Friday, November 15, 2024
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Ghost Bites (Absa | AfroCentric | Grand Parade Investments | MTN | MultiChoice | Pan African Resources | Sibanye-Stillwater | Sun International | The Foschini Group | Transaction Capital)

The Finance Ghost
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Ghost Bites (Absa | AfroCentric | Grand Parade Investments | MTN | MultiChoice | Pan African Resources | Sibanye-Stillwater | Sun International | The Foschini Group | Transaction Capital)

Absa: more bearish (or realistic) than peers? (JSE: ABG)

This credit loss ratio outlook sounds more realistic than the narrative at its peers

Absa has reported results for the year ended December 2022. The difference is that the release comes well after peers Nedbank and Standard Bank, so Absa had more time to digest the GDP impact of load shedding at the end of 2022. Whether or not this is the reason for more bearish credit loss ratio guidance, I can’t be sure.

What I do know is that Absa expects the FY23 credit loss ratio to be at the top end of the through-the-cycle target range of 75 to 100 basis points. That’s significantly higher than the guidance from Nedbank or Standard Bank, which implied a range in the mid-to-high 80s. Interestingly, Absa expects more pressure in the first half of the year than the second half, which I think could be an overly optimistic view on Eskom’s prospects this year.

The share price was trading 5% lower in lunchtime trade, so the market is (quite rightly) focusing on earnings prospects rather than the year that was. Credit must go to Absa for a great year in 2022 that saw revenue climb by 15% and headline earnings increase by 14%, with return on equity up from 14.6% to 15.6%. This would’ve been a much stronger result were it not for exposure to Ghana sovereign instruments that suffered heavy impairments.

Looking geographically, headline earnings in South Africa increased by 17% and Africa fell by 4%.

The bank is still targeting a return on equity of 17%. As the exposure to Ghana has shown, there are so many variables that can impact the achievement of that target. For now, the South African economy is probably the biggest risk to this story, as that is where the growth has been.

AfroCentric profitability takes a knock (JSE: ACT)

There’s no dividend either, thanks to the Department of Health

As AfroCentric prepares for a much deeper relationship with Sanlam, the potential benefits of that infrastructure are clear to see. Operating a relatively small group makes it hard to be efficient, with revenue up by 1.2% but HEPS down by 19%.

There is also no interim dividend, as there has been a significant increase in trade receivables. The National Department of Health owes the company a lot of money.

Both the Services Cluster and the Pharmaceutical Cluster came under pressure, with operating profit down by 7% and 18.4% respectively.

A grand turnaround (JSE: GPL)

Grand Parade Investments has approximately doubled HEPS

In a trading statement that was fairly light on details, Grand Parade Investments indicated that HEPS for the six months to December will be between 95% and 115% higher, which means that earnings approximately doubled.

This has been driven by an improvement in the gaming assets and a decrease in corporate costs and debt, as part of the group’s ongoing efforts to unlock value for shareholders that also saw the group sell its Burger King investment in recent times.

The market cap is R1.56 billion and there isn’t much liquidity in the stock.

MTN’s margins in South Africa are dropping (JSE: MTN)

My recent warnings about this sector are proving to be correct

MTN has 289 million customers across 19 markets. As lovely as that is, it didn’t stop the share price dropping around 9% by lunchtime trade on Monday.

The problem doesn’t lie in revenue growth, which was up 14.4% as reported or 15.3% on a constant currency basis in the year ended December 2022. Of the total revenue base of R196.5 billion, data revenue of R73.7 billion grew by a meaty 30.4%. Surprisingly, FinTech revenue was only up by 8.6% to R17.3 billion.

EBITDA margin is where the story starts to come under pressure, falling by 60 basis points to 43.9%. Still, HEPS increased by 16.9% to R11.54 per share and there were non-operational impacts that had a material impact in this period, causing HEPS to be R1.59 lower than would otherwise have been the case.

A final dividend of R3.30 per share has been declared, 10% higher than the prior year. The dividend yield is modest because (1) MTN still has a lot of debt and (2) the capital intensity in the network is high, which means that a substantial portion of revenue (18.5%) is reinvested in the network.

The knock to the share price is because of the outlook for EBITDA margin in South Africa, which has dropped from a range of 39% – 42% to 37% – 39%. This only tells part of the story, as there is also pressure on free cash flow from elevated capital intensity to upgrade the networks in Africa and respond to the energy crisis locally.

The share price is down over 35% in the past year. Over the same period, Vodacom has lost nearly 20%.

MultiChoice margins are well below guidance (JSE: MCG)

When TVs don’t have electricity, they also don’t have MultiChoice

This is one update that doesn’t surprise me. I’ve been wondering for a while where consumer spending pressures are being felt the hardest, particularly as food and energy costs are hard to avoid. MultiChoice is clearly a place where consumers can cut the cost and save that money, especially when the TV doesn’t work most evenings anyway thanks to load shedding.

Sure enough, MultiChoice’s FY23 trading margin in South Africa is expected to be 23% to 28%, which is well below previous market guidance of 28% to 30%. In Rest of Africa, solid subscriber growth (especially in Nigeria) means that the business is due to return to trading profitability this year. The problem in that part of the business is that MultiChoice struggles to bring the profits home.

There isn’t much good news here, but at least the company expects to beat its FY23 cost savings target. There’s also a hedging policy in place that works well in a weaker ZAR environment.

With an ongoing shift to streaming by higher income clients and pressure on advertising spend for TV as a medium, I don’t think MultiChoice is going to thrill shareholders in the short term.

Pan African Resources completes the Mintails funding (JSE: PAN)

RMB is putting another R400 million into the deal to get it across the line

It’s been a busy few months for Pan African Resources, with the company working to put together the R2.5 billion required for the Mintails Project. The deal has been fully covered by debt, including R800 million under the Domestic Medium Term Note programme, R1.3 billion in senior debt from RMB and now another R400 million from RMB as well.

The R400 million tranche is structured based on a sale of 3,617kg of gold over 24 months at $1,909/ounce. This is obviously a really specialised funding transaction that requires a deep understanding of mining.

For shareholders, the big win here is that the full funding package was achieved without any dilution to shareholders. With a payback period of three and a half years, the market celebrated this news with a rally of 10.6%, although some of this was also due to a positive day for the gold price as the US panicked about contagion from Silicon Valley Bank.

Sibanye-Stillwater just keeps getting shafted (JSE: SSW)

No, really – there’s a shaft that’s been damaged

Mining really isn’t a joke. If it’s not a flood, then it’s a shaft damaged during non-routine maintenance. Either way, Sibanye-Stillwater has reported more challenges at the Stillwater operations in the US.

Access to the deeper levels of the mine has been impacted by structural damage to the vertical shaft, leading to a suspension of production below 50 level for approximately 4 weeks.

This will lead to a production impact of between 25,000 and 30,000 ounces for the year.

Betting on Sun International would’ve worked out (JSE: SUI)

The share price is up more than 46% over the past year

After a solid first half in 2022, the second half of the year saw an even better performance by Sun International as both locals and tourists took advantage of the post-pandemic reality to get out there and have fun. Sun International is literally in the business of selling fun, something that was in short supply under Covid restrictions.

The fun is back and so are the share price returns, with investors having enjoyed a run of 46% over the past year. The numbers support that, with a ten-fold increase in headline earnings!

