Monday, March 10, 2025
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Ghost Bites (Afine | Capital Appreciation | Copper 360 | Fairvest | Huge | Impala Platinum | Mahube Infrastructure | Nampak | Sirius | Spar | Tongaat Hulett)

The Finance Ghost
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Ghost Bites (Afine | Capital Appreciation | Copper 360 | Fairvest | Huge | Impala Platinum | Mahube Infrastructure | Nampak | Sirius | Spar | Tongaat Hulett)

Afine’s profits are in line with the pre-listing forecast (JSE: ANI)

Year-on-year comparability is limited due to restructuring activities

Afine Investments is a REIT that owns a portfolio of fuel filling stations. The numbers for the year ended February 2023 reflect some big year-on-year moves, but the company is reminding investors that comparability on that basis is limited.

Instead, the focus is on the results vs. the forecasts made in the pre-listing statement. On that basis, distributable profits are actually slightly higher (6.5%) than the forecast levels and HEPS is in line with the forecast.

The total dividend per share for the year was 43.83 cents. The current share price is R4.49 but the bid-offer spread is absolutely huge, so good luck getting a trade through.

At Capital Appreciation, growth comes at a cost (JSE: CTA)

Strong revenue growth has been offset by expense growth and a large credit loss provision

In a trading statement for the year ended March 2023, Capital Appreciation noted an impressive 19% growth rate in revenue. That’s largely where the good news ends for investors, as there has been a significant increase in expenses and there’s a nasty credit loss provision as well.

The expenses relate to the core business, so let’s start there. The rate of growth in expenses isn’t disclosed in this announcement but we know that HEPS is between -2% and -1% lower than the prior year, which means between 13.13 cents and 13.27 cents.

That HEPS number excludes the credit loss provision for the GovChat associate of R70.8 million. If we take that into account by looking at EPS, there’s a drop of between -45.5% and -44%.

The share price closed 6.3% lower at R1.48, which implies a Price/Earnings multiple of roughly 11.2x. Detailed results are expected on 6th June and I’m sure that investors will take a detailed look at the expense growth and how it supports future growth.

Copper 360 was classic IPO silliness by punters (JSE: CPR)

As I joked at the time of the listing, the ticker CPR might indicate what some people will need!

It certainly isn’t the company’s fault that investors love throwing money away shortly after an IPO. This is a story as old as time, which is precisely why I avoid IPOs as a rule (just look at Zeda as another example). Here’s the Copper 360 chart:

The company has released results for the year ended February 2023 and has also given an operational update.

Growth is rapid, with tons milled up by 296% and copper sales up by 191% The average copper price received fell by 5.4% measured in rand. I must highlight that there was only five months of focused trading in this period, so I’m not sure that the growth rates are all that useful.

With the group very much in the early stages of its life, the revenue increase of 175% was overpowered by a 279% increase in operating expenses. This drove a swing from an operating profit of R9.8 million to an operating loss of R78.5 million. That’s the number that I would keep in mind.

I would also take note of management’s commentary around a decrease of 36% in the delivered copper grade, a direct result of lower grade stockpiles of ore that necessitated the acquisition of a R30 million crushing plant. The company still believes that the forecast copper production for FY24 that was noted in the pre-listing statement can be achieved.

Fairvest: it matters which class of shares you own (JSE: FTA JSE: FTB)

The A shares are smiling – the B shares not so much

In property funds with two classes of shares, you really need to do your homework. These legacy structures were put in a place during a time when institutional investors demanded a mix of safer and riskier structures. The theory is that one class is more defensive than the other, but then offers less upside as well.

At Fairvest, the results for the six months to March 2023 reflect a drop in net asset value (NAV) per share for both share classes. The dividend for the A shares is 5% higher and for the B shares is 2% lower.

The loan-to-value sits at 38.4%.

In addition to its portfolio of 137 properties, Fairvest holds 60.9% in Indluplace and 5.1% in Dipula Income Fund. Remember, Indluplace is currently under offer from SA Corporate Real Estate.

The market is sending a Huge message about valuation (JSE: HUG)

Some of these investment assumptions are breathtaking

Despite the obvious economic pressure we find ourselves in, Huge Group somehow managed to increase the net asset value (NAV) per share by 5.3%. It now sits at R9.4385 per share, with the share price at R2.74. This discount to NAV is gigantic even by investment holding company standards, so something isn’t adding up.

I decided to go digging into the way in which the assets have been valued. It’s not hard to see why the market puts more faith in Eskom’s promises than this valuation.

Let’s start with the R571.9 million valuation on the Huge Connect preference shares. With the total unlisted portfolio apparently worth R1.46 billion, this is a very big contributor. I therefore find it remarkable that the valuation yield is 10.85% at a time when the South African 10-year bond yields are over 11%.

Is Huge less risky than the government of the country in which it operates? Do me a favour.

We then arrive at Huge TNS, valued at R641 million. The weighted average cost of capital applied here is 16.81%, with meaty revenue growth of 10.13% in the model. This division is the combination of Huge Networks and Huge Telecom, with the Telecom side of the business having historically struggled. Personally, that discount rate feels too low for me.

The share price is down 27% in the past year. Against that backdrop, I cannot see how any valuation increase of 5.3% in the NAV per share could hope to be taken seriously.

Impala withdraws allegedly misleading statements (JSE: IMP)

The bun fight between Northam Platinum and Impala Platinum is setting interesting precedent

If you have deal fatigue regarding the battle for control of Royal Bafokeng Platinum (JSE: RBP), can you imagine how the parties and advisors involved must feel?

Northam Platinum (JSE: NPH) eventually walked away from the deal, citing a drop in PGM prices. This left Impala Platinum as the only horse in the race to get control of Royal Bafokeng. This has finally happened thanks to the PIC selling its 9.26% stake in Royal Bafokeng Platinum to Impala Platinum.

After the latest trades, Impala Platinum holds 55.46% in Royal Bafokeng Platinum – a controlling stake. This triggers the public interest and related conditions of the approval by competition authorities, which inevitably means a requirement to execute B-BBEE ownership transactions. This will include community and staff trusts as well as the introduction of an empowerment consortium.

Black retail investors get shut out as usual, although Royal Bafokeng Platinum does have a history of being highly focused on regional empowerment rather than broader, national empowerment. This is a more reasonable outcome than when Absa didn’t do a retail B-BBEE deal, for example.

Although Northam Platinum pulled out of the deal, they remained a thorn in the side of Impala Platinum, as the offer requires a compliance certificate from the Takeover Regulation Panel (TRP). To get that certificate, certain complaints made by Northam Platinum needed to be resolved.

To this end, Impala Platinum has elected to formerly withdrawn certain statements made by executives to the media and in results presentations over the course of the offer. The comments vary, with references made to the market dynamics of the deal, the appetite for time extensions and comments on the Competition Commission approval.

The official line is that Impala Platinum has withdrawn the statements and advised the public to ignore them in consideration of the offer. This is not an admission that the statements were false or misleading. We will now wait and see how long the Compliance Certificate takes to come through. The longstop date for the offer has been extended once again to 28 June, so that’s the (very loose) deadline that Impala Platinum has set to meet this condition.

Mahube Infrastructure needs more wind, please (JSE: MHB)

A feel-good asset isn’t always a good asset

Mahube Infrastructure has investments in solar PV and wind farm projects. We would all love these to be slam-dunk winners, but sadly life is never so easy.

For the year ended February 2023, the revenue was actually negative R14.1 million. I don’t think I’ve ever seen negative revenue before and I didn’t have time to dig into the financials on this. They note positive dividend income of R18 million and then a negative change in the fair value of the assets, which decreased revenue by R33.1 million.

Perhaps someone who is more up to date than me on IFRS can explain why the change in fair value is recognised as revenue.

Either way, the worrying bit isn’t just the change in macroeconomic inputs that has affected the valuation. No, I would be more worried about the comment that the wind IPP industry across the country is experiencing lower winds than expected. This certainly highlights the risks inherent in such projects.

The tangible net asset value has dropped from R11.21 last year to R9.91 in this period. There is no final dividend after an interim dividend of 45 cents was declared earlier this year.

Nampak prepares for its rights offer (JSE: NPK)

A share consolidation is necessary to escape penny stock territory

After the monumental destruction of shareholder value at Nampak, the share is now trading at 73 cents (down another 4% for the day). This isn’t great for a rights offer that is clearly going to be priced at a discount, with Nampak worried about setting the rights offer price at a “practical level” – that says a lot about what is coming.

In preparation for the R1 billion capital raise that is desperately needed to save the balance sheet, Nampak is proposing a share consolidation that turns every 250 shares into 1 share. In other words, the price should be 250 times higher after this as there will be fewer actual shares in issue.

Some cash will change hands, as fractional entitlements (i.e. where you own fewer than 250 shares) will be cash settled at a 10% discount to the VWAP of the first day of trading.

The slide in Nampak’s value has been extraordinary and I wouldn’t be surprised to see more pain before this rights offer is concluded.

Sirius reports strong growth in its distribution (JSE: SRE)

The benefit of low funding costs was still in these numbers

Sirius Real Estate has given the market guidance on the total expected dividend for the year ended March 2023. The increase is between 26.2% and 31.4%, which is obviously a good outcome for shareholders.

After the recent announcement around the refinancing of debt and the increase in funding cost as rates have gone through the roof in the past year, I would caution that this growth probably isn’t sustainable.

Spar is the latest retail casualty, tanking 15% (JSE: SPP)

The South African retail apocalypse continues

The local retail industry is being smashed by load shedding. I was bearish on this sector coming into 2023 and had written on that view a few times. I wanted to be wrong, but sadly I wasn’t.

Spar has guided a decrease in HEPS of between -35% and -25% for the six months ended March 2023. This horrific outcome isn’t from a lack of turnover growth, but rather from huge jumps in operation expenses.

Spar is a wholesaler, so fuel and distribution cost pressures sit squarely in this group. There was also substantial investment in IT, so that didn’t help matters against this economic backdrop, as I don’t think I’ve ever seen a SAP implementation that hasn’t been accompanied by major inventory issues and implementation challenges. Even the European operations weren’t immune from the cost pressures.

