Wednesday, March 19, 2025
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Ghost Bites (Acsion | Blue Label | Clientele | Motus | PPC | Sephaku Cement | Visual International)

The Finance Ghost
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Ghost Bites (Acsion | Blue Label | Clientele | Motus | PPC | Sephaku Cement | Visual International)

A little less conversation, a little more Acsion (JSE: ACS)

This is the property development company you’ve probably never heard of

Acsion isn’t in the news very often, yet it has a market cap of roughly R2.3 billion. This group is focused on growing its net asset value (NAV) per share rather than just its dividend, so this sets it apart from the REIT structures on the JSE.

Liquidity in the stock is very limited, with a 21% move on Thursday as a perfect example of what happens when liquidity is tight.

Results have been released for the year ended February 2023, with revenue up by 22% and HEPS up by 14%. The NAV per share has increased by 12% to R23.90. At a closing price of R5.80, that’s one of the biggest discounts to NAV that you’ll find on the market.

Although there were repurchases during the year, there is also a cash dividend of 18 cents per share. At this enormous discount to NAV and with no pressure on the company as it isn’t a REIT, there should theoretically be no cash dividend at all. Every cent should be invested in share buybacks.

As was pointed out to me on Twitter after the first version of this article was posted (thanks @RossMalt), the CEO holds most of the shares in issue. This makes it difficult to execute share buybacks to a great extent, though the difference between a cash dividend of R71 million and buybacks of R121k is still vast. It really begs the question of why this group is listed in the first place, as minorities could be taken out at a large discount to NAV.

Blue Label announces new management at Cell C (JSE: BLU)

An ex-Vodacom executive has taken the top job at Cell C

I quite enjoyed the comment in this Blue Label Telecoms announcement about how new CEO Jorge Mendes is “poised to steer Cell C towards new heights of success” – this implies there are previous heights of success, which there most definitely aren’t. Cell C has been a financial disaster throughout its life, with Blue Label now giving it another roll of the dice with a new, more capital-light strategy.

In fairness, this is probably Cell C’s best chance of success. The announcement is just doing an excellent job of putting perfume on a pig.

Mendes is the former Chief Consumer Business Officer at Vodacom South Africa and has experience in various African markets. Let’s see what he can do!

The blandest of bland cautionaries at Clientele Limited (JSE: CLI)

Bland or not, the stock closed 20% higher

Although large bid-offer spreads always need to be considered when looking at one-day moves in JSE stocks, I still found it interesting that Clientele managed to close 20% higher after releasing the blandest cautionary possible.

The JSE doesn’t love these bland cautionaries that are drier than a small McDonald’s burger without tomato sauce. We don’t even know whether Clientele is looking to buy or sell a business. All we know is that shareholders should exercise caution when trading in the shares. That didn’t stop the late afternoon punters!

Highlights from the Motus investor day (JSE: MTH)

The company has made the presentation and recording available

An investor day is a wonderful thing if you hold the stock in question. Although there is often a lot of repetition of the most recent results, there are also updates on the state of the market and the recent performance.

The very first meaningful slide in this investor presentation from the Motus event deals with the “fragile consumer” and why that is the case. As one might expect, the list of problems in South Africa is longer than in the UK and significantly longer than in Australia.

This is a smart way to kick off the story around the investment thesis, as Motus is pursuing a diversification strategy. The target is a 50-50 EBITDA split between vehicle sales and non-vehicle sales. There is also a goal to get to a 70 – 30 split in terms of SA vs. international contributions to operating profit. These aren’t pie in the sky targets, as the group is pretty close on both metrics.

And for all the noise around electric vehicles in the market, there’s a great slide in the presentation showing the level of adoption in SA vs. other countries:

There’s another slide that I want to highlight. It quite brilliantly shows how the cost of mobility has gone through the roof in recent years, driven by everything from currency weakness through to inflation and fuel costs. Consumers are trading down in response to this, with banks still happy to lend money against the cost of vehicles. In a country with such limited public transport alternatives, here’s part of why our savings rate is so poor:

You’ll find the full presentation here and the recording here.

PPC is still loss-making (JSE: PPC)

But the headline loss at group level is smaller than before

As a strong reminder of what happens when a balance sheet goes wrong in a complicated African group, PPC reports based on the “SA obligor group” and that obligation relates to debt. In other words, this is the part of the group that has to keep the banks at bay.

One of the biggest threats to the company is cement imports, with a weaker rand actually helping PPC in that context. But despite the coastal regions enjoying better competitiveness against imports, volumes in the SA obligor group still fell by 5.8% because of pressure on the inland region. Thankfully, pricing increases at least took the revenue growth to 1.7% for South Africa and Botswana collectively. Costs were up 4%, so that means margins went the wrong way.

EBITDA in the SA obligor group fell by 26% to R570 million in the year ended March 2023. Importantly, net debt reduced considerably from R1.06 billion to R800 million. This is a decent debt to EBITDA ratio and it excludes any dividends from Rwanda and Zimbabwe.

The business in Zimbabwe is debt-free and achieved EBITDA of R365 million, down 7%. This allowed PPC to receive R147 million in dividends (net of withholding taxes), significantly higher than R91 million in the prior year.

Rwanda is the jewel in the crown right now, with EBITDA up by 31% to R447 million. There is net debt of R105 million in that group. The SA obligor group received dividends of R79 million, net of withholding taxes. The annoyance is that PPC only holds 51% of this jewel, hence the significant difference between EBITDA and the dividend received.

So from a balance sheet perspective, the hard work to get net debt to a reasonable level has certainly paid off. If you include the dividends from Zimbabwe and Rwanda in the SA obligor group EBITDA, the net debt to EBITDA ratio looks manageable.

Despite all this effort, group HEPS is still a loss of between -8.0 cents and -10.5 cents. This is an improvement on -13 cents in the comparable period but is obviously still a loss.

As in every PPC announcement, the group reminds the market that it has excess capacity and is ready to respond to an uptick in infrastructure spending and economic growth.

Sephaku’s local business drops to breakeven levels (JSE: SEP)

This has had a significant impact on group results

For the year ended March 2023, Sephaku Holdings has noted a drop in HEPS of between 38% and 46%. Although we have to wait until detailed results on 28 June to get all the information, we do know where the problems were.

Sephaku Cement managed to maintain market share but sadly market share is no measure of profitability. Financial performance deteriorated to breakeven levels, which obviously hit the group numbers. Thankfully, the impact was blunted somewhat by a strong performance at Métier across revenue and profit.

Visual puts the concern in going concern (JSE: VIS)

This listed company had R3.7k in the bank at the end of February – not a typo

It’s not every day that a company will happily continue trading with current liabilities exceeding current assets by 78 times. Again, that’s not a typo. Current liabilities at Visual International Holdings are R25.3 million and current assets are R0.3 million.

This property developer is in a world of hurt, with SARS fights being part of the mix and even a claim by the old auditors that the company is now defending.

The company is a going concern in the opinion of the directors for various reasons, including disposals of land and the development at Stellendale Junction that is finally underway. I hope they are right, as the Companies Act provisions related to reckless trading aren’t pretty. I’ve seen companies go into business rescue with healthier balance sheets than this one.

