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Ghost Bites (Capital Appreciation | Fortress | Mondi | Oceana | Rebosis | Sirius | Sygnia)

The Finance Ghost
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Ghost Bites (Capital Appreciation | Fortress | Mondi | Oceana | Rebosis | Sirius | Sygnia)

Capital Appreciation revises HEPS guidance (JSE: CTA)

The credit loss provision for GovChat must be included in the HEPS calculation

In the trading statement published in May, Capital Appreciation reported that Earnings Per Share (EPS) would be between 45.5% and 44.0% lower for the year ended March 2023. This was primarily due to the credit loss provision on the GovChat amount of R70.8 million.

HEPS guidance was for a drop of between -2% and -1%, which reflects growth in expenses ahead of revenue.

After discussion with the auditors, the company released a revised trading statement that includes the impairment in the HEPS number. This means a drop of between -45.2% and -43.7%. in HEPS.

None of this changes the cash earnings of the group.

Clicks gets a little sweeter (JSE: CLS)

Will we see anything meaningful done with the Sorbet acquisition?

The acquisition of the Sorbet franchise chain by Clicks for R105 million has been approved by the Competition Tribunal, although as usual this comes with the standard forced B-BBEE Ownership clause that means Clicks will need to do something specifically at Sorbet level. There are also requirements to increase local manufacturing of Sorbet branded products and to train staff.

The only effect of the current approach by our competition authorities is that acquirers are pricing for these conditions and offering less for businesses. The very last thing that the South African economy needs is heavy-handed regulators.

I’ll be interested to see what Clicks does with Sorbet. It’s not hard to see the opportunity to get your nails done while waiting 30 minutes to see a pharmacist.

Fortress goes it alone with the Pick n Pay DC (JSE: FFA JSE:FFB)

Pick n Pay has opted to retain its capital and rather pay a higher rental

Back in May 2021, Fortress and Pick n Pay agreed to develop a huge new distribution centre (DC) at Eastport Logistics Park, owned by Fortress. The idea was for Pick n Pay to own 60% of the asset, with Fortress holding 40%. Pick n Pay intended to rent it on a 7% yield of total development cost, with an initial term of 15 years and an escalation of 6% per annum.

That was then and this is now, with Pick n Pay seemingly having more important uses for the cash. Based on the retailer’s recent trading performance, I’m not surprised.

The deal has been amended such that Fortress will own 100% of the asset and Pick n Pay will rent it on a yield of 8.5%. The term of the lease remains at 15 years with a 6% escalation. The development cost is R2.13 billion.

Pick n Pay will retain a first right of refusal on any potential disposal of the asset.

This means that Fortress won’t receive the R1.3 billion cash from the sale of 60% to Pick n Pay. The fund’s loan-to-value ratio is expected to remain at 37.5% (as reported at the end of December 2022).

One of Mondi’s Russian deals falls over (JSE: MNP)

The sale of Mondi Syktyvkar to Augment Investments has been terminated

Mondi would like to sell its Russian business for rather obvious reasons. This is proving to be difficult, with the sale to Augment Investments failing to make progress in obtaining regulatory approvals to complete the deal.

Mondi has run out of patience and has not agreed on an extension to meet the conditions. Instead Mondi will look for another buyer.

Importantly, the sale of the three Russian packaging operations to Gotek Group is not connected to this deal and the transaction is still underway.

Oceana investors count their Lucky Stars (JSE: OCE)

Here’s a rare beast: an FMCG business doing well in this environment

When fishing works, it works well. Oceana has reported on the six months to March 2023 and the results are excellent, with HEPS jumping from 140.4 cents to 313.5 cents. The 123% growth in HEPS was driven by a 48% increase in revenue, so there’s today’s example of how operating and financial leverage work in practice. In short, most business models tend to magnify a percentage change in revenue into a larger percentage change in profits.

The revenue performance was a combination of improved pricing for products and higher opening inventories that ensured stock availability and the ability to offset tough operating conditions with load shedding and the like. Notably, Lucky Star’s volumes reached record levels. The weaker exchange rate also helped with the translation of US dollar revenue into rand.

Despite the jump in revenue, gross profit was actually slightly down at 27.1% vs. 27.2%. The cost of imported frozen fish for Lucky Star put a dampener on the party.

The operating profit jump of 92.7% was thus due to operating costs increasing at a slower rate than revenue, rather than because of efficiencies at gross margin level.

It also didn’t do HEPS any harm that the effective tax rate reduced to 25.5% vs. 32.6%. Along with the benefit of higher inventories at the start of this period, this is part of why I think investors should be cautious in interpreting this massive jump in HEPS.

Although net debt increased from R2.2 billion to R3.0 billion, net debt to EBITDA improved from 1.8x to 1.6x because the underlying performance was so strong. EBITDA can be volatile, so the impact of the weak rand on US dollar denominated debt is something that investors shouldn’t ignore. Although not in this reporting period, Oceana has used the proceeds of the sale of CCS Logistics for R760 million to reduce debt.

Over the past year, we can possibly conclude that fish beats chicken:

Or, we could just conclude that Oceana should count its Lucky Stars, as Sea Harvest Group seems to taste just like chicken:

An update on the Rebosis garage sale (JSE: REB)

There are 22 preferred bidders in the due diligence and offer phase

Rebosis Property Fund is in business rescue. It’s not rocket science to figure out that the only way to “rescue” a property fund is to sell off assets to try and reduce debt.

In the Public Sales Process that got off to a very embarrassing start with email address failures, there were 45 participants who eventually submitted expressions of interest for properties in the portfolio. From this process, the various stakeholders at Rebosis chose 22 preferred bidders to go through to the due diligence and offer phase.

The company is on track to receive final binding offers by 29 June.

The business rescue practitioners believe that there is a “reasonable prospect” of rescuing the business. That doesn’t necessarily mean that equity investors won’t lose money.

