Altvest has garnered a lot of attention in a short space of time. This financial services group is building in public, which is a very difficult thing to do as start-up losses are scrutinised by the market and pivots are a matter of public discussion rather than private decisions in a boardroom.
With a controversial approach at times to its public persona, much of the Altvest story has been lost in the noise.
Warren Wheatley approached me for a fireside chat to dig into the vision at Altvest and to address some of the historical matters on social media.
This is a raw, unedited discussion that lasted just over an hour. If you want to understand a lot more about the Altvest business and the challenges of building in public, then this is for you.
Note:
An appearance on the Ghost Stories podcast is never an endorsement by me of a company’s investment case, business model or share price. Always do your own research and arrive at your own decision. At the time of the release of this podcast, I do not currently own shares in Altvest or any related entity.
The total value of deals captured (excluding South Africa) for Q1 2023 was US$3,63 billion, almost a third of the value of that reported for the same period in 2022. Of the 123 deals captured, 38% of activity was recorded in East Africa – specifically, in Kenya – followed by West Africa, led by Nigeria with 28% of the Q1 M&A activity.
The increasing importance of private equity (PE) investment on the continent has been highlighted for some time, and the decrease in M&A activity for the first quarter of 2023 is directly aligned with the fall off in PE investment for the period. There were 74 PE deals captured for Q1 2023, with a reportable value of $562,6 million (reportable because the value of many of these deals is undisclosed), constituting 60% of all M&A activity for the quarter. This is compared with $1,34 billion (139 deals) over the same period, a year ago. According to Africa: The Big Deal, the amount raised by start-ups in the first four months of 2023 is less than half of what it was at the same time back in 2022, with healthcare being the only sector recording positive year-on-year growth, contrasting with the steep decline almost everywhere else. If the continent’s economies are to return to the unprecedented growth seen in the two decades leading up to COVID, then focus should be on ensuring that start-ups have the support and conditions needed to help fuel the next wave of growth. Africa, with 60% of its population under the age of 25, is ripe to embrace new technologies, particularly if they address the socio-economic problems faced.
The largest deal by value was the acquisition by China Natural Resources (CNR) of the Williams Minerals lithium mine in Zimbabwe for US$1,75 billion from Chinese investment company Feishang Group and Top Pacific (China). The deal is a strategic move by CNR to meet the rising demand for a safe and reliable resource of lithium in a global market where the appetite for renewable energy continues to grow. Unsurprisingly, with the world focused on goals to reduce carbon emissions toward a clean energy future, five of the top six deals by value for the quarter fall into the Energy/Resources sector.
Life Healthcare is to acquire the renal dialysis clinics in southern Africa belonging to German dialysis specialist Fresenius Medical Care. The 51 clinics located in Namibia, Eswatini and South Africa will become part of Life Healthcare’s renal care programme.
With the liquidation of Conduit Capital’s largest insurance business, Constantia Insurance Company, the Group does not have the scale and capital to grow its remaining insurance businesses. For this reason, Conduit Capital is to dispose of Constantia Risk and Insurance to TMM for an aggregate cash price of R55 million. Part of the disposal payment will be kept in escrow to cover sales claims against Constantia Life should they arise.
The offer by Community Holdings to Jasco Electronics’ minority shareholders has been accepted in respect of 70,097,576 Jasco shares representing 19.08% of the total shares in issue, increasing the equity stake to 74.42%. The shares were acquired for a consideration of 16 cents per Jasco ordinary share, representing a 4% premium on the 30-day weighted average traded price of Jasco shares on 2 December 2022, the trading day preceding announcement. The delisting of Jasco was terminated this week on 23 May 2023.
Nampak has disposed of the property in Dar es Salaam which housed its Tanzanian manufacturing business prior to being wound down and closed. The property was sold to Canda (T) Investment Company for US$5,55 million.
Unlisted Companies
Edtech startup Play Sense, has secured an undisclosed funding from Grindstone Ventures. The preschool offers play-based learning through its micro-schools online platform. The funds will be used to enhance its franchise model and accelerate growth.
TSX-listed Dye & Durham, one of the world’s largest providers of cloud-based legal practice management software, has acquired Cape Town-headquartered GhostPractice in a deal in which the financial terms were undisclosed. GhostPractice is the largest provider of legal practice management software in South Africa and also serves law firms in Canada.
Texton Property Fund is to repurchase 72,129,048 shares from the Government Employees Pension Fund at a repurchase price of R2.15 per share. The repurchase represents 19.8% of the total issued share capital of the company. The shares will be cancelled with the aggregate number of Texton shares in issue reducing to 291,572,055. A total of 31,852,013 shares will be held as treasury shares.
Orion Minerals has issued 115,35 million shares at an issue price of $0.015 (R0,18) to investors as part of its capital raising exercise and a further 51,5 million shares to Tembo Capital as repayment of the convertible loan. Funds from the two-tranche placement to raise $13 million will be used to accelerate the development of both of its key base metal production hubs in the Northern Cape.
In the release of its interim results, Nampak told shareholders that the requirement for a minimum Rights Offer of R1,5 billion has been reduced to a Rights Offer of up to R1,0 billion. On going negotiations to conclude credit-approved term sheets for the refinancing package for the next five years together with the implementation of the restructuring plan will determine the size of the required rights offer, which will be announced to shareholders in due course.
Universal Partners has issued 108,036 new shares to Argo Investments Managers as part settlement of the carry fee owned to Argo in relation to the disposal of the company’s investment in YASA.