The urban casinos segment recovered sharply, with EBITDA up 71% and EBITDA margin of 36.4%, up 200 basis points on 2019 levels. The Sun Slots business experienced some margin pressure thanks to load shedding but still did well, with income up 20% and EBITDA up 17%. SunBet is an early stage business that is growing strongly across key metrics, with many players competing in the online betting and gaming space.

Finally, the resorts and hotels business posted EBITDA of R450 million, well up on R300 million in the 2019 financial year. Adjusted EBITDA margin of 17.5% is also a material jump from the pre-pandemic level of 11.7% in 2019.

It’s also interesting to note diesel costs of between R12 million and R14 million a month, with 20% of the cost being offset by electricity savings. In other words, generators cost 5x as much to run as getting power from Eskom.

Debt is down from R7.1 billion to R6.6 billion, of which R5.9 billion sits in South Africa. The group is targeting a 2x net debt to EBITDA level going forward and is aiming to pay out 75% of headline earnings as a dividend, which suggests that management will be taking a conservative approach going forward with capital allocation. Shareholders often like seeing this.

Total dividends for FY22 were 329 cents per share, which puts the group on a 9.5% trailing dividend yield.

The Foschini Group sounds the load shedding alarm (JSE: TFG)

The South African retail industry is being hurt severely by Eskom

It feels like load shedding fits neatly into Ernest Hemingway’s famous “gradually and then suddenly” quote about bankruptcy. We’ve had it for a long time, yet having it this badly means that many businesses just can’t cope anymore.

The Foschini Group (TFG) traded 3.5% lower in afternoon trade on a day that burned bright red for many companies on the local market. The company released updated trading information based on heightened load shedding and there is a clear impact here, although nowhere near as bad as at grocery retailers with a cold chain to maintain.

With the financial year ending soon on 31 March, a strong sales result for the nine months ended December (+12.6% excluding Tapestry Home Brands) is being somewhat blunted. For the 48 weeks ended 25 February, this has dropped to 11.4% because growth in January and February has been low single digits. The problem is that this is the growth run-rate that would be carried into the new financial year if load shedding doesn’t calm down, despite TFG’s substantial investment in backup power solutions that cover 70% of local turnover.

The problem is bigger than just the hours for which there is no electricity. TFG has observed a significant drop in footfall before and after load shedding as well, as it just creates a logistical problem for everybody.

The group estimates that load shedding has cost it R1 billion in turnover in this financial year, with a double-whammy impact on gross margin as inventory levels were too high for the level of demand. There have also been costs of R65 million on diesel, security and maintenance. Cash flow was put under further pressure by capital expenditure to-date of R220 million on backup solutions, with another R30 million expected to take backup to over 80% of turnover. Even then, the backups are only effective up to Stage 4.

Is there any good news? Well, sales in the first week of March showed strong growth again as load shedding calmed down from stage 6. The group also sounds happy with the performance of Tapestry Home Brands and the launch of Bash, TFG’s new online shopping platform. It’s also good to see that the London and Australia businesses are doing well, which helps mitigate some of the impact in South Africa.

It does sound a bit like TFG is making a bigger deal of load shedding that might be the case, particularly given the recent trading numbers. There’s obviously a negative impact but TFG can’t claim to be nearly as badly affected as many other companies.

Transaction Capital ruined my Monday (JSE: TCP)

I thought things would be tough, but not this ugly

If you want to see something that will be bright red on Tuesday morning, look no further than Transaction Capital. In trading update released after the market close on Monday, the company gave investors an entire night to digest a horrible set of numbers.

There have been some major recent director dealings that pointed to this outcome, with significant selling. I expected some ugly numbers and I remain a believer in the long-term fundamentals of the business, so I had put on my hard hat for something ugly to come out. I just didn’t expect it to be this bad and I don’t think many others expected it either.

I will need a hazmat suit on Tuesday morning, not a hard hat!

The Nutun division is the highlight, with the collections business growing earnings at a rate exceeding historical levels. That brings us neatly to the end of the good news.

WeBuyCars expects earnings to be down by up to 20% in the six months to March, with margin pressure as the culprit as the mix of vehicles shifted towards lower-priced cars. I don’t think anyone expected this business to grow off such a high base, so that’s not a shocker. Importantly, penetration of finance and insurance products continues to increase.

We now arrive at SA Taxi, which is basically in the same shape as those taxis a couple of decades ago that had wrenches as steering wheels. The headwinds are now “structural” rather than “cyclical” which is really bad news. In an attempt to try and soften the blow, this is where Transaction Capital stashed the Gomo business, which is the used vehicle F&I platform (that would make a lot more sense structurally in WeBuyCars). They seem to be positioning this new Mobalyz division as an asset-based finance business, though no amount of creative spelling can hide the fact that there is a huge problem inside the group.

The challenge is that the economic profit pool in the minibus taxi industry has shrunk. Fuel prices are high, vehicle prices have increased, the cost of debt is up and commuter volumes have dropped. The taxis have not been able to push through price increases, even when they try hard to set fire to competing services like busses.

It can’t be a good time to work at SA Taxi, with much talk of restructuring the business and cutting costs. This will include the sale of the auto refurbishment and repairs business and related assets, as the attractiveness of lending against Quality Renewed Taxis has taken a knock. The credit impairments are frightening here.

SA Taxi was 70% of group earnings four years ago. It is now the smallest segment, not least of all because the profitability has collapsed. It’s painful to think what might have happened without the acquisition of WeBuyCars.

For the six months to March, EPS and HEPS are expected to drop by more than 20%. I expect it to be a lot worse than that, as 20% is the minimum guidance under JSE rules.

Little Bites:

  • Director dealings:
    • RBFT Investments (the associate of a director of Salungano (JSE: SLG) that is mopping up shares in the market) has bought an additional R2.5 million worth of shares.
  • Orion Minerals (JSE: ORN) asked the Australian Stock Exchange to put an immediate trading halt on the securities as the company is planning to make an announcement regarding a proposed capital raising. This is an Australian rule rather than a JSE rule, which is why you don’t see it very often.
  • In an update from the dustbin section of the JSE, the financial director and the auditors of Luxe Holdings (JSE: LUX) have resigned. I have no idea why this company is even still listed

Ghost Stories #8: Of Dark Stores and “Dark” Stores (with Roy Bagattini, CEO of Woolworths)

The Finance Ghost
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Ghost Stories #8: Of Dark Stores and “Dark” Stores (with Roy Bagattini, CEO of Woolworths)

Roy Bagattini has led a strong turnaround at Woolworths, putting the group back on track and rewarding shareholders in the process. It didn’t come a moment too soon, with our electricity crisis putting retailers under immense pressure.

There’s simply no margin for error in this environment or room for distraction.

In this candid discussion, I picked Roy’s brain on a wide variety of topics including:

  • The denim strategy in Woolworths (hardly a coincidence given Roy’s background at Levi’s) and how the clothing business thinks about category leadership
  • Roy’s global experience and why he continues to spend his time building a business in South Africa, when he could pick just about anywhere else in the world instead
  • The strength of the Woolworths brand and particularly Woolworths Food among South Africans
  • The immense challenge of load shedding, particularly for a business that has its cold chain as a key differentiator, along with how Woolworths is responding to this threat across alternative energy sources and replenishment strategies in the store
  • The pricing strategy in Woolworths Food to make the products more accessible to customers, with targeted price investment across certain products or categories
  • Consumer preferences in terms of online vs. in-store sales and the percentage of the basket price that Woolworths believes is incremental to what customers planned to spend
  • The economics of online fulfilment for retailers, with commentary on grocery vs. clothing retail and the usefulness of dark stores
  • Why Country Road can win where David Jones failed in the Australian market
  • Other geographical expansion plans for the group
  • Trends in trading space across Fashion, Beauty and Home on one hand and Food on the other.
  • New store formats, including an expansion into liquor and other convenience formats
  • Key focus areas over the short term for Roy and the broader business

At a time when it’s easier to feel hopeless about South Africa rather than hopeful, it’s refreshing to speak with an executive who is bullish on the future without being blind to the challenges.