Little Bites:

  • Director dealings:
    • In case you thought your last derivative trade was impressive, the latest from Dr Christo Wiese in Shoprite (JSE: SHP) should bring you back down to earth. He bought puts with exposure of R226.5 million at R226.45 per share and sold calls with exposure of R236 million at R236.18. These are December 2023 options. He also bought single stock futures contracts with exposure of R465 million.
    • A director of Investec (JSE: INL) has sold shares worth £829k.
    • An associate of a director of Ethos Capital (JSE: EPE) has bought shares worth roughly R5 million.
    • Associates of two directors of Ascendis Health (JSE: ASC) have each bought shares worth R514k (total purchase R1.03 million)
  • I skimmed the proposed amendments to the JSE Listings Requirements in terms of a new BEE Section on the exchange. One of my great irritations is how tiny the local investable universe is for BEE investors, especially when companies like Absa add to the problem by doing fresh deals that don’t have a listed element available to retail investors. The new rules relate to the listing of BEE special purpose vehicles. It would be great to see more listings in this part of the market as a way to encourage saving and investing.
  • In an important step for the working relationship between the two companies, the CEO of Sanlam (JSE: SLM), Paul Hanratty, has been appointed to the AfroCentric (JSE: ACT) board as a non-executive director. Marinda Dippenaar has also joined the AfroCentric board from African Rainbow Capital.
  • In a very fluffy ESG-filled announcement that says a lot but also doesn’t say very much at all, Anglo American (JSE: AGL) announced a collaboration with Jiangxi Copper in China on “responsible copper” – which means knowing how the stuff is mined, processed and brought to market. It reads like a government announcement about a foreign visit, with no indication of what this actually means for shareholders.
  • Buried at the bottom of an announcement about its AGM, Finbond (JSE: FGL) announced that Protea Asset Management (linked to Sean Riskowitz) now holds 12.08% in the group after acquiring more shares.

Ghost Bites (Labat | Mantengu Mining | Marshall Monteagle | Naspers + Prosus | Shaftesbury | Spar)

The Finance Ghost
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Ghost Bites (Labat | Mantengu Mining | Marshall Monteagle | Naspers + Prosus | Shaftesbury | Spar)

Labat takes the risky approach with its rights offer (JSE: LAB)

It is highly unusual to see a structure like this

Given the lack of support for small caps on the JSE, it’s very rare to see an “exposed” capital raise, like a rights offer without an underwriter. Companies generally push for a capital raise that technically cannot fail, thanks to the presence of an underwriter who is usually a large existing shareholder or a new shareholder looking to take a strategic stake.

Cannabis group Labat is taking a different route, looking to raise R74.7 million without the support of a genuine underwriter. Strangely, the offer price is 12 cents per share at a time when the share price is 8 cents a share. As a final twist in this tale, no excess applications are allowed, so any rights that aren’t taken up by the rights holder will simply lapse.

I’m not sure what’s going on here, because no company that is serious about raising money uses a structure like this. They want to use the capital to invest in the infrastructure around the SAPHRA extraction licence, with any leftovers set aside for working capital.

Directors and associates will “partially underwrite” the offer by committing to capitalise existing amounts owed to them. As I understand it, that means they would offset loans against equity, which is hardly a capital raise that helps drive growth. No commission is payable to them, as one would hope.

This is a most unusual situation, not least of all when the market cap of R50 million is well below the proposed capital raise!

Mantengu Mining reports on its first Langpan year (JSE: MTU)

This is the base against which earnings will be measured going forward

Mantengu Mining has released results for the year ended February 2023. This is the first year with the Langpan Mining reverse takeover in the numbers, a deal that was effective on 27 July.

The accounting is complicated here, with an attempt made by accounting rules to make the comparable period useful by including Langpan numbers that had nothing to do with Mantengu in that period.

The commissioning of the Langpan chrome beneficiation plant took place after year end, so that will be the real focus of the numbers going forward.

For the sake of completeness, Mantengu recorded a loss for the year of R16.9 million.

Marshall Monteagle’s earnings evaporate (JSE: MMP)

Earning in ZAR and reporting in USD isn’t ideal

FMCG support business Marshall Monteagle has released a trading statement for the year ended March 2023. It doesn’t make for pretty reading.

The company reports in USD and earns in ZAR, which is the first problem based on the rapid devaluation of our currency. The other problems are inflation and losses in South African trading subsidiaries.

HEPS has fallen from positive $7.9 cents in the prior period to a headline loss of $2.3 cents in this period.

Naspers and Prosus released trading statements (JSE: NPN | JSE: PRX)

I love the reference to a “market correction in internet valuations”

In case you don’t know the story of Naspers and Prosus, it goes something like this…

Group makes investment in China many years ago. Investment does insanely well. New management team inherits cash cow. New management team takes cash and incinerates it in stupid deals. New management team becomes fabulously wealthy along the way. Market shouts. New management team doesn’t listen, putting in place more ridiculous structures to keep buying time. Market shouts more. New management team eventually listens and buys back shares instead of throwing cash in the furnace. New management team celebrates this success like it was their own. New management team becomes wealthier.

The sale of shares in Tencent and the repurchase of shares by Prosus has created $29 billion worth of value, according to the management team. Of course, what they don’t say is that the value was destroyed by the company in the first place. It should rather say “recovered $29 billion worth of value” – a lot closer to the truth.

Headline earnings per share has fallen by between 73.6% and 80.6%. A lower contribution from Tencent is obviously part of this, with higher impairment charges on the portfolio due to a “market correction in internet valuations” – of course, those were the exact valuations at which they were merrily buying assets during the pandemic.

Just to confuse you even further, the share price is up nearly 70% over the past year. This is a direct result of the share buybacks closing the gap to NAV, rather than anything to do with performance in the rest of the portfolio. Over 3 years, the share price is flat.

As for Naspers, the HEPS story and underlying drivers are all similar to Prosus for obvious reasons. The share price is up 82%, as Naspers has been a relatively larger beneficiary of the discount closing. Over 3 years, you would’ve made just over 6% in Naspers – in total.

Remind me again what this management team gets paid? Actually, please don’t. I have enough to deal with.

Shaftesbury Capital gave a detailed update at the AGM (JSE: SHC)

This is a “first 100 days” speech that you normally see in politics

After Capital & Counties merged with Shaftesbury and primarily adopted the latter’s name, the enlarged group (Shaftesbury Capital) obviously wants to have clear communications with the market. The AGM featured a detailed trading update that was released on SENS, covering the first 100 days of life as a merged group.

It’s not quite 100 days mind you, unless we are talking business days. For the first five months of the year, leasing transactions saw an uplift of 6% vs. the estimated rental value given at December 2022. Happily, the cost savings indicated in the merger documentation are running ahead of schedule, so that’s good news for margins.

I found it quite surprising that the biggest rental uplift vs. expectations is coming from office properties, where rents are up 8%. Residential was up 4%, hospitality and leisure 5% and retail 7%.

To give you a sense of how upmarket this London portfolio is, they make reference to restaurant openings by Michelin Star chefs. This isn’t your local food court with a Steers, I’ll tell you that much.

With significant debt refinancings on the horizon, investors need to keep an eye on the weighted average cost of debt.

No dividend at Spar (JSE: SPP)

When a company announces a SAP project, hit the sell button

I’ll never understand how a SAP project can cause so much pain at a retailer. Shoprite had its fair share of challenges, with Spar as the latest victim of go-live challenges. I don’t have the time to work back through Ernie Els’ career to figure out whether his SAP branding on his cap caused him any missed shots, but it wouldn’t surprise me. The SAP issues in KZN still haven’t been sorted out, amazingly, which means huge inventory and ordering problems in the region.