And of course, the environment with higher interest rates is driving an increase in net finance costs.

If we dig deeper, Spar’s wholesale grocery business grew turnover by 7.9%. TOPS, usually a strong performer, suffered a 1.9% drop in sales vs. a high base period when South Africans were unleashed to behave wildly after lockdowns. Build it reported further declines, down 3.8%.

Looking abroad, BWG Group in Ireland and South West England reported 8.8% turnover growth measured in euros. SPAR Switzerland fell by 4.3% in local currency thanks to volume declines. Turnover in Poland was up 4.9% in local currency despite contracts being terminated with 58 retailers in July 2022.

The pharmacy business is tiny but was actually the highlight, with sales up 20%.

The group reckons that the retailers spent over R700 million on diesel in this period. At wholesale level, diesel costs “more than tripled” and pressure in the retail stores obviously flowed to the top, as Spar doesn’t have a business without its franchisees doing well.

Much like the entire sector right now, I continue to avoid this one.

Tongaat Hulett has published the business rescue plan (JSE: TON)

It looks like a JSE delisting is likely

If you would like to see what a business rescue plan looks like, you’ll find the plan for the group holding company at this link.

In summary, the business rescue practitioners are looking for strategic equity partners for the business and it looks likely that a delisting from the JSE will take place. The plan notes that if the company was liquidated, unsecured creditors would receive nothing. Shareholders would therefore also receive nothing.

In case you’re wondering how that happens, BDO has estimated the assets to have a gross realisable value of R5.1 billion. Secured creditors have claims of R7.3 billion and unsecured creditors had another R1.7 billion excluding inter-company loans.

With 2,500 direct employees and 23,000 indirect jobs depending on this group, the reality is that saving Tongaat Hulett is a social imperative. The effect on the local sugar industry would be horrific if this group was not able to continue in some form or another.

To achieve that, a strategic equity investors will need to buy the assets of the group out of business rescue, with the creditors being dealt with through this process. Expressions of interest have been requested from eight bidders, so there is interest in the asset. It just won’t help existing shareholders who have essentially been wiped out.

Little Bites:

  • Director dealings:
  • MTN (JSE: MTN) is holding a capital markets day over two days this week (so the name is a bit odd, but it’s an industry standard). There are a large number of materials, including several podcasts, available at this link for those interested.
  • In a very interesting move, Serialong Financial Investments is being required to deliver nil paid letters to Glen Anil Development Corporation even on the Purple Group (JSE: PPH) shares that Glen Anil only has the option to acquire. The argument is that the rights were attached to the shares at the time of the original option agreement, even though the rights offer hadn’t been announced at that stage. I really can’t see why Glen Anil would exercise the options then, as the rights offer lets them mop up a large number of shares at a vastly lower price than the strike price in the option agreement. This is painful for Serialong.
  • Renergen (JSE: REN) has released its financials for the year ended February. With the group very much in the early stages of production, I don’t pay much attention to the headline loss per share of 19.89 cents. The current share price is being driven by a multitude of factors and I don’t think last year’s results feature highly on the list.
  • RH Bophelo (JSE: RHB) is a healthcare investment entity that focuses on net asset value as its leading metric. In the year ended February 2023, this has decreased by 3.5% overall and 3.6% on a per share basis. Cash is up from R8 million to R152 million but borrowings have increased from nil to R102.5 million and I’m not sure this is the right environment for borrowing money. There was no dividend in this period, unlike in the last period.
  • Metals business Insimbi Industrial Holdings (JSE: ISB) announced results for the year ended February 2023. A drop in revenue of 5% drove a decrease in operating profit of 3%. At net profit level, there was a 2% increase and at HEPS level, there was growth of 12%. The metric to keep an eye on is cash from operating activities, down 30%.
  • Trustco (JSE: TTO) released results for the six months ended February 2023, reflecting a drop in NAV per share of 10.6% that the company largely attributes to the resources portfolio and associated dilution in underlying assets.
  • Brikor (JSE: BIK) released results for the year ended February, showing a 14.3% increase in revenue but a collapse in HEPS to a loss-making position of -0.1 cents per share. The coal segment was loss-making for the year but showed improvement towards the end of the period, while the brick segment performed very well overall.
  • The most useful thing about the release of financial results by Buka Investments (JSE: ILE) is that at least I now know how to find the corporate website. The company is a “suspended shell” on the JSE that had no assets at the end of February other than some cash. The initial plan was to acquire a shoes business, but that was stopped for various reasons (even though the website seems to imply otherwise). The idea is now to acquire fashion businesses. After burning through R1.9 million in FY23 just to be a listed company, they better get on with it.
  • The scheme of arrangement to delist Industrials REIT (JSE: MLI) was approved by shareholders, with the delisting date on the JSE anticipated to be 27 June.
  • In case you’re wondering, the acquisition of Bundu Power by Ellies Holdings (JSE: ELI) is still intended to go ahead. The publication date of the circular has been extended to no later than 31 July.
  • Metair (JSE: MTA) has announced that the current interim CEO and interim CFO have both been appointed to the roles permanently, which is good news for investors in terms of stability.
  • Lewis Group (JSE: LEW) has repurchased a further 4.8% of issued shares during May, with a value of R114 million. Another 2.2% of shares outstanding can be repurchased under the existing authority from shareholders, calculated with reference to the number of shares that were in issue at the time the authority was granted.
  • Shareholders of Tradehold (JSE: TDH) have approved the change of name to Collins Property Group Limited. It will be made effective during June.
  • In other renaming news, Tsogo Sun Gaming (JSE: TSG) shareholders have approved the change of name to Tsogo Sun Limited. It will be interesting to see how the strategy develops in this group.
  • Acsion (JSE: ACS) is another company with delayed results, expected to be released on 15 June.

Ghost Stories #15: Understanding ETF Strategies with Duma Mxenge (Business Development Manager at Satrix)

The Finance Ghost
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Ghost Stories #15: Understanding ETF Strategies with Duma Mxenge (Business Development Manager at Satrix)

In this episode of Ghost Stories, Duma Mxenge (Business Development Manager at Satrix) joins the platform for the first time for a great discussion around ETFs, trends around this type of investment and the way that investors understand the products and use them.

More specifically, we discussed:

  • Some of the generational trends coming through in the attitude to investing and particularly ETFs, including fees.
  • The impact of fees in a wealth creation journey.
  • Whether investors tend to have a good understanding of the underlying indices tracked by ETFs
  • The approach to using ETFs and whether investors see this as a “playing safe” approach or a more active investment decision.
  • A discussion around ETFs as the core underpin in a portfolio, leaving space for more speculative opportunities in single stocks.
  • The value of local ETFs that track global indices vs. moving cash into foreign currency and incurring forex costs.
  • The benefit of ETFs in the context of rebalancing of a portfolio of single stocks.
  • Whether retail investors can do it all themselves vs. using financial advisors as part of the journey.
  • The SatrixNOW platform and how it helps investors navigate this process.

For more from the Satrix – Ghost Mail partnership, visit this link to find various podcasts and articles.

Disclosure
Satrix Investments (Pty) Ltd is an approved FSP in term of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision.

While every effort has been made to ensure the reasonableness and accuracy of the information contained in this podcast (“the information”), the FSP’s, its shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaims all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information.

Ghost Bites (Crookes Brothers | Hudaco | Huge Group | Invicta | Momentum Metropolitan | Pepkor | Primeserv | Sirius | Tiger Brands | Trustco)

The Finance Ghost
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Ghost Bites (Crookes Brothers | Hudaco | Huge Group | Invicta | Momentum Metropolitan | Pepkor | Primeserv | Sirius | Tiger Brands | Trustco)

A rare update from farming group Crookes Brothers (JSE: CKS)

A substantial farming operation in Caledon is being sold for R200 million

Crookes Brothers isn’t a company that you’ll hear from very often on SENS. They tend to just get on with it, navigating the challenging world of primary agriculture. The group is in the process of selling certain farming properties that aren’t generating returns in line with targets. This will enable Crookes Brothers to reduce debt and invest in other diversification projects.

The big news is the sale of Vyeboom Fruit Farm for R200 million, consisting of 404 planted hectares and related infrastructure.

One of the conditions is the purchaser (a Western Cape fruit farming business) obtaining a loan from Standard Bank. There’s no guarantee of this sale going through until the conditions are met.

The profit after tax for the farming operation for the year ended March 2022 was just R9.8 million and the net asset value was R265.2 million.

This is a Category 1 transaction, which means a circular will be sent to shareholders to approve the deal. It will no doubt include many interesting details around farming!

Hudaco announces a significant R315 million deal (JSE: HDC)

The acquisition of Brigit is a big investment into the fire protection space

Hudaco is an industrials group that tends to do interesting deals. The latest example is the Brigit group of fire protection companies, clearly named after the founder Brigit van Zyl. This is a complementary acquisition for Hudaco as it bolsters the services already being sold into the security industry.

There are 65 employees in the business and revenue is R215 million per year. Profit for the year ended February 2023 was R36 million.

The maximum price is R315 million, based on average annual profits for the two years after the deal. The initial payment is R143 million and the rest is payable over two years.

Importantly, the current managing director of the business will enter into an employment contract for two years and has signed a restraint of trade covering a further three years.

Huge Group closed 14% higher, but watch the spread (JSE: HUG)

The net asset value per share is between 4.92% and 5.42% higher

The bid-offer spread on Huge Group is worthy of the company’s name, which is why you can see massive swings in a single day. The price action needs to always be interpreted very carefully.

After Huge Group decided to call itself an investment entity and change its accounting approach to rather reflect the fair value of underlying assets, the right metric to look at is technically net asset value (NAV) per share. This increased by between 4.92% and 5.42% in the year ended February 2022, implying a range of R9.41 to R9.45.

The share price of R2.74 is your best evidence of what the market thinks of the director valuations underpinning that NAV.

