Friday, November 15, 2024
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Ghost Bites (Anglo American Platinum | Attacq | Curro | EOH | Italtile | Metrofile | Spear REIT | Transcend Residential Property Fund)

The Finance Ghost
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Ghost Bites (Anglo American Platinum | Attacq | Curro | EOH | Italtile | Metrofile | Spear REIT | Transcend Residential Property Fund)

Anglo American Platinum confirms the earnings damage

We knew these earnings would be poor – now we know just how bad they are

Amplats (as everyone calls it) has released a trading statement for the twelve months ended December. Thanks to regular production updates, it didn’t take anyone by surprise that earnings are lower.

With PGM sales volumes down by 26% and just a 2% increase in the rand basket price, this result was always going to be in trouble. Inflationary pressures in mining costs didn’t help, either.

Headline earnings per share is expected to decrease by between 33% and 52% (a wide range) vs. the preceding year. This implies a range of between R144.31 and R201.28 per share. This puts the company on a Price/Earnings multiple of somewhere between 8.65x and 6.20x.

Attacq jumps over 15% on news of a deal

The GEPF is plowing R2.8 billion into the portfolio

There is a substantial deal on the table, with Attacq selling 30% in the Waterfall City portfolio to the Government Employees Pension Fund (GEPF). This gives Attacq a long-term investment partner, which helps tremendously with the development pipeline.

The sale of the 30% stake is worth R2.5 billion and the GEPF will inject another R300 million in the form of a shareholder loan. The net impact is a reduction in Attacq’s gearing from 37.2% to 24.0%.

As for the pricing of the deal, the GEPF will invest at a 10% discount to the NAV of the subsidiary holding the Waterfall assets. This is a much smaller discount than the discounts at which listed property companies typically trade, which is why Attacq’s share price jumped.

This is a Category 1 deal, so shareholders will need to vote on it. As an Attacq shareholder, I’m only too happy to see this deal on the table.

Curro’s earnings are heading in the right direction

Recurring HEPS is back above pre-pandemic levels

Curro’s share price flatlined during the pandemic and hasn’t really escaped that trap:

My average in price is R12.22 vs. the closing price of R8.94, so I’ve decided to be patient with Curro in waiting for it to behave itself. There hasn’t been much recent momentum in the share price, with investors worried about the impact of energy and other costs on the business.

In the year ended December, recurring HEPS is expected to be between 51.5 cents and 59.5 cents. In the year ended December 2019 (before the pandemic), recurring HEPS was 51 cents.

Before you scream from the rooftops that the share price should therefore be back to pre-pandemic levels, be aware that Curro undertook a huge rights offer in 2020 to raise R1.5 billion from shareholders. This was highly dilutive, which is why the share price cannot be compared to pre-pandemic levels.

Notably, earnings per share is between 2.3% and 17.3% lower due primarily to a large impairment related to lower-yielding school assets. Curro is still trying to find its way in this post-pandemic reality, facing longer-term problems like inflation in utility costs and challenges in affordability for middle class South Africans.

Importantly, student numbers increased from 70,408 learners on 28 February 2022 to 72,835 learners on 10 February 2023.

Anything is interesting at the right price

EOH’s rights offer is proof of this phenomenon

When you’re willing to sell an asset at a low price, you’ll always find a buyer. EOH managed to raise R500 million in a rights offer that was oversubscribed, with demand from investors of more than 135% of the quantum of the rights offer.

The underwriters (Aeon, Anchor Capital and Visio) weren’t required to take any shares in the end.

In addition to the rights offer, there was a specific issue of shares to Lebashe Investment Group (EOH’s empowerment partner) for R100 million.

The company is thrilled that over 90% of shareholders followed their rights. This is what happens in a heavily discounted rights offer where shareholders practically have no choice but to suck it up. The share price is now R1.71. I originally had a punt at around R7 and exited at a similar level when I realised that this story wasn’t going to end well. I’m grateful that I got this one right.

Italtile signs off on a tough period

The company finds itself in a highly unfavorable environment

To make money, Italtile needs homeowners to (1) have disposable income and (2) feel good enough about the country to justify further investment in fixed property. Sadly, those aren’t common characteristics of South Africans at the moment.

To make things even harder, Italtile is dealing with significant inflationary impacts on input costs and the disruptions on manufacturing operations caused by load shedding. The pressure on margins has come through in a 160 basis points decline in gross margin in the six months ended December 2022.

An increase in system-wide turnover of 3% wasn’t enough to offset these issues, with trading profit down 9% and headline earnings per share (HEPS) down 6%. The ordinary dividend followed suit with a 6% decline.

Given the uncertainty in the operating environment, the company has chosen not to give any detailed earnings guidance for the remainder of the year.

An interim dividend of 32 cents per share was declared. The share price closed nearly 1% higher at R14.13.

Metrofile invests further in the Middle East

The stake in E-File Masters has been increased

Metrofile must be happy with the growth being achieved by Metrofile Middle East. So happy in fact, that the company is increasing its stake in the region from 80% to 95%.

Sadly, we don’t get any more details than that. This is a very small deal in the group context and so no information has been given on price etc.

It’s not unusual to find a listed company with regional partners in faraway lands, so these types of deals (buying all or part of the stake held by minority partners) do happen from time to time.

Spear sells the Liberty Life building

A disposal worth R400 million will help rebalance the portfolio

Spear acquired the Liberty Life building in Century City in 2019. This was before the pandemic drove a significant change in office building strategies. There’s no denying that the need for office space has diminished in the wake of the pandemic and much of that demand will never return, as staff love having hybrid working arrangements.

Spear wants to rebalance the portfolio towards industrial and retail assets in the Western Cape, with less exposure to office properties.

The sale of this office building is at a 8.7% discount to the latest reported book value of the property. The management team still believes this is an attractive deal, not least of all because the current tenant is likely to only need a portion of the building. There are other major issues, like costs of refurbishment and risks of negative rental reversions.

One could argue that management should’ve known all of this when valuing the business at the last reporting date. Still, this transaction makes sense to me as office property is hardly the hottest asset around. The disposal yield is 9.57%.