Listen to the discussion here:

This episode of Ghost Stories is brought to you by EasyEquities, encouraging investors to do their own research and make informed decisions in the market. Nothing in this podcast should be considered an endorsement of Woolworths as an investment opportunity by either The Finance Ghost or EasyEquities.

The Finance Ghost does not hold a position in Woolworths at the time of release of this podcast.

EasyEquities is a product of First World Trader (Pty) Ltd t/a EasyEquities which is an authorised financial services provider (FSP 22588).

Investing mirrors life: How bias affects investment decision making

Sponsored Content
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Investing mirrors life: How bias affects investment decision making

By Kingsley Williams, CIO & Nico Katzke, Head of Portfolio Solutions

Do you see yourself as an above average driver? Do you believe referees generally favour Springbok opponents more?

If your answer to any of these is a confident ‘yes’ – you may very well be displaying common behavioural traits, or biases. In this short piece, we explore areas in which similar investment biases can adversely affect long-term capital growth. We also highlight how indexation strategies can help investors avoid the noise and focus on what matters most: consistency and being mindful of costs.

Superiority bias is best described by the fact that most people believe they are better than average drivers. This, of course, cannot be true by definition. Investors have shown to overstate their ability to identify the best fund managers, despite strong evidence to the contrary. The reality is that there is little correlation between past performance and current performance, locally and abroad. Consider that since 2015 if you were to randomly pick one of the top quartile equity managers in SA over three years – your odds of outperforming half the managers in a given year is roughly 40% and repeating top quartile performance is less than 25% (meaning less than even odds for both). Winners remaining winners is thus a rare achievement, yet our research shows that fund flows over the past 20 years have tended to flow strongly toward top past performers.

The second common heuristic is that of confirmation bias. This refers to people looking for evidence to confirm their prior beliefs. We do this frequently – e.g. evaluating a refereeing decision against our sports team more critically, and disregarding similar mistakes made to the opposition (although, to be fair, the Springboks suffer more under the whistle). Related to investing, certain supposed truisms are cemented in popular belief, including that “passive” strategies are designed to underperform – with the cost benefit simply dwarfed by underperformance. Again, the data simply does not support this thesis. When we compare the performance of active managers over the last 20 years on a rolling 3-year basis to a representative benchmark index, the results are striking. The median active manager underperformed the Capped All-Share Index more than 85% of the time – even after applying a conservative annual fee of 0.5% on the index return. The reason for this is the impact of compounding management fees and trading costs working against active managers.

A key reason why many investors believe index funds, like ETFs, does not add value over time is due to a prevailing positive reporting bias. Active managers tend to attribute outperformance to skill, while linking underperformance to one-off factors outside their control – unlikely to repeat in future. This creates a false perception that the average manager is far better than average, and certainly better than a rules-based index. Positive reporting bias reinforces the idea that active managers mostly add value above indexation – which not only contradicts empirical reality, but also theory. Nobel Laureate, William Sharpe, argues in The Arithmetic of Active Management that active management is a negative sum game – meaning the average active fund should be expected to underperform a representative benchmark after fees. Strong index fund performance should therefore not be a surprise.

The last related bias to consider is that of action bias, which refers to our propensity to want to act even if doing so may result in a worse outcome. How often do you change lanes in traffic, only to realise the fast lane indeed proved faster, and applying the concept of masterly inactivity (or choosing not to act) would have gotten you to your destination quicker. When investing, our natural instinct is also to act – believing that in doing so we are more likely to achieve a positive outcome. Research has shown the contrary – tactical deviations from long term strategies seldom add value (and reliably add costs).

Consider the Satrix Balanced Index Fund.

It uses low-cost index tracking building blocks and is an example of successfully applying masterly inactivity when investing. The fund’s focus is on the longer-term strategic asset allocation, which research has shown to explain the vast majority of returns. While investors might feel that preserving the ability to act in the short term is prudent – managers seldom get tactical calls right with reliable consistency.

The undeniable reality is that for one expert to be right, another expert must be wrong. Market prices reflect the culmination of all market participants, armed with masses of fundamental and real-time data, and the incentive to exploit profitable opportunities via a variety of different trading and investment strategies, making predictable price inefficiencies extremely rare.

The Satrix Balanced Index Fund has been a top quartile performer over its nearly 10-year existence, while outperforming the local high-equity balanced fund industry’s median return nearly 95% of the time on a rolling 3-year basis. This follows as active funds need to be right far more often than not to make up a significantly higher cost differential to index strategies – which has proven very hard to achieve consistently.

It is important to note that some funds have shown the ability to offer long term value to clients and earn well deserved fees; but these are exceptional. Investors should consider the benefits that indexation can offer – specifically helping to focus investment behaviour on the long-term while reducing overall costs. We strongly believe that indexation offers great value to clients by giving them access to well diversified, low-cost investment vehicles like ETFs. It takes much of the guess work of selecting active managers out of the equation – a sensible strategy, unless, of course, you are an above average investor.

Ghost Bites (Acsion | Brait – Premier | Netcare | Southern Palladium)

The Finance Ghost
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Ghost Bites (Acsion | Brait – Premier | Netcare | Southern Palladium)

No action at Acsion (JSE: ACS)

This R2.7bn company won’t be going private after all

Acsion Limited has been trading under a cautionary announcement since October 2022, based on the company contemplating a delisting of its shares. This would’ve triggered an offer to shareholders, something the board was probably trying to put the funding together for.

Although no reasons are given in the latest announcement, the potential delisting is off the table. The share price is illiquid and fell 11.7% after the news, which is precisely why shareholders should exercise caution.

Brait’s IPO of Premier Group will go ahead after all (JSE: BAT)

It won’t take long either – Premier will be separately listed from 24 March!

In case you’re wondering: no, you can’t just wake up and decide to list a company within the next two weeks. This certainly isn’t the normal timeline.

If you’ve been following the Brait story, you’ll know that Premier Group was all set for a listing before market demand seemed to fall away. Brait negotiated a private deal with Christo Wiese and his bankers, with that deal in progress until a group of investors approached Brait to make the Premier IPO happen.

This group of investors is large enough to meet the free float rules of the JSE, thereby de-risking the IPO. The board of Premier decided to go ahead with the listing rather than the alternative, private deal.

The IPO will raise between R3.5 billion and R3.6 billion, with Premier valued at R6.9 billion. Brait will retain approximately 47.1% of Premier after the IPO. The goal is to unbundle that stake to Brait shareholders by December 2024.

Margins are up at Netcare as volumes recover (JSE: NTC)

But diesel costs are going through the roof

For obvious reasons, hospitals have been able to operate without reliance on the grid for a long time now. It’s one thing when milk goes off in the fridge. It’s quite another when someone is lying on the operating table and the EskomSePush app gives you bad news.