Invicta: focus on HEPS, not EPS (JSE: IVT)

Major asset disposals and fair value gains in the prior period are distorting things

There are very good reasons why investors tend to focus on HEPS rather than EPS. The H for “Headline” makes all the difference, as it splits out many of the accounting funnies and once-offs that tend to skew results.

For example, in the latest Invicta trading statement for the year ended March 2023, HEPS is up by between 43% and 53% whereas EPS is down between 32% and 42%.

To understand this properly, you need to take note of the profit on disposal of businesses in the comparable prior period and a large fair value gain on remeasurement of joint venture investments. This is included in the base period for the EPS calculation but not the HEPS calculation.

HEPS is thus the best measure of the performance in the core business and with a range of between R4.72 and R5.05, Invicta is trading on a Price/Earnings multiple of roughly 5.8x at the midpoint.

Momentum Metropolitan reports solid year-to-date growth (JSE: MTM)

For the nine months ended March, normalised HEPS grew strongly

There aren’t many local companies that provide quarterly updates. Momentum Metropolitan is one of them, with an operational update released for the nine months ended March 2023.

Normalised HEPS has increased by over 32%, with a major driver being an improved mortality experience in the life business thanks to a less severe impact of Covid in this period. Share buybacks helped here as well, as normalised headline earnings increased by 29%. The additional 300 basis points was thanks to the number of shares in issue.

As is usually the case in these groups, new business volumes were up in some areas and down in others.

Annualised return on equity for the period of 18% was within the target range of 18% to 20%.

It looks like Hillie Meyer will be leaving the group on a high, despite the challenging economic conditions in which the business is operating.

Even Pepkor can’t escape these retail pressures (JSE: PPH)

These are dark days in our economy – literally

Pepkor is seen as a relatively defensive retailer in this market, or at least as defensive as a clothing and homeware retailer can really get. With a firm focus on a value offering, Pepkor competes on a combination of price and quality rather than brand. The challenge is that “defensive” is a relative term in South Africa, as the core client base of lower income consumers is under immense pressure from food and transport inflation.

I think there’s an argument that retailers further up the pricing curve are perhaps more defensive in this environment, as their customer base isn’t part of the “working poor” group of South Africans whose plight is genuinely heartbreaking.

That plight is clearly visible in the numbers for the six months to March, with 4.3% growth in revenue and an 11.7% drop in HEPS (or 8.6% excluding non-recurring items). Diesel costs increased by 142% to R72 million, which isn’t a total disaster in an expense base of R7.8 billion but definitely doesn’t help in a low-growth environment.

Ackermans is really struggling in this environment with an 8.3% drop in like-for-like sales, driving a 2.0% drop in like-for-like sales in the clothing and general merchandise segment. Overall growth in that segment was 7.0% thanks to Avenida in Brazil performing ahead of expectations.

Amazing, isn’t it? Businesses can function when they have electricity.

The trouble with poor performance at a retailer is that the balance sheet deteriorates rather quickly, with inventory levels up by 11.7% thanks to slower sales in the core operations. So not only is profitability down, but more working capital is tied up on the shelves.

PEP Home grew by 18.8% as another desperately needed highlight in this story.

Furniture, appliances and electronics retailer JD Group was impacted by weak demand and a 3.7% drop in like-for-like sales. Online sales are now 10% of the tech division’s turnover.

The Building Company managed to maintain its sales levels, which frighteningly means that it outperformed its competitors.

On the FinTech side, Flash improved profitability by over 20% and the Capfin lending business expanded its loan business. A sad reality of tough times is that it isn’t difficult to find people to lend to.

On that note, group cash sales grew by 2.6% and credit sales grew by 36.7%.

In terms of outlook, Pepkor notes that April trading was weak but May was better. Overall, the operating consumer environment is not expected to “improve any time soon” – ouch.

Our economy is severely broken and I do not see any obvious way for that to change. You hold shares in local retail businesses at your own peril, with Pepkor down over 11% in afternoon trade.

And guess what? Steinhoff is also impacted by this. If the equity in Steinhoff was worthless before, what is it now?

We finally know who Primeserv is buying (JSE: PMV)

On a market cap of just R130 million, I guess a deal worth R11 million is material

This transaction isn’t going to blow your socks off in terms of deal value, but at least we now know that Primeserv is acquiring Pinnacle Outsource Solutions and AJR Enterprises for just under R11 million.

These businesses supply temporary employment services within the logistics industry.

The purchase price is payable over three years based on net profit after tax targets for each of 2024, 2025 and 2026. This is a sensible structure when acquiring such a small company.

The profit after tax for the group was R4.5 million in the 2022 financial year, so there’s a good example of how low the valuation multiples are for private companies in South Africa.

Sirius refinances debt at 4.25% (JSE: SRE)

Welcome to the yield curve

When assessing property funds, it is very important to consider the impact of refinancing of existing debt. In a steady rate environment, that’s not a big deal. In a rising rate environment, it absolutely is.

Sirius Real Estate has refinanced a €58.3 million 7-year facility approximately seven months in advance of expiry, which I suspect is just a sign of the company’s expectations for further rate increases.

The all-in fixed rate is 4.25%, which is enough to take the group’s weighted average cost of debt from 1.4% to 2.1%. The total weighted average debt expiry has increased from 3.3 years to 5.0 years.

Another €49.3 million worth of debt is expiring within the next three years.

Tiger gets slashed down to March 2020 levels (JSE: TBS)

Food inflation is out of control

In case you’ve recovered from reading the Pepkor numbers, I’ll now hit you with the revenue growth of 16% at Tiger Brands.

But that’s great, isn’t it? It would be, if it wasn’t for the fact that 17% is from price increases and -1% is attributable to volumes.

Just let that food inflation story sink in and ask yourself: where does this end for the working poor of South Africa? Frankly, where does it end for the middle class?

Fascinatingly, Tiger Brand spent almost the exact same amount as Pepkor on diesel over the six months (in this case R76 million), which it reports as an incremental energy cost of R48 million. It’s good of Tiger to do that, as it gives us a reference point that running generators is costing roughly 60% more than using power from Eskom in those hours.

But here’s the difference in energy costs: while Pepkor only attributes 1% of operating costs to diesel, at Tiger the diesel spend is 1.9% of operating costs. Again that may not sound like a big difference, but these businesses are fighting for growth in an economy on life support and value is literally being transferred from shareholders to suppliers of diesel.

With gross margin down from 29.2% to 27.0% and pressure on expenses, group operating income fell by 9%. If you exclude the distortion of insurance payments in both periods, it was down 2%.

HEPS increased ever so slightly from 729 cents to 731 cents and an interim dividend of 320 cents was declared, which is bravely in line with the interim dividend last year.

The share price has retreated to March 2020 levels:

Trustco gives wide guidance for its NAV (JSE: TTO)

If you’re looking for precision, you won’t find it here

In the latest strange behaviour from Trustco, the company has released a trading statement that suggests its net asset value per share could be between 0.81% and 20.81% higher for the six months to February 2022. I think we can all agree that this isn’t exactly a tight range.

Results are due on 31 May, so I am sure they will be busy through the night to get that range tighter. Or perhaps they could’ve just released a trading statement timeously, rather than the day before results?

Little Bites:

  • Director dealings:
    • The CEO of MTN (JSE: MTN) has bought shares in the company worth $123.5k. You read that currency correctly – he bought American Depository Receipts. Fascinating.
    • The CEO of Pan African Resources (JSE: PAN) has taken advantage of the share price sell-off to buy £26.4k worth of shares and a similar exposure in CFDs on the UK market where the company is also listed. The financial director followed suit but on the local market, buying shares worth R757k.
    • Directors of Santova (JSE: SNV) have bought shares worth R1.27 million.
    • A director and an associate of that director bought shares in Redefine (JSE: RDF) worth R470k.
  • Old Mutual (JSE: OMU) has commenced its R1.5 billion share repurchase programme.
  • Afine Investments (JSE: ANI) announced that its HEPS for the year ended February 2023 will be within 10% of the profit forecast at the time of listing and 20% of the prior period.
  • Stefanutti Stocks (JSE SSK) has received R90.85 million under the project arbitration award and has made a capital repayment of R50.6 million towards the funding loan.
  • Southern Palladium (JSE: SDL) announced a mineral resource update that shows a 39% increase from the resource presented in the prospectus last year. The management team also sounds pleased with the conversion of Inferred to Indicated. These are technical terms that make sense to geologists.
  • Delta Property Fund (JSE: DLT) has agreed to sell 5 Walnut Road, Durban for R46 million. The proceeds will be used to reduce debt with the loan-to-value expected to decrease from 58.2% to 58%. Depressingly, a circular is needed for the deal which is costly and time consuming. This really is picking up pennies in front of a steamroller, but it’s not like the company has a choice.
  • If you want to reinvest your dividend in Dipula Income Fund (JSE DIB), the reinvestment price is R3.52 per share which is a 3.00% discount to the 30-day VWAP.
  • Mantengu Mining (JSE: MTU) announced the successful commissioning of the Langpan Mining Co chrome processing plant. First deliveries from the plant are expected imminently. There are another two processing plants that Langpan has invested in, both expected to be commissioned in August 2023. The company has also announced the appointment of a general manager of Langpan who comes with extensive experience, most recently within Northam Platinum.
  • In other commissioning news, Wesizwe Platinum (JSE: WEZ) has announced the commissioning of the Bakubung Platinum Mine processing plant.
  • The creditors of Tongaat Hulett Developments (the property subsidiary of Tongaat Hulett JSE: TON) have approved the business rescue plan.
  • Sable Exploration and Mining (JSE: SXM) released results for the year ended February that reflect a 2% drop in EBITDA and a 24% drop in the NAV per share. This is a highly speculative mining group in a state of flux and the financials aren’t the major focus for exploration companies.
  • With tough times at the company, it’s not ideal that the Company Secretary of Nampak (JSE: NPK) has resigned from the group after 19.5 years of service.

Unlock the Stock: Calgro M3

The Finance Ghost
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Unlock the Stock: Calgro M3

Unlock the Stock is a platform designed to let retail investors experience life as a sell-side analyst. Corporate management teams give a presentation and then we open the floor to an interactive Q&A session, facilitated by the hosts.