Spar’s troubles can’t be exclusively blamed on SAP, that’s for sure. They are the masters of scoring own goals, with diluted HEPS falling by 30.2% in the wake of huge management changes and no shortage of controversy. This time, we can’t even attribute the pain to the business in Poland.

Despite group turnover being 7.9% higher, operating profit fell by 17.5%. Add on the cost of debt and you can quickly see why HEPS fell by over 30%.

SPAR Southern Africa managed to grow turnover by 5.6%. If we unpack that number, core groceries were up 7.9% against price inflation of 10.8%, which means volumes fell sharply. TOPS turnover fell by 1.9%, admittedly against a strong base where South Africans were unleashed from lockdowns. Build it saw turnover fall by 3.8%, nothing we aren’t used to seeing in the building sector. At least S Buys Pharmacy at SPAR grew by 20% in this period, admittedly off a small base vs. the rest of the business.

In Ireland and South West England, BWG Group saw turnover increase by 8.8% in local currency and 15.1% as reported in ZAR. There was far less joy in Switzerland, where turnover fell 4.3% in local currency and 6.9% in ZAR. People in Switzerland literally cross the border to buy groceries, something that wasn’t possible when borders were closed in the pandemic. In Poland, growth in local currency was 4.9% and in ZAR was 9.3%, with a significant increase in retailer loyalty after a difficult period with the newly acquired franchise network. The Polish business is unfortunately still loss-making.

Even if you knew nothing about the balance sheet, you wouldn’t be surprised to learn that there is no dividend based on these numbers. But when you read the section on net debt, you’ll very quickly realise that your best chance of cash back from Spar is a coupon at the till. Group net debt has ballooned from R9.8 billion at 30 September 2022 to R12.8 billion, with a breach of the leverage covenant that lenders are waiving for now at least. A major reason for the breach is the translation of foreign debt into ZAR.

This is going to be a tough journey.

Little Bites:

  • Director dealings:
  • It seems so strange that a property management company internalisation needs to be approved by the competition authorities, but the rules are the rules. The Investec Property Fund (JSE: IPF) deal is big enough to require a merger filing. The Competition Commission has approved the deal without conditions and the Competition Commission Tribunal must now consider it.
  • The vote on the business rescue plan for Tongaat Hulett (JSE: TON) and two of its subsidiaries has been postponed to allow the business rescue practitioners to amend the plans of the companies to take into account various developments.
  • Steinhoff (JSE: SNH) has announced that the hearing for the WHOA Restructuring Plan will take place on 15th June. This will help shareholders find out whether their shares are worthless now or later.

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?

A short and quiet week on the M&A front with news focusing rather on what was not happening in South Africa.

Exchange-Listed Companies

Glencore is to dispose of its 50% stake in virtually integrated business, Viterra, which is focused on the global agricultural product value chain. Viterra is to be merged with Bunge, a company connecting farmers to consumers to deliver food, feed and fuel globally. The deal is expected to realise significant value to Glencore. Under the terms of the agreement, Glencore will receive c.$3,1 billion in Bunge stock (32,8 million shares, representing 15% in the combined group) and $1 billion in cash.

Glencore (take three). The company continues in its quest to implement a deal with Teck Resources with the company proposing an alternative offer to acquire the steelmaking coal business Elkview Resources (EVR). While the financial details of a proposed transaction were not disclosed, the latest proposal provides a middle ground for both companies – an exit for Teck Resources from the coal business and the option for Glencore to split its business into CoalCo and MetalsCo. Glencore’s first prize remains a merge with Teck Resources and a demerge of the coal business, having offered $8,2 billion to Teck shareholders who did not want exposure to the coal business.

Telkom has, it is reported, rejected the latest offer from the Maseko-led consortium with the Business Times reporting that the consortium had offered R46 per share for a controlling stake. Management has requested that the consortium provide further clarity on several matters including the proposed offer price and certainty of funding.

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

Labat Africa intends to raise a maximum of R74,68 million via a partially underwritten (by directors) rights offer for working capital purposes with the balance to be retained in an interest-bearing cash reserve account. If fully subscribed, 622,312,545 shares will be issued at 12 cents per rights offer share. Currently the company has a market capitalisation of R49,79 million with the share price trading at 8 cents.

Ellies has proposed to raise R120 million via a Rights Offer to part fund the acquisition of Magetz Electrical and Power On Wheels announced in February. Mazi Asset Management and Imvula Education Empowerment Trust have, together agreed to underwrite the proposed capital raise. Shares will be issued at R0.07 per rights offer share.

Purple Group has successfully raised R105 million via the issue of 129,629,630 shares at an offer price of 81 cents. The rights offer was oversubscribed and accordingly SIH in its capacity as underwriter was not required to subscribe for any shares.

Oasis Crescent Property Fund unit holders representing 45.4% of units qualifying to receive a distribution have elected to reinvest their distribution. The company has accordingly issued 748,452 units in terms of its scrip dividend election at R23.91 per unit amounting to R17,89 million.

Shareholders holding 28.07% of Dipula Income Fund shares have elected to receive the dividend re-investment option resulting in the issue of 18,253,926 new shares retaining R64,25 million in new equity for Dipula.

As part of its capital optimisation strategy, Investec Ltd acquired on the open market a further 552,644 Investec Plc shares at an average price of 451 pence per share (LSE and BATS Europe) and 752,733 Investec Plc shares at an average price of R107.42 per share (JSE).

Brait has revealed to Business Day that it aims to wind-down, sell and unbundle its remaining assets which would result in Virgin Active remaining as the listed entity with a primary listing in Luxembourg and a secondary listing on the JSE.

Merafe Resources will join the growing number of JSE-listed companies to take a secondary listing on A2X. The company will trade on the exchange from June 21, 2023. The listing of Merafe brings the number of instruments listed on A2X to 135.

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:

Investec’s share repurchase programme has been renewed and commenced on May 30. The programme will end on or before September 29. This week 778,251 shares were repurchased at an average price per share of R106.07. Since November 21 2022, the company has repurchased 11,200,577 shares at a cost of R1,2 billion.

South32 this week repurchased a further 1,327,431 shares at an aggregate cost of A$5,17 million.

This week Glencore repurchased a further 11,760,000 shares for a total consideration of £51,9 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 June 5 to June 9 2023, a further 1,692,901 Prosus shares were repurchased for an aggregate €111,41 million and a further 364,626 Naspers shares for a total consideration of R1,14 billion.

Seven companies issued profit warnings this week: Novus, Thungela Resources, African Equity Empowerment Investments, Mantengu Mining, Prosus, Naspers and Marshall Monteagle.

Four companies issued or withdrew a cautionary notice: Afristrat Investment, Telkom SA, enX and Ellies.

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

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

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

DealMakers AFRICA

Société Générale, the European financial services group, is to divest of its stakes in its African subsidiaries in Congo (93.5%), Equatorial Guinea (57.2%), Mauritania (95.5%) and Chad (67.8%). Pan-African banking groups Vista and Coris will acquire the subsidiaries. Financial details were undisclosed.

Two of Egypt’s largest entrepreneur communities, The GrEEK Campus and MQR, have announced their merger. The entities combined have a total resident community of 3,500 members representing over 450 companies. The two brands will continue to operate independently under a centralised leadership. Financial details were undisclosed.