Sirius: dividends are up but valuations are down (JSE: SRE)

The share price is now flat over the past 12 months

Well, what went up has certainly come down. As I warned at the time, buying a property fund on a huge premium to its net asset value per share is just silly. Here’s what that looks like on a chart for Sirius:

You can’t see it easily on the chart, but the peak was over R30 at the end of 2021. Even after a strong performance in recent times with rand weakness as a major help, the price is still 30% off those peaks.

This isn’t because there is anything wrong with the underlying business. Sirius grew Funds From Operations by 36.9% in the year ended March 2023 and achieved a 7.7% increase in the group annualised like-for-like rent roll. The total dividend for the year was 28.8% higher.

Sirius tries hard to convince the market that the premium to NAV is justified, with disposals in the period coming in at a 25% combined premium to book value. That’s all good and well, but I would argue that the disposals will be a cherry-picked view on the portfolio.

The group notes that 95% of total group debt is fixed for the next 3.25 years. The announcement doesn’t remind investors that a recent refinancing process drove a substantial increase in the weighted average cost of debt, the effect of which is coming in the next period. With a loan-to-value ratio of 41.6%, debt is a bit on the high side in my view.

The NAV per share calculated in line with EPRA standards is €1.0811 or R22.31 at current rates. The share price of R21.13 is thus a slight discount to NAV.

Sygnia’s earnings drop slightly (JSE: SYG)

The payout ratio is considerably higher as the dividend has increased 8.8%

In the full earnings report for the six months to March 2023, Sygnia talks about how investors have withdrawn savings to cope with the cost of living and the need for solar power installations. Emigration also comes up in the report. Institutional withdrawals exceed contributions, with unemployment and retrenchments as an issue.

Sygnia has R253.3 billion in institutional assets under management and R59.4 billion in retail assets under management. Both these numbers are higher than in the comparable period thanks to an increase in market prices over this period.

This makes it difficult for any of the asset management firms in South Africa, with Sygnia increasing group revenue by just 2.8% despite assets under management and administration increasing by 9.7% thanks to higher equity values in this period. Expenses are up 11.1% and after-tax profit fell by 0.5%. At the all-important HEPS level, the drop was 0.9%.

Despite this, the interim dividend per share is up 8.8%.

Little Bites:

  • Director dealings:
    • Associates of directors of Ascendis Health (JSE: ASC) have acquired shares worth R286k.
    • An associate of a director of Sea Harvest Group (JSE: SHG) has acquired shares worth R237.5k.
    • Associates of the CEO of Spear REIT (JSE: SEA) have bought shares worth nearly R134k.
    • An associate of a founding director of Brimstone Investment Corporation (JSE: BRT) has bought N ordinary shares in Brimstone worth almost R75k.
  • Castleview Property Fund (JSE: CVW) will pay a dividend for the 13-month period ended March 2023, as the financial year-end was changed after the I Group Investments properties were reversed into the structure. The dividend will be between 14 and 18 cents per share, which is tiny relative to the R7.10 share price.
  • SAB Zenzele Kabili (JSE: SZK) has approved the declaration of a dividend of 45 cents per share. The price is all the way down at R36, a painful learning experience for those who stubbornly pushed it up to R180 per share back in 2021 despite numerous warnings on Twitter against this strategy.
  • If you hold fewer than 100 Invicta (JSE: IVT) shares, take note that the odd-lot offer is going ahead. If you don’t specifically choose to retain your shares by the deadline on 4th August, they will be automatically sold to Invicta at a 5% premium to the 30-day VWAP.

Ghost Bites (African Media Entertainment | Gemfields | Finbond | Nedbank)

The Finance Ghost
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Ghost Bites (African Media Entertainment | Gemfields | Finbond | Nedbank)

Video hasn’t killed the radio star (JSE: AME)

African Media Entertainment surpasses pre-Covid earnings

For the year ended March 2022, revenue at African Media Entertainment (AME) increased by 7% and the percentages get better as you move down the income statement. Operating profit was up 16% and HEPS increased by 30% to 484.5 cents, well ahead of 408.2 cents in the year ended March 2020 or 437.3 cents in the 2019 financial year.

With an asset-light model, cash from operations (net of taxes) of R38 million translated into dividend payments of R28.7 million.

The good news stories were all in the radio businesses, like Algoa FM’s revenue being 12% above budget and EBITDA returning to pre-Covid levels. Central Media Group (which includes OFM) grew its EBITDA in this period.

It’s not all Guns & Roses I’m afraid, with a few thorns in the system as well. MediaHeads360 saw its EBITDA drop by 69% based on pressure in linear television and related advertising and general content. Radio really has been stronger than television in this period, with media sales business United Stations sounding bullish, a particularly interesting read compared to MediaHeads360 with a television focus.

I always pay close attention to Moneyweb’s results for obvious reasons. The only information in the results release is that Moneyweb grew by 8%, presumably on the revenue line. The company notes that performance wasn’t up to scratch and that more revenue models will be added to the business.

Glittering auction results for Gemfields (JSE: GML)

Records tumbled at the latest emerald auction

Gemfields has been trading sideways this year, with the market stubbornly refusing to put a higher multiple on the earnings. The market for precious stones is notoriously opaque (ironically), so there aren’t observable prices for the share price to trade against. Once you add in the geopolitical risks in Mozambique, it’s just too hard for institutions to really pile in.

The share price did get a 3% boost on Friday after the recent emerald auction results were announced. Total revenue of $43.7 million was a record for Kagem emerald auctions and all 35 lots were sold at an average price of $165.55 per carat, which is another record for Gemfields.

These records are meaningful, as there have been 45 Kagem emerald auctions since July 2009.

Inflation helps here, as does the ongoing strength of the global luxury market. Gemfields is a way to play that market on a very modest Price/Earnings multiple vs. the eye-watering multiples of the global luxury goods giants.