Being independent of the grid and being able to do this without breaking the bank are two different things. Netcare spent R9 million on diesel in FY21 and R35 million in FY22. In just the four months to the end of January 2023, that amount has come in at R41 million. At that run rate, the cost for the year would be R120 million.

To put that in perspective, the capital expenditure plan for FY23 includes R111 million for the expansion of the mental health operations. Again, we can only dream of what this country could achieve if we were doing something other than spending a fortune on diesel.

The good news for Netcare is that the group has been on an energy efficiency drive since 2013, investing R585 million and saving R1.1 billion in energy costs along the way. Energy intensity per hospital bed has been reduced by 35% over the past decade.

Paid patient days haven’t quite recovered to pre-pandemic levels, but the trend is firmly positive. There are pockets that are now running ahead of pre-pandemic levels, like mental health days.

In this four-month period, revenue increased by 12.3% and EBITDA was up by over 20%. Operating leverage is a feature of the hospital business model, as the beds are there whether they are occupied or not.

Guidance for FY23 is revenue growth of between 9% and 12%, with margin expansion and improved return on invested capital. This assumes an average of stage 5 load shedding for the rest of the year, with the winter months as a worry.

Southern Palladium gives us a geology lesson (JSE: SDL)

Unless you’re a mining specialist, only the management commentary will be of value

Junior mining is about as specialised as investing gets. With reasonable levels of commercial knowledge, you can make sense of most other industries. When it comes to junior mining, you’re confronted with sentences like “the Merensky pyroxenite, containing potentially exploitable platinum group elements, is overlain by spotted anorthosite and underlain by leucocratic norite.”

Wonderful. Spotted anorthosite has always been my favourite kind of anorthosite.

On a more serious note, the Southern Palladium managing director’s commentary is positive, noting that the results thus far have further supported the conclusions in the recently completed scoping study. The shallower Merensky reef may be included in future development in addition to the UG2 reef, which would be expected to increase the upside potential of the project and extend the life of mine.

Little Bites:

  • Director dealings:
    • An executive director of Harmony Gold (JSE: HAR) sold shares worth R113k.
    • An executive director of Invicta (JSE: IVT) bought shares worth R19k.
  • The share code remains unchanged, but Kaap Agri Limited (JSE: KAL) will be changing its name to KAL Group Limited, which makes sense given that the major recent acquisition was in the fuel retail sector, not the agriculture sector.

Ghost Wrap 15 (Capitec | Standard Bank | Nedbank | AVI | Sea Harvest | Bidvest | Shoprite | STADIO | Renergen)

The Finance Ghost
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Ghost Wrap 15 (Capitec | Standard Bank | Nedbank | AVI | Sea Harvest | Bidvest | Shoprite | STADIO | Renergen)

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

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

  • Capitec is growing its HEPS in the mid-teens, but that valuation multiple is looking far too frothy.
  • Standard Bank and Nedbank posted great results for 2022, with the credit loss ratio under control and return on equity increasing – but what will load shedding mean for 2023?
  • Fuel cost pressures have ruined profitability at fishing businesses I&J (part of AVI) and Sea Harvest Group, with the latter investing further into abalone and oysters as part of its strategy to focus on higher value seafoods.
  • Bidvest has posted excellent results, with top-line growth and margins maintained despite inflationary pressures.
  • Shoprite is resonating across the LSM curve, posting exceptional revenue growth that was severely blunted for investors by the cost of running generators.
  • STADIO gave the market something to worry about by reporting a slowdown in student growth and relatively modest HEPS growth vs. the high P/E multiple.
  • Renergen shareholders seem to have finally realised that a junior mining business needs capital, with a sell-off this year that has seen the share price fall 55% from its 52-week high.

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 (Attacq | Capitec | Distell | Exxaro | Labat | Metair | Northam Platinum – RB Plats – Implats | Orion | OUTsurance | Sibanye-Stillwater | Standard Bank | Thungela)

The Finance Ghost
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Ghost Bites (Attacq | Capitec | Distell | Exxaro | Labat | Metair | Northam Platinum – RB Plats – Implats | Orion | OUTsurance | Sibanye-Stillwater | Standard Bank | Thungela)

Attacq maintains full year earnings guidance (JSE: ATT)

The full year growth rate will be far more modest than interims

Property fund Attacq has announced growth in distributable income per share of 27.9% for the six months ended December 2022. This has been driven by rental income from newly completed developments as well as the existing portfolio, alongside lower finance costs.

Guidance for the full year ended June 2023 has been left unchanged at between 8% and 10% growth, with a dividend payout ratio of 80%.

When the detailed interim results are announced, Attacq will also confirm the quantum of the dividend for the interim period.

Capitec’s growth rate looks a little bit…normal? (JSE: CPI)

At this valuation multiple, I’m not sure this growth rate will cut it

If Capitec’s share price ever truly cracks, it will do so spectacularly. With a valuation that is still vastly above the other banks, the strong return on equity cannot justify the current share price all by itself. The market is also pricing in considerable growth, which looks very risky to me in a country with negative GDP growth and not much electricity.

Yes, Capitec achieved remarkable things over the years. No, that doesn’t mean that remarkable growth can be achieved into perpetuity.

In a trading statement for the year ended February, the bank confirmed that group HEPS will be between 13% and 16% higher than the prior year. That’s an admirable outcome of course, but not when you are trading at a share price that is multiple times higher than the net asset value per share.

For reference, Standard Bank just posted 33% growth in HEPS and trades at a much lower valuation multiple.

Cheers, Distell (JSE: DGH)

The Competition Tribunal has approved the Heineken deal, with conditions

Finally, the Distell – Heineken deal can go ahead. There are conditions of course, with the Competition Commission (and Tribunal) never missing the opportunity to tell capitalists how to incentivise staff. In this case, there’s also something about the working conditions of staff, which is an issue that the company should’ve sorted out long before regulators were involved.

The first condition is (mostly) a genuine competition issue, with Heineken required to sell the Strongbow business and brand to a licensee that must be majority owned by historically disadvantaged persons.

The company also needs to establish an employee share ownership plan and must engage in enterprise and supplier development activities that promote B-BBEE.

The final condition relates to the conditions for workers on the farms, including the provision of sanitation facilities in the vineyards.

I’ve been worried for some time now about how wide the reach of the Tribunal actually is. You may recall the Burger King deal and how much trouble Grand Parade had to go to in selling that asset, which is incredibly ironic when you remember that Grand Parade is a B-BBEE investment group!

Wide-ranging powers create great uncertainty in the dealmaking process, which in turn makes our country less attractive for foreign investment. Considering that we can barely offer a worthwhile electricity supply, I don’t think our regulators should be making it even harder to do deals here. We already have a well established set of B-BBEE rules and I don’t believe that the Tribunal should be stepping in to force further compliance that isn’t necessary by law.

Exxaro made the most of coal prices in 2022 (JSE: EXX)

The trauma of Transnet couldn’t ruin the result, but didn’t help matters either

For the year ended December 2022, Exxaro grew HEPS by between 20% and 34%. The coal business did well in a time of higher export and domestic sales prices, though that situation has now changed as a quick look at other coal miner share prices will tell you.

Despite ongoing logistical challenges (*cough* Transnet *cough*), solid cost control in the business supported this result.