The proceeds will be used to settle the existing debt on the property of R375 million, with R24 million to be redeployed into other projects. Other than reducing the loan-to-value ratio by 500 basis points to between 34% and 36%, the other benefit is that the fixed debt ratio of the group will increase from 62% to between 72% and 77%, which is in line with the target level.

This is a category 2 transaction, so shareholders don’t need to vote on it.

Transcend Residential Property Fund releases results

Despite this, there was still no volume traded on the day

An illiquid share is a sorry sight. When there isn’t a single share traded on the day on which results are released, you know that the listing really isn’t achieving any of its objectives.

For the 12 months ended December, Transcend Residential Property Fund’s net asset value per share limped higher by 2.8% and the distribution per share increased by 2.5%. The loan to value is 36.3%, a significant improvement from 52.7% two years ago.

There are 4,079 residential units in the portfolio and the occupancy rate at the end of December was 95.8%, with average occupancy over the year of 95.8%. There is significant churn in the units within the portfolio, with 379 units sold and 442 green units acquired. This strategy is no accident, with “green loans” comprising 69.1% of the total term debt book and providing a funding benefit.

The net asset value per share is R8.76 and the share price is R6.41. The distribution of 57.81 cents per share is a yield of 9%.

Little bites:

  • Based on the ongoing uncertainty around Royal Bafokeng Platinum’s future ownership, the wholly-owned subsidiary of Anglo American Platinum (Rustenburg Platinum Mines) that buys PGM concentrate from Royal Bafokeng Platinum has agreed to extend the notice date for termination of this agreement. It can be terminated in respect of either 17% or 50% of the concentrate purchased under this agreement.
  • In the Afrocentric – Sanlam deal, some associates of directors with very large stakes (like Community Investment Holdings) have accepted the partial offer.
  • Hudaco repurchased 4.8% of the company’s issued share capital at an average price of R151.05 per share, which is below the current traded price of R160. Share buybacks make sense in companies that trade on modest multiples.
  • Another industrials group following a buyback strategy is Argent Industrial, have repurchased 0.09% of its shares at an average price of R15.31 per share. This is exactly in line with the current traded price.
  • The PIC has reduced its stake in Delta Property Fund, which isn’t a great sign when you remember that Delta’s strategy is built around having government bodies as its tenants.
  • Murray & Roberts adjourned its general meeting regarding the disposal of the shareholding in Bombela Concession Company. This will allow the company to conclude discussions with key stakeholders. The meeting will be reconvened on 20 February.
  • Vodafone Group Plc has increased its stake in Vodacom from 60.5% to 65.1% as a result of the completion of the Vodafone Egypt transaction.
  • Grand Parade Investments has concluded the property deals related to the settlement of the dispute with Gumboot Investments Proprietary Limited.

China: Rebuilding Sentiment

Sponsored Content
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China: Rebuilding Sentiment

By Siyabulela Nomoyi – Quantitative Portfolio Manager, Satrix

On 22 July 2020, Satrix launched the Satrix China ETF tracking the MSCI China Index which captures the large and mid-cap sectors across China A shares, H shares, B shares, Red chips, P chips and foreign listings.

It has 717 constituents and covers around 85% of the Chinese equity universe. Apart from being labelled as the factory of the world, China plays a major role in South Africa from an economic point of view as well as due to its impact on the performance of our local stock market.

China’s Influence on the SA Economy

As at the end of November 2022, China is South Africa’s number one trading partner, as 10% of our exports go to China while 20% of our imports come from China. In 2009, China surpassed the US and EU in terms of our exports, with South Africa exporting $4bn while importing $35bn.

When former president Zuma visited China before we officially joined BRICS, the relationship between our two countries was dubbed as being an upgrade from a strategic partnership to a more comprehensive one.

A large interest China has in South Africa is the country’s abundance of mineral resources, for which China brings huge demand. Even after the global financial crisis in 2008, China still had massive GDP growth which was mainly pushed by its investment in infrastructure, though there were other factors as well, like low labour costs and high productivity.

Their massive investment in infrastructure required the supply of a significant quantity of commodities, and South Africa was readily available to meet this demand. South Africa’s top export to China is ore, either in the form of iron or manganese, and other metals like zinc and copper. Mineral fuels like coal and petroleum oils come next, with alloys and stainless steels also needing a mention. This means that China’s demand for these exports from South Africa plays a big impact on the pricing of our commodities. In the fourth quarter of 2022, rating giant Fitch said that they see the construction sector slowing down as China’s fixed assets were more likely to expand at a slower pace, which would mean less demand for commodity imports into the country.

Local Equities and China

The Chinese love to buy luxury goods. In fact, China is the second largest personal luxury goods market worldwide. At the beginning of 2022, China grew its expenditure on luxury goods by 31%, with a 10% share of a market that is valued at around $380bn.

A name familiar to local stock watchers is Richemont (CFR), a major luxury goods business. Another example is Britain’s Burberry. China’s approach with its zero-COVID policy dampened the big spenders’ ability to splash out more on Louis Vuitton bags and Swiss watches, so much so that sales in the sector were down 25% in the last quarter of 2022.

Stock watchers always keep an eye on sales results from Richemont, and the stock holds the biggest weight in our local market cap index; the FTSE/JSE All Share index, at 15%. The second biggest stock in the All Share index is Anglo American (AGL) at 10%, which exports basic materials like iron ore, manganese and platinum, with China as a huge client. Lastly, Naspers (NPN) at 9% is the third largest weight in the local equity market and provides investors with exposure to China’s very own Tencent, a stock largely influenced by policies around its gaming platforms and entertainment. This means that around a third of the JSE equity market’s performance is influenced by three stocks which have a significant portion of sales linked to China.