PPC has taken a secondary listing on A2X with effect from 30 May 2023. The company will retain its listings on the JSE and the Zimbabwean Stock Exchange. The listing will bring the number of instruments listed on A2X to 129 with a combined market capitalisation of over R9 million.
A number of companies listed on one of South Africa’s Stock Exchanges have initiated share buyback programmes and each week update shareholders. They are:
Lesaka Technologies has repurchased c. 250,000 common shares in the company at a price of $3.26 (R62.08).
South32 has increased its share repurchase programme by c. $50 million in anticipation of a stronger outlook for commodity prices in the second half of its financial year. This will enable the company to return $158 million to shareholders before September 2023. This week the company repurchased a further 1,957,023 shares at an aggregate cost of A$7,90 million.
Glencore this week repurchased 14,880,000 shares for a total consideration of £64,20 million. The share repurchases form part of the second phase of the company’s existing buy-back programme.
Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 15 to 19 May 2023, a further 2,696,979 Prosus shares were repurchased for an aggregate €183,62 million and a further 571,127 Naspers shares for a total consideration of R1,91 billion.
Five companies issued profit warnings this week: Nampak, MiX Telematics, Delta Property Fund, Premier Fishing and Brands and Ayo Technology Solutions.
Six companies issued or withdrew a cautionary notice: Ayo Technology Solutions, Conduit Capital, Tongaat Hulett, Primeserv, Finbond and Texton Property Fund.
Abler Nordic, a public-private partnership investing in companies in Africa and Asia, has announced a successful exit from its decade-long investment in Baobab Senegal. Baobab is a financial services group with operations in seven countries across the continent and a presence in one province in China, servicing half a million micro entrepreneurs and small businesses.
Corcel Plc, the AIM-listed extractive industries exploration and development company, is to acquire a 90% stake in Atlas Petroleum Exploration Worldwide (APEX). APEX has working interests in several historically producing oil assets in the Kwanza Basin, onshore Angola. The £800,000 deal is the company’s first oil and gas acquisition and will be settled by the issuance of 200 million new ordinary shares.
Creditinfo Group, a service provider of credit information and risk management solutions, is to acquire two credit bureaus in Uganda and Namibia.
Dawi Clinics, a large chain of outpatient care in Egypt, has raised EGP 250 million in an investment round led by Al Ahly Capital Holdings (ACH), the local investment arm of the National Bank of Egypt. The Egyptian-American Enterprise Fund co-invested alongside ACH. The investment will be used to fund the growth of its chain of clinics across Egypt by opening 30 new branches.
Sadot, a subsidiary of Muscle Maker Inc, a global agricultural-commodity supply chain and emerging growth stage restaurant company, has announced the purchase of 2,000 hectares of agricultural land located within the Mkushi Farm Block of Zambia’s Region II agricultural zone. The land, along with buildings and related assets was acquired for US$8,5 million. Initially wheat, soy and corn will be grown and sold to local African markets with the goal to integrate into Sadot’s international trade, launching a new business vertical in the food supply chain strategy.
The takeover of companies is a highly regulated process. This article focuses only on oversight over disclosures made by potential offerors or targets.
In the UK, the Takeover Codes allow for two types of disclosures to be made prior to a formal offer, namely voluntary possible offer announcements and mandatory possible offer announcements. A mandatory possible offer announcement is required when, inter alia, a company “is the subject of rumour and speculation or there is an untoward movement in its share price”. Few details are provided as the announcement is aimed at subduing speculation. On the other hand, a voluntary possible offer announcement allows an offeror or a target to test the waters of the market through a public announcement that a potential takeover may be on the cards. The Takeover Codes require this announcement to identify the potential offeror and state the “put up or shut up” deadline (the date by which the potential offeror must either make an offer or announce that it no longer intends to make an offer).
The UK’s Takeover Codes, therefore, allow a potential offeror to voluntarily announce a potential takeover before making a firm offer. However, does South African law allow the same? In a recent ruling, the Takeover Special Committee (Committee) discussed public statements made before a firm offer in South Africa. Caxton & CTP Publishers and Printers Limited (Caxton) made certain public statements as to its intent to acquire control of Mpact Limited (Mpact), an acquisition that would be subject to the Takeover Regulations. Unhappy with these public statements, Mpact approached the Takeover Regulation Panel (TRP) and the TRP prohibited Caxton from making any further public statements about the acquisition in any form without the prior approval of the TRP under Regulation 117 of the Takeover Regulations. Caxton appealed to the Committee, claiming that Regulation 117 does not apply to an announcement of an objective to acquire securities in a manner that might constitute an affected transaction. It argued that there was not “even a proposed deal on the table” as it had made no offer, nor proposed a purchase price, and its statements clearly indicated that any offer was dependent on competition approval. According to Caxton, Regulation 117 only applies to documents that relate to the offer to acquire shares or the acquisition itself.
The Committee began by setting out the two stages of an affected transaction regulated by the Takeover Regulations – the pre-firm offer stage and the post-firm offer stage. The following principles arising from Regulations 95, 99 and 100 apply to the pre-firm offer stage – (i) an approach may only be made to the target’s board;
(ii) all pre-firm offer negotiations are confidential and leaks of price sensitive information must immediately be disclosed in a cautionary statement (a statement that urges security holders and the marketplace to exercise caution when trading the securities of the target);
(iii) confidentiality may only be broken to make a cautionary statement or a firm intention announcement, both of which fall within the oversight of the Takeover Regulations; and
(iv) the target’s board is the gatekeeper that must satisfy itself that the potential offeror is ready, willing and able to commit to the offer.