Digital Africa, an organisation investing in technological advancement and innovation in Africa, has made an undisclosed investment in Ivorian startup Fatala Digital House. Fatala is a digital services company assisting organisations in Europe and Africa on their path to digital transformation. The investment by Digital Africa is its first in Côte d’Ivoire.

Egyptian logistics platform Trella, which connects shippers with qualified carriers to seamlessly move and manage loads, has raised US$3,5 million from Avanz Capital Egypt. The startup, which also operates in Saudi Arabia, the UAE and Pakistan, will use the funds to expand and develop its logistic solutions.

Nigerian startups Messenger, a logistics platform and customer engagement solutions provider Termii, have received funding from Nama Ventures. The Saudi Arabian venture capital fund led a pre-seed round in which Messenger raised an undisclosed amount. Termii raised US$3,6 million in a round led by Fintech Collective and Ventures Platform with participation from several investors including Nama Ventures and Launch Africa Ventures.

The International Finance Corporation (IFC) has announced a US$257,4 million debt ($100 million) and equity ($157 million) injection in Safaricom Ethiopia. Following the transaction, IFC will hold a minority stake in Safaricom Ethiopia. Funds will be used to create a competitive market for mobile connectivity.

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

Risk it for the biscuit: opportunities for private equity in business rescue

Jessica Osmond and Tobie Jordaan
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Risk it for the biscuit: opportunities for private equity in business rescue

Private equity firms have long been known for their ability to strategically identify and act on opportunities where others may not see them, and business rescue is no exception.

Business rescue presents a unique opportunity for private equity firms and investors to invest in companies that are struggling financially, but that, with the right resources and support, have reasonable prospects of a profitable turn around or rehabilitation.

With the increase in interest rates, rising inflation and relentless loadshedding, the economic strain experienced by businesses and consumers around the country continues to grow. It is only a matter of time until we see a surge in business rescues, where companies are left with little to no option but to restructure their debts through mechanisms provided for in the Act. This presents enormous opportunity for private equity players in the market who understand how business rescue may be used as an attractive vehicle to pursue their investment objectives. Private equity firms play a pivotal role in the distressed and restructuring sector as they are able to act quickly and decisively, which is vital in ensuring a successful and efficient rescue.

Chapter 6 of the Companies Act provides a rehabilitation mechanism for financially distressed companies through the process of business rescue, but one of the prerequisites for placing a company in business rescue is being able to prove that there is reason to believe that the company can be successfully rehabilitated, and this can look different from one distressed company to another.

Since Chapter 6’s inclusion in the Act, business rescue has continued to evolve, and the interplay between various sectors, particularly in the private equity, capital investments and distressed mergers and acquisitions space, has become evident.

While business rescue can be a complex and challenging process, for those with the right expertise and experience, it can be used as an opportunity to create significant value in the long run.

Unlike other potential investors, private equity firms typically have the resources and operational expertise and experience to undertake the necessary due diligence and make swift investment decisions, affording them the ability to take advantage of the opportunities presented in a distressed scenario.

This can be particularly valuable in a business rescue situation, where time is often of the essence and the company may need significant operational improvements to return to profitability. Similarly, the business rescue practitioners are often under immense pressure to ensure that processes are followed in accordance with the time frames stipulated in the Act and the approved business rescue plan.

It’s no secret that when a company is struggling financially, its assets are often undervalued or overlooked by investors. However, in such circumstances, private equity firms are able to leverage their experience to acquire these assets at a discount, seeing the potential to generate significant value in the long term. Being able to take advantage of these opportunities may also afford these firms an invaluable window to secure a position in industries in which there are significant barriers to entry, where acquiring distressed assets may be one of the few ways to gain a foothold in the market.

Apart from their unrivalled expertise and resources, private equity firms are also able to bring significant financial resources to the table in a business rescue or distressed situation. This is particularly important given that the company in rescue is, more often than not, struggling with significant debt and disgruntled creditors and stakeholders. This capital injection can provide the necessary funds to compromise its debts, or restructure the debt in such a way as to allow the company to return to solvency.

Whilst, in these circumstances, private equity can offer high returns in the long run, this type of investment is not without risk. Like with most investment strategies, there is often uncertainty as to whether the investment will pay off, and sometimes even more so when investing in distressed companies. To best mitigate this risk, private equity investors should appreciate the importance of winning over the cooperation and approval of stakeholders – being both creditors and shareholders. This may involve working alongside the business rescue practitioner in conducting extensive due diligence, analysing the company’s financials and operations in detail, and developing a comprehensive plan for turning the business around.

Much like in instances of distressed mergers and acquisitions, we are seeing an uptick in the interplay between private equity takeovers or buy-ins as a means of rehabilitation in the business rescue space. This is promising for the future of business rescue and other restructuring endeavours, as it serves as a win-win for investors and companies looking to return to a healthy position of solvency.

Jessica Osmond is an Associate, Dispute Resolution and Tobie Jordaan a Director in Cliffe Dekker Hofmeyr’s Dispute Resolution practice and Head of its Business Rescue, Restructuring & Insolvency sector.

This article first appeared in Catalyst, DealMakers’ quarterly private equity publication

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

The increasing focus on public interest considerations in African competition policy

Lerisha Naidu, Angelo Tzarevski and Sphesihle Nxumalo
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The increasing focus on public interest considerations in African competition policy

There has been a general upward trend in competition policy enforcement across the continent over the past few years. African jurisdictions have strengthened their competition and antitrust regimes by way of amendments to existing legislation, the introduction of new laws and regulations, and renewed fervour and political will to enforce existing laws. Most notably, there has been a growing convergence of competition law and social policy on the continent.

The central tenet of competition policy is that inclusive economies yield better outcomes for both producers and consumers. Recent trends indicate that governments in various parts of the world, particularly Africa, are moving away from the purely economic origins of competition regulation, and are instead adopting a model that recognises and, to some extent, caters to the broader needs of modern society and socioeconomic transformative narratives. In this context, the South African Competition Act was amended in 2019, to ensure economic transformation (among other things) by providing mechanisms to address high levels of economic concentration, enhance small business development, and combat the “racially-skewed” spread of ownership through merger control, as well as by vesting the authority with increased powers to launch market inquiries into highly concentrated industries and impose structural remedies to facilitate the effective and sustainable participation of small and medium enterprises (SMEs) and historically disadvantaged persons (HDPs) in the economy.

As another illustration, competition authorities in Africa have increasingly acknowledged their role as protectors of fair practice and consumer protection, and have stated their intention to enforce these principles in the future. Across the continent, the price volatility of essential food items is a growing concern. In addition, businesses in the consumer goods and retail sector are facing significant supply chain disruptions due to geopolitical, environmental, and infrastructure challenges.

The issue of price volatility in relation to essential food items was addressed in the South African competition authority’s Essential Food Pricing Monitoring report, which included a list of fruits, meats and cooking oils that have recently experienced price volatility. It was noted that poorer communities were most negatively affected by such price increases. Having said that, it bears noting that not all increases in the cost of essential foods were caused by the pandemic. Changing weather conditions (from drought to heavy rain), oil price fluctuations, severe supply chain blockages and massive geopolitical challenges have all contributed to a decrease in supply, and subsequent price increase. The authority stated that it would continue to keep a close eye on the price of essential and imported food items to ensure that anticompetitive behaviour does not occur, and that the increase in prices of essential food items can be justified. After noting “unjustified price increases” in recent years, the authority announced in early 2023 that it would investigate the prices of a variety of essential food products, including bread, cooking oils, corn meal, rice, flour and margarine. It noted that food was a priority sector due to the fact that poor consumers spend a significant portion of their income on essential foodstuffs.