Performance

Since February 2021, Chinese equities tumbled and investors faced massive volatility and, as a result, in 2022 stocks in the country traded at their lowest levels in years. COVID-19 restrictions limited population mobility, while the housing market in the country also struggled and was seeking bailouts from the government. China’s domestic consumption accounts for 50% of its GDP, which the zero-COVID policies had dented. The property sector in China contributes 25% of the country’s GDP, so when there were uncertainties and defaults in the sector, it made sense that investors would be worried, driving the markets down even further as China’s property giant Evergrande missed debt deadlines and defaulted in payments. As a result, in 2021 the MSCI China Index was down 21.7% and in 2022 it was down 21.9% net USD.

The year 2022 could have been worse, but a big turnaround of 13.5% in the last three months of the year softened the blow.

Shanghai lockdown restrictions were lifted, and the People’s Bank of China initiated a 16-point plan for real estate stimulus, which was seen a stabiliser of the property sector as developers would have financing to complete projects while pushing sales.

Blackrock has highlighted that there are signs of deflation, with a slowing down of exports highlighting near-term hurdles beyond COVID-19. Even though Chinese equity markets fell in 2022, there were net positive flows into their funds from international investors for the year, with around $4bn net inflows. Investors looked at Chinese stocks as a source of relative value and an alternative when looking at investing outside developed countries.

China Exposure for Local Investors

The easiest way to get Chinese equity exposure for South Africans is through the locally listed Satrix China ETF, which tracks the MSCI China index, providing more direct exposure to companies like Tencent, Alibaba and China Construction Bank. The Satrix Emerging Market ETF also provides exposure to China as it is the country with the largest exposure in the fund.

If you want to move away from equities, you can also consider Chinese bond exposure. China is the 3rd largest issuer at 9% in the Satrix Global Bond ETF which tracks the Bloomberg Global Aggregate Bond index. Lastly, locally listed mining stocks that are influenced by the Chinese economy are available via the Satrix RESI ETF.

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.

DISCLAIMER >>

Ghost Wrap 11 (Bowler Metcalf | PPC | Renergen | Orion | Sappi | British American Tobacco | Kaap Agri | Pick n Pay | Spur)

The Finance Ghost
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Ghost Wrap 11 (Bowler Metcalf | PPC | Renergen | Orion | Sappi | British American Tobacco | Kaap Agri | Pick n Pay | Spur)

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

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

  • Bowler Metcalf is on the wrong side of load shedding.
  • PPC was a classic “buy the rumour, sell the deal” play.
  • Renergen raised R110 million via an accelerated bookbuild.
  • Orion Minerals finalised its funding package with the IDC.
  • Sappi reminded the market that valuations are forward looking.
  • British American Tobacco is still a cash cow, despite fulling volumes.
  • Kaap Agri released a terrific quarterly update that ticked all the right boxes.
  • Pick n Pay is losing more ground to Shoprite, with Pick n Pay Clothing as a silver lining.
  • Spur’s earnings have recovered above pre-pandemic levels.

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 (Alphamin | Distell | MultiChoice | Pan African Resources | Stefanutti Stocks)

The Finance Ghost
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Ghost Bites (Alphamin | Distell | MultiChoice | Pan African Resources | Stefanutti Stocks)

Drilling update at Alphamin

The good news from Mpama South continues

Drilling updates are always 95% geology, 5% finance. I focus on the 5%, usually found in the management commentary on the results.

The Mpama South project is an important part of Alphamin’s long-term growth story, so it’s encouraging to note that the latest drilling campaign has increased the indicated resource and identified significant additional resource growth potential because of the nature of the resource.

Construction of the Mpama South Mine is progressing according to plan. Once completed, Alphamin’s annual contained tin production will increase from 4% of the world’s mined tin to 6.6%.

Distell: patience still needed

The Competition Tribunal ruling remains outstanding

The champagne can’t be popped just yet. The Heinekens need to stay in the fridge for a little bit longer. Distell has had to delay any updates on the transaction with Heineken because the Competition Tribunal hasn’t released its ruling yet.

The hearings were held from 18 to 24 January 2023. That was only a few weeks ago, so I’m not overly surprised that Distell’s self-imposed deadline wasn’t met. The company will update the market once the ruling is released.

French connection

The stake in MultiChoice continues to be built…

If you’ve been following MultiChoice closely in recent times, you’ll know that French media outfit Groupe Canal+ has been building up a substantial stake. Given the legal limitation on voting rights for a foreign company in a local broadcaster (capped at 20%), the additional shares are purely for economic value rather than voting influence.

Still, the French group now owns 30.27% of MultiChoice. They can only get to 35% before triggering a mandatory offer and I have no idea how that would ever work out based on the voting limitation.

The African assets are a different story. It’s not impossible that Canal+ is looking to do something in Africa with MultiChoice, with this stake as a way to bring strategic alignment between the parties.

Stay tuned! (sorry – I couldn’t resist)

Pan African Resources cools off

There’s been a drop in production and the average price of gold sold

Pan African Resources has released a trading statement for the six months to December. HEPS went firmly in the wrong direction, down by between 31% and 41%.

The market knew this was coming, as the company had released an operational update for this period back in December. In that update, the production challenges at Barberton Mines were discussed, with the company hoping for an improvement in the second half of the financial year.

Although production is down 15.6% year-on-year, the company reminds shareholders that the comparable period was a record for production levels.

To add insult to injury, the average US$ gold price received decreased by 4.4%. The company reports in US dollars, so the falling rand wasn’t as flattering for this result as it was for many other mining companies.

Schwegmanns. Schwegmanns everywhere.

What is brewing at Stefanutti Stocks?

To help investors keep an eye on significant changes in a shareholder register, the Companies Act requires a company to disclose shareholding changes under certain circumstances.

In this case, Stefanutti Stocks disclosed that the register is now swarming with the Schwegmann family. MJ Schwegmann now owns 8.1% in the company, up from 6.6%. J Schwegmann holds 1.3% and HF Schwegmann holds 1.1%. The Windsor Drive Property Trust now owns 4.4% as well and it’s not clear from the announcement whether this trust is related to the family.

A quick search on Google reveals that the Managing Director of the Building Business Unit at Stefanutti Stocks is Howard Schwegmann. It’s hard to believe that this is a coincidence, so this is essentially more buying by insiders at Stefanutti. I included it here rather than under director dealings because these parties aren’t directors of the listed company.