On the other hand, post-firm offers are governed by Regulations 117 and 111(8). Regulation 111(8) also applies to any statement that, while not necessarily factually inaccurate, may create uncertainty or mislead security holders. Clearly, no communication falls beyond the reach of the Takeover Regulations where it either signals an approach with a view of an offer being made (a pre-firm offer communication) or where it is made following an announced firm offer (a post-firm offer communication).
The Committee held as such: (1) Caxton’s statements, although undeveloped, conveyed a clear and unambiguous declaration of its intent to eventually acquire control of Mpact through an affected transaction.
(2) It was also made in the context of a collapsed negotiation with Mpact’s board after it refused to co-operate with Caxton to file a joint merger notification. Caxton had failed to convince Mpact’s board, the gatekeeper to the transaction, that it was ready, willing, and able to implement a proposed offer.
(3) Therefore, its impugned announcement to the market, which subjected Mpact to speculation without a firm offer on the table, conflicted with the principles and spirit of the Takeover Regulations.
(4) The prohibition on Caxton should not have been sourced in Regulation 117, which applies to cautionary announcements that are made during the pre-firm offer stage, but rather regulations 99(1), read with regulation 95 and 100, in that it did not respect the role of the board as the gatekeeper, it did not maintain confidentiality, and it did not disclose the leak of price sensitive information as a cautionary statement.
(5) Regulation 117 does not apply to verbal statements, but Regulations 99(1), 95 and 100 apply to both oral and written statements during both the pre-firm offer and the post-firm offer stages.
Therefore, in South Africa, until we have direction otherwise, there appears to be no space for possible offer statements. Any announcements in the pre-firm offer stage would only be permitted in the form of a cautionary statement following a leak of price-sensitive information. Silence is golden then, it seems.
Brian Jennings is a Director and Keagan Hyslop a Candidate Attorney in the Corporate & Commercial practice | Cliffe Dekker Hofmeyr.
This article first appeared in DealMakers, SA’s quarterly M&A publication.
Despite global economic challenges, the African fintech ecosystem continues to expand, with startup fintech investments proving a dominant source of venture capital deals. In 2022, over 100 startups in Africa obtained first-time funding above US$1 million, with fintech proving a strong source of investment. This reflects a steady course for growth in African fintech, with the industry making up more than 25% of all venture capital rounds in the last few years.
In such investment rounds, South Africa is joining other regional leaders, like Egypt, Nigeria and Kenya. Nigeria and Kenya have been two of the African fintech hotbeds garnering the most attention. Kenya’s fintech explosion occurred largely because the general African fintech wave followed the penetration of mobile phone technology and infrastructure. Kenya’s current mobile penetration surpasses the country’s entire population by 12%. Kenya’s fintech industry was originally focused on mobile money transfer services, and rode the wave of exponential market adoption between 2007 and today. Building on technology akin to GSM text messaging, major players in the market were able to expand their offering to users who did not have internet or data connections, but had access to cellular phone towers and basic mobile devices. In that same period, financial inclusion went from 26% in 2006 to 83% of the total population today. That activity created a market that many other fintech entrants were able to diversify within and, as a result, a large portion of GDP flowed through such services. This makes the regulators similarly fintech-friendly and creates interest in being cooperative towards innovation.
Nigeria’s rise has been similar, although perhaps more rapid in the last few years. Three of the largest African unicorns come from Nigeria, and the country is dominant in Africa in respect of fintech venture capital investments. This has followed some of the same drivers as Kenya on mobile penetration, but has also benefitted from a highly entrepreneurial technology sector and deep issues in respect of financial inclusion. About 38 million adults in Nigeria are completely financially excluded, particularly when it comes to credit access. This created the perfect conditions for dynamic fintechs to emerge, with a massive potential market if successful.
Out of the nine notable tech unicorns in Africa, seven are fintech companies. In terms of scaled fintech, mobile money, and third-party payment systems in particular, are segment leaders in the African fintech space, with more than half of the world’s mobile money customers now based in Africa. Many experts predict Mobile Network Operators (MNOs) will refine their fintech strategies in 2023 and 2024, taking more space out of the traditional banking industry, particularly as they begin to obtain mobile money licenses in new territories.
Nonetheless, the traditional banking industry has also seen some notable projects. In South Africa, for instance, the recent launch of the rapid payments system branded as ‘PayShap’ has been a particularly noteworthy development.
PayShap is the outcome of an industry-spanning collaboration, driven by BankservAfrica, the Payments Association of South Africa and the South African banking community, with the aim of modernising the national payments industry in the country. This development signals a progressive approach by local policymakers, together with the industry, and will hopefully lead to more dynamism in the sector and wider access to the country’s fintech products and investment opportunities, whilst keeping in step with the growing demands of international standards. It is also, however, a potential disruptor in the fintech sector, where some successful fintech ventures have built their payment products in the gaps of the traditional banking digital payments infrastructure. It remains to be seen whether the introduction of PayShap will influence any consolidation of players in an already saturated payments industry, and how this development may reshape or enhance African payments business models going forward.
Stagflation and the drying up of speculative capital remain some of the biggest challenges facing fintech globally, as investors are going to be more careful in their investment choices and selective in their risk-taking. Early venture figures in the first quarter of 2023 showed broader venture investment dropping to close to pre-pandemic levels, and this will have an impact on the types of fintech ventures that are able to survive. However, the African fintech space has shown incredible resilience to global market turmoil and there is still a lot more room for growth in segments such as alternative lending, digital investment and neobanking. African economies are buoyed by young populations that are increasingly entrepreneurial and driven by technology-led innovation. Digital infrastructure is also attracting investor interest; for example, there is an imbalance in the supply of data centres, compared to the growth expected from consumers that need more data and are spending more time online. There are also many other African countries that haven’t yet reached the heights achieved by the likes of Nigeria, Kenya, South Africa and others in their fintech development. The resilient rise of fintech in Africa appears to be far from over.