Public interest considerations are especially taken into account in the case of merger control, but they can also be factored into investigations into alleged abuses of dominance and other prohibited practices. Notably, merger regulation in South Africa, and in many other African countries, is heavily influenced by the government policy agenda. Many African merger control regimes have developed a competition policy approach that balances traditional competition law considerations with public interest concerns, especially in terms of market concentration, access to competitive markets for SMEs, greater spread of ownership by firms owned by HDPs, and employment considerations. For example:

• Botswana’s competition legislation mandates “certain aspects of general public interest.” The use of the specified public interest considerations is especially notable in the context of mergers. In previous years, the authority imposed conditions on merger clearances aimed at promoting the sustainability and growth of a sector by ensuring that the merged entity sources its input requirements from local suppliers; maintaining and creating employment; promoting citizen economic empowerment by ensuring that Botswanan citizens hold shares in the merged entity; ensuring the professional development or employability of local citizens by ordering their appointment to certain positions in the merged entity; and promoting citizen economic empowerment by ensuring that Botswanan citizens hold shares in the merged entity.

• In Ethiopia, the authority considers the contribution that a merger will make to accelerating economic development, promoting technical knowledge transfer, improving the production and distribution of goods and services, and enabling SMEs to be capable and competitive.

• Namibia and Nigeria, like South Africa, consider the likely impact of a merger on a specific industrial sector or region; employment (whether the merger will result in redundancies); SMEs’ and HDPs’ ability to effectively access or compete in the market; and national industries’ ability to compete in international markets. The Namibian authority frequently considers the employment implications of a transaction. For example, during the 2017- 2018 fiscal year, the authority imposed employment conditions on the majority of the mergers evaluated, with the result that approximately 860 jobs were secured.

• In Kenya, the Competition Act includes a public interest test in merger control that assesses a merger’s impact on a particular sector or region, the creation and retention of employment, and the competitive access that SMEs have to the market. The Act also provides for the granting of exemptions to certain indispensable restrictive practices aimed at increasing exports, enhancing efficiency in production and maintaining the quality of services, only under exceptional and compelling reasons of public policy.

• In Tanzania, the public interest factor is especially important when a merger is likely to create or strengthen market dominance. In such cases, the authority may consider whether the merger is likely to benefit the public by increasing efficiency in production or distribution, promoting technological or economic progress, increasing efficiency in resource allocation, or protecting the environment.

Although legislatively mandated public interest factors frequently carry equal weight, the employment effects and promotion of ownership by local citizens (particularly in Botswana) and HDPs (particularly in South Africa) are scrutinised by the authorities in every transaction. Conditions are almost always imposed when job losses are intended or anticipated, even when the numbers are negligible. Even if job losses are not anticipated, conditions may nevertheless be imposed to safeguard against potential merger-specific job losses in cases of uncertainty. The promotion of greater ownership diversity, particularly among HDPs, is also gaining importance, especially as transactions that reduce ownership by historically disadvantaged individuals are scrutinised more closely by authorities. In the last 24 months, the South African competition authority has been particularly active, imposing public interest conditions on more than 74 mergers relating to employment, and with heavy focus on greater spread of ownership by HDPs, as well as local production and procurement, amongst others.

As social imperatives play an ever-increasing role in the development of competition policy, the trend of placing emphasis on the empowerment of SMEs as a means of fostering a healthy economic ecosystem, as well as the need to provide adequate opportunities to HDPs, will continue into the future. Furthermore, with digital innovation allowing many previously excluded individuals and businesses to participate in the African economy, it is likely that public interest imperatives will play a critical role in the development and implementation of competition law in the digital space across the continent.

The African Continental Free Trade Area (AfCFTA) is providing impetus for the continent to move toward the adoption of a pan-African competition policy, which could be geared toward socioeconomic transformative goals (such as maintaining acceptable consumer prices) and a consistent approach to public interest. In February 2023, the African Union Assembly of Heads of State and Government adopted the protocol on competition policy.

Doing business in Africa will necessitate awareness of the public interest mandates of competition authorities and how practices promote or impact public interest outcomes, as enforcement trends on the continent indicate that public interest considerations will significantly influence broader enforcement activity, especially through prioritisation policies.

Lerisha Naidu is a Partner and Head of the Antitrust & Competition Practice, Angelo Tzarevski is a Director Designate and Sphesihle Nxumalo is a Senior Associate | Baker McKenzie, Johannesburg

This article first appeared in DealMakers AFRICA, the continent’s quarterly M&A publication.

DealMakers AFRICA is a quarterly M&A publication
www.dealmakersafrica.com

MultiChoice returns rest of Africa to profit and continues to expand

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MultiChoice returns rest of Africa to profit and continues to expand

MultiChoice Group (MCG, or the group), Africa’s leading entertainment company, returned its Rest of Africa business to profitability and further expanded its consumer services ecosystem during the year ended 31 March 2023 (FY23).

“We continued to scale our overall subscriber base and benefited from a strong performance in the Rest of Africa, that delivered a trading profit for the first time since our listing in 2019. It is a remarkable performance by the team considering that they have had to absorb almost ZAR3bn in currency losses in the last four years” says Calvo Mawela, Chief Executive Officer. “We increased the breadth and depth of services offered to our customers and continued to grow our entertainment ecosystem, most notably through our recent streaming partnership with Comcast,” he added.

Visit the Group’s Investor website for more results information

Read the full press release here:

MultiChoice-FY23-Results-Press-Release

Ghost Bites (AEEI | Attacq | Brait | Delta | Ellies | enX | Ethos Capital | Glencore | MultiChoice | Resilient | Telkom)

The Finance Ghost
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Ghost Bites (AEEI | Attacq | Brait | Delta | Ellies | enX | Ethos Capital | Glencore | MultiChoice | Resilient | Telkom)

A closer look at AEEI (JSE: AEE)

There’s not going to be much left after AYO is unbundled

African Equity Empowerment Investments (AEEI) reported large losses for the six months to February 2023, both from continuing and discontinued operations.

With AYO Technology due to be unbundled, the next largest segment is Premier Fishing. After that, there’s very little to talk about in the group. For example, the events and tourism “segment” generates just R7.3 million in revenue of which only R4.7 million is external, with a loss of R2.8 million.

Speaking of fishing, that segment only managed a profit of R12.4 million off revenue of R223 million.

The company points to the impairment in the investment in BT Communications Services South Africa as the major driver of losses in this period. Whilst that may be true for the basic loss per share, the reality is that the group is marginal at best when continuing operations are viewed overall.

Attacq on track for FY23 guidance (JSE: ATT)

A pre-close update presentation has been made available

As we head into the final couple of weeks of the year ending 30 June 2023, Attacq has released a pre-close presentation (available here) that talks to the company being on track to deliver growth in distributable income per share of between 8% and 10%.

Interestingly, Mall of Africa is the second highest growth in trading density over the 12 months to April (take note of the period here), with growth of 19.2%. Only Waterfall Corner posted higher growth of 20%.

On the balance sheet, weighted average cost of debt has increased from 9.4% to 10.0% but total borrowings have come down slightly.