Finbond looks to Namibian students (JSE: FGL)

I‘m just not sure that a 49% stake in a business is ideal for a listed group

Finbond is set to acquire a 49% stake in Trustco Finance, currently a 100% subsidiary of listed group Trustco. The market has very little love for Trustco, evidenced by its traded discount to net asset value that is high even by investment holding company standards.

In other words, I don’t think shareholders will leap with joy at the news of Finbond investing in a Trustco subsidiary. Perhaps it’s a good business though, providing educational loans to students at the largest private distance-learning tertiary education institution in Namibia.

Finbond’s rationale for the deal is to gain access to the Namibian market and diversify with student lending. The purchase price for the 49% stake is R60 million and the full amount is due by August 2023, so there’s no earn-out here to protect Finbond shareholders.

As a good example of why the market doesn’t believe the Trustco valuations, this asset was valued at R183 million in Trustco’s financials as at August 2022. That implies a R90 million valuation for 49%, with Finbond only paying R60 million. Even a premium for control doesn’t justify that difference.

When the deal closes, the net asset value of Trustco Finance should be R226 million. Finbond is getting in here at a discount, which may explain the decision to buy 49% – the largest non-controlling stake you can buy (leaving aside decimal points). Normally, for a strategic stake giving access to a market, you can get away with buying 20% to 30% and going from there. By buying 49%, you’re committing more capital and not getting a greater level of control than a significant minority stake (20% – 30%) would get you.

But at that price, it may simply be that Finbond sees it as a cheap entry point and wanted to maximise its stake.

Nedbank is growing headline earnings at mid-teens (JSE: NED)

But the real news is that Mike Brown is stepping down as CEO after 13 years

Once upon a time, I was a CA Trainee on the training programme at Nedbank, which gives an opportunity to complete articles outside of the audit profession. I have very fond memories of Mike Brown attending every single important function related to the programme, no matter how busy he was. When I was at such an impressionable young age, he certainly made the right impression.

After 13 years in the job, he’s stepping down as CEO at the age of 57. The actual handover date will only be confirmed once a successor has been found.

His tenure covered a very difficult time for South Africa economically. Recent conditions have been quite juicy for banking at the moment, with a combination of high inflation and interest rates driving (1) demand for credit and (2) improved yield on that credit for lenders. But of course, there’s a tipping point at which credit quality falls over when interest rates continues to climb.

We may well be reaching that point, with Nedbank noting a far more challenging environment for the four months to April vs. expectations. The group specifically notes that the benefit of higher rates vs. interest rate increases is “likely to reverse with further interest rate increases” – very important to take note of.

For now at least, headline earnings growth is strong in the mid-teens despite the credit loss ratio being above the top end of the through-the-cycle range. The growth in earnings is being helped by a positive JAWS ratio, which means income growth is faster than growth in expenses and hence margins are expanding.

Little Bites:

  • Director dealings:
    • You won’t often see a trade like this! An associate of CEO Johnny Copelyn has bought shares in Hosken Consolidated Investments (JSE: HCI) worth R118 million. This stock has been on a rampage and with solid growth in underlying net asset value to support it.
    • Adrian Gore, CEO of Discovery (JSE: DSY) has sold shares in the company worth R13.4 million in relation to previous funding arrangements linked to Discovery shares. I guess it’s hard to finance a share that has lost 11% of its value over 5 years.
    • A director and prescribed officer of Harmony Gold (JSE: HAR) collectively sold shares in the company worth R5.76 million.
    • A director of a subsidiary of African Rainbow Minerals (JSE: ARI) sold shares worth R1.4 million.
    • A prescribed officer of Sibanye (JSE: SSW) who runs the business in America has bought shares worth $73k (denominated in dollars as the ADRs in the US were bought, not Sibanye shares on the local market – but the principle is the same).
    • Directors of Santova (JSE: SNV) exercised options collectively worth R1.2 million. I didn’t see an immediate sale to cover the tax. If they don’t sell a portion, it means they paid the tax out of their own pockets in order to hold on to shares, which counts in my books as a genuine purchase of shares by directors. Perhaps the sale is still coming.
    • A non-executive director of CA Sales Holdings (JSE: CAA) and his associate bought shares worth R694k.
  • The WHOA restructuring plan hearing for Steinhoff (JSE: SNH) will be heard on Thursday, 15th June. That is truly last chance saloon for Steinhoff shareholders.
  • Wesizwe Platinum (JSE: WEZ) has announced that the hot commissioning of the BPM Processing Plant was delayed due to certain faults discovered at the end of May. The plan is to commission the plant on 5 June.
  • AVI (JSE: AVI) has announced that Mike Watters has replaced Gavin Tipper as chairman of the board. Watters appears to mainly have experience in property funds, so that’s an interesting appointment.

Ghost Wrap #27 (Nedbank | Spar | Hudaco | Pepkor | Sirius Real Estate | Tiger Brands)

The Finance Ghost
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Ghost Wrap #27 (Nedbank | Spar | Hudaco | Pepkor | Sirius Real Estate | Tiger Brands)

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

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

  • Nedbank’s operational update, reflecting strong growth in headline earnings and a warning about further interest rate increases, along with the news of Mike Brown stepping down as CEO.
  • An awful week for Spar shareholders, with the stock now trading at levels last seen in 2011
  • Hudaco’s acquisition of the Brigit group of fire protection companies, featuring a surprisingly high valuation multiple.
  • Tough results at Pepkor and more resilience in the share price than I expected.
  • Sirius Real Estate refinancing debt and showing an increase in the cost of debt that will be a feature of offshore property funds going forward.
  • A nasty sell-off in Tiger Brands despite a modest increase in HEPS under difficult circumstances.

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 (Afrimat | BHP | Choppies | Steinhoff)

The Finance Ghost
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Ghost Bites (Afrimat | BHP | Choppies | Steinhoff)

Afrimat issues a cautionary (JSE: AFT)

We may not have any details, but this is important

Afrimat has a long history of dealmaking and an enviable track record when it comes to capital allocation. Deals are part of the strategy here, so Afrimat issuing a bland cautionary announcement deserves a spot up here rather than in Little Bites.