This year, Unlock the Stock is delivered to you in proud association with A2X, a stock exchange playing an integral part in the progression of the South African marketplace. To find out more, visit the A2X website.

We are also very grateful to the South African team from Lumi Global, who look after the webinar technology for us.

In this nineteenth edition of Unlock the Stock, Calgro M3 returned to the platform with a triumphant set of results and a clear strategy for the way forward.

As usual, I co-hosted the event with Mark Tobin of Coffee Microcaps and the team from Keyter Rech Investor Solutions. Watch the recording here:

Ghost Bites (Adcorp | Brikor | Exemplar | Redefine | Steinhoff | Transcend Residential Property Fund | Zeda)

The Finance Ghost
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Ghost Bites (Adcorp | Brikor | Exemplar | Redefine | Steinhoff | Transcend Residential Property Fund | Zeda)

Is the value unlock at Adcorp finally working out? (JSE: ADR)

Revenue has grown for the first time since 2016

If ever you want to learn about the pain of a bid-offer spread in small caps, Adcorp is a great way to do it. The spread has come down a lot if there’s a busy trading day. On other days, you could park a bus in there. This makes it difficult to trade the stock and you have to patiently sit on the bid or offer at your desired price, hoping for a trade. You can’t just give an instruction to execute at the best available bid or offer at any given time as you’ll get a nasty surprise.

Looking at the results for the year ended February, the (rather shocking) news is that revenue from continuing operations has grown for the first time since 2016. Talk about a lost half-decade! Cash flow is also a lot better, with cash generated from operations up 45.2%. Operating profit from continuing operations is down 18.4% though, with the major culprit being a significant impairment of goodwill.

It’s a complicated result to try and work through, but cash is a language we all understand. With a share price at time of writing of R5.44, a special dividend of 91.3 cents and a final dividend of 16.5 cents have been declared.

Brikor warns of a headline loss per share (JSE: BIK)

The brick and coal group will release detailed results this week

Brikor released a trading statement noting a headline loss of between 0.09 cents and 0.11 cents per share for the year ended February 2022. This is a move from green to red over the past year, as the prior period reflected positive HEPS of 1.1 cents.

The current share price is 15 cents.

Exemplar enjoys a rebound in retail property (JSE: EXP)

Some of the malls could probably fit inside the bid-offer spread!

Exemplar REITail is a perfect example of the liquidity that investors complain about on the local market. This property fund is worth a few billion rand, so it’s certainly not a small cap. Despite this, bids are at R9.00 and offers at R12.00, which is a gigantic spread that makes trade very difficult.

Leaving that issue aside, let’s focus on results for the year ended February 2023. The 26 retail assets in the portfolio enjoyed a much better year, with revenue up by 18.4% and the total dividend per share by 20% to 141.12192 cents. I’m loathe to quote the current price of R9.00 in giving you a trailing yield, as the spread is huge and the yield will change drastically depending on the bid vs. offer. Perhaps that’s the point, with the huge spread reflecting a yield of between 15.7% and 11.8%.

At a yield of 15.7%, it’s not hard to see why some people are sitting on the bid at R9 and waiting to be hit.

The net asset value per share is R13.74, up 11.8% year-on-year.

Take a trip to Poland with Redefine (JSE: RDF)

After the takeover of EPP by Redefine, there’s a lot for shareholders to consider in Poland

Redefine announced that a property tour is being held in Poland over the next few days. Aside from being a lovely excuse for the fortunate few to travel and enjoy a country with electricity, this is a also useful opportunity for all Redefine investors to learn more about the EPP portfolio that Redefine acquired as part of that takeover and delisting.

EPP is the largest asset manager of retail real estate in Poland when measured by gross leasable area (GLA). There are 35 projects of which 29 are retail and 6 are offices. The portfolio is split across 23 Polish cities, absolutely none of which can be successfully pronounced by anyone whose surname doesn’t have a lot of Zs and Ws in it.

The presentation also deals with the ELI portfolio, a group incorporated in the Netherlands and held 48.5% by Redefine Europe. The portfolio is also based in Poland, with a strong slant towards logistics properties.

You can find the full presentation at this link if you want to really dig in.

Steinhoff might be forced by SdK Schutzgemeinschaft der Kapitalanleger to appoint a herstructureringsdeskundige (JSE: SNH)

Spare a thought for business radio presenters everywhere

Reading that sentence will either give you anxiety or make you want to order a beer. Or both.

I’m not going to pretend to be close to the details on this Steinhoff restructuring plan. Frankly, it’s good enough for me that management has said multiple times that the equity is likely worth nothing.

With the group trying to enter into the WHOA Restructuring Plan, it was the shareholders who said “whoa!” in the end. Unsurprisingly, the creditors who stand to receive some value all voted in favour of the plan and the shareholders left out in the cold didn’t.

From my understanding, the potential outcomes are that a court sanctions the WHOA plan regardless of the shareholder vote, or Steinhoff will end up in liquidation.

To celebrate the equity possibly being worth zero in an unexpected way rather than the communicated way, punters drove the share price around 3.8% higher in afternoon trade. No, I still don’t understand why anyone is buying here.

Transcend Residential Property has 97.4% occupancy (JSE: TPF)

People need somewhere to live

The latest results from Transcend Residential Property Fund cover the 15 months to 31 March 2023. The year end was changed, so the year-on-year growth numbers are pointless as we are comparing 15 months to 12 months. To make it worse, the base period had a whole lotta Covid in it.

Instead, I’ll just look at the latest facts, like an occupancy rate of 97.4% and a loan-to-value ratio of 37.1%, which is far more palatable than it used to be. This was achieved through the sale of 425 residential units to raise R390.7 million in cash, which was then used to reduce debt.

The company is taking full advantage of the availability of so-called “green” finance, comprising 68% of the total loan book and offering a rate benefit based on the underlying use of the funds and the ESG metrics.

The distribution per share is 72.34 cents which implies a yield of 11.3%. Again, I would caution that there are three extra months’ worth of profits in that number.

The net asset value per share is R8.40 and the share price is R6.40.

The market didn’t love the Zeda numbers (JSE: ZZD)

Car rental activities are still way below pre-pandemic levels, but the debt is the focus

It was rather interesting to see the Zeda share price come under pressure particularly in afternoon trade after releasing interim results early in the morning. On the face of it, they really didn’t look bad with revenue up 20%, EBITDA up 19% and operating profit up 25%.

Return on equity was up by 590 basis points to 28.3% and net debt to EBITDA improved by 60 basis points to 1.6x.

So, for the six months to March, it’s unlikely that the year-on-year numbers were the cause of concern in the market. I suspect that the balance sheet and the lack of dividend were to blame.

The trouble might be in some of the commentary, which touches on obvious pressures in the market. For example, margin on used cars reduced in the second quarter of the financial year as supply chain issues normalised. This is a worry for the second half of the year, as the used car side of the business is a critical part of the car rental value and leasing value chain. Those cars are eventually sold through the used car retail footprint and online auction platforms, so Zeda needs a robust used car environment.

Zeda owes a big chunk of money to Barloworld based on a loan from its old parent company. Now as a separately listed entity, Zeda’s balance sheet needs to be able to stand on its own feet. Some of the market jitters might be around this debt which is due by the end of the calendar year. Still, Zeda says that the company is on track to settle the debt.

Looking at the car rental business, the huge growth in inbound travel and corporate travel drove increases in revenue of 138.7% and 69.5% respectively vs. the prior period. If you read deeper into the results, you’ll see a comment that total car rental activities are still operating at only 26.8% of pre-pandemic levels. As always, bulls will see this as growth runway and bears will see this as a structural decline in demand.

I’m a bit on the fence with this. I think the adoption of video calling has removed a layer of business travel forever. I also think that the unreliability of Uber in South Africa is a major boost for car rental firms, with so many people on Twitter experiencing horrible service from Uber. I’ve also really struggled to get an Uber at times, which doesn’t build confidence in the platform.

The leasing business is a useful part of the group, helped along by commercial vehicles and the higher interest rate environment that makes it more difficult to buy rather than lease. But with revenue only up by 6% and EBITDA down by 2% in that segment, this could be another area that caused concern in the market.

Interim HEPS was 189 cents per share, up just 4% because of the net interest costs increasing by 56%. There is no interim dividend per share, with the group presumably focused on the debt reduction. The share price slipped below R10 in afternoon trade, so the Price/Earnings multiple looks modest on an annualised basis. It all comes down to the debt.

Little Bites:

  • Director dealings:
    • Directors executed small additional purchases of Calgro M3 (JSE: CGR) shares to the value of R14.5k.
  • Holders of 70.75% of shares in AfroCentric (JSE: ACT) tendered their shares in the offer from Sanlam (JSE: SLM). Each participant can now choose the split between cash and Sanlam shares in line with the circular, with a value of R60 per Sanlam share being used in the formula as the 30-day VWAP came in at R54.
  • Buka Investments (JSE: BUK) has absolutely no bids and offers in the market, so the trading update only earns a spot in Little Bites. The headline loss per share is expected to be between -25 and -31 cents for the year ended February 2023. The share price is only 73 cents. In case you are wondering where you’ve heard this name before, Buka Investments is what became of the Imbalie Beauty listed shell. I would love to give you a website link but I can’t find one and got tired of looking – the company clearly isn’t bothered about anyone finding information.

Powering the Future: Unveiling the Potential of Alternative Energy

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Powering the Future: Unveiling the Potential of Alternative Energy

In the land of sunshine and braais, where the woes of loadshedding have become a dishearteningly familiar refrain as Eskom’s troubles continue to cast a shadow over South Africa’s energy landscape, savvy investors may seek refuge in alternative energy.

As the sun sets on traditional power sources, we look at Renergen (JSE: REN) as this trailblazer harnesses the winds of change and captures the essence of possibility in a world where investing in the Green Wave gains significant traction.