Ashlin Perumall is a Partner in Baker McKenzie’s Corporate/M&A Practice in Johannesburg
This article first appeared in DealMakers AFRICA, the continent’s quarterly M&A publication.
Constantia Risk and Insurance has attracted a buyer
Before you get confused, the subsidiary within Conduit Capital that suffered liquidation is Constantia Insurance Company. There were a couple of other businesses within the group that could be sold to help it at least realise some value.
One such entity is Constantia Risk and Insurance, which is being sold for R55 million. The buyer is TMM, a diversified pan-African investment group. Half of the purchase price will be held in escrow due to the liquidation process within the broader group and the potential for claims. This means that the money will be kept on one side to settle such claims if they arise. If the claims never come, the money will be released.
Negative Delta (JSE: DLT)
The property fund is struggling
In maths, delta is the symbol for change. The change in earnings at Delta Property Fund is unfortunately negative, with distributable earnings per share for the year ended February 2023 expected to be between 69% and 74% lower than the prior year.
This is a function of the issues plaguing the entire sector, ranging from negative reversions through to vacancies and higher interest rates.
“Distributable” is a relative term here, as there’s no dividend anyway for this period because of the challenges being faced.
Indluplace releases detailed results (JSE: ILU)
With 9,282 residential units, this is buy-to-let delivered at scale
Indluplace is more than just a residential fund, with a significant retail portfolio as well. The portfolio value is R3.4 billion and the company is currently under offer from SA Corporate Real Estate (JSE: SAC) for R3.40 per share. The price is now anchored to that number, trading at a slight discount to take into account the time value of money and what seems to be low deal risk.
There isn’t much for investors to think about here in terms of the share price because of the offer, but it’s interesting to note that residential occupancies improved from 89.7% to 94% over the past year and the student portfolio is back up to 98% from a dire level of 43% in March 2022.
The net asset value (NAV) per share is 5.5% lower at R6.5983, so the offer price is a discount to NAV of roughly 48.5%.
As highlighted previously by Indluplace, there is no distribution based on these interim numbers but there will be a clean-out distribution before the scheme is implemented, assuming all goes ahead.
MiX Telematics will have tricky results to work through (JSE: MIX)
A trading statement reveals a major impact on earnings from deferred tax
With detailed results due to be released on Thursday this week, MiX released a trading statement on Wednesday giving an indication of earnings. This is another great example of a company releasing a trading statement far too late in my view. It’s meant to be an early warning system, not something that comes out one day before results!
HEPS will be between 42% and 46% lower than the in year ended March 2022. This is mostly because of a deferred tax charge on forex movements linked to an intercompany loan. Investors will need to dig into this properly to understand it, with adjusted earnings per share (excluding the forex move and tax) actually increasing marginally.
Liberty Two Degrees’ pre-close update is worth a look (JSE: L2D)
There are useful insights here into the broader retail environment
Liberty Two Degrees has exposure to some of the strongest properties in the country. This is a quality portfolio, yet it certainly hasn’t been immune to what has been going on out there. For example, office occupancy remains problematic at just 80.7% vs. retail occupancy of 97.7%.
But for me, the most interesting part of the update is the charts that give us an indication of the operating environment. For example, this chart from the update is pretty interesting, although that y-axis for growth is wild if you look closely:
It tells the story of the pandemic: wild volatility, huge pain in 2020 and then a strong recovery in 2021 driven by global stimulus. 2022 was a consolidation year, with 2023 growth taking a knock from load shedding.
Here’s another interesting graphic, which supports my view that fast food businesses are doing very well in this environment (despite Famous Brands telling us otherwise):
And in hospitality, occupancies are up sharply and there were 67 events at the Sandton Convention Centre between January and April 2023 vs. 47 in the same period last year. Investors in hotel groups will also be pleased to know that RevPar (a measure of room pricing) has increased significantly vs. 2022.
Nampak calls 2023 a “defining year” – no kidding (JSE: NPK)
Interim CEO Phil Roux sounds believes in the future of the business at least
It is entirely possible that Nampak can emerge from this mess as a sustainable business. It’s also possible for shareholders to lose a ton of money along the way, despite a rally of 9% after the release of results on Wednesday. I would remind you that even over 3 years (which means the worst of the pandemic as a starting point), the share price is down 44%.
With revenue of R8.4 billion and trading profit of R899 million, this hardly sounds like a basket case. But once you include net forex losses of R571 million because of Angolan and Nigerian profits, the situation deteriorates rather quickly. Operating profit before impairment losses was R259 million for the six months ended March and net finance costs were R494 million (up by a whopping 77%), so not even the debts are being serviced by these assets, let alone the shareholders.
Even if we ignore the very large impairment losses, the headline loss for just the interim period is R342 million.
Is there any good news? Well, the originally envisaged rights offer of R1.5 billion has been reduced to a rights offer of R1 billion. A circular will be published at the end of May to this effect. With a market cap of under R500 million, this is still a massively dilutive rights offer.
In addition to the rights offer, there is an asset disposal plan that needs to be delivered before Nampak can breathe a sigh of relief on the balance sheet.