The negotiations are regarding a “potential transaction” and we have no idea if Afrimat is possibly buying or selling an asset here. Time will tell.

Even big companies like BHP really botch it sometimes (JSE: BHP)

There have been major mistakes in the HR calculations in the Australian businesses

Leave days and public holidays in Australia are clearly more treacherous than the eight-legged beasts that call the country home. BHP has figured out that leave was incorrectly deducted for employees on public holidays since 2010, affecting 28,500 employees with an average of 6 leave days in total.

The cost? A whopping $280 million to fix this issue.

It seems that OZ Minerals has the same problem. This is the business that BHP acquired in 2023. I can’t help but wonder if they used the same HR system and there was a problem in it somewhere.

Either way, that’s an embarrassing and expensive problem.

Choppies launches a rights offer (JSE: CHP)

The capital raise isn’t for growth reasons, but rather to repair the balance sheet

Not all capital raises are created equal. Some are for growth purposes, where companies need capital to achieve their ambitions. Those are few and far between these days, though there are good examples (like Purple Group). Others are purely to fix a balance sheet, ranging from less urgent raises (like this one at Choppies) through to survival raises like the one coming at Nampak.

Choppies wants to raise P300 million (that’s Botswana pula), or roughly R430 million. The rights offer pricing is a 10% discount to the 30-day VWAP up until 31 May 2023.

Most of the raise will be used to extinguish shareholder loans from Ram Ottapathu and Farouk Ismail, as well as Shanta Retail Holdings. There is also P126 million earmarked for a reduction in bank debt.

Ottapathu and Ismail have agreed to follow their rights, so there’s effectively a roundtrip of cash here that converts their loans into equity. Commitments from major shareholders to follow their rights come to P149.8 million.

The other half of the raise is underwritten by Ivygrove Holdings (P120 million) and Export Marketing (BVI) Limited (P35 million). Each of the underwriters will receive a 1% fee for the pleasure.

Across the commitments and underwritten amounts, the raise is effectively fully spoken for. Of course, investors who want to be avoid being diluted at a 10% discount can follow their rights, which means the underwriters wouldn’t get the full allocation of shares.

Steinhoff – how many more times could I warn you? (JSE: SNH)

Down 15.6% to 27 cents a share, it is now overvalued by 27 cents

The directors of Steinhoff have been explaining that the equity is worthless for a while now. Despite this, desperate shareholders have been trying hard to make the process difficult, hoping that a miracle will somehow pop out of them.

Even before the latest capitulation in the Pepkor share price, the equity at Steinhoff wasn’t enough to cover the debt. Can you imagine how bad it looks now?

You won’t need to imagine. You can now watch it play out. After the WHOA restructuring plan was accepted by creditors and not by shareholders, an activist shareholder approached the court to appoint a restructuring expert. The court said no, referencing the WHOA confirmation hearing to be heard on 15 June.

Now, I guess there’s a chance that the court is simply deferring to that hearing, as the WHOA plan being rejected by the court would presumably lead to an expert being appointed anyway. In my opinion, there’s a far greater chance of the plan being accepted by the court and the equity holders being left with nothing.

Little Bites:

  • Director dealings:
    • The CEO of Clicks (JSE: CLS) has bought a chunky R3.5 million worth of shares in the company.
    • An associate of the CEO of Fairvest (JSE: FTB) has bought B ordinary shares in the company worth R983k.
    • Various executives at Adcorp (JSE: ADR) have bought shares collectively worth R344k.
    • A director of Visual Holdings (JSE: VIS) obviously wasn’t paying attention when the disclosure rules were explained, having bought numerous shares in January and only reporting it now. There’s a long list and the company decided that putting a total at the bottom wasn’t important either, but it looks like roughly R100k.
    • I don’t mention it each time or you’ll be reading the same thing every day, but be aware than an entity associated with directors of Ninety One (JSE: N91) buys shares in the company almost every day.
  • Between December and May, Southern Sun (JSE: SSU) repurchased 3.4% of its shares in issue at an average price of R4.47 per share. The current price is R4.33 as most local shares have been under pressure this year. The total capital allocated to this initiative thus far is R226 million and there is still authority in place to repurchase another 16.6% of shares that were in issue at the time the authority was granted.
  • Altron (JSE: AEL) is in the process of selling the ATM hardware and support business of Altron Managed Solutions to NCR Corporation. All regulatory approvals have been received, with the final condition precedent being a VAT registration for a newly-formed South African company. The finalisation date for the deal has been moved out by a month to 30 June to enable this to be concluded.
  • Mpact (JSE: MPT) is still having a tough time getting critical special resolutions approved at its AGM, like the financial assistance and non-executive director remuneration resolutions. I can only assume that Caxton is still voting these resolutions down. Mpact has made a plan before at subsidiary level to get around this issue but it really is difficult to justify Caxton’s behaviour in this investment, ranging from inflammatory SENS announcements through to voting down key resolutions for the company to function.
  • Datatec (JSE: DTC) has released a circular related to the scrip dividend alternative. The pricing will be based on the 30-day VWAP during the period ending on 3 July 2023, so we don’t know what that will be yet. As a reminder, this is an election by shareholders to receive more shares rather than a cash dividend.
  • Safari Investments (JSE: SAR) is changing its year end from March to June to align with its new parent company, Heriot.

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

Impala Platinum (Implats) has finally managed to acquire enough shares to push its shareholding in Royal Bafokeng Platinum (RBPlats) beyond 50%. The sale by the Public Investment Corporation (SOC) of its 9.26% stake in RBPlats as per the scheme terms announced in November 2021, has increased Implats’ aggregate stake to 55.46%. The company will now facilitate increased broad-based ownership at both Impala and RBPlat through its wholly-owned subsidiary Royal Bafokeng Resources. The transaction will comprise the creation of a community share ownership trust across both companies holding 4%, as well as an option to replace the RBPlat employee share ownership plan (4%) and the introduction of a strategic empowerment partner Siyanda Resources (5%) which will lead a broad-based empowerment consortium. In addition, a further 3% will be warehoused for entrepreneurs, with a focus on women and youth entrepreneurs, from the Rustenburg community.