Lights Out, Ideas On: Exploring Alternative Energy Amid Loadshedding 

As South Africans come to terms with the dim reality that loadshedding is no temporary inconvenience but rather a permanent fixture in our everyday lives, alternative energy solutions may prevail as viable investment options for market players looking to safeguard their portfolios from the ongoing energy crisis.

According to the South African Reserve Bank, loadshedding is expected to increase by nearly 60% in 2023 from 2022, which could wreak havoc concerning economic growth and inflation. The persistent blackouts are predicted to inflate prices by a staggering 1.1% annually, and with South African inflation remaining stubbornly high, it is clear that loadshedding has economic consequences far more extreme than many could fathom. With headline consumer inflation ticking higher to 7.1% in March, up from 7% in February, further rate hikes may be in store for the already-struggling average South African consumer.

Amidst a landscape riddled with uncertainty, we direct our focus to Renergen. This innovative domestic alternative energy company holds the potential to illuminate some of the darkness cast by Eskom’s challenges. As a recent pioneer in the industry, Renergen offers a potential hedge to the Eskom woes and embodies the global trend towards reducing carbon emissions and investing in renewable energy solutions. The company’s operations align seamlessly with the quest for long-term sustainability, making it all that more topical. However, as the traditional saying goes, “Don’t count your chickens before they hatch,” market participants should understand there is still a long way to go before Renergen becomes a formidable force in the global helium and natural gas-producing industry.

Renergen Limited (JSE: REN) 

In a world where innovation meets sustainable energy solutions like never before, Renergen, a trailblazing force in the energy sector, is making significant strides in unlocking a cleaner, greener future. With their pioneering technology, Renergen captures and liquefies natural gas from underground helium wells, taking a giant leap towards energy independence and reducing carbon footprints.

Through Renergen’s Virginia Gas Project, South Africa has joined a league of eight nations producing their own liquid helium, playing an indispensable role in numerous cutting-edge industries. From propelling space exploration and fuelling rocketry to empowering high-level scientific advancements, enhancing medical MRI machines, revolutionising fibre optics and telecommunications, enabling superconductivity, and empowering nuclear power stations, helium’s versatility knows no bounds. While helium is a precious resource known for its scarcity, the economic viability of its extraction is noteworthy. It becomes a financially viable pursuit even at concentrations as low as 0.1% within natural gas.

However, the Virginia Gas Project stands out with an impressive average helium concentration of 3.4%, which could open up unprecedented possibilities, potentially solidifying Renergen’s position as a valuable player in the helium extraction landscape.

Although the company aspires to become a global helium-producing powerhouse, significant work remains for Renergen to finalise the Virginia Gas Project before reaping such benefits.

  • Renergen has already successfully sourced liquefied natural gas (LNG) and liquid helium from the Phase 1 plant in its Virginia Gas Project, making it the world’s newest producer of liquid helium.
  • While the company’s Phase 1 liquefaction plant can produce approximately 50 tons of LNG daily, the subsequent phase is expected to produce the bulk of LNG and liquid helium. Renergen aims to increase its production capacity to around 680 tons daily, equivalent to approximately 940,000 litres of diesel per day, when it rolls out the Virginia Phase 2 liquefaction plant.
  • On that note, Renergen has outlined its strategic goal of establishing a series of LNG refuelling stations across South Africa in the coming three years. This initiative will be implemented once Phase 2 of the Virginia Gas Project becomes operational.
  • In a recent announcement, the company provided a glimpse into its endeavours through a collaboration with Time Link, a privately-owned transport and logistics company based in Cape Town.
  • Through its subsidiary, Tetra4, Renergen has entered into an agreement with Time Link to supply LNG for their long-haul fleet, facilitating the company’s transition from costlier diesel fuel.

According to Renergen CEO Stefano Marani, establishing LNG refuelling points along major highways in the country is expected to proceed smoothly. Marani emphasised that these fuelling points will primarily cater to the transportation of goods between cities. Using LNG instead of diesel during long-haul trips, such as from Cape Town to Johannesburg, offers substantial cost savings. Additionally, Time Link acknowledged the positive environmental impact of reducing diesel consumption in their fleets, saying, “As fleet operators, we are always looking to reduce our carbon footprint, enhance fuel efficiency and reduce costs. Introducing LNG to displace diesel in our fleet makes sense.”

While there is still a long road ahead before Renergen completes the second phase of its Virginia Gas Project, it appears the company already has an advantageous position nationally and globally in the energy and helium sectors.

South Africa’s daily helium consumption sits at a mere 200kg, while the United States has an average daily consumption of approximately 35,000kg. The Virginia Phase 1 liquefaction plant aims to steadily increase liquid helium production to around 350kg per day during 2024, while the second phase is expected to reach a production capacity of up to 4,200kg per day. Having said that, if Renergen can successfully roll out the completion of its second phase in its Virginia Gas Project timeously, the potential exists for the company to emerge as a global powerhouse in the liquid helium-producing industry.

Fundamental Analysis

In Renergen’s recently-released 2023 financial statements, the locally-based natural gas and helium producer reported an impressive 381% year-over-year surge in revenue, coming in at R12.69 million for the 2023 financial year. Despite not realising a profit, the company cut its net loss figure by more than 20% to -R26.73 million for the 2023 financial year, while its EBITDA figure improved by just over 23% to -R30.11 million.

These improved financial results align with Renergen emerging as a producer rather than an explorer.

Year-to-date (YTD), Renergen has seen its share price outperform fellow industry peer Montauk Renewables, as seen in the price chart below. Despite outperforming its alternative energy peer, Renergen has lost nearly 7.5% to shareholders (orange line) since the beginning of the year. Montauk Renewables has lost close to 35% to shareholders (green line).

Over the last three months, Renergen has returned approximately 3.5% to shareholders (orange line), while Montauk Renewables has lost 32% over the same three-month period (green line).

Technical Analysis

Analysing the weekly price chart of Renergen, it is clear that its share price has been consistently declining for just over a year, indicating a prevailing downtrend, with the 50-day moving average remaining above the candlesticks. Last week saw positive market sentiment push Renergen’s share price significantly higher, but this week has seen the share price retrace and tick down somewhat.

Looking at the daily chart analysis of Renergen, we can see that the company’s share price broke above its consolidation phase, exhibiting a pronounced upward trend. This week has seen some of that upward trajectory reverse as the share price retraces downward.

For the bull case, if positive sentiment persists around Renergen and if the local natural gas and helium producer rolls out the second phase of its Virginia Gas Project as expected, market participants could anticipate the share price to rise and potentially test the R26.40 resistance level (horizontal black dotted line). The R26.40 level could be watched closely by market participants as a potential entry point for bullish investors or a point at which the bears may expect a retracement toward lower levels.

For the bear case, if negative sentiment emerges as it has done in the past, Renergen’s share price could potentially fall lower and decline towards the primary support level at R17.00 (solid red line). Should there be a delay in rolling out the completion of Renergen’s second phase in its Virginia Gas Project, for example, market participants could potentially drag the share price lower.

* Sources: Business Live, IOL, Koyfin, Moneyweb, Renergen Ltd., Trading View 

Ghost Wrap #26 (Pan African Resources | HCI Group | Southern Sun | Datatec | Poultry (Astral + Quantum Foods) | Lewis Group | Trematon)

The Finance Ghost
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Ghost Wrap #26 (Pan African Resources | HCI Group | Southern Sun | Datatec | Poultry (Astral + Quantum Foods) | Lewis Group | Trematon)

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

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

  • Pan African Resources shareholders are licking their wounds, with a major sell-off in the share price after a reduction in production guidance.
  • The Hosken Consolidated Investments (HCI) group of companies reported this week, with a vastly different picture at the mothership vs. underlying listed companies Deneb, eMedia and Frontier Transport.
  • Southern Sun’s earnings tell an interesting story vs. pre-Covid levels, particularly when assessed against occupancy levels.
  • Datatec has unfortunately found the “adjusted EBITDA” button, a metric that global technology groups just love using.
  • The poultry sector is in disarray, with Astral and Quantum Foods both reporting horrific drops in profitability despite increasing revenue – and that’s before the impact of the avian flu outbreak in April!
  • Lewis Group can’t rely on share buybacks forever, with the trend in cash sales vs. credit sales being cause for concern.
  • Trematon’s intrinsic net asset value per share is under pressure from Generation Education in particular, with worrying metrics in that business.

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 (Finbond | ISA Holdings | Mahube Infrastructure | Pan African Resources | Quantum Foods | Texton | Tradehold | Transcend Residential Property Fund)

The Finance Ghost
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Ghost Bites (Finbond | ISA Holdings | Mahube Infrastructure | Pan African Resources | Quantum Foods | Texton | Tradehold | Transcend Residential Property Fund)

Finbond’s losses have decreased (JSE: FGL)

But the group is still firmly in the red

When reading about a small financial services group listed on the JSE, it’s easy to assume that any troubles must be related to the local economy. In Finbond’s case, you would need a passport to go and find the problems.

Of all places, Illinois in the US has been the biggest headache for the group. Finbond needs to lend money to lower income customers and those customers were the beneficiaries of incredible levels of stimulus in the US. In a perverse irony of note, the US economy is too strong for Finbond to be doing well there.

To add to the difficulties, there were major regulatory changes in March 2021 in Illinois that caused problems for the business model, with a revised longer-term product leading to a lag effect in profitability. Simply, accounting rules require interest revenue to be earned over the period of the loan and credit loss provisions to be recognised upfront, so a period of strong growth in lending would actually have a negative impact on short-term profitability!

Now that your mind has been blown by good things that are actually bad things for Finbond, I can highlight the financial performance for the year ended February 2023. Revenue increased by 21%, gross loans and advances increased by 25.6% and the headline loss per share decreased from -17.9 cents to -15.1 cents.

There is yet again no dividend, which makes sense in the context of the headline losses.

I was surprised to see that no mention is made of net asset value per share anywhere in the announcement, especially as this is generally seen as a key input for valuations of financial services groups. Based on a very quick look at the market cap and equity on the balance sheet, it looks like a price/book of roughly 0.3x.