Attacq will be presenting on Unlock the Stock on 22 June (alongside Tharisa – so you get to learn about two companies at once). Thanks to our brand partner A2X, you can attend for free by registering here>>>

Brait’s latest NAV per share is R7.06 (JSE: BAT)

The share price of R3.45 is a discount of over 50% to NAV per share

Brait has released results for the year ended March 2023. It’s been an important period for the group that finally saw the listing of Premier, the FMCG business that has been posting solid results. This raised R3.6 billion for Brait in addition to the R924 million pre-listing dividend.

Aside from the stake in Premier that can effectively be bought at a discount through Brait, shareholders will be focusing on Virgin Active and to a far lesser extent, New Look. This is because Premier is now only 21% of Brait’s total assets.

Virgin Active grew membership by 14% over the past 12 months. The group is still valued on a 9x two-year forward EBITDA multiple, which I feel is a high multiple that is partly responsible for the discount to NAV that the group trades at. As a massive fan of my local Kauai, I’m not surprised to see that Real Foods is doing well within this segment.

It’s a tough gig selling gym memberships in South Africa, with sales over the six months to March of 127k but net membership growth of just 34k. Those new year resolutions didn’t stick around long. Attrition was also high in the UK, with Italy showing a greater retention of members. In the Mediterranean, I guess summer bodies really are made in winter. What’s Italian for “boet” again?

The carrying value of Brait’s investment is just over R9 billion, up from almost R8.3 billion and contributing 53% of Brait’s total assets.

UK fashion retailer New Look is 5% of Brait’s total assets. Revenue increased by 2.3% and EBITDA by a whopping 68%, so that’s encouraging. After investing further in the business during the year to help it reduce debt, the carrying value of the investment is R931 million.

Although there was substantial cash on the balance sheet at the reporting date, R2.8 billion of the R3.6 billion cash balance has been used since year-end to settle debt and invest further into Virgin Active.

Right at the bottom of the announcement, you’ll find perhaps the biggest source of the discount to NAV: the management contract with The Rohatyn Group (who bought Ethos Private Equity). At a cost of R65 million this year and R50 million the following year, shareholders of Brait are losing out to an expensive management company structure that appears to cost a lot more than a normal executive management team would cost.

Delta sold properties worth R209 million this year (JSE: DLT)

More disposals were achieved after year-end

Delta Property Fund has released results for the year ended February 2023. The focus is on recycling capital and paying down debt, which is what happens when your loan-to-value has blown out to 61.4% despite best efforts to reduce debt. Debt was already problematic, with fair value decreases in the portfolio causing this all-important ratio to worsen.

The trouble in the underlying portfolio isn’t over, with funds from operations per share dropping sharply from 36.91 cents to 11.12 cents. A major driver is negative rental reversions with government tenants. When costs are going up both operationally and financially due to higher interest rates, property funds cannot afford a drop in rentals.

There is obviously no dividend, with the group in a race against time to meet debt covenants and appease its bankers during facility negotiations.

Ellies needs money (JSE: ELI)

A fully underwritten rights offer at a fat discount is the order of the day

Ellies is in the process of acquiring the Bundu Power business, a major step into alternative energy that has been necessitated by ongoing challenges in the rest of the Ellies group.

The deal is worth R202.6 million, requiring an initial payment of R72.6 million and three earn-out payments from 2023 to 2025.

To fund the initial payment and the earn-out, Ellies needs to execute a rights offer for R120 million. They will issue new shares at R0.07 per share, well below the current market price of R0.11 per share. The raise is fully underwritten by Mazi Asset Management and Imvula Education Empowerment Trust, so this is a classic case of strategic investors increasing their stake through a discounted rights offer.

They will each receive a fee of 1.5% of the value of shares they subscribe for. That’s a better outcome for Ellies than the market norm, which sees the underwriter paid regardless of how many shares they take.

I must note the related party angle here, with the underwriting agreement with Imvula including reference to future paid advisory services to Ellies on terms that haven’t been agreed as of yet. When the terms are agreed, the JSE’s related party rules will be applied.

enX releases a fairly detailed cautionary (JSE: ENX)

This is a rare and welcome departure from the market norm

When most JSE-listed companies release a cautionary announcement, they give barely any details at all. By the time you’re done reading it, you can’t be sure whether they are selling a business or simply redecorating the CEO’s office.

Not so at enX, with the company noting that it is in discussions regarding a possible sale of its interest in Eqstra Investment Holdings. This would be a Category 1 transaction, which means a detailed circular and shareholder approval would be required.

As always, there’s no guarantee of a deal being announced.

Ethos Capital’s NAV is inching forwards (JSE: EPS)

Progress is slow and painful

In the nine months to 31 March 2023, Ethos Capital could only increase its net asset value (NAV) per share by 1.4% to R8.61. This is based on the Brait share price. If they use the Brait NAV per share instead, it’s actually fallen by 3% to R10.34.

At least the unlisted portfolio is up year-to-date, with a 10% return thanks to valuation gains in Optasia, Gammatek and Synerlytic. Those are all very Star Trek sounding names.

The only thing being beamed up by Ethos Capital is management fees to The Rohatyn Group, with shareholders watching the NAV move gently sideways.

Glencore is never far from a deal (JSE: GLN)

While we were all watching Teck, Glencore has done an unrelated deal for Viterra

When it comes to companies that love a bit of swashbuckling M&A, Glencore has to be near the top of the list. With the recent focus on Teck in Canada and Glencore’s ongoing attempts to work a deal, the latest transaction has nothing to do with Teck or even with coal.

Instead, Glencore has agreed to sell its approximately 50% stake in Viterra in exchange for $1 billion cash and $3.1 billion in Bunge Limited stock. This gives Glencore a 15% stake in the merged business, which is a diversified global agribusiness solutions company.

Glencore has agreed not to sell any of the stock in Bunge for 12 months and will thereafter only sell the shares in an orderly fashion.

MultiChoice gives full details on its results (JSE: MCG)

I’ve been really looking forward to this one

MultiChoice is a fascinating business, sitting perfectly at the point where consumer preferences and technologies collide. With a general shift towards streaming, I love working through these numbers to see how MultiChoice is navigating this environment.

There are 14.2 million households in the Rest of Africa and 9.3 million households in South Africa that subscribe to MultiChoice. That’s still a huge base.

Group revenue increased by 7%, with Rest of Africa delivering a 25% increase in subscription revenue. I was impressed by a 7% increase in advertising revenue, though you must remember that this period included the mother of all sporting events: the FIFA World Cup.

Earnings were weaker overall, with trading profit down 3% and South African margins contracting to 24% from 31% in the prior year. Although core HEPS was up 2%, I would interpret this number with great caution as it doesn’t include the forex pain that took the group into a heavily loss-making position.

With the South African trading profit down by 23% and forex as an ever-present risk in Rest of Africa, I wasn’t surprised to see the share price continue its negative slide. This is particularly true in the light of no dividend being declared as the group invests heavily in Showmax and other initiatives.

To read more about this result and the group’s official statements, check out this article>>>

Resilient flags higher rates in its pre-close update (JSE: RES)

As new debt facilities come in, the average finance cost will go up

In a pre-close update for the six months to June 2023, Resilient spends a lot of time talking about the investment in energy and particularly solar. Annoyingly but also predictably, local authorities have been slow to implement the amended regulations announced by national government earlier this year.

Nevertheless, Resilient has pushed on. This has helped during a tough period of load shedding, with comparable sales growth of 2.9% for the four months to April.

The distribution for this interim period is expected to be in line with the second half of last year. There are risks to this distribution in the near-term, driven by higher funding costs coming through the system as debt is refinanced in a higher rate environment.