Little Bites:

  • Director dealings:
    • In addition to the buying by the Schwegmanns, there was a director of a subsidiary buying shares in Stefanutti Stocks. With a purchase of R66k, this adds to the recent spate of insider buying.
  • Acsion Limited is currently trading under cautionary because the company is considering a cash offer to shareholders and delisting. This isn’t stopping them from doing deals, with news of the acquisition of an unoccupied industrial property in Greece for €9.2 million. The property was acquired on auction from a company that was liquidated, with Acsion managing to pay the reserve price. This is a significant discount to replacement cost. Discount or not, it seems that the price was in line with the value of the company, so it’s not obvious what the appeal would be of a random property in Greece. Diversification for the sake of diversification?
  • As part of the significant recent management changes at Sygnia, a new Financial Director has now been appointed. Carmen Le Grange comes to the group with substantial prior experience at PricewaterhouseCoopers and Denel.

Ghost Bites (ArcelorMittal | British American Tobacco | Emira | Kaap Agri | Spur | Steinhoff)

The Finance Ghost
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Ghost Bites (ArcelorMittal | British American Tobacco | Emira | Kaap Agri | Spur | Steinhoff)

ArcelorMittal releases annual results

The share price barely budged, with the market knowing what was coming

In the year ended December 2022, ArcelorMittal dealt with a significant decrease in sales volumes, mitigated to some extent by a 6% increase in realised dollar steel prices for the full year. The second half of the year saw pressure on selling prices though.

Despite substantial process made in reducing expenses, EBITDA was still down 50% and headline earnings fell 62%. Net debt increased from R1.26 billion to R2.81 billion, so the balance sheet reflects the much tougher year that the company just survived.

Still, return on equity in 2022 was 25.2%. There’s nothing wrong with that. It just looks horrible year-on-year after the blowout result of 120.3% in 2021.

To give you an idea of how cyclical the company is, the share price is up 209% over 3 years but is down 60% over the past 12 months! Strong stomachs only need apply.

British American Tobacco is still a cash cow

100% operating cash conversion is the real story here, not the nauseating attempts at ESG

If you want to read the most irritating ESG commentary in the market (accompanied by a TRADEMARKED term for ESG, of all things), then British American Tobacco is for you. The best approach is to ignore the tobacco guilt section and just look at the numbers.

Much as the company would have you believe otherwise, it’s still all about selling cigarettes to people. For the year ended December, revenue was £27.6bn and just over 10% of that came from the New Categories: products that allow people to blow fruit-flavoured smoke all over the place.

They hope that New Categories will be profitable by 2024, one year ahead of plan. It hardly matters, as the segment is tiny in the group context. I think most shareholders just see it as a necessary tax on the rest of the business.

Reported operating margin was lower but the group attributes this to once-off issues, with adjusted operating margin up by 150 basis points. The most important news is 100% conversion of operating profits into cash, which enabled the company to return £6.9bn to shareholders in 2022.

This is a slow growth but defensive business, with adjusted diluted EPS up 5.8%. The dividend is up 6%.

Globally, tobacco industry volume is expected to be down 2% in 2023. Against this backdrop, it’s all about the cash, with a plan to generate £40 billion in free cash flow over the next five years.

Emira’s earnings are up

And there’s an interesting technical point about trading statements

For non-property companies, a trading statement needs to be released when the management team is reasonably sure that earnings will differ by 20% (up or down) vs. the prior period. For property companies, the trigger is a 15% difference in distribution per share, which is a different way of thinking.

Sending the share price over 4% higher in the process, Emira released a trading statement with an expectation of distribution per share increasing by between 15% and 17.5% for the six months ended December.

Kaap Agri is killing it

The company couldn’t resist taking advantage of the AGM

Usually, an AGM is dryer than a McDonald’s burger that was left in the sun. Some companies take advantage of the event by giving an update on trading conditions, which is exactly the approach Kaap Agri took. With numbers like these, I’m not surprised.

For the first three months of 2023, like-for-like revenue increased by 17.8%. This is the right metric to use, as overall revenue is vastly higher (73.8%) because of the acquisition of PEG Retail Holdings. Sales have also been significantly boosted by fuel price inflation, which takes group inflation to 26%. Without fuel, it’s only 12.5%.

Even excluding PEG, volumes were 6.3% higher across the rest of the business. That’s very strong. Fuel volumes excluding PEG fell by 3.2%, which the group notes is better than the rest of the industry.

With PEG out of the equation, retail-related revenue grew by 7.5% and agri-related revenue was up 7.2%. Like-for-like expenses only grew 2.5% which is an astonishing performance. Excluding load shedding costs, the expenses actually fell by 1.8%!

Recurring headline earnings per share grew by 19.8% for the quarter. To make this result even better, the working capital cycle improved during the quarter with more efficient inventory ratios and other improvements.

Unsurprisingly, return on capital improved during the quarter. This was a terrific result. And despite numerous challenges in the economy, the full-year result is expected to be at the upper range of medium-term targets.

Despite this, Kaap Agri’s share price suffers from the mid-cap curse of trading at a low multiple:

A whole lotta burgers

Spur’s trading update for the six months ended December is excellent

Based on recent updates from property funds, we knew that restuarants were performing well again. Spur directly benefits from this, with franchised restaurant sales up by a whopping 31.5% year-on-year. There’s still a COVID impact in the base of course.

To give more context to the performance, Spur points out that sales grew 21.1% in the second half of the year vs. the first half when COVID played a much lower role. That’s impressive.

Clearly, South Africans still need a cold beer and something to do with the kids. Restaurants aren’t usually thought of as being defensive, but that model makes sense to me.

Spur was the top performing format in the group, up 33.6%. RocoMamas only grew by 14.6% and I’m not surprised based on my last trip to the restaurant a few months ago, as the format has lost its value proposition that made it so successful initially.

Speciality Brands were most impacted by the pandemic, as they rely on sit-down sales that inevitably include alcohol. An example is The Hussar Grill. That segment grew sales by a juicy 62.3%!