ISA Holdings displays resilience, if not growth (JSE: ISA)

The digital security group could only increase revenue by 1%

If you dig into the numbers of this technology small cap, you’ll see that ISA Holdings managed to tread water on the top line. The same can’t be said for operating expenses, which jumped by 22.5% largely due to payroll expenses. The company is clearly hiring, but the benefit hasn’t come through on the revenue line yet.

The net profit result was saved for the year ended February 2023 by a major increase in share of profits from associate DataProof, which increased from R1.6 million to R7.7 million. This made all the difference in profit before tax growing from R22.8 million to R26.4 million.

With all said and done, HEPS grew by 34% to 14 cents per share. At R1.35 per share, the business trades on a sizable valuation for a company with a market cap of just R230 million. The core business needs to show a much better margin story to justify that multiple.

Mahube Infrastructure: renewables aren’t easy (JSE: MHB)

They may tug at the heartstrings, but renewable energy projects aren’t guarantees of success

Mahube Infrastructure (JSE: MHB) has investments in a variety of wind and solar farms. It’s a small listed group, with a market cap of just over R300 million.

In a trading statement for the year ended February 2023, some of the challenges in this sector were laid bare. The fair value of the assets went the wrong way based on macroeconomic variables (like discount rates) and the adverse revision of long-term assumptions on the amount of electricity generated. I was surprised by the latter issue, as that is not good news for these types of projects.

The results were also impacted by a drop in dividend income, including from the wind investments that experienced adverse wind conditions during the reporting period.

Pan African Resources shareholders get a 21% hiding (JSE: PAN)

Production guidance has been revised sharply downwards

You won’t often see a significant local company receive a 21% smack from the market in a single day. Then again, you won’t often see a gold miner reduce its full-year production guidance by roughly 12.5% with just over a month to go until the end of the period.

If we compare the latest guidance from Pan African Resources to the midpoint of the previous guidance range, there’s a drop of 25,000oz. Approximately 10,000oz has been attributed to Eskom’s electricity supply, with the rest due to a slower ramp-up at Barberton Mines and lower than expected production at Evander Mines.

Renewable energy projects are underway, but these take time of course. The company also noted that the issues at Barberton have improved towards the end of this financial period. The problems at Evander Mines were due to geological challenges that take longer to deal with.

The only good news is that the Mintails project is expected to receive the last remaining approval imminently, which means plant construction can commence within the next month. Steady state production is expected by December 2024.

Thanks to strong gold prices, the group is still in a decent financial position and net senior debt could be reduced by as much as 50% since December 2022.

This period really is a case of what might have been, with production issues at a really unfortunate time when the gold price finally gave miners an opportunity to generate substantial cash flows.

Even looking ahead to the 2024 financial year, we see production guidance of 178,000oz to 190,000oz, which is still lower than the guidance of 195,000oz to 205,000oz that was on the table for the 2023 financial year before being reduced to 175,000oz.

The underperformance relative to peers is severe this year:

Quantum Foods is a lesson in margins (JSE: QFH)

Revenue growth doesn’t matter if costs have gone ballistic

The poultry industry is a wild place. I cannot think of another sector that is so volatile at net earnings level, with skinny margins that can vary for reasons far beyond the control of the companies in this industry.

In the latest interim period, revenue at Quantum Foods increased by 22.0%. It was cold comfort, as gross profit only increased by 6.6% and operating expenses grew by 8.4%. With such tiny margins in this sector on a good day, that was enough to smash operating profit by 57.4% and HEPS by 82%.

Quantum Foods describes the six months to March 2023 as the most challenging conditions since listing in October 2014. Across record high feed raw material costs, outrageous levels of load shedding and consumer pressure that makes it impossible to recover the costs through pricing increases on eggs, this has been a perfect storm for poultry.

The bigger issue is that there is no obvious improvement to any of these problems. The weak rand has a significant impact on raw material costs. We all know that Eskom has no solutions for any of us. Finally, it’s not like the situation is getting any better for South African consumers.

To give you an idea of how much more expensive it has become to raise chickens, the cost of layer and broiler feed increased by 30.3% and 27.4% respectively, while the selling prices for eggs only increased by 7.5% and volumes fell by 9%. There is a crisis brewing for South Africa’s core sources of protein.

If you’re hoping that Quantum has an exciting energy solution on the cards, you’ll be disappointed. The company is only at the point of having generators installed at its major sites, which of course only helps with availability of power rather than the cost thereof.

It gets worse before it gets better. Although this period wasn’t affected by avian flu, there was an HPAI outbreak in April 2023 at the Lemoenkloof layer farm in the Western Cape. Just this outbreak carries a cost of R34 million, which is frightening when headline earnings for the six months to March was just R6 million.

Unsurprisingly, there was no interim dividend for this period.

Texton moves ahead with the GEPF repurchase (JSE: TEX)

If you see a rights offer down the line, remember this day

This certainly isn’t the first time that Texton has had me scratching my head. The company isn’t exactly the gold standard in capital allocation track record, evidenced by a share price that is down roughly 60% over 5 years.

The latest unusual step is a massive specific repurchase of 19.8% of the shares from the Government Employees Pension Fund (GEPF), managed by the PIC. At a price of R2.15, this is a discount of 11% to the current traded price. That’s great for Texton shareholders and strange for the GEPF, as the net tangible value per share before the repurchase is a much higher R6.11.

It would make a lot more sense for the PIC to rather put pressure on the company to recycle capital and return it to shareholders, particularly with the price at such a high discount to the tangible NAV. I’m grateful that I have precisely none of my own money in the GEPF.

If Texton can actually afford this, it’s really good for remaining shareholders as they are getting rid of a big chunk of shares from someone else at a discount. My bigger concern is that the initial announcement around this deal mentioned a potential equity raise in future, which could then negate any benefit from this deal.

If you see a rights offer from Texton at any stage in the near future, just remember this repurchase price of R2.15 and compare it to whatever price the rights offer will be executed at.

Shareholders of Texton will need to approve the deal with a 75% approval required. It helps that Heriot Investments (with a 64.7%) holding has already agreed to vote in favour.

Will Tradehold regret its UK exit? (JSE: TDH)

Although losses were realised on disposal in the UK, things aren’t easy at home either

In November 2022, Tradehold sold its operations in the UK for just over R2 billion, realising a loss of R164 million after releasing forex reserves on the disposal. The proceeds were used to redeem preference shares held by RMB and pay a special dividend of R4.34 per share to shareholders in November.

This makes Tradehold a primarily South African group (73% of assets) so the reporting currency is now the rand.

Net asset value (NAV) per share has dropped from R19.47 to R12.40 over the year ended February 2022, of which R4.34 is due to the special dividend. This means that R2.73 is simply due to losses on the disposal of the UK assets and the general performance of the portfolio.

The highlight here is Collins Group, with a portfolio of mainly industrial buildings and large distribution centres. Net profit grew by 9% in this period, although the average increase on renewals was just 3% in this period.

Solar projects are obviously top of mind for distribution centres with huge roof areas. Collins is using a rental based model to roll out solar projects, so there is no capital expenditure outlay.

As a sign of the times, the group plans to increase its exposure to the Western Cape to 17% of the total portfolio, which still seems pretty low vs. 42% in KwaZulu-Natal and 39% in Gauteng.

A final dividend of 30 cents per share has been declared. At R7.99 per share, the discount to NAV is just over 35%.

Transcend Residential Property Fund flags higher earnings (JSE: TPF)

You need to read very carefully to spot the change in reporting period

In a trading statement released by the company, Transcend Residential Property Fund noted an increase of 28.29% in its dividend per share. That sounds extraordinary, until you realise that this covers the 15 months to March 2023 vs. the 12 months to December 2021.

So not only has the financial period been changed, leading to a once-off longer period, but the base period included plenty of Covid issues.

The growth rate is irrelevant here. Instead, the helpful information is that the dividend per share is 72.34 cents, so the trailing yield is 11.3% based on the current share price.

Little Bites:

  • Director dealings:
    • There is more selling in the gold sector, this time a prescribed officer of AngloGold Ashanti (JSE: ANG) selling R1.94 million worth of shares.
    • A name you won’t see in this section very often is Sea Harvest Group (JSE: SHG), so take note of an associate of an independent director buying R1.33 million worth of shares.
    • The CEO of Brimstone Investment Corporation (JSE: BRT) bought shares worth R254k.
    • A director of Calgro M3 (JSE: CGR) has bought shares worth R92.8k.
  • Choppies Enterprises (JSE: CHP) has renewed the cautionary announcement related to the potential acquisition of 76% in the Kamoso Group, an FMCG business in Botswana. The negotiations were originally for a 100% stake.
  • With all said and done on the Sanlam (JSE: SLM) – AfroCentric (JSE: ACT) transaction, Sanlam will hold 60% of the shares in AfroCentric. It will be interesting to see how successfully the strategy is delivered going forward, as substantial promises were made to AfroCentric shareholders about the benefits of this deal.
  • The odd-lot offer by CA Sales Holdings (JSE: CAA) lives up to its name in my books. After considerable effort to attract a wide base of shareholders, the company is moving ahead with an odd-lot offer to try and mop up the 5,073 shareholders who each hold less than 100 shares. It’s also possible that this base was inherited from PSG as part of the unbundling. This is just 0.02% of the company, so I can understand the administrative burden vs. the total shareholding. What I can’t understand is that the total value of those shares is roughly R860k and the cost of executing the odd-lot offer is R680k! I’m sure the maths has been done, but I find it surprising that the company is a net winner on this basis. It shows how expensive it is to have a retail shareholder base in South Africa’s regulatory environment, though I must point out that an odd-lot means fewer than 100 shares and that’s a value of just R700 at the current share price.
  • Hillie Meyer will retire from the top job at Momentum Metropolitan (JSE: MTM) on 30 September 2023. His replacement is Jeanette Marais, who has been Deputy Group CEO since 1 March 2018. This seems like a solid example of succession planning.

