asset Management has bought more shares, taking its stake from 14.41% to 16.57%. This is helpful, but the market doesn’t pay too much attention to asset managers making small changes.

Insiders give the real clue to what might be going on. There were two such examples on Wednesday, with a non-executive director (Diane Radley) buying nearly R1.2 million in shares and none other than Chris Seabrooke (through Sabvest Capital) mopping up R5.4 million shares.

Now, when Sabvest buys shares, the market pays attention. The purchase price was around R10.80 per share.

Transaction Capital closed 9.8% higher at R11.69. The rollercoaster continues.

Little Bites:

  • Director dealings:
    • There was an absolute banger of a director purchase of shares at Curro (JSE: COH), sending the share price 5.6% higher. Piet Mouton bought R19 million worth of shares.
    • As noted above, non-executive directors of Transaction Capital (JSE: TCP) bought shares worth R6.6 million, including Sabvest Capital (JSE: SBP – linked to Chris Seabrooke) buying R5.4 million.
    • Des de Beer is back at it, buying R386k worth of shares in Lighthouse Properties (JSE: LTE).
    • A director of Kaap Agri (JSE: KAL) bought shares worth R120k.
    • An associate of the CEO of Invicta Holdings (JSE: IVT) has bought shares worth R111k. There’s been quite a bit of insider buying at Invicta – something to take note of?
  • Although the results aren’t out on SENS yet, news reports suggested that the Steinhoff (JSE: SNH) shareholders rejected the restructuring plan. I maintain that the equity is worthless, yet it still changed hands at R0.30 on Wednesday. The end is surely nigh.
  • Perhaps I wasn’t blind on Tuesday when I couldn’t find the Rebosis (JSE: REA) business plan. They released a subsequent SENS announcement with the link and I can now see it right at the top of the page at this link.
  • It seems like there was an unexpected resignation at Metair (JSE: MTA), with CEO Riaz Haffejee stepping down with effect from 31 March. That doesn’t leave any time at all for a handover and he was only there for roughly two years. The current CFO, Sjoerd Douwenga, will take over as interim CEO. There has been an internal promotion to the interim CFO position.
  • There have been significant changes to the executive management team of Grindrod Shipping (JSE GSH), with the founder and CEO of Taylor Maritime also taking the role of CEO of Grindrod Shipping.
  • Mr Mvuleni Geoffrey Qhena, former CEO of the IDC, has joined the board of Telkom (JSE: TKG) as its Chairperson.
  • Europa Metals (JSE: EUZ) has announced that the initial budget for drilling has been agreed with its joint venture partner in the Toral Project in Spain. $1.8 million will be spent over a 12-month period.
  • Randgold & Exploration Company (JSE: RNG) issued a further trading statement that tightens the earnings range. The headline loss per share will be between 80.26% and 90.26% worse. This is to be expected in a junior mining company.
  • Choppies Enterprises (JSE: CHP) renewed its cautionary announcement regarding the potential acquisition of up to a 100% stake in a Botswana-based FMCG business.

Ghost Stories #9: Why Bias is Bad for You (with Kingsley Williams of Satrix)

The Finance Ghost
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Ghost Stories #9: Why Bias is Bad for You (with Kingsley Williams of Satrix)

In the markets, we are often our own worst enemies. Bias clouds our decision making, making it difficult to take a logical and unemotional approach to each investment or trading decision. An understanding of bias is the first step in winning the battle against our own minds, with application to decision-making that goes far beyond your investment portfolio!

Kingsley Williams, Chief Investment Officer of Satrix, joined me to talk about:

  • An introduction to behavioural finance and cognitive bias, including some suggestions on further reading.
  • Superiority bias: the belief that we are better than the average and how this impacts the choice of active funds over time based on performance vs. the benchmark.
  • Anchoring bias: poor decision making as a result of anchoring to a particular number or outcome, making it difficult to accept an alternative.
  • Confirmation bias: pre-existing beliefs that limit our ability to interpret new information, especially when it goes against what we believed to be true.
  • Action bias: the fear of doing nothing, even when it’s the right thing to do.

At the intersection of psychology and finance, we find these fascinating topics. Whether you have been exposed to these topics before or not, this podcast is an excellent investment of your time.

Disclaimer
Satrix Investments (Pty) Ltd is an approved financial service provider in terms of the Financial Advisory and Intermediary Services Act, No 37 of 2002 (“FAIS”). Satrix Managers (RF) (Pty) Ltd (Satrix) is a registered and approved Manager in Collective Investment Schemes in Securities. The information above does not constitute financial advice in term of FAIS. Consult your financial advisor before making an investment decision. Past performance is not indicative of future performance.

Ghost Bites (Afrimat | Cashbuild | Lighthouse Properties | Merafe | RCL Foods | South Ocean | Transaction Capital | York Timber)

The Finance Ghost
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Ghost Bites (Afrimat | Cashbuild | Lighthouse Properties | Merafe | RCL Foods | South Ocean | Transaction Capital | York Timber)

Afrimat’s diversification is formally recognised (JSE: AFT)

This is important: Afrimat has moved to the General Mining sector on the JSE

This may sound like a shuffling of the chairs to you, but the sector in which a company is listed can make a significant difference to the shareholder base. For example, a mandate may specifically exclude certain sectors or only include a narrow range of sectors.

Exchange traded funds (ETFs) track an index and that index is usually built based on sector classifications, so being in one sector rather than another can make a significant difference to liquidity and the institutional shareholder base.

For Afrimat, the move from Construction and Materials to General Mining is recognition of the company’s diversification strategy – one that has seen several transactions over the years.

If you’re keen to learn more about Afrimat, the company was recently on the Unlock the Stock platform alongside Capital Appreciation:

The Cashbuild odd-lot offer is finalised (JSE: CSB)

The cash will be in your account on 3 April if this affects you

If you hold fewer than 100 Cashbuild shares, then you need to decide by 31 March whether you want to keep them or not. If you do nothing, you will be deemed to sell your shares.

The good news is that you would be paid out at a 5% premium to the 30-day VWAP. This sets the odd-lot offer price at R197.28 and some change. Monday’s closing price was R184 per share, so you can probably figure out the arbitrage here.

The last day to trade to participate in the offer is 28 March.

Lighthouse Properties releases annual results (JSE: LTE)

The distribution is only 0.9% higher year-on-year and the NAV per share is lower

Despite 92% of its debt being hedged and no loan maturities until November 2024, Lighthouse is taking the step of a scrip distribution to protect the balance sheet. This gives shareholders the option to receive more shares instead of a cash dividend, incentivised through the scrip dividend being larger than the cash dividend.

The loan-to-value has increased from 13.64% to 23.84%, so that might help explain this course of action.

The net asset value has dropped from 46.64 EUR cents to 40.50 EUR cents.

The outlook also doesn’t look fantastic, with a forecast distribution of 2.80 EUR cents in FY23 vs. 3.25 EUR cents in FY22.

Merafe is on a dividend yield of 18.5% (JSE: MRF)

Production cost per tonne makes for frightening reading, though

For the year ended December, Merafe managed to increase its ferrochrome production by 1% and only experienced a 2% decrease in revenue. The trouble lies in production cost per tonne, which skyrocketed 30%.