The percentage change in HEPS is meaningless as there are huge tax distortions in the base. It’s more useful to just consider the diluted HEPS range for this period of 134.79 cents to 138.28 cents. If I go back to the six months ended December 2019, diluted HEPS was 124.9 cents.

This means that Spur is finally running ahead of pre-pandemic levels. It’s been a journey.

Steinhoff tanks another 18%

I still don’t understand why anyone is buying it

Steinhoff’s plan was to sell a 6.5% stake in Pepkor in an accelerated bookbuild, which means institutional investors bid for shares at a discount to the prevailing share price. Without the discount, there’s no incentive for bidders.

Importantly, this doesn’t actually hurt other shareholders in Pepkor. The company isn’t issuing new shares at a discount. Pepkor has nothing to do with this actually, as Steinhoff sold shares that are already in issue.

The demand for Pepkor shares at a discount was so great that the size of the placing was increased to a stake of 7.2%, with Steinhoff raising R4.9 billion in the process. The shares were sold at a discount of 5.3% to Pepkor’s closing price the prior day.

So, why did the Steinhoff share price fall so hard? Perhaps because people have finally referred back to the deal on the table, in which shareholders will either have 20% of an unlisted company or 100% of sweet nothing.

In my view, at 36 cents per share, Steinhoff is still 36 cents too expensive.

Little Bites:

  • Director dealings:
    • An associate of a director of Salungano has acquired shares worth nearly R3m
    • A director of Trematon sold shares worth R450k
    • A director of Clicks has bought shares worth R98.5k
  • This is a little bite with a potentially big impact. Sam Sithole has been appointed as a non-executive director of Tiger Brands. If you aren’t familiar with the name, Sithole co-founded Value Capital Partners back in 2016 after a strong career at Deloitte and then Brait. Value Capital Partners currently holds 3.45% of Tiger’s shares and these director appointments are usually the precursor to the company increasing its stake.
  • There’s a switcheroo in the AEEI – Premier Fishing and Brands deal. The offeror is no longer AEEI, but is instead Sekunjalo Investment Holdings (a private company). This is to avoid the complications of a related party transaction under JSE rules. The Takeover Regulation Panel (TRP) will need to consent to this.

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

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

Exchange-Listed Companies

Anglo American is to acquire a 9.9% stake in Canada Nickel Company which owns the Crawford nickel project in Ontario, Canada. The undisclosed investment is part of Anglo’s approach to expand its nickel offering with additional battery-grade nickel for use in electric vehicles. Anglo will apply its FutureSmart Mining™ technologies to ore samples with the aim of assessing opportunities to improve processing recoveries and reduce the project’s overall energy, emission and water footprint.

Old Mutual asset manager Futuregrowth has invested in prop-tech startup platform Flow Living. Futuregrowth was the lead investor in the US$4,5 million pre-series A funding round alongside Kalon Ventures, Vunani, Endeavour, CRE Venture Capital among others.

Sanlam announced two deals at the end of last week. Through its subsidiary Sanlam Life, Sanlam will acquire a 26% interest in Capital Legacy by disposing of Sanlam Trust to Capital Legacy for R390 million in exchange for shares in Capital Legacy. It will also subscribe for further shares in Capital Legacy for R720 million in cash. Sanlam already has exposure to Capital Legacy through its 25% shareholding in Africa Rainbow Capital Financial Services Investments which itself holds (a diluted) 25% stake in Capital Legacy. Sanlam also announced the decision to acquire the remaining 38% stake in BrightRock; it first invested in the life insurer in 2017.

Thungela has announced a deal to acquire an 85% interest in the Ensham thermal coal operation in Queensland, Australia. The deal, implemented through a new company Sungela Holdings, comprises an equity investment of A$267 million and a mezzanine loan of A$68 million to the co-investors representing R4 billion. The stake will be acquired from Idemitsu with LX International holding the remaining shares.

Speculation regarding the possible sale of its subsidiary, PPC Zimbabwe for c. US$200m has been dismissed by PPC saying that it regularly receives unsolicited approaches for various parts of its businesses. Any developments on these unsolicited approaches it said, would be shared with the market via official channels. Nevertheless, the market responded positively with the share price up 21% on the rumours.

The proposed delisting of Premier Fishing and Brands from the JSE by majority shareholder African Equity Empowerment Investments (AEEI) announced in December has hit a regulatory snag – the JSE has advised AEEI that the deal constitutes a related party transaction. That is because AEEI is buying up the remaining 6.14% from minorities at R1.60 per share. Rather than delay the transaction – the circular must be updated – AEEI is considering replacing itself with Sekunjalo Investment Holdings as the offeror. Sekunjalo is the holding company of AEEI.

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

Weekly corporate finance activity by SA exchange-listed companies

Marylou Greig
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Weekly corporate finance activity by SA exchange-listed companies

Renergen has successfully placed 4,600,000 newly issued ordinary shares via an accelerated bookbuild process at R24.00 per share, representing a 6.5% discount to the pre-launch closing price of R25.68 on February 6, 2023. The funds will be used to support the capital expenditure required for the Phase 2 expansion. Phase 2 of the Virginia gas project will produce 34 000 GJ of liquefied natural gas and up to 5 t/d of helium.

Steinhoff International raised R4,9 billion, placing 265 million Pepkor shares in an accelerated bookbuild, representing c. 7.2% of the current issued shares of the company. The placing, at a price of R18.50, represents a 5.3% discount to the pre-launch Pepkor share price on 8 February 2023. The disposal of shares reduces Steinhoff’s stake to 43.8% and increases the free float of Pepkor shares from 49% to 56.2%.

Cashbuild has announced a proposed odd-lot offer to shareholders holding 40,493 shares representing 0.16% of the total issued share capital of the company. The shares will be repurchased at a 5% premium to the 30-day VWAP of a Cashbuild share at the close of business on March 17, 2023.

Industrials REIT has issued 2,343,679 shares in terms of its scrip dividend election, representing 0.78% of the current issued share capital of the company. Following the allocation, the issued share capital of the company will be 298,775,175 of which 1,914,727 will be treasury shares.