The coal price party was partially offset by a lower contribution from the energy business (as wind conditions were low over the past twelve months) and pressure in Sishen Iron Ore, which is equity-accounted by Exxaro.

The HEPS result was supported by the share repurchase program that reduced weighted average number of shares from 247 million to 242 million. This is why companies love share buybacks!

Labat is still narrowly loss-making (JSE: LAB)

A long-term share price chart makes for ugly viewing here

Labat’s market cap is under R56 million, so this really is a tiny company by listed standards. It’s gotten a lot smaller in the past year, with the share price having approximately halved over that period.

In the six months ended November 2022, the headline loss per share has improved from -4.3 cents to -0.1 cents. Still negative, but only just!

Metair made a loss in FY22 (JSE: MTA)

Although the market knew about major issues, the share price dropped more than 5%

The last thing you want to learn as a shareholder is that HEPS has fallen by over 100%, as this means that it has gone negative. In Metair’s case, HEPS is only slightly negative, with a drop of between 104% and 105%.

Aside from the non-cash impact of hyper-inflation accounting in Turkey, there were real issues (i.e. the kind that hurt cash flow) in the year ended December 2022. Supply chain disruptions led to the use of premium freight, while OEM production volumes and efficiencies came under pressure in the automotive components business. Of course, the biggest issue was the KZN floods which turned Toyota South Africa into an Olympic swimming pool.

On top of this, Metair had to incur pre-production costs for the new Ford Ranger project.

On the plus side, at least the group dodged any major impact from the earthquake in Turkey. Perhaps Metair’s luck is turning, with volumes looking better in both automotive components and energy storage.

Implats seems to have deal fatigue for Royal Bafokeng (JSE: RBP)

Perhaps the recent results at Royal Bafokeng Platinum have something to do with this?

Literally a day after I wrote about whether Royal Bafokeng Platinum’s performance actually deserved a bidding war and fight at the regulators between its two suitors, that fight has fallen away. Impala Platinum (JSE: IMP) has withdrawn its complaints to the Takeover Regulation Panel about Northam Platinum (JSE: NPH), allowing that offer to go ahead.

I do wonder if the latest results have something to do with it, as Royal Bafokeng reported a rough set of numbers that were ruined by difficult production numbers. Perhaps this is a case of “here we go Northam, YOU can pay a silly price for this now”?

In a separately announced trading statement for the six months ended December, Northam demonstrated that there’s no shortage of cash in the system. With a substantial jump in production, HEPS is up by between 62.3% and 72.3%! That’s an exceptional result in such an inflationary period.

Net debt to EBITDA is all the way down at 0.62x and the R17 billion cash set aside for the Royal Bafokeng offer has been fully funded by a cash confirmation and bank guarantee.

Funnily enough, the dividends from Royal Bafokeng (as Northam already holds a large stake) have generated a 13.7% return on cash invested.

I will be very interested to see how the offer for Royal Bafokeng now plays out!

Orion reports a smaller loss for the six months to December (JSE: ORN)

The real focus is on the development projects, which made significant progress in this period

The highlight of this period for Orion Minerals was the progress made in pre-development funding for Prieska, with definitive agreements signed with Triple Flag and the IDC for funding of over R365 million. This is critical for the achievement of a bankable feasibility study for an early production plan at Prieska.

The Okiep Copper Project has also secured pre-development funding, with the IDC taking a 43.75% stake in that project and extending pre-development funding of R35 million.

Orion’s operating loss for this period was A$7.5 million, which is lower than A$10.5 million in the comparable period. A big chunk of this was just unrealised foreign exchange losses.

OUTsurance updates its trading statement (JSE: OGL)

Most of the metrics don’t help, as there were large discontinued operations

After the restructuring of Rand Merchant Investment Holdings to create OUTsurance Group, things changed so much that historical financial information is basically useless. There were unbundlings of shares in Discovery and Momentum Metropolitan, as well as the sale of Hastings.

The normalised earnings for OUTsurance Holdings Limited is where I would focus if I was an investor here. On that metric, earnings were up by between 31% and 41% for the six months to December 2022.

Sibanye-Stillwater concludes the Beatrix and Kloof s189 (JSE: SSW)

With severe recent disruptions in the gold business, I’m glad this was fairly painless

Sibanye-Stillwater is restructuring the local gold operations in an effort to mitigate losses at the Beatrix 4 shaft and depleting mineral surface reserves at the Kloof 1 plant.

There were 2,314 employees affected and the impact on jobs has been reduced significantly through a consultation process. 1,136 employees will transfer to other operations and 552 employees took voluntary separation or early retirement packages. 103 employees left during the process through natural attrition.

In total, 168 employees are going through the s189 retrenchment.

Standard Bank waves that flag (JSE: SBK)

I know it was a good year for banking, but 33% growth in HEPS?!?

Record headline earnings. That’s what shareholders want to see, with Standard Bank delivering huge year-on-year growth in the year ended December 2022. There’s obviously a base effect in here, but still. A record is a record.

A major driver of this result was positive jaws of 579 basis points. This is the difference between the income growth rate and expenses growth rate, leading to an improvement in the cost-to-income ratio from 57.8% to 54.9%.

Another big contributor was Liberty Holdings, which moved from a net loss in FY21 to a profit of R2.1 billion as pandemic-related provisions worked their way out of the system.

With the total dividend per share up by 38% vs. 33% growth in HEPS, even the payout ratio increased as economic conditions largely improved. The all-important metric Return on Equity (ROE) increased from 13.5% to 16.4%.

A really interesting point is that the credit loss ratio is near the bottom of the through-the-cycle range, which is different to Nedbank where this ratio is closer towards the top of the range. At 75 basis points, the credit loss ratio is up slightly vs. the prior year (73 basis points) with credit impairments driven by Ghanaian sovereign exposures among other charges. For the full year to December 2023, the group expects the credit loss ratio to be above the midpoint of the 70 – 100 basis points target range.

Sustainable finance loans and bonds of R54.5 billion were implemented in 2022, more than double the levels seen in 2021.

The bank expects a further 25 basis points of interest rate increases in the first half of the year. As expected, the electricity supply is highlighted as a major risk to the group’s growth prospects.

Thungela: a perfect example of how a cyclical can bite (JSE: TGA)

Beware the low Price/Earnings multiple in a commodities business

Thungela’s share price has tanked 40% in the past six months. On that basis, you would expect earnings to be sharply lower, right? Wrong.

For the year ended December 2022, HEPS approximately doubled to a range of between R130 and R133 per share. With a closing price of around R208, that’s a Price/Earnings multiple of just under 1.6x.

Bargain? Not so fast.

In mining groups (and especially single commodity miners), the share price has almost nothing to do with last year’s earnings. The market only cares about the current commodity price and what that means for future earnings. With the coal price down, Thungela’s share price fell with it.

The trailing Price/Earnings multiple is a proper red herring in these companies.