EBITDA fell by 12% and HEPS decreased from 67 cents to 56.4 cents. On a closing price on Monday of R1.35, this is a trailing Price/Earnings multiple of just 2.4x.

Be careful though: a single commodity miner like this can be treacherous. This is why the multiple is low.

The multiple is actually even lower if you adjust for cash. With a market cap of under R3.4 billion, the cash balance of R1.27 billion is a significant part of the value.

The final dividend has dropped from 22 cents per share to 13 cents per share, which takes the full year total for 2022 to 25 cents per share. This is a trailing dividend of 18.5%.

Merafe is by no means a slam dunk, but has delivered spectacular returns in the wake of the pandemic.

How many more times can appraisal rights be used like this? (JSE: RCL)

At some point, this loophole will surely be closed – RCL Foods is the latest example

Laws are laws. If there’s a way to profit from them, an astute trader will figure that out and do it. The reason we have courts is because when there’s an iffy interpretation or a dispute, parties go and make their arguments and the courts decide on the way forward.

Albie Cilliers (a well known figure on local Twitter) has executed a number of appraisal right transactions that some may call opportunistic, others may call clever and a third group may call downright obnoxious. I guess it depends on who lost out each time.

I won’t get into the legal details here, but suffice to say that a scheme of arrangement triggers an opportunity for a shareholder to exercise appraisal rights provided certain administrative steps are perfectly followed. If a shareholder can afford the legal costs or is familiar enough with the process, a tidy profit can be earned each time if the fair value of the shares is above the price in the scheme of the arrangement.

In the latest example, he used RCL’s unwind of a B-BBEE deal as an opportunity to exercise appraisal rights. Now, the sticky thing is that the law intended this to be a remedy for shareholders who were losing out in the process and disagreed with what was happening. A key point here is that Cilliers and his entity bought the RCL shares after the scheme was announced and he paid R10.20 per share, so there’s zero argument here around “ag shame, he never saw it coming”.

Relying on the fair value guidance from the independent expert, he got paid out R14.69 per share. Based on 150,000 shares, this was a profit of R674k. It’s a nice trick if you can pull it off, especially on the JSE where many companies are trading below fair value.

There has been previous court action in this type of deal, which RCL highlights in a SENS announcement as the company is obviously upset about this. The annoyance stems from the fact that the BEE beneficiaries will receive nothing, but the company represented by Cilliers will receive what is almost an arbitrage profit. I say almost, as this course of action isn’t risk-free because of the potential court process. Of course, it’s also not his fault by any means that the RCL BEE deal was a failure, so the tearjerker argument from RCL doesn’t carry much water.

The company stresses that the conduct is not unlawful. The argument is around the intent of the law, something the courts may look at if these trades carry on.

South Ocean’s profitability went south (JSE: SOH)

This little-followed industrials group has a market cap of R254 million

In the year ended December 2022, South Ocean’s revenue went backwards by 6% and the knock-on effect on profitability is severe, particularly because operating expenses increased substantially year-on-year.

HEPS fell by 40% and the dividend per share is down by 33%.

If you’re wondering how big that dividend is, the company declared 6 cents per share. The closing share price on Monday was R1.25.

A bad day for Transaction Capital (JSE: TCP)

Yes, another one…

Honestly, even the most broken taxis on the road are likely to deliver a smoother ride than Transaction Capital in coming months. The share price dropped 7.4% on Monday. After I played a game of double or quits last Friday, my average in-price is down to R12.23 and it closed at R10.65 on Monday.

Amazingly, even though the management team apparently didn’t have price sensitive information just a few months ago, they have now found the crystal ball at the office and can give guidance out to the year ending 30 September 2023. That’s a remarkable improvement in forecasting ability and not annoying at all.

The knock-on effect of the share price capitulation is that the transaction for the additional 15% stake in WeBuyCars isn’t happening anymore, at least not for now. It would’ve required 30% of the purchase consideration to be settled in shares. The board of Transaction Capital doesn’t want to issue shares at this price and I don’t blame the WeBuyCars sellers for managing their risk and agreeing the delay the transaction.

It should be a temporary issue, as there is a call option that allows Transaction Capital to acquire the stake in two equal tranches in September 2023 and September 2024.

It tells you how bad things have gotten that the board needed to confirm that there are no cross-default clauses between Nutun, WeBuyCars and SA Taxi. There are no holding company guarantees to subsidiaries. If SA Taxi dies, it dies alone it seems.

Another clue to the pain is that the founders of the company have confirmed that although there is a general finance facility against their shares in the company, there are “no circumstances” under which a reduction of the share price will trigger a forced sale of shares based on security pledges.

For the six months to March 2023, HEPS is expected to drop spectacularly by between 370% and 375% to between -199.5 cents and -196.1 cents. A better second half to the year is expected, taking the full year to a loss of between -157.7 cents and -147.2 cents.

Welcome to the jungle.

York Timber: all bark, not much bite (JSE: YRK)

Pricing power is limited and inflation is hurting margins

I’ve never been bullish on York Timber. The share price has lost 19% over 5 years, so it’s definitely not been a long-term winner. Timing is everything though, as it more than doubled in the past 3 years.

It certainly isn’t doubling anytime soon, with a drop in production, limited pricing power and significant diesel costs to mitigate load shedding all on the list of problems. Of course, the biological asset is more valuable, because there was more planting and less harvesting. The biological asset has always been more appealing at York than the actual earnings. Perhaps a highly enthusiastic and wealthy botanist will buy the company one day?

Until then, shareholders need to stomach a drop in HEPS of between 27% and 32% for the six months ended December. Cash generated from operations is expected to be between 30% and 35% lower.

Little Bites:

  • Director dealings:
    • An executive of Gold Fields (JSE: GFI) took advantage of this run in the gold price to sell R8.5 million worth of shares.
    • An associate of a director of Stor-Age (JSE: SSS) has acquired shares worth R495k.
  • Schroder European REIT (JSE: SCD) has acquired an industrial warehouse in the Netherlands for around €11 million. I only include such minor updates like these because the net initial yield for the deal is interesting. It gives us a sense of property valuations. In this case, the yield was 5.6% and the tenant has a 20 year triple net lease. The deal isn’t that small for Schroder, as it increases the portfolio industrial weighting from 25% to 29%.
  • The Rebosis (JSE: REA) business rescue plan has finally been published. You’ll apparently find it at this link. I say “apparently” because trying to work through the messy list of documents (with no publication dates) is annoying and I gave up, as I (thankfully) have no horse in this race.
  • In an unusual move, Ascendis (JSE: ASC) has terminated the services of its auditor (in this case PricewaterhouseCoopers) but cannot yet announce a new auditor. Whilst it is true that a Big 4 audit firm is overkill for how small Ascendis now is, the optics on this could’ve been better.
  • Eastern Platinum (JSE: EPS) has almost no liquidity, so I can’t give it much space in Ghost Bites. If you are a shareholder though, you’ll want to read Monday’s announcement about massive accounting restatements that have resulted in far lower revenue than what was previously reported.