Copper 360, the red metal producer is to list on the AltX board of the JSE later this month.

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:

Santova announced the repurchase of 4,109,908 shares during the period November 1, 2022 and February 2, 2023. The shares, which will be held as treasury shares, were repurchased for a total transaction value of R31,93 million.

Datatec repurchased 3,000,000 shares on the open market at a price of R33.50 per share for a total transaction value of R100,5 million. The shares will be held as treasury shares to be used in settlement of share-based remuneration awards.

Glencore this week repurchased 22,500,000 shares for a total consideration of £123,48 million. The share repurchases form part of the second phase of the company’s existing buy-back programme which is expected to be completed this month.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 30 January to 3 February 2023, a further 3,966,195 Prosus shares were repurchased for an aggregate €292,8 million and a further 683,846 Naspers shares for a total consideration of R2,29 billion.

One company issued a profit warning this week: Sasol.

Three companies issued or withdrew cautionary notices. The companies were: Pembury Lifestyle, Tongaat Hulett and Coronation Fund Managers.

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

Thorts: ESG reporting begins with honest and verifiable statements

Paula-Ann Novotny, Jaqui Pinto and Chandni Gopal
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Thorts: ESG reporting begins with honest and verifiable statements

An increased focus on ESG reporting has heightened the risk that stakeholders may take a number of decisive actions against a company for making false or misleading claims, including litigation and shareholder derivative actions.

Today, in assessing the likely resilience and sustainability of their investments, investors employ an integrated framework based on environmental, social and governance (ESG) principles. Companies are now expected to consider and reflect ESG risks, impacts and opportunities in their strategies, product portfolios, operational value chains, decisionmaking structures, and stakeholder engagement platforms.

As stakeholders and shareholders pay more interest to these nonfinancial parameters of a company’s performance, there is an increased demand for companies to disclose data that is transparent, verifiable, credible, and accurate.

Reporting requirements are evolving

Various organisations, regulatory and industry bodies, and even States have developed frameworks to guide ESG disclosure and reporting which, although all seeking to achieve similar goals, have nuanced approaches, recommendations and focus areas. One of the biggest challenges faced by corporates is understanding which frameworks (global, regional, or sector-specific) to report against and how to meet those requirements in alignment with other stakeholder expectations and requirements.

A global effort towards convergence and harmonisation of these guidelines is under way. The latest effort is the ISSB’s Exposure Drafts of two new disclosure standards aimed at establishing a global baseline guideline for sustainability and climate-related disclosures. Reporting in line with these frameworks is currently voluntary for South African organisations, but we anticipate a mandatory disclosure regime(s) in the near future (as is already happening in the UK and EU).

For South Africa, the JSE has issued voluntary sustainability and climate change disclosure guidance documents, which align with global standards but are framed by a domestic context.

In deciding what information to disclose (as guided by the principle of “materiality”), corporates must identify the purpose and users of their reports. For example, integrated reporting targets stakeholders seeking to assess enterprise value (e.g. investors, lenders and creditors), so disclosure includes a sub-set of sustainability issues that enable users to understand the financial implications of sustainability-related risks and opportunities on enterprise value over time. The various disclosure frameworks which have been published recommend different approaches to materiality (single materiality vs double materiality), depending on the report’s purpose and users.

Stakeholders can deploy various weapons

Companies have various stakeholders, such as employees, the communities in which they operate, funders, trade unions, non-governmental organisations, and shareholders. This piece focuses on shareholders, although other agendas and concerns must also be considered and balanced.

Shareholder activism involves shareholders deploying certain mechanisms to effect change within a company. This has been effectively used to pursue ESG agendas.

South Africa has an enabling framework for shareholder activism, including the Companies Act, the Takeover Regulations, and the Financial Markets Act. Guidelines and requirements issued by regulators such as the JSE and the Takeover Regulation Panel also provide shareholders with certain protections, as well as the King Code.

• Shareholder activism can take the form of attending, taking part in, calling (in certain circumstances) and voting at meetings. Companies can prepare themselves by considering who the shareholders are, what information they are using, and what their main concerns are. It is always best to be proactive and to engage with shareholders at the appropriate levels and through appropriate channels to pre-empt any issues, and to cater for them.
• Shareholders have the right to access certain company information. The Protection of Access to Information Act allows shareholders (and other parties, including broader stakeholders) to request and access additional information. For example, they may ask to see verifiable evidence that lies behind a company’s claims of its ESG achievements.
• Appraisal rights, which are governed by Section 164 of the Companies Act. This provides the shareholder, in certain circumstances (predominantly involving corporate actions) the right to demand that the company buy back all shares held by that shareholder for a fair market value.
• Dissenting shareholders have various protections in legislation. For example, in terms of the Companies Act, an affected transaction is subject to court review if more than 15 percent of the shareholders vote against it and, within five business days after the vote, any person who voted against it requires the company to seek court approval.

Apart from legislative tools, shareholders can also effectively use social media to obtain support and change ideas, as well as influence a company’s strategy.

South Africa’s legislative provisions uphold disclosure

While South Africa has no specific legislation targeting ESG-related claims, there are “hard” and “soft” law requirements that potential litigants may utilise to hold companies accountable for inaccurate or misleading disclosures and statements.

“Hard” laws primarily include statutes such as the Consumer Protection Act, Companies Act and Financial Markets Act, all of which contain provisions relating to disclosures and statements. Various environmental, health and safety regulations similarly impose reporting requirements.
“Soft” laws comprise common law requirements such as those in delict where, for example, a financial statement could lead to an investor suffering financial loss, giving rise to an actionable claim.

Claims relating to ESG disclosures may be ventilated in numerous forums. Apart from the court system, there are also statutory ombudsmen and regulators, and various forms of alternative dispute resolution. Dispute resolution proceedings, particularly litigation and arbitration, are generally considered to be an expensive endeavour, which tends to deter potential claimants. In recent years, however, the advent of third-party litigation funding, especially for matters of public interest and climate change (in)action, has ameliorated the “expense” barrier to entry, making litigation much more accessible to ordinary consumers and affected communities.