Happy Birthday ETFs I 30 years of democratising global investing

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Happy Birthday ETFs I 30 years of democratising global investing

By Fikile Mbhokota – CEO, Satrix

2023 marks the 30th birthday of one of the most significant financial innovations of modern times – The Exchange Traded Fund (ETF). In this time, ETFs have championed the cause of democratising investing, levelling the playing field by making it simple and accessible for all.

Three decades on, these powerhouses continue to offer flexibility and diversity, drawing in the most inexperienced of investors while maintaining a strong performance – currently boasting an impressive $US10 trillion in assets under management (AUM).

After record inflows in recent years, it is no surprise that it’s predicted that ETFs will hold over $US20 trillion by 2026, representing a compound annual growth rate of 17% over the next five years. This makes ETFs more popular than ever and this can also be attributed to their accessibility and the rise in digital investment platforms.

Satrix introduced the first ETF to South Africa in 2000, and investors have never looked back. ETFs have seen an increase in fund inflows in South Africa due to their resilience, making them an attractive option for investors looking to weather the pandemic storm and current tough economic times. Currently, ETFs have an AUM of R129 billion in South Africa.

A true revolutionary of the investing world, ETFs are arguably the single-most disruptive and game-changing product the market has ever seen.

Prior to the advent of ETFs, investing was expensive, could be confusing to beginners, and offered fewer options for portfolio diversification. ETFs changed all that, providing a basket of securities that trade on an exchange, like a stock, allowing investors to access a wide array of different exposures at minimal cost.

The introduction of ETFs has transformed the investing landscape, making investing accessible to everyone, and allowing individuals to make their money work harder for them at minimal expense. The market has transitioned from being predominantly composed of wealth managers buying shares, to a more diverse investment market accessible to all. The impact of ETFs has been seismic, and their significance in democratising investing, particularly in South Africa, and helping retail investors ‘own the market’ cannot be understated.

Major milestones for the world’s greatest financial innovation

Here is a timeline of ETFs’ greatest hits so far:

  1. The ETF is born:
    There were a few ‘prototype’ ETFs, from Wells Fargo’s efforts, to the Toronto 35 Index Participation units. Then, 30 years ago, in 1993, State Street Global Advisors launched the Standard & Poor’s Depositary Receipt (SPY), the first US-based Exchange Traded Fund (ETF), which tracked the S&P 500. It’s known as SPDR today, pronounced ‘Spider’. It’s still the largest ETF in the world, with over $370 billion in assets under management, consistently trading over 80 million shares daily. It was physicist-cum-submarine-specialist Nathan Most’s ‘baby’, and it took him about six years to launch.
  2. Dotcom changed everything:
    The Dotcom boom catapulted ETFs into public consciousness, thanks to the proliferation of the internet, which fueled S&P 500 growth of 28% a year, on average, between 1995 and 1999. This catalysed growing awareness of the power of indexing to ‘own the market’, versus stock picking.
  3. A big Millennium moment:
    In 2000, European ETFs launched for the first time, following approval from the Undertakings for Collective Investment in Transferable Securities (UCITS) directive from the European Union. In 2000, ETFs had $65 billion in assets. By 2010, this grew to $991 billion. 2000 also saw the first factor-based ETF come into existence in the US.
  4. Satrix brings ETFs to South Africa:
    Satrix pioneered its flagship Satrix 40 ETF, the first-ever South African ETF in November 2000, the same year the product launched in Europe. Kingsley Williams, our CIO, says, “We pioneered index tracking in South Africa to disrupt the status quo. Today, the power of investing belongs to everyone.”
  5. The Dotcom bust (2000-2002):
    The Dotcom bust showed many investors that trying to beat the market was incredibly difficult to do with any degree of consistency. A low-cost, well-diversified fund, with low turnover and tax advantages was an attractive option in a time of total upheaval, so ETF uptake grew considerably.
  6. Bonds arrive:
    Bond ETFs were launched in 2002, giving investors more opportunity to build diversified portfolios at low cost. It took close to 20 years for bond ETFs to surpass $1 trillion in global assets. BlackRock predicts they’ll hit $2 trillion by 2024. Commodity ETFs came shortly after bonds. All these different asset classes helped further democratise investing.
  7. Active ETFs arrive:
    2008 saw the first actively-managed ETFs launch, combining the traditional benefits of ETFs like low fees and tax efficiency, while capturing an active investment strategy. South Africa was only to see the Active ETF landscape materialise in 2023.
  8. ETFs ramp up in retail:
    ETFs started to gain traction in the retail market (non-professional) during the 2010s, driven by education and awareness, and people’s cost sensitivity and desire for transparency. They offered a plethora of interesting products at excellent price points. They also allowed astute investors to stay ahead of the curve, without having to wait for forward pricing for trust and mutual funds.
  9. The $1 trillion milestone is met:
    ETFs hit the trillion mark in assets under management in 2009.
  10. Sustainable ETFs take off:
    There’s been growing demand for sustainable and ESG-linked ETFs that allow investors to align their values with their investments. Satrix was the first to launch an ESG ETF in South Africa in 2019, with its Diversity and Inclusion ETF. Global ESG ETFs have had a 90% compound annual growth rate from 2015 to 2020. In 2020, ESG ETFs took approximately 10% of overall ETF flows globally. Sustainable assets are expected to double by 2025.
  11. No more minimums:
    In 2015, South Africa had another major ETF milestone when Satrix removed all minimums, making investing more accessible than ever before, with the launch of SatrixNOW.
  12. Invest more, offshore:
    ETFs also gained a lot of traction in South Africa because they allow for 100% offshore exposure, without people having to lose their foreign allowance capacity. Satrix’s partnership with iShares, for example, has been a major game changer for accessing foreign markets.
  13. Covid-19 caused major adoption:
    Counterintuitively, during the pandemic Satrix saw record investing inflows to ETFs. ‘Locked’ at home, many people had some disposable income available, and ETFs presented a safer option, in a time of serious distress. In 2019, the total AUM in the SA investment market was about R6 trillion, of which 5.3% was made up of indexed assets. This rose to R6.7 trillion (6.7%) by the end of 2021. Globally, the pattern was the same, with the pandemic pushing major money into index products, like those tied to the S&P 500.
  14. The first crypto ETF arrives:
    2021 saw the first ever Bitcoin ETF launch in the US.
  15. Passive surpasses active:
    In 2022, the AUM of equity indexed funds surpassed active funds in the US for the first time. Research shows global net inflows into indexed strategies have been far more consistent, relative to active funds, attracting 59% of new net flows from 2009 to 2019.

🎈 Happy 30th birthday to ETFs! 🎂
We’re proud to be a part of this industry that brought about an evolution in portfolio construction with greater choice, more features, reduced costs, and a consistently compelling performance. And their next chapter promises greater growth than ever before.

Disclosure
Satrix Investments (Pty) Ltd is an approved FSP in term of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision.

While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSP’s, its shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaims all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information. 

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Ghost Bites (African Media Entertainment | AYO Technology | Deneb Investments | eMedia | Frontier Transport Holdings | HCI | Lewis | Life Healthcare | MiX Telematics | Old Mutual | Premier Fishing | Reinet | Southern Sun | Stefanutti Stocks | Texton)

The Finance Ghost
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Ghost Bites (African Media Entertainment | AYO Technology | Deneb Investments | eMedia | Frontier Transport Holdings | HCI | Lewis | Life Healthcare | MiX Telematics | Old Mutual | Premier Fishing | Reinet | Southern Sun | Stefanutti Stocks | Texton)

African Media Entertainment rides a radio recovery (JSE: AME)

The trading statement is highly encouraging

Covid wasn’t great for the radio industry. That statement may not make sense at first blush, but the live events and music festivals held under the radio station banners are highly lucrative and nobody wanted to attend them as masked balls.

Things are better now, with African Media Entertainment guiding growth in HEPS for the year ended March of between 21% and 40%.

AYO Technology flags a large loss (JSE: AYO)

The headline loss per share has more than doubled

For the six months to February, AYO Technology has guided for a headline loss per share of between -75.63 cents and -82.49 cents. That’s huge when the share price is only R3.05! The headline loss per share in the comparable period was -35.90 cents.

The company has attributed this to lower gross margin, restructuring costs and fair value adjustments on options.

Finance costs hurt Deneb in this period (JSE: DNB)

And if you split out insurance proceeds, it’s worse

Deneb is part of the HCI stable and the company holds some interesting assets, though you would be forgiven for thinking otherwise based on the absolute lack of commentary on the underlying operations in the result.

Although revenue at Deneb managed to grow 14%, gross margin pressure meant that the increase in gross profit was unexciting.

With the usual inflationary pressures factored in alongside higher net finance costs, HEPS fell by 15%. If you exclude the business interruption proceeds insurance in this period, it fell by 45%!

eMedia: from Anaconda to Afrikaans Turkish telenovelas (JSE: EMH)

Diversification has helped at a time when advertising revenue is dropping

eMedia owns not just e.tv, but also other assets like YFM (the radio station) and local film studios. This diversification has been helpful in a period of extended load shedding, with the company believing that Eskom has cost the TV advertising industry a whopping R500 million in revenue.

I think it’s pretty good that group revenue only fell by 0.6% in this environment, with profit down by 10.3%. The market clearly didn’t see it coming, with the share price dropping 9.7% on the day. A 20% drop in the dividend (and hence a lower payout ratio) may have been a driver here.

I found myself thoroughly intrigued by a note that Afrikaans Turkish telenovelas have been a major audience generator in the eVOD platform. This is the local version of a Netflix Originals strategy!

To give context to the results, group profit was R377 million and within that number, we find smaller subsidiaries like Media Film Services with net profit of R45 million and YFM on R15.9 million.

Frontier Transport Holdings – are you on the bus? (JSE: FTH)

You may not even be aware that these businesses are listed

Frontier Transport Holdings is one of those companies that only a close market watcher will likely know about. Part of the Hosken Consolidated Investments (JSE: HCI) stable, it includes businesses like Golden Arrow Bus Services.

For the year ended March, revenue increased by 15.1% but operating expenses increased by 18.9% over the same period. This margin pressure was driven by issues like fuel costs, with EBITDA only 2% higher as a result.