Ghost Wrap #16 (Transaction Capital | Sun International | AngloGold + Gold Fields | Hyprop | Sabvest Capital | STADIO | Caxton | Balwin)

The Finance Ghost
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Ghost Wrap #16 (Transaction Capital | Sun International | AngloGold + Gold Fields | Hyprop | Sabvest Capital | STADIO | Caxton | Balwin)

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

In this week’s episode of Ghost Wrap, we cover:

  • Transaction Capital is evidence of why I prefer diversification to concentration, with SA Taxi having blown a hole in the balance sheet (and many portfolios, including mine).
  • Sun International is shining brightly, with a strong recovery across the business segments and EBITDA running ahead of pre-pandemic levels.
  • With gold miners rallying hard in March as the gold price benefits from the banking worries, Gold Fields and AngloGold announced a joint venture to create the largest gold mine in Africa.
  • Hyprop has enjoyed busy shopping centres, yet there is no interim dividend despite a substantial jump in earnings.
  • Sabvest Capital is an excellent example of an investment holding company that has worked well for investors, especially those who bought when the discount to NAV was wider.
  • STADIO’s detailed results showed the seasonality in the business, suggesting that the market may have prematurely panicked about a slowdown in student growth – the high dividend payout ratio is also worth a mention!
  • Caxton & CTP has a great story to tell about its business, especially when the company isn’t writing silly SENS announcements focused on its fight with Mpact.
  • The outlook for Balwin is worrying and the narrative doesn’t do the company any favours, making it clearly that the company tries to smooth out volumes in each year.

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.

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Ghost Bites (Balwin | Capital & Regional | Montauk Renewables | Premier | Richemont | SA Corporate Real Estate)

The Finance Ghost
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Ghost Bites (Balwin | Capital & Regional | Montauk Renewables | Premier | Richemont | SA Corporate Real Estate)

Balwin: an ongoing lesson in optics (JSE: BWN)

The outlook is worrying and so is some of the narrative

If ever there was a company that desperately needed to invest in an investor relations / PR team much earlier in its life, that would be Balwin. Over time, institutional investors were put off the stock and the valuation struggled as a result. In the latest result, we see yet more evidence of this.

In case you think this is just my opinion, I saw quite a bit of commentary on Twitter on Friday from respected local accounts with an overall negative sentiment towards Balwin.

Let’s start with the good news, which is that HEPS for the year ended February 2023 is expected to increase by between 16% and 21%. A focus on gross profit margin was a major contributor here.

We then arrive at this wonderful paragraph, which in my mind is just a long-winded way of saying that the management team tries hard to deliberately smooth the earnings profile:

Happy to take different views here, but I’m pretty sure this means that sales were deliberately pushed out to FY24 because management is scared about what the coming year will bring.

Speaking of the coming year, here’s another unpleasant paragraph for investors:

No wonder they have a “slightly defensive strategy” going into FY24. Selling complexes in a complex trading environment isn’t any fun.

I’ll hit you with one more screenshot, as there’s another paragraph that I think is a pretty clear sign of troubles to come:

What is a CEO Loyalty Program? I truly have no idea. But aside from other incentives that won’t do gross margin any favours, the planned rental guarantee worries me. Buy-to-let is a truly horrible investment in a high interest rate environment, especially in Gauteng (the bulk of Balwin’s revenue) where tenants hold more power in negotiations than landlords. Any initiatives to make this “better” to drive sales volumes can only hurt Balwin’s margins.

This announcement gives off a very strong smell of desperation around sales volumes going into FY24. The share price closed at R3.05 on Friday, which is a trailing Price/Earnings multiple of just under 3.4x at the mid-point of the earnings range for FY23.

Does that make it cheap? Read the commentary I’ve highlighted above and decide for yourself.

Capital & Regional sells The Mall (JSE: CRP)

This has to be the least original name in the history of property

Capital & Regional has announced the disposal of The Mall, a shopping centre in Luton. This reminds me of when Ferrari named a car LaFerrari, literally “the Ferrari ” – about as imaginative as The Mall!

The price is £58 million and all the proceeds will go to the secured lender. There’s no equity in this thing. Capital & Regional was acting as property and asset manager for The Mall and earned fees of £1.4 million in 2022, a deal that now falls away with the disposal of the property.

Montauk Renewables swings into profitability (JSE: MKR)

This wasn’t enough to stop the share price dropping 17.7%

Very few people know anything about this company. It doesn’t help that you have to dig through a 10-K form for information, a format familiar to Americans rather than South Africans. This is because the company is listed on the Nasdaq!

Montauk is primarily focused on the recovery and processing of biogas from landfills to use as a replacement for fossil fuels. The group is one of the largest US producers of Renewable Natural Gas (RNG). It’s an interesting place to play, with strategic initiatives like generating biogas from dairy manure.

The engineers specialising in cow poo have probably found a better way to explain this at the dinner table on a first date.

In the year ended December 2022, the company grew revenue by 39% and EBITDA by a lovely 158%. This turned a headline loss of $2.9 million into headline earnings of $38.7 million for the year.

Montauk may get very little attention locally, but it’s a R18.6 billion market cap company. It has unfortunately lost 60% of its value in the past six months. The challenge seems to be that the company missed earnings estimates, with concerning earnings guidance for the next financial year.

The results of the Premier offer were announced early (JSE: PMR)

Brait (JSE: BAT) has raised R3.6 billion through the share placement

Premier Group’s listing will become effective on 24 March. From that day onwards, typing JSE: PMR into a trading system will give you something new to look at!

In the meantime, Brait has raised R3.6 billion by placing roughly 66.9 million shares. Titan (Christo Wiese’s investment group) took up its cornerstone shares (36.16% of the offered shares, not the entire company) and will take another 15.45 million shares which weren’t taken up in the offer. That’s a big chunk going to the underwriter, which makes me wonder about demand for this listing.

Stabilising actions regarding the share price are allowed for 30 calendar days after the admission date. After that, we will see true price discovery.

Richemont simplifies its listing structure (JSE: CFR)

The depository receipts will be a thing of the past

The best way to have learnt about Richemont’s depository receipt programme has always been to try and work out any of the earnings multiples from scratch. As you shake your head over and over again at the silly numbers your calculator is displaying, you finally work out that one Richemont “share” on the JSE isn’t actually equivalent to one share in the company.

A depository receipt programme is a way to list an instrument on an exchange that is linked to the shares in the underlying group, not always in a 1:1 ratio. This is the case at Richemont. To simplify this archaic structure, Richemont is going to get rid of the depository receipt programme and will instead list its “A” shares (the class for people whose surname isn’t “Rupert”) on the JSE.

This will make life easier for everyone. It will also facilitate cross-border trading in these shares on the JSE and the SIX Swiss Exchange.

Depository receipt holders will receive one “A” share in exchange for 10 depository receipts that they own, free of charge.

Fractional entitlements will be paid out in cash based on the volume weighted average price, less 10%. Read the circular if you’re a shareholder.

SA Corporate Real Estate inches forward (JSE: SAC)

The market can now digest results alongside the latest deal news

If you’ve been reading your Ghost Bites, you’ll know that SA Corporate is making a play for Indluplace (JSE: ILU). The goal is to substantially increase the size of SA Corporate’s residential property portfolio, making it a “buy-to-let” investment at scale.

For the year ended December 2022, the company managed mid-single digit improvements across most key metrics. Funds from operations (FFO) increased by 5.3% and the distributable income increased by 5.5%, as did the distribution itself. The net asset value only increased by 2.5% to 410 cents.