In an effort to safely navigate the minefield of litigation risk presented by ESG-related disclosures, companies should remember that “the best defence is the truth”. If a company can support concrete statements with evidence of sustainability efforts and firm data, it is more likely to be able to neutralise and defend potential ESG claims.

Paula-Ann Novotny and Jaqui Pinto are Senior Associates, and Chandni Gopal a Partner | Webber Wentzel

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

www.dealmakerssouthafrica.com

Ghost Bites (Anglo American | Coronation | Lesaka | Orion | Pick n Pay | Sappi | Steinhoff | WBHO)

The Finance Ghost
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Ghost Bites (Anglo American | Coronation | Lesaka | Orion | Pick n Pay | Sappi | Steinhoff | WBHO)

Anglo American invests in Canada

The mining giant is acquiring a 9.9% stake in Canada Nickel Company

In addition to this minority stake in the company, Anglo American will have the exclusive right to buy up to 10% of the recoveries of nickel concentrate, iron and chromium in the magnetite concentrates, as well as any corresponding carbon credits from the Crawford project.

Concentrate indeed – that’s what you have to do when reading these mining announcements.

Put simply, this is part of Anglo’s strategy to expand its nickel offering in preparation for electric vehicle demand. I’m sure it also helps that Canada has electricity.

Farewell, Coronation dividend

An 11% drop in the share price accompanied the bad news from SARS

The only reason to invest in Coronation is for the dividend. When that’s gone, shareholders run for the hills. We have perfect evidence of this after the latest news regarding tax litigation in the group’s international operations.

This has been going on since 2021, when the Western Cape Tax Court ruled in favour of Coronation Investment Management. SARS went to the Supreme Court of Appeal in November 2022 and judgement was handed down yesterday, upholding SARS’ appeal and ordering Coronation to pay additional taxes together with interest and costs. Thankfully for shareholders, the claim for costs was dismissed.

This will have a “material impact on earnings and cash flows” although the company needs to quantify the claim first. For this reason, no interim dividend is expected.

Coronation is also considering an appeal to the Constitutional Court.

Lesaka jumps 13% after beating revenue guidance

The company is still loss-making, but to a far lesser extent than before

In the second quarter of the 2023 financial year, Lesaka (previously Net1) exceeded revenue guidance by 4%. The actual growth is a pointless measure, as the acquisition of Connect Group has vastly increased the size of the group.

The operating loss of $2.2 million is a 74% improvement from a loss of $9.4 million in the comparable period. The net loss has improved from $12.4 million to $6.6 million.

Perhaps the biggest milestone of all is positive net cash of $3.4 million vs. an outflow of $13.8 million in the comparative period. The return of the Consumer business to profitability was a major driver of this result.

Guidance for the full year has been reaffirmed, which the market seemed to like. Still, the group isn’t profitable yet and took on a lot of debt for the Connect Group acquisition, so there’s a lot of work still to be done.

Orion signs a definitive agreement with the IDC

The R250 million facility will help fund early works at Prieska

Orion’s funding package with the IDC has been in the works for a while, made possible by the initial $87 million funding package from Triple Flag. The IDC facility has been structured as a senior secured convertible loan facility worth R250 million.

The IDC loan can be converted into shares in the Prieska copper-zinc project based on a pre-money valuation of the project of R1.2 billion.

The company now has funding for demonstration trial mining and dewatering, critical to the early works bankable feasibility study which the company hopes to complete by mid-2023.

This is a mezzanine facility into a risky project, so seeing an interest rate of Prime + 3.5% isn’t surprising. This money doesn’t come for free even if Orion opted not to use it, with the IDC earning a raising fee of 1.25% and a commitment fee of 0.75%. It’s common to see these fees in funding packages.

Pick n Pay – for load shedding, that is

The share price was the most discounted item on the shelf today, down 8.5%

Pick n Pay released a trading update for the 43 weeks ended 25 December 2022. That’s a rather odd period to be reporting on, capturing effectively the 10 months preceding Christmas.

In grocery stores with an all-important cold chain, there’s absolutely no choice but to pay for energy backup solutions when Eskom does what it does best. The company notes “some impact on turnover” which makes sense based on my visit to a depressed, rather dark mall on Wednesday afternoon. The far bigger impact is on operating costs, with generators costing a fortune to run.

Pick n Pay is still tracking miles behind Shoprite, with sales growth in South Africa of 9% and an increase of only 4.8% in like-for-like sales. Rest of Africa was up 17% or 9% on a constant currency basis.

There’s a deceleration here in the South African business, with sales for the 17 weeks to 25 December posting like-for-like growth of just 2%. The shocker is Boxer, which managed just 0.2% like-for-like growth in that period vs. Pick n Pay at 2.8%. The company blames base effects, with like-for-like for Boxer returning to 9.7% in January.

Whichever way you cut it, volumes have dropped severely. Internal selling price inflation for the 17-week period was 10%, below CPI Food of 12.2%. This means volume declines of roughly 8%, which is extraordinary.

Not only is the sales performance poor, but the incremental increase in diesel costs year-on-year was R346 million to run generators. The current run rate is R60 million per month, which is a massive problem. Investment is being made in more efficient power solutions, which impacts the rate of growth in the store footprint. Basically, corporates now need to do what government is supposed to be doing, which will negatively impact economic growth.

Pick n Pay Clothing is a very good little business, with sales up 11% for the 10-month period and 6.2% for the 17-week period, running ahead of key competitors like Mr Price and Ackermans. The standalone clothing stores grew 11.4% in the 17-week period, with the clothing lines within supermarkets suffering from system upgrades.

Clothing isn’t enough, sadly. Previous guidance for earnings was that they would be flat for the full year. Based on these numbers and the management commentary, it’s almost certain that full year earnings will be down year-on-year.

Pick n Pay was managing to hang on to Shoprite in the good times. Now that things are tough, the gap between the two is being opened at a frightening rate.