The MultiChoice Group, Rapyd and General Catalyst have announced a joint venture aimed at developing an integrated payment platform for Africa. The joint venture will operate under a new name ‘Moment’. The JV will consolidate the US$3,5 billion in payments that the MultiChoice Group processes annually and will address the need for an accessible and reliable payment platform for many small businesses and consumers across the continent.

Agriculture company Crookes Brothers which has local operations in KZN, Mpumalanga, the Western Cape and in Eswatini, Zambia and Mozambique, is to dispose of the business Vyeboom Fruit Farm to Western Cape-based fruit farming business Witzenberg Properties. This deal includes the business names Vyeboom, Ou Werf and Dennebos. The aggregate transaction value is R200 million. The company said it had initiated processes to sell certain farming properties that were not generating returns commensurate with its targets. Funds realised would be used to reduce its financial gearing and assist in completing its other diversification projects.

Hudaco Industries has acquired Brigit, a local company offering fire protection solutions through the businesses of Brigit Fire, Brigit Systems and Portagas. The business provides an ideal fit for Hudaco which focuses on supplying quality, branded products and services which with significant value-add for the consumer. The maximum consideration is R315 million which will be funded from cash generation and existing facilities. An initial amount of R143 million will be paid with the remaining due, in cash, over the following two years.

Primeserv, via its subsidiary Primeserv Pinnacle, is to acquire Pinnacle Outsource Solutions and AJR Enterprises CC – businesses that supply temporary employment services. The R10,95 million acquisition forms part of Primeserv’s strategy to expand its footprint in the temporary services sector of the Logistics, Transportation and Distribution Centre industry.

Viterra, a Canadian grain and oilseeds marketer and handler, 50%-owned by Glencore, is said to be in talks to merge with US oilseeds processor Bunge, in a move which, according to Glencore, would unlock value from Viterra.

Delta Property Fund has disposed of the property at 5 Walnut Road, Durban to UBUD Development for a cash consideration of R46 million. The net proceeds will be utilised by the company to reduce debt and the Loan to Value by 0.2% from 58.2% and reduce vacancy levels by 0.3% from 33.9%.

Bloomberg reported earlier this week that the Public Investment Corporation may back a possible bid by investment vehicle Afrifund and Mauritius-based Axian Telecom for a 35% stake in Telkom SA. This comes a week after the state-controlled telecommunications company’s share price fell as much as 30% after the company warned it was considering writing down the value of its assets by about R13 billion.

Unlisted Companies

Pioneer Foods which was bought out and delisted by PepsiCo in 2019, is to acquire the remaining 50% stake in Future Life health products following the initial 50% acquired in 2015. The stake will be acquired for an undisclosed sum from Future Life founder Paul Saad.

Heineken Beverages of South Africa has, according to a filing by Nigerian Breweries Plc to its shareholders, offered to sell its majority interest (via Distell International) in Distell Wines & Spirits Nigeria Ltd to Nigerian Breweries. The outcome of the brewers’ decision will be communicated to shareholders in due course.

South African ISP, Level-7 Internet, has acquired connectivity service provider Fliber. With the strategic acquisition, Level-7 Internet will leverage its expertise and resources together with Fliber’s strong community support to drive further growth and deliver enhanced services to customers.

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

Choppies Enterprises intends to launch a partly underwritten renounceable rights offer to raise P300 million. The offer will be partly underwritten by Ivygrove and Export Marketing. The company will offer a total of 520,833,333 ordinary shares at an offer price of P0.576/R0.82368. The offer will open on 15 June 2023.

CA Sales has made an odd-lot offer to approximately 5,073 shareholders holding less than 100 CA&S ordinary shares. If the 117,861 shares are repurchased at an assumed price of R7.29 per share, the cost to the company will be c. R859,207 (excluding transfer costs).

Adcorp shareholders are to receive a special gross dividend of 91,3 cents per ordinary share in addition to a final gross dividend of 16,5 cents per ordinary share. This follows the release of the company’s audited results for the year ended 28 February 2023.

On June 30 2023, at a general meeting of the company’s shareholders, Nampak will propose a restructure of its share capital by consolidating and reducing the authorised ordinary shares by the consolidation of every 250 shares into one share, propose and increase in the authorised, unissued share capital of the company and the issue of new shares to implement a proposed rights offer to raise gross proceeds of up to R1 billion. The company will over the next two months conclude credit-approved term sheets for the refinancing package for the next five years. This, together with the group’s progress in its implementation of the restructuring plan, will determine the size of the rights offer required. The date by which credit approved term sheets for the refinancing of the group debt needs to be finalised has been extended from 15 June to 15 July 2023.

Kibo Energy is to issue 48,000,000 in respect of a warrant exercise notice received. The shares will be issued at a price of £0.001 with an aggregate value of £48,000.

The Mediclinic and Bidco deal, first announced in August 2022, has become effective. Mediclinic is expected to delist from the JSE and the NSX from commencement of trade on 7 June 2023.

Tradehold has received confirmation that the special resolution for the change of name of the company to Collins Property Group Ltd. The company will trade on the JSE under its new name from 13 June 2023 under the share code ‘CPP’.

Barloworld and Astral Foods have taken secondary listings on A2X with effect from 7 June 2023. These companies with market capitalisations of c.R16 billion and R6,1 billion respectively, will retain their listings on the JSE. These listings will bring the number of instruments listed on A2X to 134 with a combined market capitalisation of over R9 trillion.