Finally, if you really want to understand how severe those forex losses are, take a look at this:
The tide went out on Premier Fishing’s profitability (JSE: PFB)
HEPS has more than halved
For the six months to February 2023, Premier Fishing and Brands suffered a significant drop in profitability. HEPS has tanked by between 51.56% and 71.56%, which means interim HEPS of between 0.87 and 1.49 cents per share.
That share price of R1.62 is looking very high relative to those earnings.
No further details behind the drop are given in the trading statement, but detailed results are due this week.
Reunert is on the right side of this environment (JSE: RLO)
When industrials businesses do well, they tend to do really well
Most industrials in South Africa are struggling at the moment, with load shedding as a major driver. But with significant export and renewable energy businesses, Reunert is about as well positioned as one can hope to be in this environment.
In the six months to March, revenue is up 21% and operating profit increased by 33%, so the joy of operating leverage is coming through here. We need to be careful though, as this period included a business interruption insurance payout of R44 million. Without that, operating profit would be 23.8% higher, so the positive operating leverage effect is far more muted than initially appears to be the case.
Major drivers of revenue growth were better cable volumes in the Electrical Engineering Segment and growth in sales in the Applied Electronics Segment thanks to demand for renewable energy products and the defence export business.
I must also note that the ICT Segment is acquiring IQbusiness, a management and technology consulting firm with revenues in excess of R1 billion. Remember this reference if someone says to you that “selling time” isn’t a business. It sure is one!
Although HEPS was 37% higher, the dividend per share is only up by 11%. This might be due to the R324 million increase in working capital across debtors and inventory.
RFG Holdings has been a beacon of hope (JSE: RFG)
There aren’t many local companies growing HEPS, let alone by 37.7%
Food producer RFG Holdings has put in a very strong performance in the six months ended 2 April 2023, with the international business operations as a major contributor. The rand has really helped here, particularly as the base period included a failed peach crop in Greece that was a temporary boost to RFG’s business.
Group revenue increased by 10.2% with price inflation of 14.8%, which means that volumes dropped. Ultimately, all that matters is total revenue, so it’s not a big deal if price increases more than make up for a drop in volumes. There are many companies out there suffering a drop in volumes even without price increases.
We do need to note foreign exchange gains and the Today acquisition that contributed 2.7% and 2% to revenue respectively. This means that the group volume decline was actually 8.5%, so RFG’s ability to still grow HEPS in this environment is very impressive.
Interestingly, the fruit juice category delivered the best market share gains for RFG. These food businesses are just a roll-up of a number of categories, which can make it very difficult for investors to forecast growth. A lot of it comes down to belief in the management team that they can keep doing the right things.
To give a sense of the effect of load shedding, operating profit in this period was R346 million and diesel costs were R37.8 million. This means that operating profit is roughly 10% lower than would be the case if dear Eskom was functioning.
Overall, HEPS increased by 37.7% and the group even managed to reduce net debt slightly despite net working capital increasing by 13.7%. Return on equity has increased from 9.9% to 14.1%.
Trematon’s INAV is under pressure from Generation Education (JSE: TMT)
But the overall drop in INAV is also largely due to a capital distribution to shareholders
Trematon is an investment holding company, which means that intrinsic net asset value (INAV) per share is the key metric when assessing performance. This is based on director valuations of the underlying assets and is the market standard for a company like this.
When a capital distribution is made to shareholders, this reduces the size of the group and hence the INAV. The shareholders receive that cash, so it’s not a loss in value. Of the drop in INAV from 487 cents to 421 cents as at February 2023, 40 cents was because of the capital distribution. The remaining 26 cents is because of the assets.
The major pressure was in Generation Education, where profit from operations fell from R11.5 million to R4.7 million. This was driven by slower growth in student numbers and higher costs, so margins were squeezed. The ARIA property business also suffered a drop in profitability, yet the contribution to INAV has somehow remained flat. I’ll also touch on the Club Mykonos resort in Langebaan, which generated operating profit of R3 million vs. break-even in the prior interim period.
There are various business units that you could dig into with detailed analysis. Overall, the share price of R2.45 means that the group is trading at a discount to INAV of 42%. I must point out that INAV per share should always take into account deferred tax and I see no evidence of that here (happy to be corrected if I’m wrong). Investors also need to allow for centralised costs, so this discount often isn’t as high as it initially seems.
Vunani reports a drop in earnings and the dividend (JSE: VUN)
Asset administration saved this result from being a lot worse
Vunani has a variety of business units that really need to be considered separately in order to understand the group’s results for the year ended February 2023.
The largest contributor to profit is now asset administration, achieving profit of R33.7 million out of a group total of R61.7 million. It has jumped sharply from R19.8 million in the prior year, which is just as well because there have been major negative swings in some other business units.
The only other unit with a good news story for this period is insurance, with profit of R14.6 million vs. R11.8 million in the prior period.
Businesses linked to the markets have come under pressure, like fund management where profits dropped from R37.4 million to R21.2 million and institutional securities broking which slipped from a profit of R1.4 million to a loss of R9 million. Stockbroking really is one of the toughest business models around at the moment.
Finally, advisory services increased revenue by over R12 million but somehow only managed a flat profit performance of R1.3 million.
Overall, Vunani’s revenue increased by 10% but HEPS dropped by 14.4% to 29.7 cents. The dividend of 11 cents per share puts the trailing dividend yield on 3.9% based on the current share price of R2.80.
Little bites:
Director dealings:
Directors of Harmony Gold (JSE: HAR) have sent a pretty clear message about where they think we are in the cycle, with two directors selling a combined R10.2 million worth of shares.
An associate of a director of Ascendis (JSE: ASC) has bought shares worth over R373k. In a separate transaction, an associate of a different director of the company bought shares for R232k.