The company managed to offset the impact of a higher weighted average cost of debt of 9% by having less debt on the balance sheet. Net finance costs were flat year-on-year thanks to this. Despite the lower debt, the loan to value ratio has increased from 37.4% to 38.1% if you exclude derivatives, or a drop from 38.5% to 37.8% if you include them.

At a closing price on Friday of R1.89 per share, the dividend yield is 12.8%. The share price has fallen over 21% this year.

Little Bites:

  • Director dealings:
    • The CEO of Invicta (JSE: IVT) bought shares worth around R8.4 million. Importantly, several directors of Invicta also bought Invicta preference shares (JSE: IVTP) worth R9.6 million. The share price is slightly down year to date and has been trading in a range since mid-2022.
  • Niel Birch’s retirement date as CEO of Novus (JSE: NVS) has been confirmed as 31 March 2023. He will consult on the integration of the Pearson South Africa deal, a very important strategic move for Novus. On an interim basis, Andre van de Veen of A2 Investment Partners has been appointed as executive chairman for six months.

Ghost Bites (ADvTECH | African Rainbow Capital | AngloGold and Gold Fields | Ascendis | BHP | Caxton | Exxaro | Hyprop | Investec | Libstar | PPC | Sabvest)

The Finance Ghost
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Ghost Bites (ADvTECH | African Rainbow Capital | AngloGold and Gold Fields | Ascendis | BHP | Caxton | Exxaro | Hyprop | Investec | Libstar | PPC | Sabvest)

ADvTECH is rewarding shareholders with growth (JSE: ADH)

A 4.7% rally in one day is worth smiling about

Times are good at ADvTECH, as evidenced by a trading statement for the year ended December 2022. HEPS is expected to be between 18% and 23% higher, a lovely result overall.

The company also reports normalised earnings per share, excluding once-offs and corporate action costs. Those are sensible exclusions and the range isn’t terribly different to HEPS anyway, coming in at between 17% and 22% higher.

Despite Thursday’s rally, the share price is down 7.7% this year.

African Rainbow Capital: still no pot of gold (JSE: AIL)

NAV per share is down thanks to the management team getting rewarded above shareholders

African Rainbow Capital has returned less than 12% in total over 5 years. I can assure you that the management team has done a lot better than shareholders in this one.

Consider that although the intrinsic investment value increased by just 0.2% over the six months to December 2022, the NAV per share fell by 1.1% because new shares were issued based on the performance hurdle being met. Clearly, “performance” means different things to different people. There is a timing lag here, as the shares were issued based on prior period performance. Still, the hurdle is just 10%, which is less than you’ll get on a government bond right now.

The only portfolio highlight really worth a mention is Rain, which is on course for over R2 billion in EBITDA for the year ended February. This investment is now 26.6% of the fund value.

In terms of exits, the investment in PayProp and Humanstate achieved an IRR of 19.7% which certainly isn’t bad.

Major follow-on investments include TymeBank and Tyme Global (R490 million to fund the acquisition of Retail Capital) and Kropz Plc (R472 million). TymeBank is now 14.1% of fund value and Kropz is 10.1%.

Overall, the fund has reduced its mining exposure and over 69% of the portfolio is at break-even or mature business stage. This means there is still a substantial speculative component.

With a new management fee structure in place, at least there will be more crumbs for shareholders. The share price has shown decent momentum recently, as investors punt at improved returns going forward.

AngloGold (JSE: ANG) and Gold Fields (JSE: GFI) to create the largest gold mine in Africa

But what happens to the stake held by the Government of Ghana?

Ghana has been a headache for a couple of banks holding exposure to sovereign instruments in the country, but it is the venue for a potential joint venture that would create the largest gold mine in Africa.

Gold Fields Ghana holds a 90% share in Tarkwa Mine, with 10% held by the Government of Ghana. AngloGold Ashanti holds 100% of the Iduapriem Mine. The parties have agreed a joint venture that would see Gold Fields operate the combined entity, with both companies contributing their mines in exchange for shares.

Gold Fields will hold 66.7% in this joint venture and AngloGold the remaining 33.3%. If you’re wondering where the Government of Ghana went, I think the structure will see Gold Fields contributing its 90% stake to the joint venture, with the government continuing to hold 10% directly in that mine. I’m not convinced that will work (or that this is even the intention – the SENS isn’t entirely clear), as I’m sure the government would want exposure to the combined entity.

The combined mines would have an all-in sustaining cost of under $1,000/oz for the first five years and below $1,200/oz over the estimated life of operation (at least 18 years).

Ascendis has no debt for the first time since listing (JSE: ASC)

The balance sheet is better – now the income statement needs to come right

The focus at Ascendis was on saving the group and putting together a sustainable balance sheet, which wasn’t easy with so many wolves at the door. The dust has finally settled after that process, with the next focus presumably being on profitability.

For the six months to December 2022, the normalised headline loss per share from continuing operations will be between 13.9 cents and 17 cents. This is a massive improvement from the comparable period but is quite clearly still a loss.

The UK court action isn’t going away for BHP (JSE: BHG)

There are 500,000 new claimants in these proceedings

BHP is still dealing with the aftermath of the Fundao Dam nightmare, a terrible incident in Brazil that saw tailings travel as far as 620km downriver, killing 19 people (according to Wikipedia) and destroying countless homes. BHP has spent around $5.9 billion on remediation and compensation programs.

Court action has been underway in Brazil for some time, with a claim in the UK now gathering steam. BHP believes that the claim is a duplicate of the Brazilian proceedings, but I somehow doubt that the lawyers behind this claim in the UK would be pursuing something frivolous.

BHP’s provision as at 31 December 2022 was $3.122 billion. The company can’t give a range of possible outcomes linked to the UK proceedings.

Strong earnings from Caxton and a sobering outlook (JSE: CAT)

The language around the Mpact stake seems to have toned down a lot

It’s amazing what a regulatory slap on the wrist can do to calm a company down. Gone are the days of SENS announcements that feel like someone’s angry kid wrote them. Instead, Caxton & CTP is releasing far more measured statements, recognising the good recent results from Mpact but highlighting the levels of debt and aspects of corporate governance as a concern.

Caxton’s own house looks to be in order financially, with HEPS for the six months ended December up by 36.4%. This result was driven by a 25.8% jump in revenue, as Caxton pushed through pricing increases to recover the costs of raw materials and operating expenses.

Volume growth “surprised on the upside”, which is what shareholders want to see.

Operating expenses climbed by 19.8%, so Caxton’s pricing power is critical here. There were abnormal costs included in this number, so a more maintainable view gives an increase of 15.3% – still very high.

The outlook statement is less of a good news story, with Caxton noting inflation and load shedding as likely causes of lacklustre growth. With a strong second half last year, the group is essentially warning the market that the year-on-year story might not be pretty. The focus is on managing costs and cash.

Exxaro grows HEPS by 28% (JSE: EXX)

Coal is by far the largest contributor to group revenue and EBITDA

At Exxaro, the energy and ferrous segments basically cover the cost of the corporate head office. All the profits are made by the coal business, which is why 2022 was a good year financially. Revenue in coal was up 43% and EBITDA was up 78%.

The cash came in the way you would hope, with cash from operations increasing by 79%, very much in line with EBITDA. With capex down by 33%, this was a strong period for free cash flow. The net cash position is much higher at R9.6 billion vs. R764 million a year ago.