Little Bites:

  • Director dealings:
    • A director of AB InBev (JSE: ANH) exercised share options for $3.4 million and sold the whole lot for $19 million. That will buy a few drinks…
    • A non-executive director of British American Tobacco (JSE: BTI) has bought shares worth just under $150k.
    • Clearly wanting nothing to do with the streaming initiative, the company secretary of MultiChoice (JSE: MCG) sold shares worth R574k.
  • Just when you thought things couldn’t possibly get worse for Tongaat Hulett (JSE: TON), tropical cyclone Freddy has impacted the Mozambique operations. It literally never rains, but pours for this group.
  • Exemplar REITail (JSE: EXP) is acquiring a 50% undivided share in Mamelodi Square for R116.5 million, payable in cash. The seller has guaranteed the net income of the property for a period of two years. This is a small related party deal as the sellers are also directors of Exemplar. An independent expert will need to provide a fairness opinion.
  • In the fight between Mpact (JSE: MPT) and Caxton & CTP (JSE: CAT), the Takeover Regulation Panel dismissed Caxton’s application and found in favour of Mpact, though it needed to modify its ruling slightly to be more legally correct. Long story short: whether something is pre-offer or even structured in a “rudimentary” manner doesn’t matter, as the Takeover Provisions apply. For the full ruling, follow this link.

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

Sea Harvest Aquaculture (Sea Harvest) which currently owns a 54% stake in Viking Aquaculture, a vertically integrated, sustainable abalone producer is to acquire a further 28%. Viking has farms in the Western and Northern Cape and two vertically integrated oyster farming operations in South Africa and Namibia. Minority shareholders Viking Fishing Group Administration and Odin Investments, holding 18% and 10% respectively, will sell their stakes to Sea Harvest in a deal valued at R210 million.

At last Heineken International has received Competition Tribunal approval for its acquisition of JSE-listed Distell – a complex deal over several jurisdictions valued at c.R39,5 billion. The deal was first announced in November 2021. The expected termination of Distell’s listing on the JSE is 28 April 2023. The company has accordingly postponed its AGM which was due to be held on 17 March as the company will now be preparing for and implementing the various pre-scheme transactions – required to be implemented before the scheme of arrangement between Distell and its shareholders can be implemented. The AGM has been rescheduled to 18 May 2023.

The original deal to acquire the remaining shares in Premier Fishing and Brands announced in early December via a scheme of arrangement has been amended. Initially African Equity Empowerment Investments (AEEI) made the offer to acquire the remaining 6.14% stake (15,976,380 shares) at R1.60 per offer share. The Takeover Regulation Panel has agreed to the substitution of the offeror with Sekunjalo Investments which controls AEEI.

Exemplar REITail has acquired from related party McCormick Property Development, a 50% undivided share in Mamelodi Square. The consideration payable for the stake is R116,5 million.

In early December 2022, Brait, the owner of Premier, backtracked on its plans to list the food manufacturer on the main board of the JSE, giving as its main reason an unconducive capital market environment. Instead, Brait said it would sell its shares to Titan and RMB. Informing shareholders, Brait now says it has been approached by a group of institutional investors who will commit to participate in an IPO by Premier. Brait says it is considering its options.

RCL Foods has disclosed it may dispose of its Vector cold chain distribution business following engagements with a potential buyer. The company, majority-owned by Remgro, did not give any further details.

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

African Equity Empowerment (AEEI) is to unbundle its 49.36% stake in AYO Technologies to shareholders by way of a pro rata distribution in specie in the ratio of 1 AYO share for every 2.89 shares in AEEI in a transaction valued at c.R509,6 million.

Cashbuild received the support of its shareholders to implement an odd-lot offer to shareholders holding fewer than 100 shares. The price paid will be a 5% premium to the 30-day VWAP of a Cashbuild share at the close of business on 17 March, 2023. The company will also repurchase 1,000,000 shares from former CEO Pat Goldrick.

The reverse takeover of Shaftesbury by Capital & Counties Properties first announced in June 2022 is complete and the entity has now changed its name to Shaftesbury Capital, with effect from 7 March 2023. The JSE code will change from CCO to SHC.

Octodec Investments and Fortress Real Estate Investments are to list their securities on A2X with effect from 14 and 16 March respectively. The companies’ listings on the JSE will be unaffected by the secondary listings.

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

South32 has increased its share repurchase programme by c. $50 million in anticipation of a stronger outlook for commodity prices in the second half of its financial year. This will enable the company to return $158 million to shareholders before September 2023. This week the company repurchased a further 527,525 shares at an aggregate cost of A$2,44 million.

African Media Entertainment advised that the company had repurchased 50,000 shares during 2022. This was in addition to the announced 451,775 shares repurchased in January this year. The shares were cancelled upon repurchase.

Glencore this week repurchased 12,900,000 shares for a total consideration of £64,76 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 27 February to 3 March 2023, a further 3,163,968 Prosus shares were repurchased for an aggregate €219,65 million and a further 524,864 Naspers shares for a total consideration of R1,73 billion.

Two companies issued profit warnings this week: Trencor and Metair Investments.

Four companies issued or withdrew cautionary notices. The companies were: Jasco Electronics, AYO Technology, Trustco Group and Tongaat Hulett.

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

The return of dual class shares

Johann Piek
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The return of dual class shares

The “man walking his dog on a leash” analogy is often used to describe the relationship between the economy and the stock market. Over the short term, the man (the economy) and the dog (the stock market) may move in different directions for a host of reasons. However, over the long term, both are likely to follow the same path.

The truth of the analogy is evident from the impact that South Africa’s macroeconomic environment and global economic pressures have had, and continue to have, on the country’s largest stock exchange, the JSE Limited (JSE). Since the 2008/2009 global financial crisis, South Africa has experienced weak economic growth against the background of numerous continuing challenges, including loadshedding and entrenched high levels of unemployment.1 Over this period, the JSE has also faced significant headwinds, including periods of substantial net-outflows in trading by foreigners in South African equities and bonds2, as well as a slew of JSE delistings3. The JSE has been commendably active in seeking to stem the tide of delistings, to enhance the attractiveness of the JSE as a listing destination, and to improve market confidence. Initiatives undertaken by the JSE include, inter alia, its “Cutting Red Tape” project4 and the memorandum of understanding entered into between itself and the New York Stock Exchange to collaborate on the dual listing of companies on both exchanges5.

It is against this background that the JSE, in May 2022, published a consultation paper with several proposals regarding its listings framework. One such proposal was for the reintroduction6 of dual class shares for new main board listings on the JSE. Since then, the JSE has consulted with market participants and, following a positive response7, has included dual class shares in its proposed amendments to the JSE Listings Requirements (Proposed Amendments).

As the name suggests, a dual class share structure involves a listed company having two kinds of shares, one of which confers additional voting power to its holders (Weighted Voting Share) when compared to other normal shares (Ordinary Share). Typically, Weighted Voting Shares and Ordinary Shares are identical, save for the voting element. Such a dual class share structure enables certain shareholders to retain voting strength (or even control) disproportionate to their economic interest in the company.

Dual class share structures allow companies to be listed and to raise equity capital in the market, without impacting the control enjoyed by their current shareholders. Such structures also help to shield a company against opportunistic takeovers, and investors driven by short-term gains at the expense of the company’s long-term vision.