Telkomasaurus releases results (JSE: TKG)

Our local telecommunications dinosaur saw HEPS drop by 76.6%

The year ended March won’t go into the happy memory box for Telkom or its shareholders, with revenue up by just 0.9% and EBITDA taking a 19.8% knock. This puts EBITDA margin at 22.1%, way below where the more modern telecoms businesses are playing.

Headline earnings per share (HEPS) fell by 76.6% to 134.6 cents, which puts Telkom on a very high Price/Earnings multiple of 22.8x. The trick here is that the share price isn’t trading with reference to the earnings at the moment, as Telkom is ripe for corporate actions and the cheeky offer by the ex-CEO is just the latest example of a vulture circling this carcass.

There are elements of the Telkom business that are modern of course, like Openserve’s fibre products. What Telkom calls “next-generation” products are actually current generation products, contributing nearly 70% of Openserve’s revenue. But with a rapid decline in legacy products, the transition simply isn’t happening quickly enough, even though Openserve fibre now passes over 1 million homes.

It’s hard not to chuckle at Telkom’s reference to a “planned decline in traditional copper-based voice services” as though this is Telkom’s choice rather than a consumer trend. Either way, those services are 5.8% of external revenues in Telkom Consumer.

Even in the Mobile business, revenue only grew by 1.8% despite a 7.8% expansion in the customer base. It doesn’t help bringing more customers into the fold if they aren’t growing revenue.

In BCX, revenue was flat. Again, it’s a race against time to grow the IT business while the Converged Communications business drops as customers migrate to newer technologies.

Masts and towers business, Swiftnet, grew revenue by a marginal 0.9% and EBITDA margin came in at 68.8%. This is one of the parts of the business that always gets talked about for M&A activity, with the other being fibre.

Although it has no cash impact, an impairment of over R13 billion to Openserve and Telkom Consumer sends a message about the underlying Excel models that forecast the financial performance of these business units. There have been significant drops in headcount, with those benefits only coming through in FY24.

A very real cash impact is negative free cash flow of R2.7 billion, with mobile post-paid sales (contracts) putting cash under pressure. Telkom has to buy the phones and then sell them on contract, collecting cash over a period of time. In reality, this wouldn’t be a problem if the business was healthy.

The dividend has been postponed once again. You can’t pay a dividend when your cash flow is being smashed.

Little bites:

  • Director dealings:
    • The CEO of Spear REIT (JSE: SEA) is still buying shares for himself and his family, this time to the value of roughly R105k
  • With the reverse takeover of Langpan Mining behind it, Mantengu Mining (JSE: MTU) has released a trading statement for the year ended February 2023. The group headline loss per share is expected to be between -11.40 and -12.60 cents.
  • The liquidation application brought by a shareholder of Afristrat Investment Holdings (JSE: ATI) against the company was heard in the High Court on 8 and 9 June. Judgement has been reserved for the time being.
  • If you are a WBHO (JSE: WBO) shareholder, then take note that the company has made the Avior Conference presentation available at this link>>>

Ghost Bites (AEEI | Alexander Forbes | Glencore | Lighthouse | Purple Group | Telkom | Thungela | Vukile)

The Finance Ghost
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Ghost Bites (AEEI | Alexander Forbes | Glencore | Lighthouse | Purple Group | Telkom | Thungela | Vukile)

AEEI: losses all round (JSE: AEE)

AYO will now be presented as a discontinued operation

The losses keep mounting in this group, with African Equity Empowerment Investments (AEEI) reporting a headline loss per share for the six months to February of between -33.08 and -35.90 cents. The headline loss per share in the comparable period was -14.06 cents.

Even if we focus on continuing operations (i.e. excluding AYO), the loss is between -28.11 and -28.31 cents vs. -1 cent in the prior period.

The company notes that an investment in a telecommunications multinational company is to blame for the loss.

Alexander Forbes rallies based on strong numbers (JSE: AFH)

Normalised HEPS growth of 31% is impressive

For the year ended March, Alexander Forbes did a solid job of demonstrating the benefits of its new strategy. With the share price up 8% by afternoon trade, there was clearly a round of applause from the market.

Although the five-year story is anything but exciting, the share price has enjoyed one-way traffic since the worst of lockdowns:

Operating income grew by 8% this year, with acquisitions contributing 200 basis points of the growth. Operating expenses grew by a similar percentage, with profit from operations up 9%. HEPS from continuing operations is up 22% and HEPS from total operations is up 44%.

The balance sheet is in great shape, evidenced by a 35% increase in the final dividend. The group also reports normalised HEPS growth of 31%, which makes sense alongside the growth in the dividend.

There was a significant amount of corporate activity, with acquisitions of EBS International and Sanlam’s retirement fund administration business, as well as Bidvest Wealth and Employee Benefits. The group disposed of AFICA to Sanlam-owned Glacier. After the end of this period on 1 June 2023, a majority interest was acquired in TSA Administration.

Highly experienced corporate leader Kuseni Dlamini has been appointed as the Chair of Alexander Forbes.

Glencore keeps pushing with Teck (JSE: GLN)

Calling all pockets for a deal here

You can’t accuse Glencore of not being persistent, that’s for sure. The courtship with Teck has been anything but smooth, with Glencore throwing more money and alternative deal structures at the problem in an effort to woo shareholders.

The Big Hairy Audacious transaction is the proposed “merger demerger” which is as complicated as it sounds. As an alternative that would give Teck’s shareholders the ability to offload the dirty coal business that gives them ESG nightmares, Glencore is willing to acquire that business (EVR) for cash.

The announcement doesn’t give an indicative value for EVR, so Glencore is playing that card close to its chest for now. If this deal happens, Glencore’s deal would be to reduce debt for a period 12 – 24 months and then demerge the enlarged CoalCo, which likely just means an unbundling to shareholders.

In that process, Glencore would need to move from a debt level of $10 billion to approximately $5 billion, otherwise the group’s debt rating could be affected.

Glencore’s flexibility in potential deal structures is very helpful in a situation where Teck’s board is pushing against doing any kind of deal with the group. Eventually, if the deal looks juicy enough, there are enough shareholder voices supporting the deal that the board has no choice but to explore options.

Lighthouse seems to be shining brightly (JSE: LTE)

Sales and footfall are up substantially in the retail portfolio

If you are a regular reader of Ghost Bites, you’ll know that Des de Beer buys shares in Lighthouse in the same way that some of us buy groceries on a weekly basis. This hasn’t been enough to prop up the share price, with even the latest pre-close update only achieving a 2.4% rally by afternoon trade.

The trend in European property funds is for rental income to be higher and property values to be flat or lower, with the rising cost of capital more than offsetting the benefit of higher net operating income.

We will have to wait for the release of results to get an updated view on valuation, but the pre-close update gives strong clues about the direction of travel for income.

In the first quarter of 2023, sales across the portfolio were up 17.2% and footfall was up 12.9%. The announcement goes into a fair bit of detail on specific leasing opportunities that I won’t rehash here. Generally, demand from tenants seems to be strong and the leases are enjoying the benefits of indexation i.e. inflationary increases.

The stake in Hammerson is far more of an issue. Lighthouse owns approximately 23% in Hammerson and has been putting plenty of pressure on the company to sort itself out, with the lack of recent dividends putting a lot of pressure upstream in Des de Beer’s broader property stable. The announcement notes some important property disposals by Hammerson and a commitment to reduce its operating expenses. I think that is strongly underplaying the level of boardroom fighting going on in the background.