The outlook section makes for interesting reading, with the company noting European interest in South African thermal coal. With South African coal at a discount to Australian coal, demand from the Pacific is expected to be strong.

It’s just a pity that Transnet is so bad, really.

A 30% jump in earnings at Hyprop but no dividend (JSE: HYP)

Shareholders will have to be patient for a full-year dividend

For the six months ended December 2022, Hyprop delivered growth in earnings that reflects a significant recovery in the retail property sector. Distributable income per share increased by 30% to 203 cents, driven by mid-teens growth in tenant turnover and a very low vacancy rate both in South Africa and Eastern Europe.

Sub-Saharan Africa still needs work, with a vacancy rate of 7.8% vs. South Africa at 1.5% and Eastern Europe at 0.6%.

Although a great deal of effort has gone into the balance sheet, the loan-to-value ratio has increased from 36.4% in June 2022 to 37.2% in December 2022 because of the weakening of the rand against the euro. This is despite R500 million being “raised” through the dividend reinvestment programme in 2022.

Despite this, the group isn’t paying an interim dividend because of concerns around infrastructure in SA and energy costs. A full year dividend will be the order of business here.

The share price has dropped over 6% this year, now trading at close to the 52-week low.

Investec made the most of positive conditions for banking (JSE: INL)

Both the local and UK businesses have growth earnings

In a pre-close trading update for the year ending March, Investec guided HEPS growth of between 22% and 29%. The UK has outperformed the local business, with adjusted operating profit growth of at least 15% vs. at least 10% in SA.

Return on equity is expected to be within the group’s target range of 12% to 16%. This is lower than the other South African banks but you need to remember that much of Investec’s business is in the UK, which typically has a lower required rate of return than South Africa because of the relative risk.

Interestingly, it sounds like the second half of the year was better in SA than in the UK, so the FY24 numbers might tell a different relative story. This will depend greatly on load shedding though, so market conditions are dynamic to say the least.

Investec runs at a very low credit loss ratio, expected to be between 25bps and 30bps. That’s around a third of the level seen at the large banks.

Not much twinkling at Libstar (JSE: LBR)

The gross margin trend is a little, well, gross

In the year ended December 2022, Libstar managed to grow revenue by 10.7%. That’s good. Gross profit could only grow by 3.7%. That’s bad.

The margin contraction (from 22.2% to 20.7%) is due to several factors and all the usual suspects are there, like load shedding and input cost inflation. Long story short: Libstar doesn’t have as much pricing power as shareholders would like to see. Pricing increases contributed 7.7% of sales growth and volumes contributed 3.0%.

Although operating cost growth was limited to 6.3%, this wasn’t enough to stop normalised EBITDA from decreasing by 4.1%, with margin dropping from 10.1% to 8.8%. There were pockets of EBITDA growth, but the overall group was negative.

Cash generated from operations was also marginally lower, down by 2%.

After trying and failing to sell the Household and Personal Care division, this is now being shown as a continuing operation once more. The company would still sell this division given a choice, as the focus is on food categories.

There are significant impairments in these numbers, including R98 million for the Denny Mushrooms’ Shongweni facility that burnt down in September 2022. Impairments are excluded from HEPS.

Speaking of HEPS, that metric fell by 12.9% as reported or 11.8% on a normalised basis. Either way, a double-digit decline isn’t tasty.

A final cash dividend of 22 cents per share has been declared.

PPC’s debt reduction is on track (JSE: PPC)

But the share price fell 9%, likely due to worries about demand

In the year ended March, PPC’s business faced different dynamics in its various countries of operation. South Africa and Botswana have suffered a drop in demand, whilst Zimbabwe and Rwanda are enjoying the benefits of infrastructure investment. You would almost expect it to be the other way around, right?

Do yourself a favour and do more research on Rwanda, though. It’s quite an economic story.

In light of pressure on demand, PPC’s focus has been on reducing debt. In South Africa and Botswana, net debt is expected to be down from R1.08 billion at the end of March 2022 to between R725 million and R775 million at March 2023.

The businesses in Zimbabwe and Rwanda are expected to be in a net cash position at the end of March 2023.

Right now, the strategy in South Africa is to maintain market share, an ongoing battle against cement imports that are often cheaper. The overall market is under pressure, with PPC’s cement sales volumes down by between 4% and 7% despite the modest pricing increases. PPC only expects a major price increase in 2024 to restore EBITDA margins.

With price increases of between 5% and 7% and production cost inflation of 11%, you don’t need to get the calculator out to know that margins are down. EBITDA margin for South Africa and Botswana is expected to be between 9% and 11% for the full year, down from 14.5%.

The big kicker here would be higher infrastructure investment in South Africa, which PPC is ready to respond to should it happen.

Sabvest Capital reminds us what an investment company can achieve (JSE: SBP)

NAV per share is 17.6% higher year-on-year

At Sabvest, you are investing alongside the Seabrooke Family Trust. Alignment with investors is strong, unlike at certain other investment funds where the management team is clearly getting the first, second and possibly third bite at the cherry.

Sabvest has achieved a 17% CAGR in NAV per share over the past 15 years. That is exceptional. The relatively tight discount to NAV vs. other investment holding companies is a result of this performance, as well as the portfolio that includes many unlisted companies.

If it makes you feel any better as a Transaction Capital shareholder, even Sabvest was on the wrong side of that stock. It’s not a huge position in the fund, but there’s an ugly bath to be taken there.

The group isn’t planning any new investments at this time and expects satisfactory growth in NAV per share in 2023. With a dividend of 90 cents for the year, there’s even a trailing dividend yield of around 1%.

Little Bites:

  • Director dealings:
    • A director of WeBuyCars bought shares in Transaction Capital (JSE: TCP) worth R9.9 million – and I plan to join that party on Friday morning, having observed some of the most aggressive forced selling in the market that I’ve ever seen
    • Directors of STADIO (JSE: SDO) bought shares worth a meaty R5.03 million
    • Directors of Motus (JSE: MTH) bought shares worth R1.9 million
    • An associate of a director of Safari Investments RSA (JSE: SAR) has bought shares worth R254k
    • It’s nice to be a listed company director, like the director of Gold Fields (JSE: GFI) who sold R22.9 million worth of performance shares awarded back in 2012. Not bad for sticking around for a decade.
  • Andre van der Veen of A2 Investment Partners is now on the board of Nampak (JSE: NPK). Given A2’s track record in transactions, I suspect that this was the main driver of a 7.5% rally in the share price.
  • The process at the regulators took so long that Northam Platinum (JSE: NPH) needs to update the transaction circular for its offer to shareholders of Royal Bafokeng Platinum (JSE: RBP). The company is targeting 8th May as the date for the distribution of the circular.
  • Sanlam’s (JSE: SLM) partial offer to shareholders of AfroCentric (JSE: ACT) is unconditional in terms of the number of acceptances, but hasn’t met all conditions precedent yet. This means that the offer date needs to be extended by Sanlam for everything to still work out, with that date extended to the earlier of Friday 26th May or 10 business days after all conditions precedent are fulfilled.
  • Literally a day after telling the market that the mandatory offer by GMB Liquidity Corporation hadn’t achieved all regulatory approvals yet, Grand Parade Investments (JSE: GPL) announced that the Competition Commission’s conditions for implementation of the offer were acceptable to the offeror. I actually have no idea what happens in a mandatory offer if the Comp Comm wants to block the transaction or put onerous conditions on it! Any corporate lawyers reading this, please do let me know how that would work?
  • Buffalo Coal Corp (JSE: BUC) is being taken private. There is more liquidity in the Namib Desert than this stock, so I don’t think many people will care.