A director of Brimstone (JSE: BRT) and one of his associates bought a combination of ordinary shares and “N” shares worth R70.7k.
It’s lovely to see a censure on a director of a listed company for trading in a closed period without permission. It’s grossly unfair that these types of things happen in the market and the rules are there to protect minority shareholders who don’t sit on the inside of these companies. With many years of experience, Dipula Income Fund (JSE: DIB) director Brian Azizollahoff should’ve known better when he sold shares worth R108k in a closed period without clearance. He earned himself an embarrassing public censure and a fine of R50k. Having been in top executive roles for a long time, I doubt the fine stung very much but the censure probably did. Hopefully the public censure sends a message to directors across the JSE.
Choppies (JSE: CHP) announced that the charge against the company by the Botswana accounting authorities for alleged non-compliance in 2017 – 2020 has been withdrawn.
Mustek (JSE: MST) announced that its Chairperson would be stepping down at the AGM in November, with Reverend Vukile Mehana having served in that role since 2016. The board has commenced a process to find a successor.
Alexander Forbes shows the benefit of its strategy (JSE: AFH)
Growth in HEPS from continuing operations is encouraging
Alexander Forbes has been a group on a mission to execute major strategic changes. Aside from the sale of the life insurance business, the group also sold the client administration business to Sanlam Life.
The correct measure to assess performance is thus HEPS from continuing operations, as it splits out the gain on sale of the businesses and the improved performance in discontinued operations for the portion of the year for which they were held. Continuing operations, as the name suggests, are what the shareholders will be exposed to going forward.
On that measure, HEPS increased by between 20% and 25% for the year ended March 2023. Things have definitely improved at this company, with the share price up roughly 20% in the past year.
Bytes reports impressive numbers (JSE: BYI)
Demand for the group’s services remains strong
Cybersecurity. Cloud. Hybrid datacentres. These are high-growth service offerings and Bytes has all of them, which is why revenue increased by 26.5% in the year ended February 2023. I feel compelled to point out that this is growth in British pounds, a real currency.
Although gross margin came down from 73.7% to 70.3%, we can all agree that this is still a pretty juicy margin. Operating profit increased by 20.6%, a similar percentage increase to gross profit. Operating profit margin was 27.6%.
HEPS increased by 23% and the dividend nearly followed suit.
Strategically, bolt-on acquisitions are clearly still in play here, with a 25.1% investment in AWS partner Cloud Bridge Technologies. This is a business that has worked with Bytes for a long time, which is always encouraging when you see deals like these.
I remain a happy Bytes shareholder.
Coronation has troubles beyond the tax (JSE: CML)
Outflows of 5% of average AUM are not helpful to shareholders
With R623 billion under management, Coronation is absolutely enormous. It hasn’t been a good period for the company, with the jokes writing themselves about the “Trust is Earned” slogan in light of major fights with SARS and a huge tax bill.
That fight is ongoing, with Coronation having applied for the right to appeal the ruling of the Supreme Court of Appeal in the Constitutional Court. It’s a worthwhile exercise, as the tax bill is a cool R716 million. This was the major driver of HEPS being obliterated by 97% to just 6.2 cents in the interim period.
There’s a potential sting in the tail though, with SARS lodging a cross-appeal to the Constitutional Court to appeal the Supreme Court of Appeal decision to dismiss the penalties. The tax problem could get worse rather than better!
Even without SARS, there are reasons to be concerned about these results. Although closing assets under management (AUM) increased by 9%, outflows were 5% of average AUM and that reflects the lack of ability for many South Africans to meaningfully save and invest.
Worryingly, the 11% increase in fixed expenses was impacted by the weakening of the rand, with Coronation clearly having many technology expenses that are denominated in dollars or at least linked to the currency.
Between the outflows and the increase in costs, Coronation seems to be getting squeezed by macroeconomic issues that go a lot further than just the value of the equity markets. Profit before tax fell by 8% year-on-year and that obviously excludes the huge SARS problem.
As a closing comment, I must note that the entire SARS expense (excluding a potential further issue related to penalties) has been recognised in the interim period. In other words, although interim earnings have been crushed, the second half of the year should see a normalised profit performance and so the impact on the full year numbers will be a lot less severe than the impact on the interim numbers.
Datatec has discovered “adjusted EBITDA” (JSE: DTC)
The scourge of this reporting style continues
Another soldier has fallen. Datatec has been reading earnings reports from international peers and has decided that adjusted EBITDA is the way forward.
And guess what? The adjusted numbers look better than the reported numbers. Isn’t that a massive surprise?
Continuing adjusted EBITDA margin was 3.5% for the year ended February 2023, identical to the prior year. Continuing EBITDA margin as reported properly actually fell from 3.2% to 1.9%. We shouldn’t let this minor inconvenience ruin everyone’s snacks after the results presentation.
I don’t actually mind when the adjustments relate to genuine once-off costs, like restructuring costs. I mind a lot when they involve share-based payments. Tech companies love falling into the trap of paying staff big chunks of their bonuses in shares rather than cash, proudly showing a strong adjusted EBITDA number when in reality, shareholders are constantly being diluted.
Adjusted EBITDA is generally like Pringles – once management teams start, they just can’t stop.
If we lift our heads to the overall performance, continuing revenue grew by 13.1% and continuing gross profit grew by only 2%, so the margin pressures are clear and dollar strength in the first half was the major culprit. Continuing EBITDA fell by 31.5%.