Lighthouse will release interim results in mid-August.

Purple Group’s raise was oversubscribed (JSE: PPE)

Gross demand was more than 113% of the rights offer

To support the growth of EasyEquities going forward, including the international expansion, Purple Group needed to raise R105 million. Sanlam came in as underwriter, showing a commitment to invest at group level in addition to following its rights in EasyEquities itself.

The underwriter wasn’t needed in the end, as excess applications from shareholders resulted in demand for 113% of the shares being issued under the rights offer. In practice, the way it played out is that 85.66% of shares were subscribed for excluding excess applications. A further 27.91% of rights offer shares fell under excess applications, with 14.34% being issued in order to reach 100%. This means that just over half of excess applications will be awarded to shareholders who applied.

The rights offer was strongly supported by directors Mark Barnes, Paul Rutherford, Gary van Dyk, Charles Savage, Craig Carter and William Bassie Maisela.

The share price closed at 95 cents, with a drop over the last 12 months of 59% as reality set into the market. I must point out that over 5 years, the return is over 215%. Let’s see what the next 5 years will hold!

Telkom confirms media speculation (JSE: TKG)

Every dog can have its day – if the price is right

I’m generally wary of media speculation. In this case, it seems that reports over the weekend were onto something, with Telkom up by over 10% in the past week. The usual “insider trading” grumblings will fly on Twitter over this, with the concept of “buying the rumour” firmly engrained in markets. Remember, some people are also sitting and watching for price action before climbing on the bus, even if they have no idea why the price is moving.

Telkom has now released a SENS announcement dealing with the rumours and confirming that Sipho Maseko, Axian Telecom and the PIC has put in an unsolicited, non-binding indicative letter for a controlling stake in Telkom. “Non-binding indicative” is about as loose a term as you’ll ever find in the world of M&A, telling us that the fish are circling the bait but nobody has bitten just yet.

They also describe the discussions as “non-consensual” which I’m not sure is the best application of that term.

Whether from this deal or a different one, something needs to happen at Telkom to address the slide in value. On this chart, take note of how the price has come up nicely and filled the gap, which is exactly why I believe you ignore technical analysis at your peril:

Thungela: the danger of a trailing yield (JSE: TGA)

Single-commodity groups are especially risky for investors

When it comes to single-commodity groups like Thungela, the risks are enormous for investors. If you get the timing right, the profits are extraordinary. If you get the timing wrong, you watch your money disappear. This is a perfect example of the classic risk-reward trade-off.

Chasing hype stocks is particularly dangerous, with Thungela having been a market darling of note thanks to a meteoric rise from just over R20 per share to over R370 per share. You can make a lot of money on a rise like that even if your timing is far from perfect.

Now down at R139 per share, there’s been plenty of money to lose as well. And thanks to massive dividends along the way, the trailing dividend yield is a rather hysterical 72%. This is a textbook example of why a forward yield should always be the focus, not a trailing yield. Share prices move in anticipation of the next dividend, not based on the last dividend.

The next dividend isn’t going to be nearly as exciting, with Thungela’s pre-close update for the six months to June 2023 highlighting the sharp fall in seaborne coal prices. Thungela is focused on the export market, which makes it vulnerable to Transnet Freight Rail as a first step and then export prices as a second step. In both cases, volatility is the name of the game.

After a milder-than-expected winter in Europe, coal volumes were redirected to Asia as European coal stocks were too high. Combined with weaker demand from China than anticipated and the presence of Russian coal in those markets, this was a disastrous combination for coal prices. The average realised export price year-to-date is $112.40 per tonne, way down from $229.21 in FY22.

To add insult to injury, Transnet had a weak start to the year and two derailments in May. Export saleable production has dropped by 5% year-on-year.

It doesn’t sound like lower production levels make a difference, but the impact on cost per tonne is substantial. FOB cost per export tonne is expected to be R1,230 in this period vs. R1,093 per tonne in the prior interim period. This does no favours to the profit margin when prices have come off so severely.

With all said and done, HEPS is expected to be between 66% and 75% lower than in the comparable interim period. The drop in share price over the past year is only 44%, so the market is putting a higher valuation multiple on Thungela than before. This suggests further risk to the share price.

The cash pile might have something to do with it, sitting at R14 billion at the end of May.

There are some major projects that will be funded from this cash, like the R2.4 billion capital investment at the Zibulo North Shaft and the substantial deal for the Ensham mine in Australia that will also see Thungela extend a mezzanine loan to its co-investors. The deal value is A$340 million and Thungela is taking a 75% stake in the company acquiring the asset. Combined with the mezzanine loan of $68 million, this means that Thungela is on the hook for over A$320 million of the acquisition price – or R4 billion in today’s money.

Cash piles can disappear rather quickly, with investors waiting to see how big the dividend will be.

Vukile grows its NAV and dividend (JSE: VKE)

But the share price has gone the other way in the past year

Vukile Property Fund has released results for the year ended March 2023. They look pretty good, with one of the highlights being a swing to positive rental reversions in South Africa and a reduction in vacancies. The Spanish portfolio is doing even better, with growth in net operating income (NOI) of 9.0% vs. 5.4% in South Africa, although one of those numbers is on a normalised basis and the other on a like-for-like basis.

The loan-to-value ratio is 42.6% which is on the high side, although 89% of interest-bearing debt is hedged and there are no maturities in Spain until FY26.

There has been quite a bit of recycling of capital, as well as a R700 million equity raise since year-end. This is despite the significant discount to the net asset value (NAV) per share that has plagued local property funds. Speaking of the NAV, that’s up by 14.3% to R20.48 per share. The current share price is R13.04.

Funds From Operations increased by 6% and the total dividend was up 6.2%.

With 56% of the fund’s direct property investments located in Spain, this is a decent rand hedge that offers some protection against local consumer pressures. Notably, the outlook section includes a comment that higher interest rates are now having an observable negative impact on local consumers.

Between load shedding and interest rates, the share price is down 12% over the past 12 months.

Little Bites:

  • Director dealings:
    • The quantum of an institutional purchase linked to directors always needs to be treated with caution, but the direction is always worth noting. Value Capital Partners, which has board representation at Altron (JSE: AEL), has bought shares worth R30 million.
    • I was rather surprised to see a purchase of Finbond (JSE: FGL) shares worth R18.2 million by Protea Asset Management, liked to director Sean Riskowitz. This fund has taken some massive knocks in the past and I didn’t realise that there is still liquidity there for purchases.
    • An entity linked to a founder of Brimstone Investment Corporation (JSE: BRT) has acquired shares worth R8.2k.
  • Dipula Income Fund (JSE: DIB) is effectively using its distribution as a mini-rights offer, having given shareholders the option to reinvest the distribution at a price that is well below the net asset value (NAV) per share (as per usual for local property funds). Even at a reinvestment price of R3.52 that is slightly below the existing share price, it doesn’t say much for the market’s belief in the NAV that holders of only 28.07% of shares elected the redistribution option. The rest were happy to take the cash and run. Dipula retained R64 million in equity as a result of this option.
  • Oasis Crescent Property Fund (JSE: OAS) announced that 45.4% of unitholders elected to receive the cash distribution and the rest opted to reinvest their distributions.
  • African Bank has appointed a new CFO and Chief Compliance Officer. When will we see the company return to the JSE?
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