Ghost Bites (Accelerate | EPE Capital Partners | Fairvest | Grand Parade | Growthpoint | MC Mining | Merafe | Orion | STADIO)

The Finance Ghost
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Ghost Bites (Accelerate | EPE Capital Partners | Fairvest | Grand Parade | Growthpoint | MC Mining | Merafe | Orion | STADIO)

Accelerate sells Cherrylane at a loss (JSE: APF)

The selling price is also below the latest valuation on the company balance sheet

Accelerate acquired the Cherrylane Shopping Centre back in December 2013 for R70.07 million and is now selling the property for R65 million. This is a classic example of buy high, sell low. Yes, you’re right, that’s the wrong way around.

The last valuation on the book was similar to the purchase price and the selling price is over 7% lower than the book value, though ironically this is still a great deal based on the discount to NAV that the market is currently putting on Accelerate.

In fact, if Accelerate sold ALL its properties at a 7% discount and returned the cash to shareholders, it would create incredible value. Don’t hold your breath.

EPE Capital Partners reports a modest increase in NAV (JSE: EPE)

There are 21 portfolio companies and investment exposure is R2.6 billion

In the results for the six months ended December for Ethos Capital (or EPE Capital Partners), you have to be quite careful with which metrics you focus on.

A useful number to consider is LTM maintainable EBITDA. In simple terms, this means operating profit (excluding once-offs) over the Last Twelve Months i.e. on a rolling basis, even though this is an interim result. This metric is up by only 1%, so all the improvement in the portfolio valuation came from multiple expansion, with the portfolio EBITDA multiple up from 7.7x to 8.2x.

Most of this uplift was driven by the Optasia business, which raised capital at a 22% premium to EPE’s previous valuation. In addition to the cash realised through this partial sale of Optasia, the group realised cash from Crossfin’s sale of Retail Capital to TymeBank. There were various follow-on investments during the period as well, as the portfolio is always being actively managed.

The listed assets in the portfolio had a tough time. Brait, the Brait exchangeable bonds and MTN Zakhele Futhi all dropped. This offset much of the growth in the unlisted portfolio.

The net asset value per share is reported based on two alternatives: Brait at its net asset value per share or Brait at its market value. Those are unfortunately very different numbers. If you use the former, EPE’s NAV per share is R10.80. If you use Brait’s market price instead, EPE’s NAV per share is R8.51.

The market isn’t interested in either of those numbers, with EPE trading at R5.60. The management fees payable to Ethos (soon to be The Rohatyn Group) is a big reason for the layered discounts.

Fairvest was a day late with this one (JSE: FTA)

The strategic rationale for this deal should’ve been announced on the same day as the deal

It’s hardly the end of the world though, as the market already knew that Fairvest’s stake in Indluplace was considered non-core. Fairvest will offload the stake to SA Corporate Real Estate (assuming the scheme of arrangement goes ahead) and will move on with its life.

If the investment is sold, the Fairvest portfolio will be skewed more towards lower LSM and convenience retail. The proceeds will be used to reduce unhedged debt, which makes an enormous amount of sense in this rising interest rate environment.

The loan-to-value ratio is expected to reduce by approximately 500 basis points.

It’s worth pointing out that the net asset value (NAV) per Induplace share is R6.61, so the selling price of R3.40 is way below the NAV.

The Grand Parade mandatory offer isn’t finalised yet (JSE: GPL)

Regulatory wheels are slowly turning

With a mandatory offer from GMB Liquidity Corporation of R3.33 per share on the way, the Grand Parade Investments share price is anchoring to that number (currently at R3.36).

Regulatory approvals are still outstanding, so the offer isn’t finalised yet and actual cash flow is still some time away. This is a mandatory offer, so the offeror cannot just decide to walk away. This is an important point.

Growthpoint’s dividend increases by 4.6% (JSE: GRT)

Tourism (and general Cape Town awesomeness) has done great things for the V&A

I’m one of those annoying semigraters (I think it’s been 8 years now) who loves Cape Town. Growthpoint loves it too, certainly far more than Sandton where the office portfolio remains a huge headache.

In the six months to December, the V&A Waterfront grew net property income by 23% vs. the comparable period. This is no indication of conditions in the rest of the portfolio. And for all the excitement around the V&A as the flagship property, it’s only R9.2 billion out of a group portfolio of R174.1 billion.

Looking beyond the biggest tourism attraction in South Africa, we find a portfolio which has seen renewal success drop from 75.1% to 61.2% and reversions worsen to -16% from -12.8% for the period ended June 2022.

This is why the overall result is only a slight improvement year-on-year. Net asset value (NAV) per share is down 2.2% but the FFO per share (a measure of cash profits) has increased by 2.1%. The dividend is up by 4.6%.

With R26.2 billion worth of Office properties in the R73.2 billion South African portfolio, Growthpoint remains exposed to the economic difficulties. The vacancy rate in that part of the portfolio improved marginally from 20.7% to 20.4%.

The group loan-to-value ratio increased from 37.9% at June 2022 to 38.8% at December 2022.

The fine print matters at MC Mining (JSE: MCZ)

The IDC loan is an important overhang for this stock

MC Mining has released results for the six months ended December. Revenue is up 8% and the headline loss per share improved from -0.54 cents to -0.50 cents. Clearly, it’s still a loss.

As a reminder, the company undertook a fully underwritten rights offer in November 2022, raising proceeds of $21.4 million.

Although there are functional operations in this group, the Makhado Coking Coal Project is the major focus. It’s also the reason for a detailed paragraph in the financials that talks about the IDC facility that is repayable in June 2023. If the company cannot defer that settlement or raise additional funding, the facility can be converted into equity. That would be very painful for shareholders.

Here’s the full paragraph, in case you’re interested in this stuff:

Good news for Merafe: the ferrochrome price (JSE: MRF)

Despite this, the share price closed flat as the broader market panicked

At Merafe, an increase in the European benchmark ferrochrome price is usually met by a higher share price. On Wednesday, the market was on fire and Merafe’s intraday gains couldn’t be maintained by the close.

The price for the second quarter of 2023 is 15.4% higher than the first quarter, so this was hardly a small move. I’ll be interested to see if the market wakes up to this update at some point when the panic subsides.

Orion announces Clover Alloys as a major investor (JSE: ORN)

This is a privately owned South African mining group with deep pockets

Newbies regularly make the mistake of thinking that large companies are only found on the JSE. These days, there are incredibly deep pockets in the private market in South Africa and the Orion deal is proof of that.

Clover Alloys apparently has an “outstanding track record” in developing and operating chrome operations. Orion is looking to raise A$13 million and Clover has come in as the cornerstone of the raise, subscribing for shares worth A$6.7 million. The company’s technical expertise will also be useful to Orion, so this goes beyond just the money.

Delphi Group and Tembo Capital are collectively coming in for A$2.6 million, with Tembo accepting shares as repayment for an existing loan facility.