With Analysys Mason having been sold, the remaining businesses are Westcon International, Logicalis International and Logicalis Latin America. EBITDA decreased across the board.
The share price closed 5.9% higher, so clearly reporting all these adjusted numbers has worked.
HCI flags a substantial jump in earnings (JSE: HCI)
Another 5% jump in the share price takes the year-to-date increase to nearly 33%
It’s been a tough year for South Africa and many investors, yet your money would be smiling back at you if it had been invested in Hosken Consolidated Investments (HCI) shares at the beginning of the year.
To back up the juicy share price gains, a trading statement for the year ended March reflects expected growth in HEPS of between 50.2% and 60.2%. With so many different businesses in the stable, investors will look forward to digging into the group company updates to see what the key drivers were.
Indluplace shows decent growth in income (JSE: ILU)
There is no dividend at this stage while the scheme of arrangement is in progress
You may recall that Indluplace is the target of an acquisition by SA Corporate Real Estate (JSE: SAC), with one of the terms being that no dividend is payable on the interim profits at this stage. Instead, Indluplace would pay a clean-out dividend prior to the scheme being implemented. I’ve seen this called a “clean price” in the property sector before, designed to ensure that current shareholders get their dividend in a process that has uncertain timing.
Excluding interest on loans earned from participants of the Indluplace share purchase and option scheme, distributable income has grown by 7.3% year-on-year for the six months to March.
Will MultiChoice shareholders be alright this year? (JSE: MCG)
With the business under pressure, MultiChoice held a capital markets day
Eskom isn’t doing MultiChoice any favours whatsoever, with load shedding making it increasingly difficult for families to justify a monthly spend on entertainment on TV. This also has a negative impact on advertising, something that eMedia Holdings (JSE: EMH) has consistently flagged in periods of bad load shedding. And of top of all of this, MultiChoice’s customer base has discovered the joy of streaming instead.
Without a doubt, Eskom cannot be blamed for all of MultiChoice’s challenges. Every time I see an advert on Facebook for DSTV, the comments section is filled with people begging for a SuperSport-only bouquet. I currently pay MultiChoice absolutely nothing. I would love to pay them a couple of hundred bucks a month for sport.
MultiChoice’s strategy is to look beyond South Africa’s borders. The focus is on Africa, with the company also seeking out major global partners. In my view, the biggest strength is the regional content, which is a genuine competitive advantage against the likes of Netflix. I would also caution that Netflix is equally focused on creating regional content, so MultiChoice doesn’t operate in a competitive vacuum even in that space.
Another competitive advantage held by MultiChoice is the ability to receive payments across Africa. That sounds so silly if you’ve never run a business that receives payments, but there are around 200 payment partner integrations and receiving money in Africa isn’t as easy as you might think. Of course, the problem lies in getting the money back from the African subsidiaries to group level.
MultiChoice is responding to growth in access to broadband on the continent by putting in place key streaming partnerships, like the recently announced deal to partner with Comcast on Showmax. It will be Showmax powered by Peacock, the streaming technology that underpins Comcast’s streaming offering. MultiChoice will own 70% in that business and perhaps the most important element is the access to Comcast’s content like English Premier League football and HBO.
In case you think streaming will be good news for MultiChoice’s profits in the next two years, think again:
Another strategic driver that possibly makes sense is sports betting, an obvious opportunity alongside SuperSport. Will that be the catalyst for a sports-only bouquet? I wouldn’t bet on it just yet.
It gets patchy after that, with other initiatives like FinTech and Home Services. Yes friends, DSTV Internet is coming. If you can’t beat ’em, join ’em?
The Rest of Africa business is on track for trading profit breakeven in FY23. That’s a nice way of saying it would be profitable without forex headwinds. Sadly, those headwinds tend to be a feature of doing business in Africa.
Finally, for Phuthuma Nathi shareholders, the good news is that MultiChoice will need a lot of capital at group level and the biggest source of that cash flow by far is MultiChoice South Africa. Phuthuma Nathi holds shares alongside MultiChoice in MultiChoice South Africa, so the movement of cash to group level for investment purposes means that Phuthuma Nathi gets its slice of the pie.
Of course, this makes it even more important for MultiChoice to look after the South African business properly. I’ll say it again for employees reading this: give us a SuperSport bouquet! My money is waiting.
Zeda is growing HEPS, albeit only slightly (JSE: ZZD)
The traded multiple is looking very modest at this stage
Mobility business Zeda was unbundled by Barloworld (JSE: BAW) in December. It’s been one-way traffic since then unfortunately, with the share price down nearly 40% since initial trade.
When you consider earnings drivers like growth in leasing and an increase in inbound and corporate travel, it’s not obvious why the company is trading at such a light multiple. The results are seasonal in line with what you might expect, with HEPS for the year ended September 2022 of 325 cents vs. HEPS for the six months to March 2022 of 182.3 cents. You therefore can’t just double the interim guidance to work out a forward Price/Earnings (P/E) multiple on this stock.
But with Zeda closing at R10.14, the P/E is just 3.1x on the full-year numbers. The guidance for HEPS for the six months to March 2023 is between 187.8 and 191.4 cents, representing growth of 3% to 5%. Although that is modest growth, it still makes Zeda sound cheap at this price point.
Is the market missing a trick here?
Little Bites:
Director dealings:
A director of Gemfields (JSE: GML) locked in the gain on share options, selling shares worth R8.1 million that were acquired at a discount of up to 35% on the current market price.
The CFO of Discovery Life (a subsidiary of Discovery – JSE: DSY) has sold shares worth R201k.