Thanks to a reduction in debt and thus finance costs, HEPS was up 5.9%. The full year dividend of 57 cents is a 9.6% increase on the prior year.

HCI’s solid result is underpinned by gaming and hotels (JSE: HCI)

A helpful contribution from coal doesn’t hurt, either

Hosken Consolidated Investments (HCI) is a fascinating group. It’s always a busy time on SENS when the company reports, as the reporting cycle is the same as the other listed companies that are part of the HCI group, like eMedia, Deneb and Frontier Transport Holdings. Those have all been covered separately today.

The easiest way to get a quick sense of the group is to use this table directly from the earnings release for the year ended March 2023:

The headings are cut off, but the latest period is on the left. You can immediately see the improvement in gaming and hotels, with coal also a lot higher. Note the pressure in media and broadcasting, particularly the television assets that don’t perform well during load shedding.

Your eyes aren’t deceiving you. In the bottom right, that is indeed a 55% jump in headline earnings.

With an investment focus on oil and gas prospects in Namibia, the group decided not to declare a final dividend. Watch this space.

Lewis feels the bite of economic pressure in SA (JSE: LEW)

Thanks to the ongoing share buybacks, HEPS managed to inch higher

Furniture retail group Lewis is well known among investors for a share buyback approach that has produced far better results for shareholders than would otherwise have been the case. Lewis trades at stubbornly low multiples, so share buybacks tend to be lucrative.

Share buybacks only get you so far, though. Lewis is facing considerable pressure in its operations, driven by broader challenges in South Africa.

Perhaps the biggest concern is that cash sales are moving sharply in the wrong direction. Cash retailer UFO suffered a sales drop of 12.5%. Group credit sales grew by 18.1% while cash sales fell by 16.3%. Ouch. It does at least help that the quality of the book has improved year-on-year, with the impairment provision improving from 40.4% of the book to 36.2%.

Total group revenue increased by 3.1% and gross margin improved by 10 basis points to 40.6%. Lower shipping rates have been helpful here. Despite this, operating profit fell by 8.3% as inflationary pressures in the cost base were too much to bear.

Here’s where the magic of share buybacks comes in: although headline earnings fell by 9.8%, headline earnings per share (HEPS) was actually up by 1%!

Life’s core business is performing strongly (JSE: LHC)

A VAT dispute settlement overshadowed the latest results

For the six months ended March 2023, Life Healthcare grew revenue by 12.9% and normalised EBITDA by 13.9%. That sounds great, until you read about normalised earnings per share only increasing by 1.1%. You can largely thank the tax dispute with SARS for that, with Life having paid R246 million in VAT of which R199 million was provided for in the prior period. This was despite Life having “strong legal and tax opinions” on this.

Something we aren’t reading about very often at the moment is margin expansion in Southern Africa, yet Life has managed to enjoy the right side of operating leverage in the land of load shedding. Revenue was up 11.6% and normalised EBITDA increased by 13.5%. In the AMG business in Europe and the UK, revenue grew by 15.5% and normalised EBITDA by 10.8%.

Net debt to EBITDA at 2.17x is higher than the comparable period at 2.03x, but remains manageable.

Strategic focus areas at the company include further investment in molecular imaging in South Africa and renal dialysis clinics, also in the local market. The hospitals have always had to be able to function with emergency electricity, so this is one of the few industries where capital expenditure is still going into the core business rather than into power backup solutions. Capex in Southern Africa was R514 million in this period, of which R418 million was on refurbishment and “portfolio optimisation” – classic boardroom terminology.

Despite the decent core results and a 13.3% increase in the dividend per share, the share price closed 7% lower.

Importantly, Life is still in discussions with various parties regarding unsolicited offers received for the AMG business in Europe.

Margins under pressure at MiX Telematics (JSE: MIX)

The impact on HEPS from a tax charge was severe

In the year ended March 2023, MiX Telematics managed to grow revenue by 15.7% or 10.3% on a constant currency basis. The acquisition of FSM was a positive contributor here, responsible for 4.5% of the 11.9% constant currency growth in the subscription revenue line specifically.

Margins went the wrong way though, with gross margin down 110 basis points and operating margin down 190 basis points. The additional pressure in operating margins was due to restructuring costs, the benefits of which should start coming through.

Because of a massive deferred tax charge on intercompany loans, HEPS fell by 46%. On an adjusted basis excluding restructuring costs and the deferred tax charge, it was slightly up year-on-year.

Old Mutual was a mixed bag this quarter (JSE: OMU)

A group this size usually has winners and losers in any given period

In an update for the three months to March, Old Mutual reported a 1% drop in Life APE sales mainly because of China, without which the sales number would’ve been 7% higher. Persistency is under pressure, which means that Old Mutual’s clients aren’t necessarily hanging on to life policies.

Gross flows increased by 22%, with Futuregrowth as a strong contributor here. Unfortunately, outflows in wealth management across all platforms was a partial mitigator of that good news story around flows.

Loans and advances were flat year-on-year, which tells me that Old Mutual is being cautious in this environment.

On the insurance side, gross written premiums increased by 19%.

Squid games at Premier Fishing and Brands (JSE: PFB)

There’s a tasty jump in operating profits at the company – but no dividend

For the six months to February, Premier Fishing and Brands reported a 15% jump in revenue, with the squid sector as the major driver of the strong jump in revenue. Lobster and hake deep sea also did well.

The problem is that shareholders of Premier didn’t get the lion’s share here, with a large part of profits attributable to minorities. This led to a drop in HEPS of 61.6%.

There’s also trouble on the balance sheet, with profits not flowing through into cash in the way that the company would’ve liked. There is no interim dividend.

Reinet flags a 2.9% drop in NAV year-on-year (JSE: RNI)

The compound growth rate since 2009 is 8.8% in euros

The drop in NAV at Reinet over the past year is mostly attributable to the stake in British American Tobacco (JSE: BTI), a company which I don’t believe is as defensive as the market likes to think it is.

The private equity investments had a good year, up by 26%. Although everyone only ever talks about the stakes in British American Tobacco and Pension Corporation, Reinet actively reinvests dividends in new opportunities that can be quite exciting, like technology funds.

The proposed dividend of €0.30 per share is 7% higher than the comparable period.

Southern Sun’s profits beat FY20 (JSE: SSU)

This is despite a lower occupancy rate than pre-pandemic

There are two ways to think about the occupancy rate. If you’re bearish, you might argue that a full recovery in occupancy isn’t coming for a long time, with a structural decrease in business travel and economic pressures on leisure travel. If you’re bullish, you could argue that there is runway for further improvement in this story.

Or, you could simply read the Southern Sun announcement, in which case you’ll see commentary around a normalisation of travel patterns except for the Sandton node. Structurally lower activity in Sandton has been a theme of the post-pandemic world, with devastating effects on office property owners in the area.

Welcome to the markets, where people can look at the same piece of information and form completely different views.

The year-on-year performance is a little silly, with EBITDAR (that’s not a typo – it’s the standard measure in hotel groups for operating profit) more than doubling from R590 million to R1.4 billion. The more interesting approach is to compare it to FY20 (where only one month was impacted by Covid), in which case EBITDAR is 6.2% higher despite occupancy of 51.5% vs. 59.3% in FY20.

In a great demonstration of how sensitive profitability is to occupancy above the point where fixed costs are covered, occupancy was only 30.6% in FY22. So, occupancy increased by roughly 68% (51.5% vs. 30.6%) and profits increased by approximately 140%. Welcome to hotel economics.

Winter is coming. The group notes the uncertainty around demand over this period, particularly with load shedding. The good news is that the balance sheet is in good shape to weather this storm.

The share price has made a full recovery vs. pre-Covid levels but seems to have run out of steam in 2023:

Stefanutti Stocks: under construction (JSE: SSK)

Valuation is everything – as evidenced by this share price move

The markets can be confusing. A company can release seemingly solid results and watch its share price drop. Stefanutti Stocks can release a headline loss per share of -38.73 cents for the year ended February 2023 and watch its share price close 9.6% higher.

It all comes down to what the market was pricing in. When it comes to Stefanutti Stocks and its broken business that is being restructured, this bruised and battered fighter isn’t exactly priced for great expectations.

The restructuring plan is being implemented over the year ended February 2024. It includes everything from the sale of non-core assets through to a potential equity capital raise.

This is a perfect example of a speculative punt on a turnaround story. With an operating profit from continuing operations of over R100 million but a total loss from continuing operations of -R37.5 million, there is something to save here underneath layers of difficulty.

Texton looks to take the PIC out at a good price (JSE: TEX)

A large specific repurchase is on the cards

Texton is proposing a repurchase of approximately 19.8% of its share capital from the PIC at a price of R2.15 per share, a substantial discount to the current traded price of R2.41. That may sound strange, but there’s absolutely no chance the PIC could sell a stake that size on the open market without smashing the price into oblivion.

Here’s the funny part: the repurchase will come out of existing cash resources, but Texton may then require a rights offer for its strategy. At what price does the management team think a rights offer can be achieved?!?

Assuming a rights offer goes ahead, is there really a saving here for shareholders net of transaction costs on the buyback and the rights offer?

Little Bites:

  • Tsogo Sun Gaming (JSE: TSG) has built a 10% stake in City Lodge (JSE: CLH) very quickly, which obviously has gotten the market talking about potential takeout activity. The City Lodge announcement doesn’t specifically mention Tsogo Sun Gaming, but the companies that own the 10% stake were figured out by financial media houses to be part of the Tsogo Sun Gaming group.
  • With the scheme of arrangement for the take-private of Mediclinic (JSE: MEI) sanctioned by the UK court, the listing on the JSE will be terminated on 7 June.
  • It won’t make much of a dent, but every bit helps – Nampak (JSE: NPK) has sold a property in Tanzania for $5.5 million, payable over four instalments until August.
  • Capital & Regional Plc (JSE: CRP) will issue shares equivalent to 2.6% of share capital under the scrip dividend.
  • The CFO of Telemasters (JSE: TLM) has retired (for the second time!) with the company in the process of finding a replacement.
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