Interestingly, those participating in this placement are also being given “attaching options” to sweeten the deal. It sounds like dodgy English, hence the quotation marks so you don’t blame me, but these are basically the rights to subscribe for further shares down the line at a price similar to the current market price.

This puts Orion in a very strong position to move forward, as you’ll recall that packages were also raised from Triple Flag Precious Metals and the IDC.

STADIO dishes out the cash to shareholders (JSE: SDO)

The dividend payout ratio has increased substantially

When STADIO gave us a teaser of the latest earnings, the market didn’t like what it saw in terms of student growth. Momentum slowed down, with second semester growth of 8% vs. 11% in the first semester.

An increase in revenue of 11% was good enough to drive HEPS growth of 18%, as the benefits of operating leverage came through the system. This is why investors tend to favour STADIO over Curro at the moment, as STADIO follows more of an asset-light model.

The surprising line for me was the dividend per share, which is up by 89% to 8.9 cents. Based on HEPS of 20 cents, that’s a pretty big payout ratio for a growth stock.

You’ll probably be interested to know that the semester one 5-year CAGR growth in contact learning student numbers is only 4%, whilst distance learning is 11%. In the past year, contact learning was down 4% and distance learning grew 14%. Obviously, this is skewed somewhat by STADIO’s strategic focus, but it’s still a good sign of where demand is.

It gets even more interesting in semester two, which has historically been a slower growth semester. It seems the market may have overreacted to the recent update about semester two vs. semester one growth. The difference is more significant in distance learning, so it seems that people either drop out halfway or get too busy midway through a year to register for distance learning.

Long story short: semester two is historically a slower period. This doesn’t mean that STADIO is losing momentum overall.

Little Bites:

  • Director dealings:
  • As anger mounted around Transaction Capital (JSE: TCP) and the share price tanked hard again on Wednesday, the company released a clarification announcement around previous dealings by a trust linked to CEO David Hurwitz. Was the trade legal? Yes, it seems that way. Does it look terrible optically, with investors sitting with huge losses just a few months later? Yes. Will his career survive this? Only time will tell. This has been a spectacular fall from grace for what was a highly respected management team on the JSE.

Ghost Bites (Attacq | Heriot | HomeChoice | IndluPlace | Labat Africa | Old Mutual)

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Ghost Bites (Attacq | Heriot | HomeChoice | IndluPlace | Labat Africa | Old Mutual)

Attacq declares an interim dividend of 29 cents (JSE: ATT)

2023 has been kind to Attacq shareholders thus far

With a year-to-date jump of 15% in the share price thanks to an exciting strategic investment in Waterfall City by the Government Employees Pension Fund, Attacq shareholders are having a great time in 2023. The interim dividend is also back in action, coming in at 29 cents per share based on distributable income per share of 35.9 cents.

There’s more to Attacq than just Waterfall City, which contributed 21 cents per share of distributable income. 10.6 cents per share is from other South African properties and 4.3 cents comes from other investments.

Like-for-like rental income increased by 7.2%, with Mall of Africa posting a strong increase. Property expenses were up by 14.8% on a like-for-like basis, so load shedding and other costs are clearly visible here. The cost-to-income ratio is much higher across the portfolio than it was a year ago, so the share price growth has been mainly driven by the GEPF deal.

Valuations of completed properties didn’t move much over the six months between June and December 2022, with Waterfall City up 0.9% and the total investment property portfolio down 0.1%.

After paying the full year dividend in October 2022, the gearing ratio increased from 37.2% at the end of June 2022 to 38.0% at the end of December.

Despite the obvious economic pressures, the full year distributable income per share guidance of between 8% and 10% growth is unchanged, as is the 80% payout ratio.

Heriot’s distribution per share inches forwards (JSE: HET)

Although NAV per share is up by 14%, the distribution per share is 3.2% higher

In the six months to December, Heriot’s property portfolio enjoyed lower vacancies and grew net operating income by 11.1%. This benefit was sadly kicked to touch by higher financing costs, reducing distributable earnings growth to 3.2%.

The balance sheet is strong enough that the entire distributable earnings per share number of 52.04 cents could be declared as a dividend. This means a 3.2% increase in the dividend, with growth in the net asset value per share of 14% perhaps giving a better indication of the true underlying performance in the portfolio.

HomeChoice posts a substantial jump in HEPS (JSE: HIL)

The FinTech and digital businesses are growing quickly

In the year ended December 2022, HomeChoice’s revenue increased by 6.5% and operating profit jumped by a gigantic 83.3%. When you see numbers like this, you always need to check where there were major acquisitions. Indeed, the results of PayJustNow were included with effect from 1 March 2021, so they are fully in the 2022 financial year and only partially in the base.

Still, the FinTech business is where the action is, with the Weaver business posting revenue growth of 31.1% and HomeChoice Retail dropping by 5.0%. If you’re looking for really high growth rates, PayJustNow’s gross merchant value increased by 260% to R0.7 billion as the digital payments gathered momentum.

It’s all about cross-selling, with the Weaver customer database doubling during 2022 to 940,500 customers. Weaver holds the FinChoice business (lending / insurance / value-added services) and PayJustNow (buy now, pay later).

Even the retail business looks better, posting operating profit of R78 million in 2022 after an operating loss of R43 million in 2021. Admittedly, there was R114 million in once-off costs in the base, linked to the recovery plan.

With HEPS up by 41.8% and the total dividend for the year increasing from 67 cents to 141 cents, this was a strong performance by the group.

A bolt from the blue for Indluplace (JSE: ILU)

SA Corporate Real Estate (JSE: SAC) wants to take Indluplace private

As soon as you see a transaction structured as a scheme of arrangement, you know that the parties are in agreement about what needs to happen going forward. This is because the board of the target proposes the scheme to shareholders, which means it endorses the offer.

With a cash price of R3.40 on the table from SA Corporate Real Estate, Indluplace’s shareholders have the ability to get out at a nifty premium to the current price of R2.90. The offer is a 12.8% premium to the 30-day volume-weighted average price, which is a modest premium that I’m not too surprised to see for such an illiquid stock. The fact that shareholders can get out of this thing is already valuable, as trading out of Indluplace is almost impossible for large shareholders.

Indluplace has very little liquidity and the primary shareholder, Fairvest Limited, doesn’t see its stake as core to the strategy. Conversely, SA Corporate sees the Indluplace portfolio as being complementary to its existing residential portfolio. Assuming the deal goes ahead, SA Corporate would have a residential property portfolio of over 19,260 units with a value of R7.9 billion.

For reference, around 9,190 of those units would be from the Indluplace deal, so this would nearly double the size of the existing SA Corporate residential portfolio.

Critically, two shareholders with a total of 63.5% in Indluplace have provided irrevocable undertakings of support to SA Corporate. One of the shareholders is Fairvest. The scheme needs 75% approval, but this gets it a long way down the road.

This is a category 2 transaction for SA Corporate, so its shareholders won’t need to vote.

Labat Africa: read carefully (JSE: LAB)

The “seed to sales” strategy has improved profitability but break-even is a long way off

Labat remains an extremely small listed company. Interim revenue was just R24.1 million, which is less than the food court at your local mall generates over six months. Gross profit was just R5.9 million.