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:

Over the period 2 December 2022 to 31 May 2023, Southern Sun has repurchased 50,604,422 shares at an average price of R4.47 per share for an aggregate R226,31 million. The repurchased shares represent 3.4% of the company’s issued share capital. A further 16.6% may be repurchased in terms of the General Authority granted by shareholders in September 2022.

Lewis has repurchased a further 2,801,999 shares, representing 4.8% of the issued share capital of the company at the beginning of the share repurchase programme. The shares were acquired for an aggregate R114,14 million.

The Old Mutual Board believes that the Old Mutual share price is trading at a discount to its intrinsic value and believes that a share repurchase programme will deliver longer term incremental value to shareholders. The Group has commenced a Repurchase Programme of R1,5 billion and will continue to repurchase the company shares until the maximum amount is reached.

South32, this week, repurchased a further 1,043,510 shares at an aggregate cost of A$4,10 million.

This week Glencore repurchased a further 12,330,000 shares for a total consideration of £51,78 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 22 to 26 May 2023, a further 2,313,758 Prosus shares were repurchased for an aggregate €151,98 million and a further 514,577 Naspers shares for a total consideration of R1,64 billion.

Seven companies issued profit warnings this week: Mahube Infrastructure, Buka Investments, Brikor, Trustco, Huge Group, Capital Appreciation and Spar.

Three companies issued or withdrew a cautionary notice: Choppies Enterprises, Primeserv and Afrimat.

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

Nigerian Breweries Plc has advised shareholders that it is considering a proposal by Heineken Beverages of South Africa that it acquire Heineken Beverages’ majority interest (via Distell International) in Distell Wines & Spirits Nigeria Ltd. The outcome of the brewer’s decision will be communicated to shareholders in due course.

Bestfly, an Angolan multinational aviation group, has acquired Austrian aircraft asset management company MS Aviation as part of its broader European expansion drive. Financial details of the transaction were not disclosed.

Egyptian developer Tatweer Misr and Naif Alrajhi Investment, a Saudi Arabian company, are to form a joint venture. The JV will focus on construction and real estate investment with an emphasis on the development of residential, commercial, educational, entertainment and hospitality projects in Saudi Arabia. The intention is to expand into Egypt. Financial details were undisclosed.

The acquisition of KEL Chemicals, a manufacturer of phosphate fertilizers, water treatment products and sulfuric acid-based industrial chemicals, has been unconditionally approved by the Competition Authority of Kenya.

In a further filing, the Competition Authority of Kenya has given Abland Diversified Holdings unconditional approval to acquire the remaining 50% stake in Buffalo Mall Naivasha.

Oryx Properties, a Namibian, NSX-listed property fund is to undertake a renounceable rights issue to raise N$379,6 million. The issue is in respect of 32,698,877 rights issue units in the ratio of one rights issue unit for every 2,5 linked units held.

PrestaFreedom, a Morocco-based home services marketplace, has raised US$1,1 million from Casablanca-based Azur Innovation Fund. PrestaFreedom intends to use the investment from the venture capital fund in its logistics and technology development with the aim of accelerating growth and scaling its footprint to a number of African markets.

Moroccan healthtech startup DataPathology was also the recipient of an investment from the Azur Innovation Fund, raising US$1m in its second seed round of funding. The investment will be used to recruit talent to support its growth trajectory.

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

Considering JSE-listed property companies

Calvin Craig
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Considering JSE-listed property companies

South African listed property struggled last year and ended 2022 as the worst performing sector on the JSE, delivering a negative total return of circa 2%. This was largely due to rapidly rising inflation (exacerbated by the Russia-Ukraine war), followed by interest rate increases by the South African Reserve Bank and international central banks, aimed at curbing inflation.

Europe’s reliance on Russia for gas led to an energy crunch during the Northern hemisphere winter months, which caused heightened concern for global investors regarding the ability of companies to withstand escalating energy costs and economic pressure. Geographically, South African listed property was shielded from direct war exposure, but nevertheless suffered from the broad-brush effects of the resulting capital reallocations.

Higher interest rates caused concern for investors in respect of property valuations, especially those properties that were already valued at lower than industry average discount rates/yields. Any expansion in these yields due to higher interest rates, which are not offset by increasing net income, result in a depressed valuation of the underlying properties. Companies with higher loan-to-value (LTV) ratios have been dealt a particularly hard blow, as investors expected these LTVs to increase off the back of reduced property valuations, combined with higher interest on loans. As a result, investors have priced in significant additional risk, which has led to the sell-off of listed property stocks.

A major difference between South African property companies and developed market global property companies is that South African businesses are accustomed to operating in a low growth environment, with elevated inflation levels and high interest rates, whereas many developed market global peers have traditionally benefited from higher economic growth, low inflation and very low interest rates. While significant economic growth in the South African economy appears a distant mirage at present, local property companies could benefit from the expected peaking of inflation and subsequent slow-down in interest rate hikes.

The three key performance metrics for listed property investors are total return, total return and total return (much like location). Investors usually gauge total return from expected increases in the property stock’s net asset value (NAV) and/or dividend yield/income. Many locally listed property companies trade at deep discounts to their underlying NAV, which may seem like a bargain to investors at face value, but which could also result in a value-trap scenario. When hunting for bargain property stocks in the market, the value trap is unlike a bear trap in that the gap between price and value does not always close (or may take a very long time to close), which poses risk for these value investors.

Due to ongoing loadshedding, many South African property businesses are allocating capital investment to alternative energy solutions, like solar, to ensure that their operations are better equipped for disruptions and to keep tenants incentivised to stay locked into medium-to-long term rental agreements.

Many South African property stocks that pay high dividend yields are compared directly to “risk-free” government bonds and/or risk-adjusted corporate bonds. But in the current high interest rate environment, it is anything but plain sailing for these listed property stocks that compete with bonds for capital in the market, and potentially also with safer bets, such as cash investments. Earnings growth will be key for South African property stocks to continue growing their dividends, and hopefully their NAV too. In the absence of earnings growth, investors may opt to be risk averse and stick with bonds and cash investments at the peak of the interest rate cycle.