And in this chart, I demonstrate that “defensive” is the joke of the day when looking at grocery retailers:

Sappi: another way to get a klap on the market

With a drop of 10%, there really are some bruises after this day on the JSE

For the quarter ended December, sales ere down 2% but profit was up by 54%. Net debt reduced by 35%. Headline earnings per share increased by 55% and the company declared a dividend again.

So why on earth did the share price tank after Sappi released its best ever first quarter result?

If you skip right down to the bottom of the announcement, you’ll see a comment that they “anticipate a return to a normalised level of earnings in FY2023” – a stark reminder that share prices are forward looking.

The market assesses cadence (results vs. the immediately preceding quarter) rather than just year-on-year numbers, looking for signs of a slowdown in the conditions that have been so beneficial to Sappi. With customer inventory levels now much higher, there’s a destocking cycle that is hitting sales volumes.

That slowdown is clearly visible and Sappi is as cyclical as a company gets, so share price volatility is par for the course.

The good news is that the balance sheet is vastly stronger than it was a year ago, with net debt of $1.24 billion vs. $1.92 billion a year ago.

Steinhoff is shedding assets faster than Eskom sheds electricity

The latest sale is a portion of the stake in Pepkor

The Steinhoff garage sale continues. After recently reducing its stake in Pepco in Europe, the company is now selling a 6.5% stake in Pepkor. This would take its ownership from 51% to 44.5%. Needless to say, the proceeds will be used to reduce debt.

Investec and Morgan Stanley will be getting their cellphones (and Bloomberg terminals) out to find buyers. Keep an eye on the Pepkor share price on Thursday!

WBHO expects a significant jump in earnings

The share price closed 3.5% higher in response

With operating profit from continuing operations expected to be up by at least 10% thanks to a revenue increase of 12%, WBHO shareholders have something to smile about regarding the six months to December 2022. The Building and Civil Engineering segment worked all the magic, with operating profit up 50% vs. a decline of 8% in the Roads and Earthworks segment. The Construction Materials and Property Developments segment expects an increase of 8% in operating profit.

Looking abroad, the UK business was flat on the revenue line and down 35% at operating profit level. WBHO is in the middle of a complicated exit from Australia, with further costs of A$5.5 million recognised in this period.

In Africa, a notable update is that income from associates and joint ventures should be up 160% thanks to the completion of the refinancing of the Gigawatt Power Station in Mozambique.

The financial position has been strong over the six months, perhaps the most important measure in the construction industry.

It also helps that the continuing operations order book is at R26.5 billion vs. R22.2 billion at the end of June 2022 and R17 billion at the end of December 2021.

A tighter range for HEPS will be given once available, with the company flagging a 20% increase in earnings from continuing operations.

Little Bites:

  • We only had Big Bites today!

Ince Individual DealMaker of the Year 2022

Marylou Greig
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Ince Individual DealMaker of the Year 2022

This is the 15th year in which such an award is to be made. Candidates are nominated by their peers in the M&A industry. From these nominations a shortlist of four candidates has been chosen by the Independent Selection Panel. They are (in alphabetical order):

Charles Young (Bowmans)

Partner and Head of Mining at Bowmans, Charles has led many high-profile and intricate transactions in the African resource sector. He led the team on behalf of NYSE-listed Ardagh Group on its entry into the African glass-packaging market with its acquisition of Consol, in a deal valued at $614m (R10bn). In another complex cross-border deal, Charles led the team representing Yamana Gold on its proposed acquisition by Gold Fields in a transaction valued at $6,7bn (R103,85bn). He advised Harmony Gold Mining on its acquisition of AngloGold Ashanti’s remaining operations in South Africa for $300m (R2,96bn), Orion Mine Finance on a complex $200m gold streaming arrangement and a $100m platinum streaming arrangement with Platreef Mine, a subsidiary of Ivanhoe Mines.

Christo Els (Webber Wentzel)

Christo has over 25 years of experience in the areas of corporate law and M&A, making the shortlist of candidates for DealMaker of the Year five times, and taking the title in 2011. He led teams in three transformational transactions during 2022, two of which have been shortlisted for the Brunswick Deal of the Year – the take private by the Manta Bidco consortium of Mediclinic International, and the Sanlam/Allianz joint venture of their insurance assets in Africa. In addition, Christo worked with Walmart on the acquisition of the remaining shares in Massmart. He also provided strategic advice on a number of matters, including Gold Fields’ proposed acquisition of Yamana Gold, and the disposal and repurchase programme implemented by Naspers and Prosus.

Johan Holtzhausen (PSG Capital)

During 2022 Johan, who has been at the forefront of South African dealmaking for the past 24 years, led his team in the PSG Group restructuring which involved the unbundling to shareholders of its six JSE-listed companies, two of which were dual-listed (R19,4bn), a scheme of arrangement for the repurchase of PSG shares, representing the unlisted portfolio, (R3,15bn) and the concurrent delisting of the group. His notable transactions from the past few years include the 2019 Brunswick Deal of the Year awarded to PepsiCo for the acquisition of Pioneer Foods (R23,6bn) and PSG Group’s unbundling of its 28.11% stake in Capitec (R28,9bn). This is the second year that Johan, who is the Managing Director of PSG Capital, has been shortlisted for the Ince Individual DealMaker of the Year.

Michael Dempster (Standard Bank)

In 2022 Michael, a corporate finance executive at Standard Bank, advised on two high profile and public M&A transactions in the local market – Walmart on its acquisition of the remaining stake in Massmart (R6,4bn), and Allianz on its joint venture with Sanlam, advising on the amalgamation of their respective African assets in a deal valued in excess of R33bn. The combined operations of Sanlam and Allianz will create the premier pan-African, non-banking financial services entity. Michael also advised the African Finance Corporation on its $100m (R1,7bn) equity investment from the Public Investment Corporation, which is a catalyst for private sector-led infrastructure investment across Africa.

The winner will be announced at the ANSARADA DealMakers Annual Awards on 21 February, 2023 at the Sandton Convention Centre.

www.dealmakerssouthafrica.com

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