The main criticism directed at dual class share structures is that they undermine shareholder democracy (i.e. one share, one vote), thereby weakening the protection typically enjoyed by shareholders, as well as shareholders’ ability to hold company executives to account. Dual class share structures enable minority shareholders with Weighted Voting Shares to frustrate the will of the larger shareholder body, resulting in, amongst others, the entrenchment of management. In order to mitigate the governance risks associated with dual class share structures, the JSE has proposed the introduction of a set of governance safeguards (Safeguards). The Safeguards are in line with the safeguards implemented by the JSE’s global peers8 who have, in recent years, also permitted dual class share structures. Notable Safeguards include:

• capping the number of votes attached to a Weighted Voting Share at 20;

• requiring the automatic conversion of Weighted Voting Shares to Ordinary Shares (on a one- for-one basis) if such Weighted Voting Shares are sold or transferred to any person or on expiry of a maximum period of 10 years from the company’s listing date;

• an enhanced voting process for certain matters, where all shares carry one vote each regardless of class. These matters include, inter alia, the variation of rights
attached to securities and the appointment or removal of independent non-executive directors; and

• mandatory disclosure of the terms of the dual class share structure in the company’s prospectus / pre-listing statement.

Provided the necessary protections are in place, the reintroduction of dual class share structures should be welcomed, as this may encourage high growth private companies to float on the JSE, thereby increasing its investable universe for both institutional and retail investors and allowing such investors to benefit from potentially valuable investment opportunities. One should not forget that mega cap companies such as Alphabet, Berkshire Hathaway, Coca-Cola, Nike and Meta have dual class share structures. If such companies had decided to remain private, millions of investors would never have benefited from their significant share price growth over time.

The willingness of the JSE to consider and follow global stock exchange trends, as well as its desire to adapt and remain competitive, should be welcomed.

1 https://theconversation.com/south-africas-economy-has-taken-some-heavy-body-blows-can-it-recover-183165
2 https://businesstech.co.za/news/finance/517618/foreigners-are-pulling-their-money-out-of-south-africa-jse-warns/
3 https://www.businesslive.co.za/fm/opinion/editors-note/2022-08-25-rob-rose-inside-the-jses-radical-overhaul/
4 https://bowmanslaw.com/insights/mergers-and-acquisitions/south-africa-amendments-to-the-jse-listings-requirements/
5 https://www.jse.co.za/news/news/new-york-stock-exchange-and-johannesburg-stock-exchange-announce-collaboration-dual
6 In 1999, the JSE Listings Requirements were amended to prohibit the creation of any new high or low voting shares. Issuers who had high or low voting shares at the time were exempted and were able to maintain such share structure and continue to be listed on the JSE.
7 73% of commentators supported the JSE considering the reintroduction of dual class share structures on the JSE.
8 The London Stock Exchange, the Hong Kong Stock Exchange and the Singapore Exchange.

Johann Piek is a Director | PSG Capital

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

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

Ghost Bites (Anglo American | Cognition | Fortress | JSE Limited | Momentum Metropolitan | Mustek | Quilter | Putprop | Royal Bafokeng | Sea Harvest)

The Finance Ghost
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Ghost Bites (Anglo American | Cognition | Fortress | JSE Limited | Momentum Metropolitan | Mustek | Quilter | Putprop | Royal Bafokeng | Sea Harvest)

Diamonds are still forever at Anglo American (JSE: AGL)

The latest De Beers sales results are in line with expectations

In the second sales cycle for 2023, De Beers sold $495 million worth of rough diamonds. That’s higher than $454 million in the first cycle, but well down on $652 million in the second cycle last year.

The management team is unconcerned, as the expectation was for purchases to be pushed out to later in 2023 because of economic uncertainty towards the end of 2022. De Beers also highlights positive trends in client demand for diamond jewellery.

De Beers is a very helpful source of profits in Anglo American, with fundamentals that are far removed from the commodities in the group.

Cognition is cash flush after selling Private Property (JSE: CGN)

The share price is up 42% in the past year, trading at close to NAV

This was a lovely value unlock play if you got in before the Private Property transaction. Cognition Holdings managed to sell that business for a fantastic price, leading to a huge jump in cash on the balance sheet over six months of R114 million to R213 million.

With total assets of R265 million and total liabilities of R33 million, almost the entire net asset value can be attributed to cash. This is why the share price is trading at close to tangible net asset value per share.

The company is busy repositioning the remaining businesses and has seen some progress in that regard. The management team talks about “realistic prospects to unlock value to shareholders in the short term” which could well mean a large special dividend or perhaps even a sale of remaining businesses.

For now, patience is needed.

Fortress: do you believe in life after REIT? (JSE: FFA | JSE: FFB)

I bet that Cher song is now stuck in your head (unless you’re too young)

Fortress is no longer a REIT. It’s now a property company, which means that dividends are taxed differently and the company has more flexibility in capital allocation. As I wrote before this issue was finalised, that may not be a bad thing.

The company has accepted its fate, with no plans to put another proposal in front of shareholders to simplify the shareholding structure in the short term. The management team stresses that shareholders can capture the full equity value of Fortress by buying the FFA and FFB shares in equal numbers. The real problem is the dividend stalemate because of this structure, as explained quite beautifully in this table:

They may as well invest in energy solutions and reduce debt, since the profits are trapped in the company because of the distribution rules of the dual share class structure.

The 23.7% strategic interest in NEPI Rockcastle is proving useful, mainly because Central and Eastern Europe has electricity. That’s one up on the local portfolio, where Fortress is taking strain thanks to Eskom.

JSE Limited is still a cash cow, but margins are down (JSE: JSE)

And yes, the JSE is listed on its own exchange!

This always confuses market newbies. JSE Limited is the company that operates the Johannesburg Stock Exchange (JSE), so it can be listed on its own product. Before this confuses you further, remember that Microsoft runs on Microsoft systems. It’s the same principle.

The market sees the JSE as a cash cow that offers a resilient revenue stream but minimal growth. This has played out in the year ended December 2022, with HEPS growth of 4% and a 2% increase in the dividend. With a full year dividend of 769 cents per share, the trailing dividend yield is now 6.9%.

The goal is to increase revenue from non-trading activity, which sounds strange for a stock exchange group. This is to diversify and make the business more resilient.

With revenue up by 5% and expenses up by 7.5%, margins went the wrong way. Thanks to inflationary pressures and South Africa’s low growth environment (or even negative growth based on the latest GDP numbers), I wouldn’t expect a material change in that trend.

With a flat performance over the past year (admittedly with no shortage of volatility), all that investors can smile about is that dividend yield. It’s not enough when you can do better on government bonds.

Momentum at Momentum Metropolitan (JSE: MTM)

Growth in HEPS of 45% does the trick

With an improved mortality experience in the aftermath of Covid, Momentum Metropolitan delivered strong growth in the six months ended December. All but two business units put in a positive performance, with Momentum Investments struggling with new volumes and weak market performance and Non-Life Insurance dealing with a high claim ratio.

Interestingly, negative fair value movements in venture capital investments drove a 47% drop in the group’s investment return. I’m not sure that this company should be taking such risky bets to be honest.

Return on equity on an annualised basis was 18.4%, up from 15.9% in the prior period.

The interim dividend is 43% higher than the prior period, coming in at 50 cents per share which is roughly 34% of normalised headline earnings. The group expects a solid earnings performance in the second half of the year as well.

Mustek grows the top line but margins are down (JSE: MST)

The company simply had too many laptops in stock coming into this period

In an adaptation of the famous saying in golf: revenue for show, margins for dough.

Mustek managed to grow its revenue by 17.9% in the six months ended December. That happiness was blunted by gross profit margin contracting by 190 basis points to 14.1% because of discounting on entry-level laptops. The net result was a modest increase in gross profit from R677 million to R691 million.

With a jump in operating expenses of around 11.5%, profit from operations fell from R253 million to R242 million. That’s not too bad, until you see the jump in finance costs.