Portfolio managers and analysts often regard certain Real Estate Investment Trust (REIT) sectors as resilient investment vehicles during times of recession, which can outperform general equities during high-inflationary periods. Experts note that REITs also outperform when bond yields continue to increase, and especially when a slow-down or pause in interest rate hikes are imminent. Whatever the environment, listed property companies benefit from having a strong balance sheet. A South African REIT is obliged to pay out at least 75% of its earnings to shareholders as dividends on an annual basis and, given that REITs receive the benefit of only being taxed on the portion of earnings that do not get distributed to shareholders as dividends, this translates into a larger pool of capital that can be allocated to dividends for shareholders, which can, in the right circumstances, provide good income opportunities for investors.

When considering capital allocation and, more specifically, returning capital to shareholders, several strategies are available to listed property companies, ranging from paying cash dividends to share buy-backs and scrip dividends. Listed companies typically consider share buy-backs in the open market where they believe that their share price is undervalued. In terms of the JSE Listings Requirements, a listed company may not buy back its own shares in terms of a general repurchase authority at a price greater than 10% above its trailing five-day volume weighted average price, which provides protection to shareholders from a capital allocation perspective.

Strategic share buy-backs, followed by the cancelling of the repurchased shares, could attribute tangible value on a per share basis to shareholders, especially where earnings grow. Scrip dividends are usually offered to shareholders as a mechanism to preserve cash reserves for the company and/or to provide shareholders with an opportunity to receive additional shares on a pro-rata basis relative to their current shareholding, without incurring transaction costs that would ordinarily need to be spent in buying shares on the open market. Scrip dividends are, however, not viewed favourably by shareholders if implemented when the share price of a listed property company trades at a substantial discount to its NAV, as issuing cheap equity is not value accretive.

Depending on how the remainder of 2023 unfolds from an inflation and interest rate perspective, the result is expected to drive and/or change investor risk appetite in the markets, which could benefit well-positioned JSE-listed property companies.

Calvin Craig is a Corporate Financier | PSG Capital.

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

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

Quarterly Corporate Law Digest – Kenya

Njeri Wagacha and Rizichi Kashero-Ondego
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Quarterly Corporate Law Digest – Kenya

In this inaugural issue of our Corporate Law Digest, we look at significant events that have taken place in Kenya’s business environment over the last quarter, to provide you with a glimpse into the country’s transforming M&A market. We find that despite growing concerns about the devaluation of the Kenyan Shilling, the increasing cost of living, unemployment and civil unrest, investors seem undeterred: banking, fintech and alternative fuel sources feature prominently in a market that is diverse, flush with entrepreneurs, and backed by its new government. Kenya is open for business, and with an election well behind it, ready to flourish.

Recent M&A Trends in Kenya

In recent years, the M&A space in Kenya has been punctuated by transactions in the financial industry, specifically where investors are looking to expand or diversify their portfolios. Two key deals of note in Q1 are those of Equity Bank (Kenya) Limited (EBKL), the largest financial services institution in the region, which purchased certain assets and liabilities of a local “troubled” Spire Bank, and the acquisition of 55.8% of Maisha Microfinance Bank by Cactus Cantina Investments Limited, a sister company of lending app Shara, which is currently awaiting Central Bank approval. On completion of the EBKL transaction, loan customers and customers holding deposits in Spire Bank become EBKL customers, significantly expanding EBKL’s asset portfolio and customer base. With respect to Maisha, customers of the lending app Shara will be able not only to borrow more, but save with the lender.

Within the fintech space, there has been a continuing upsurge of activity. According to a Fintech Global study published in February 2023, Kenya’s fintech deal activity increased by 14% from 2021 to a total of US$158 million. The largest Kenyan fintech deal in 2022 raised $75 million for M-Kopa, a linked asset finance platform. This is nothing to sniff at.

Impact investment funds, as well as green energy companies, have equally been hot targets in Kenya. BlackRock Alternatives, a climate-focused fund, is set to acquire a stake in Lake Turkana wind park, Africa’s largest wind turbine complex. Furthermore, Australian hydrogen project developer Fortescue Future Industries plans to build a 300 MW green ammonia and fertiliser plant in Kenya, the country’s first project involving green ammonia production. This is not to forget that in late 2022, New Forest launched the Africa Forestry Impact Platform (AFIP), a partnership between British International Investment (BII), Norfund and Finnfund with the goal of helping to transform the forestry sector in sub-Saharan Africa. Green investments seem destined to take pride of place in M&A deals in the near future.

SMEs in Kenya

A report issued by the Central Bank of Kenya indicated that SMEs constitute 98% of all businesses in Kenya, contributing 3% to GDP. A survey by the Kenya National Bureau of Statistics released in 2018 indicated that approximately 400,000 micro, small and medium enterprises do not make it past the second year, while very few reach their fifth year. In this respect, SMEs have generated a lot of local and international interest in their quest to capital raise. Government support has not lagged far behind with initiatives such as the Start-Up Bill 2021, proposing to provide a legislative framework that fosters a culture of innovative thinking and entrepreneurship.

In March 2023, the African Development Bank Group approved a $30 million Trade & SME Finance Facility for Family Bank Limited (FBL) in Kenya, aimed at boosting intra-Africa trade, promoting regional integration, and reducing the trade and SME finance gap in the country. The facility aims to provide a trade finance line of credit, a transaction guarantee, and a targeted line of credit to support short- and medium-term financing for SMEs in the health, renewable energy, and agriculture sectors, including women-owned businesses.

So while SMEs have room to grow, it is also important to note that in March 2023, a new report commissioned by Kenyatta University shows that debt funding is the most popular method of raising capital among micro, small and medium enterprises (MSMEs) in Kenya, with 42% preference, compared to grants and equity financing at 36% and 22%, respectively. Investors should take note: entrepreneurs are not likely to be willing to let go of control, especially when they are confident that a debt instrument may help them to scale.