Before getting excited about an improvement in the operating loss from R24.9 million to just R0.3 million, you need to take note of the R14.4 million in other income. R5.3 million is attributable to growth in the value of biological assets and R7.3 million is an adjustment on the acquisition of Sweetwaters Aquaponics.

In other words, I would ignore the R14.4 million. The group is making smaller losses, but is definitely still loss-making.

Old Mutual grows HEPS by 10% (JSE: OMU)

Despite the HEPS growth though, the dividend was flat in FY22

Old Mutual talks about “regaining” market share, which tells you that the company lost its way. There seems to be some improvement in this regard, driving growth in earnings in 2022.

Sales are up and the value of new business increased by 16% as management took deliberate action in the second half of the year to write more higher margin risk business. The value of new business margin of 2.2% is within the medium-term target range of 2% to 3%.

Surprisingly, one of the drivers of a 9% decline in gross flows was a drop in demand for offshore investments. I know that global markets had a tough time in 2022, but I worry about South Africans not diversifying their wealth geographically.

Old Mutual investors will keep an eye on net client cash flow, which was negative in this period due to lower gross flows and large disinvestments and terminations in the business. Funds under management of R1.2 trillion fell by 4% for the year as markets dropped.

Return on net asset value is only 11.1%, so there’s still a long way to go here for this lumbering (or perhaps slumbering) giant.

Although the dividend was flat for the year, the group notes that excluding the Nedbank deal from the prior year would unveil dividend growth of 13% for the year, so the payout ratio hasn’t moved much.

Little bites:

  • Southern Palladium (JSE: SDL) released its interim report for the period ended December. As the company is firmly in drilling mode, there is obviously a significant operating loss (in this case $3.8 million).
  • In a good example of how the macroeconomic picture impacts the banks, Standard & Poor’s revised the outlook for five South African banks from positive to stable. This means that the credit rating is maintained, but the rating agency no longer thinks that it might improve from here unless things change.
  • Highly illiquid company South Ocean Holdings (JSE: SOH) has released a trading statement for the year ended December that reflects a drop in HEPS of 40% to 21.96 cents. The share price is R1.20.
  • The urgent application by a shareholder for the liquidation of Afristrat (JSE: ATI) has been set down for hearing in the North Gauteng High Court on 8 and 9 June. The stock is suspended from trading and I can’t even find a website.

Orbvest: where is the Rand/Dollar going?

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Orbvest: where is the Rand/Dollar going?

The Rand has gone from bad to worse over the last month, but is it really a surprise? The R/$ has been especially volatile of late, but it’s been a story of one step forward and two steps back. We only have to look at the history of this relationship to understand that while there may be strong rallies from time to time, ultimately the rand has continued to deteriorate against the dollar, and that doesn’t look like it’s changing anytime soon.

History of the R/$

Year1995200020052010201520202023
Rates on March 1stR3.58/$R6.55/$R6.22/$R7.34/$R12.11/$R17.86/$R18.44/$

In between the dates shown above, there have been massive fluctuations due to different reasons; 9/11, the 2008 Recession, and Covid. But the overarching theme here is that while the rand may firm against the dollar on occasion, it looks set to keep its current trajectory.

Factors Affecting the Rand/$

We have now officially been placed on the grey list, which is going to have major consequences for the country, especially in terms of foreign investment. Essentially the Financial Action Task Force (FATF) concluded that South Africa has compliance issues, and the country is not doing enough to combat terrorist funding and money laundering. Countries placed on the grey list tend to see a decline in foreign investment into the country, as pointed out by Webber Wentzel attorneys. However, being on the grey list means you are committed to addressing the issues and SA has already made big strides from where it initially was.

As Mauritius has proven, it is possible to be removed from the grey list within 2 years. But even if South Africa achieves that in such a short space of time, the damage that will have been done will have ripple effects that will take a while to stabilize. Added to this is that our country is still at the hands of inept and corrupt government officials. Local South Africans are leaving the country in droves and taking their money and skills with them.

The country is also facing a major power problem, with reports saying SA should expect Stage 8 load shedding in winter. This will greatly impact our economy and have a debilitating effect on business, GDP, and the unemployment rate.

While Q4 2022 unemployment results show that SA created 169,000 jobs, 167,000 of those were created by the Western Cape. That’s 2000 jobs in the other 8 provinces over a space of 3 months. According to World Economic Forum, the outlook for unemployment shows SA with the highest unemployment rate in the world at 35%. These results may be skewed as there are a lot of countries that do not have enough data to analyze, but regardless of where we rank in the world, a 35% unemployment rate is impossible to ignore. Due to these reasons, there will most likely be a sharp decline in foreign investment, weakening the rand even further.

On the other side of the pond, while it seemed inflation was under control based on previous CPI results, it is still stubbornly high. ISM manufacturing data released recently also suggests that the Fed is going to continue rate hikes, with a 25-basis point hike expected in March and May, with many betting on an additional hike in June. With these higher interest rates, one can only expect the dollar to get stronger as foreign investors look to take advantage of the higher yields in US bonds and interest-rate products.

Looking at the history of the Rand/$, over time the rand keeps devaluing against the dollar. In the last 10 years, the rand has devalued by almost 7% per year against the $. That is a staggering statistic but a useful one. Hindsight is an exact science and while the rate may seem too high now to change your rands into dollars, the other alternative is you never do and your rands are worth less and less as the years go on. It’s extremely difficult trying to time the rate, and even the best get it wrong. One of the better options we’ve noticed is dollar cost averaging, popular when investing in markets. Buying a fixed amount on a regular basis so that your total price paid is less affected by your timing. In such a volatile market, this seems a logical choice. Magnus Heystek says the rand at this rate could still very well be a bargain compared to where it could be going and we wouldn’t bet against him.

If you are looking at buying dollars, you’ll want somewhere to invest them. Orbvest has the solution. Orbvest has just launched a new project, the Lakeside Professional Centre, in Atlanta.

This well-maintained Class A medical office property is located in the Northeastern part of the rapidly growing Atlanta MSA. The property totals 23,555 SF and is 100% occupied by all medical tenants. OrbVest believes this is a great opportunity to acquire a core medical office asset in a top-growing MSA in the US. Forecasted quarterly dividends between 7%-8% annualized with a targeted IRR of 11%-12%. A no-frills no fuss building, long-term NNN leases in place, this is a great option to preserve your capital with a reliable income stream.

To find out more, contact OrbVest at www.orbvest.com or email support@orbvest.com

Authored by Devon Thomson, an experienced Senior Investment Consultant with Orbvest and a licensed representative.

OrbVest SA (Pty) Ltd is an authorized Financial Services Provider. The content and information herein contained and being distributed by OrbVest is for information purposes only and should not be construed, under any circumstances, by implication or otherwise, as advice of any kind or nature, or as an offer to sell or a solicitation to buy or sell or to invest in any securities. Past performance does not guarantee future performance.
Returns are taxable and will be taxed as dividends from a foreign source, ordinary income, or capital gains, depending on your tax residency. OrbVest is not a tax and/or legal advisor. Owing to the complex tax reporting requirements associated with private equity and private real estate investments, investors should consult with their financial or tax advisor or attorney before investing.
For members investing via www.orbvest.com the particulars of the investment are outlined in the property supplement, a private placement memorandum, or subscription agreement, which should be read in their entirety by the proposed investor prior to investing and having obtained independent advice.

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