Companies with debt on the balance sheet in this environment are facing significant pressure on margins, as many businesses are struggling to grow operating profit at a time when funding costs have increased sharply. Mustek is no exception, with finance costs up from R31 million to R76.5 million.

With all said and done, HEPS fell by 6.5% to 221.74 cents. The share price is R16.35, so the annualised Price/Earnings multiple of 3.7x is a reminder of how low the multiple can be for small caps on the JSE. I must also caution that simply doubling interim earnings as a rough calculation is a very rough calculation. You need to do more work than that before deciding whether to buy or not.

Kudos to the management team here: Mustek is big on share buybacks and so they should be, particularly at this valuation.

Quilter puts in a relatively flat performance in 2022 (JSE: QLT)

The focus is on building distribution strength in the UK wealth industry

In this case, you need to work with adjusted profit before tax for anything to make sense. On that basis, Quilter is slightly down for the year ended December 2022, a solid performance based on broader asset values. If you use profit after tax as reported, you’ll see an 7.5x increase in earnings!

An important metric in this business is net inflows as a percentage of opening assets under management and administration. This is a way of measuring how effective the distribution network is, along with how well the products are resonating with clients. This ratio fell from 4% in 2021 to 2% in 2022, which is why the CEO believes there is work to be done in the business.

Impressively, the dividend grew by 13% in 2022 despite the broader market pressures.

In terms of the outlook, the company hopes to see an improvement in investor sentiment this year, which would lead to an improvement in net flows. There’s been an overall deterioration in market conditions, with the goal of a 25% operating margin pushed out to 2025 from the previously set goal of 2023.

That goal was established in 2021, before an interest rate hiking cycle with a severity that few expected.

Putprop maintains the dividend despite earnings falling (JSE: PPR)

The company owns 15 properties across various sectors

With a market cap of R163 million, Putprop is a rather obscure property company on the JSE. The net asset value per share is R16.14 and the share price is just R3.80, so the discount to NAV is huge in this case.

Load shedding and other pressures led to a 22.7% increase in property expenses, so this was never going to be a happy time for the company. In the six months ended December, HEPS fell sharply from 43.24 cents to 25.52 cents.

Despite this, the interim dividend was consistent at 4.25 cents. The company isn’t a REIT, so the dividend is a lot lower than HEPS.

Renergen gives detailed guidance on Phase 2 (JSE: REN)

At full production (by FY27), annual EBITDA of R5.7bn to R6.2bn is expected

This is a brave target to release into the wild, but at some point Renergen needed to give shareholders an idea of what profitability will look like. The long-term spot price assumption is $600 per MCF, although trying to form a view on that is also really hard. There’s also the currency to try and forecast and the local LNG price.

In other words, this is an educated guess at best. Still, it’s something.

To give an idea of how small Phase 1 is relative to the planned Phase 2, the current phase is designed to produce a maximum of 2,700 gigajoules of LNG and 350kg of liquid helium per day. The next phase is aiming for 34,400 gigajoules of LNG and 4,200kg of liquid helium per day.

A lot of capital will be needed to build this project – $1.16 billion of it! With Renergen’s market cap currently at less than a sixth of that number, existing shareholders are going to be heavily diluted. That’s ok, provided capital is raised at solid valuations.

Options on the table include a $750 million debt package, a 10% sale of the holding company of the local projects to the Central Energy Fund for R1 billion, a potential international IPO and other additional equity capital. There is much to be done before completion is anticipated in 2026.

In a separate announcement, the company is asking shareholders for authority to issue up to 67.5 million shares, including in the US. The price must be no more than a 10% discount to the 30-day VWAP or the price on the date of the general meeting. This is a raise of approximately R1.4 billion at current share prices.

Compared to the current market cap of R3 billion, this means that if you’re sitting with a loss of 40% in your Renergen position because you bought at the frothiest time, that loss is about to be locked in if such a large raise goes ahead at these prices.

If you want to understand more about Renergen, listen to my recent Ghost Stories podcast where I had a detailed discussion with CEO Stefano Marani about the company.

Will Royal Bafokeng’s results still justify a bidding war? (JSE: RBP)

Impala Platinum and Northam Platinum are fighting over a group with a 50.9% drop in HEPS

These are unhappy times for Royal Bafokeng Platinum. With Impala Platinum and Northam Platinum both trying to acquire the company and a stalemate playing out with regulators, Royal Bafokeng finds itself in strategic limbo. It is difficult to make capital allocation decisions and to attract or retain talent, as there is great uncertainty over what might happen depending on who the winning bidder is.

This is a dangerous situation, particularly at a time when energy is a major issue in South Africa and commodity prices aren’t playing ball. Luckily, the rand basket price per 4E ounce actually increased slightly by 1.5% for the year ended December, driven by weakness in the rand that more than offset commodity price weakness in dollars. Platinum contributed 24.8% of revenue and palladium and rhodium contributed a combined 60.1%.

With inflationary pressures in the cost base, that increase is already nowhere near enough to protect profitability. When you combine it with poor production numbers at Styldrift (down 16.1%), there’s serious trouble. A 6.8% increase in production at BRPM couldn’t save the day here.

When production numbers drop, there’s a flywheel effect on profitability (in the wrong direction) because the production cost per unit increases. With overall production of 4E ounces down by 3.9%, the net profit line never stood a chance in this environment.

EBITDA fell by 29.7% and HEPS was crushed by 50.9%. Although there is a final dividend of 535 cents per share, the risks here are clear.

Unless this impasse is resolved, there may not be much of a business left to acquire. A company cannot operate under this level of uncertainty for such an extended period without serious long-term consequences. And at some point, will the bidders eventually give up?

It’s not nice seeing a game of chess playing out with so many jobs on the line in the target company, but that’s how markets work sometimes.

Sea Harvest invests further in abalone (JSE: SHG)

Tough recent results notwithstanding, Sea Harvest is investing for growth

Sea Harvest Group already owns 54% of the shares in Viking Aquaculture, an abalone producer in the Western Cape and Northern Cape. There are also two oyster farming operations in this group.

With high-value seafood core to Sea Harvest’s growth strategy, buying more shares in this company makes sense. The stake is being increased from 54% to 82%, which will allow Sea Harvest to integrate the company into its operations and extract synergies.

To pay for the transaction, there are five equal annual instalments of R42 million, plus interest at Prime less 2% per annum. After the company made a loss of R32 million in the year ended December 2022, there’s clearly a lot of value in this business well beyond what recent results would suggest.

With a total deal value of around R210 million, this is a significant step for Sea Harvest. It’s small enough to be a Category 2 Transaction though, which means no shareholder vote will be required.

Little Bites:

  • Director dealings:
    • Adrian Gore has executed a massive hedge over a portion of his Discovery (JSE: DSY) shareholding, buying protection below R146 per share and giving away upside over R250 per share and again at R297 per share. The current share price is R145 per share, so he’s clearly worried about a drop here. He also sold R7.3 million worth of shares.
  • In a surprise to surely nobody, the publication of the business rescue plan for Rebosis Property Fund (JSE: REB) has been delayed once again, this time to 17th March. Watch this space for the next delay (this is now the sixth extension).
  • Cash shell Trencor (JSE: TRE) released a trading statement that HEPS would be between 1.5 cents and 1.8 cents per share. Nobody holding shares in this company cares much about the income statement.
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