Looking ahead 2023

Kenyan firms are increasingly turning to cleaner energy sources to reduce carbon emissions. This has seen a significant rise in the businesses entering the Kenyan market-focused on clean energy and e-mobility. We are seeing start-ups like Ecobodda Inc, Africa’s first electric motorbike taxi, providing battery-swapping charging technology for electric motorcycles. Roam Rapid and BasiGo, are also cementing their position in the electric vehicle industry by providing electric bus solutions to the Kenyan market. Large companies and state corporations such as KENGEN are also dipping their toes in the industry by installing electric vehicle charging infrastructure at some of their petrol stations and by proposing a special tariff for electric vehicles.

Earlier in March 2023, the European Investment Bank (EIB) mobilised $1,9 million in grants to support green hydrogen in Kenya, and the European Union, together with the UK government, is investing Ksh13,5 billion ($108 million) in the Menengai geothermal project in Nakuru County, Kenya, which will provide cheap, clean and reliable energy to over 700,000 Kenyans.

We look forward to sharing further positive developments that further cement Kenya’s position as a regional M&A market leader.

Njeri Wagacha is a Partner and Rizichi Kashero-Ondego a Senior Associate at CDH Kenya.

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

Grovest’s Twelve B Green Energy Fund

Sponsored Content
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Grovest’s Twelve B Green Energy Fund

Investors in Grovest’s Twelve B Green Energy Fund are well on track to claim their 125% tax deduction in the current tax year.

It’s been just three months since Twelve B Green Energy Fund launched.

Significant investment has already been secured from individual and corporate investors looking to claim their SARS-approved 125% Section 12BA tax deduction in this tax year.

Twelve B is the first private equity fund that entitles taxpayers, including individuals, trusts, companies and pension funds, to invest in a portfolio of renewable energy-producing assets and benefit from the Section 12BA tax incentive.

Twelve B Green Energy Fund marks another milestone for Grovest, the pioneers of Section 12J, and the largest small cap fund administrator in South Africa, with over R3.5 billion in assets under administration.

During the extensive pre-launch period, the Twelve B team focused on sourcing viable projects as well as establishing strategic partnerships with EPC (Engineering, Procurement, and Construction) and O+M (Operations and Maintenance) entities. This meticulous preparation ensured that when Fund I opened for investment, they were well-prepared to deploy capital as and when it was raised.

Current status of the Fund

Twelve B Green Energy Fund currently has a pipeline of over R300 million of solar projects at various stages. Jeff Miller, Twelve B’s CEO and Co-Founder anticipates the average investment across the various projects to be between R8 million and R12 million, resulting in a diversified portfolio of around 25 projects in Fund I’s R200 million portfolio.

In April 2023, the Fund’s first two projects were approved by the Investment Committee and construction has since commenced. They are on track to become energy-generating in July of this year. The profits of the partnership which have been generated from the sale of electricity, net of costs, will be distributed to investors bi-annually, and current investors can expect their first income distribution in September this year.

  • The first project approved is a sectional title complex situated in Dunkeld, Johannesburg. The solar system will have a peak power capacity of 175 kilowatts and the energy storage system will have a capacity of 300 kilowatt-hours.
  • The second project is a commercial business in Sandton, and the solar system will have a peak power capacity of 201.7 kilowatts and the energy storage system will have a capacity of 500 kilowatt-hours.

Although the ability of a fund to reach final close may be a key consideration for an investor, fund success is ultimately determined by its ability to deliver consistent and attractive returns (i.e. deploying capital into projects that have the potential to generate cash flows). Therefore, investors should carefully evaluate the capability and project pipeline of the Fund Manager before committing their capital.

Miller emphasises the crucial nature of conducting comprehensive due diligence on all projects to manage risk, evaluate project viability, remain compliant, promote transparency and accountability, as to ensure that the projects are aligned with the Fund’s Investment Mandate.

Furthermore, each project is bound by 20-year Power Purchase Agreements (“PPA’s”) which sets out the amount of electricity to be supplied, the initial pricing and the annual escalations.

Twelve B Green Energy Fund’s strategic alliance

The Fund has a strategic alliance with Hooray Power – the pioneers of large battery storage systems in sectional title complexes. The Fund has the right of first refusal on all projects introduced by Hooray Power.

  • Hooray Power’s sophisticated load management software manages power via solar, battery and the grid which provides an always-on power solution for their clients.
  • They have a 4-year proven track record and are the longest operator of these actively-managed battery systems in South Africa.

According to Miller, the Fund’s secret sauce and differentiating factor within the market is their relationship with Hooray Power, who sources all projects and handles all EPC and O+M of each approved project. This relationship is unique to the Twelve B Green Energy Fund and to the investment opportunity.

Miller is of the view that deployment and execution of the funds into energy producing assets is key, and has unwavering confidence that Twelve B Green Energy Fund will raise and deploy R200 million before the end of the February 2024 tax year.

The risk profile of the Fund is low to moderate, and there is currently no gearing within the portfolio. That said, the Fund Mandate does allow gearing which may be considered in the future.

Fund I is still open for investment and the positive market response confirms that investors within the current market climate have an appetite for a moderate risk, tax incentivised investment.

Twelve B Green Energy Fund invites savvy investors wanting to decrease their tax obligation and achieve superior returns, to invest today and add to a greener, more sustainable future for South Africa.

► To request the investor pack or schedule a meeting with Jeff: apply@twelveb.co.za

► Visit the website: www.twelveb.co.za

Twelve B Fund Managers Proprietary Limited (Registration No. 2022/832884/07) is an approved juristic representative of Black Mountain Investment Management Proprietary Limited (Registration No. 2018/230022/07) an authorised Financial Services Provider under the FAIS Act (FSP No 49908).

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