GMB Liquidity continues to live up to its name, with the new CEO of Grand Parade Investments (JSE: GPL) mopping up another R172k worth of shares via his investment vehicle.
The CEO of Spear REIT (JSE: SEA) has bought more shares for his kids and family worth nearly R72k.
A director of Sea Harvest Group (JSE: SHG) has acquired shares worth over R46k.
Value Capital Partners has reduced its stake in Novus Holdings (JSE: NVS) to 6.42%. The stake was over 10% previously.
Orion Minerals (JSE: ORN) has issued a large number of shares in line with previous announcements. Other than to directors and managers, as well as Tembo Capital as repayment of a convertible loan, the latest issuance includes the first tranche of the capital raising activities that bring Clover Alloys (SA) onto the register as a strategic partner.
Investors have been well primed on the benefits of compound returns. What is underappreciated, though, is that not all compounding is equal. In this article we discuss two key pillars of compounding that is understated in importance, but critical to make it work in your favour.
First, the source of compounding determines the rate of compounding. We all know that to earn the proverbial biscuit, you have to risk it. Casinos take a calculated risk with each spin of the Roulette wheel. Many spins make uncertain outcomes near certain. Similarly, diversified exposure to risk assets in financial markets, given enough time, has shown to pay off with high consistency – and at a superior compounding rate.
Second, know your enemy. The anti-matter to compounded returns is compounded costs. A sure way to reduce the exponential benefits of compounding is to tolerate a counter-compounding effect through high fees, costs, and inefficient re-allocations. The sheer impact might surprise you.
First Pillar: Source of Compounding
To understand why the source of compounding matters so greatly, we need to first understand the difference between Saving and Investing.
Saving means spending less than you earn – storing seeds safely to be consumed later.
Investing means sowing those seeds for greater harvests in the future.
We need both – but only investing truly benefits from compounding.
Why is that? The evergreen adage of higher risk, higher reward gives us a clue. Risk’s reward crucially relies on differences in our perception and temporal tolerance of it. Savers and short-term investors have less appetite for risking the seeds they intend consuming tomorrow. They thus pay a premium to investors willing and able to bear the possible short-term pain of sowing seeds for the long-term gain they seek. Harvesting risk premiums to truly compound one’s efforts requires time, not timing.
But how much does taking some risk truly matter? The answer may surprise you. To show just how important harnessing the right source of compounding is, we use a simple illustration.
Suppose you have two individuals, Saver and Investor. Both studied the same degree and started earning the same salary 20 years ago. Saver worked long hours and occasionally weekends. Saver is all work, no play. And it shows. Saver earns a whopping 12% salary increase every year.
Investor likes to pursue other hobbies, has a great work/life balance, and works far shorter hours. And it shows. Investor earns a basic 6% salary increase each year in line with inflation.
Both have one thing in common – they diligently set aside 10% of their income. What they do with their saving contributions differ though. Saver dislikes risk & prefers certainty and earns a fixed 5% annualised return on a savings deposit account. Investor embraces risk and earns the equity market risk-premium over time by investing in the Satrix Top 40 ETF. Suppose we left them to work 22 years and then reviewed their wealth in 2023. Note the below:
Source & Calculation: Satrix. December 2000 – December 2022.
At the end of 22 years, the hard-working Saver had a final salary more than 3 times that of Investor. He contributed R1.1m to his savings pool (dotted light blue line) and reached an accumulated R1.62m capital (solid light blue line, earning 45.9% on total contributions). Investor put aside half this amount (dark blue dotted line) yet grew her total capital by more than 15% that of Saver (netting a return on total contributions of 252%).
By setting aside capital every month, both enjoyed the benefits of compounding. One just did so significantly more than the other. Saver focused on growing income; Investor focused on what she did with hers. And this made a very big difference. It turns out that being intentional about what you do with your earnings matter far more than simply working to grow it. Very few apply this principle in life though; we are mostly conditioned to become income maximisers, not wealth creators.
The lesson is clear, but some might not be convinced. In fact, many would argue that “this time is different”, or TTID. Considering all the turmoil, currency uncertainty and all that, earning equity market risk premiums today might seem too risky and so choosing safer, less rewarded alternatives seem prudent. But if history has taught us anything, it is that TTID is only right in the short-term and can be the enemy of long-term wealth creation.
Consider that if we were to randomly select a day in the past and invest R1 in the All-Share index since 1995 – the odds of returning more than 5% annualised are 74%, 82% and 93.9% respectively over 1, 3 and 5 years (this is in line with other global equity indexes too). Similar to the casino relying on multiple spins of the wheel to make uncertain outcomes near certain – time & patience places the odds firmly in your favour to earn the equity premium.
Second Pillar: Know Your Enemy
The second pillar to making compounding work for you is avoiding its archenemy: costs. If we were to take Investor’s success above and apply a cost layer to it – her nest egg fast erodes. As before, the scale is more surprising than the statement: R1m invested in the Top 40 since 2000 would’ve been worth less than half if it had an annualized fee of 3.5%. The compounding impact of fees is crystal clear when you see it. Below we show different fee scales and show at the end how much total return were lost accordingly.
Source: FTSE/JSE. Calculation: Satrix. December 2000 – April 2023.
Conclusion
We often hear that compounding is the 8th wonder of the world and that it is a powerful force for wealth creation. In this short piece we argue that to truly harness the wealth creating potential of compounding, we need to know what the source is of compounding, and also, what is working against it.
Compounding works best if you harvest well-diversified and fairly rewarded risk premiums (such as those earned in equity markets) while limiting investment costs. Only then will this wonder truly work its magic in your portfolio.
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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