Monday, March 10, 2025
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Ghost Bites (Adcorp | Astral Foods | Balwin | Barloworld | Famous Brands | Netcare | Premier | Stefanutti Stocks | Spear REIT)

The Finance Ghost
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Ghost Bites (Adcorp | Astral Foods | Balwin | Barloworld | Famous Brands | Netcare | Premier | Stefanutti Stocks | Spear REIT)

Advantage: Adcorp (JSE: ADR)

There’s a juicy jump in HEPS at Adcorp – if you ignore one of the Aussie businesses

Adcorp closed 17% higher on Monday, which sounds incredible unless you try to actually sell your shares, at which point you’ll learn about the pain of a bid-offer spread. The spread at Adcorp is approximately the size of Jupiter, with the associated drops being your tears as you try to cross the double and trade at anything close to the “price” shown to you on your friendly local data provider like Google Finance.

Stock illiquidity aside, the company has put in a solid performance for the year ended February 2023. Revenue is up by between 5.2% and 7.7% and HEPS from continuing operations has jumped by between 38% and 58%.

The “continuing operations” point is critical here, as including allaboutXpert Australia in the numbers takes the group into a very different position. HEPS from total operations is down by between 29% and 49%. This business has been classified as a discontinued operation as the company is being placed in voluntary administration.

Importantly, the balance sheet is ungeared, which is a fancy way of saying that there is no debt. The group is in a net cash position of R312 million.

Although these are somewhat encouraging numbers, the share price is down nearly 19% this year even after the latest rally.

Astral says “no dividend down 100%” (JSE: ARL)

They really wanted to drive the point home about this dividend – and the pain of load shedding

If you want to draw a direct line from governmental failures to the impact on the poor of South Africa, look no further than Astral Foods.

Despite a 5.7% increase in revenue for the six months to March, higher feed prices and of course load shedding drove an 88% reduction in group operating profit to R98 million. To be clear on the role that load shedding played, profits in the prior period were R785 million and the group notes load shedding costs of R741 million incurred during the period that couldn’t be recovered from the market.

Is this sustainable? Absolutely not. The Poultry Division (which produces South Africa’s staple protein) made a loss of R283 million. The group was saved by the Feed Division, which reported a profit of R381 million thanks to decent recovery of raw material costs.

To add insult to injury, net working capital increased by R705 million at a time when profits collapsed. This means that strain was put on the balance sheet, with a net cash outflow of R1.2 billion for the period.

The group has moved from a net cash position of R701 million at the end of September 2022 to an overdraft of R506 million at the end of March.

Unsurprisingly, all capex that doesn’t relate to emergency maintenance or measures related to electricity and water supply has been put on hold. In line with what we are seeing everywhere, private balance sheets are being used to do exactly what government should be doing with our corporate taxes.

Semigration is clear at Balwin (JSE: BWN)

Gauteng is becoming a smaller proportion of group volumes over time

At this stage, Gauteng is still the largest contributor to apartment volumes at Balwin. This is shifting quickly, with the percentage dropping from 61% last year to 48% this year. The Western Cape jumped from 32% to 40% and KwaZulu-Natal increased from 7% to 12%.

For the year ended February, revenue increased by 6% and HEPS jumped by 21% as the group’s focus on margin paid off. There is a healthy cash position of R607.4 million as at the end of February, which is lucky as I think that tougher times are ahead.

The number of pre-sold apartments has dropped sharply from 1,551 apartments at the end of August 2022 to 870 apartments at the end of February 2023. The company puts a positive angle on this number, noting that apartments were rolled out at pace to respond to semigration. That’s great, but what about demand in the coming period?

Another concern I have is the monthly rental guarantee at some developments, where Balwin is basically encouraging buy-to-let by derisking some of the economics for the buyer. In other words, Balwin is having to absorb more risk to drive sales.

Here’s another metric that tells a story: there were 1,648 mortgages originated by Balwin this period vs. 2,824 in the comparable period.

With a net asset value (NAV) per share of 824.38 cents vs. a traded price of 290 cents, the discount to NAV is a whopping 65%. The total dividend for the year was 24 cents, so the market has put Balwin on a dividend yield of 8.3%. With what is primarily a property development business rather than rental business being valued on such a high yield, the market is sending a clear message around its skepticism of the Balwin growth story.

I have shared this skepticism since I started writing publicly about the markets and I haven’t been proven wrong yet on this stock.

The good news story at Barloworld continues (JSE: BAW)

Key metrics have all gone in the right direction

Barloworld’s revenue from continuing operations increased by 12.9% in the six months to March, with solid contributions across the board. If you look at HEPS from total operations, you’ll see a drop because of the unbundling of Zeda. The correct metric is HEPS from continuing operations, which increased by 29.4% to 578.1 cents.

At EBITDA level, the performance was a mixed bag across the divisions.

Equipment Southern Africa managed to grow EBITDA by 22.7%, a juicy number despite a contraction in EBITDA margin from 12.9% to 11.4%. This was attributed to a change in sales mix, with machine revenue being higher in the current period vs. the prior period. It’s always important to remember that the mix effect can have a big impact on margins even if revenue seems to be doing well. This is simply because different products and services achieve different margins.

Looking abroad, Equipment Mongolia more than doubled EBITDA, with margin expanding from 16.7% to 19.8%. Equipment Russia suffered a 24.6% drop in EBITDA, even though margins were much higher at 17.8% vs. 11.9%. This was because of demand for aftermarket products in Russia, which carry higher margins.

Finally, food ingredients business Ingrain reported a 7.5% drop in EBITDA, with a margin of 14.1% vs. 17.6% in the comparable period. There were production issues in this part of the business, with unplanned breakdowns and other troubles.

The banks continue to do well, with net finance costs up by 49.4% because of an increase in working capital and obviously higher average interest rates. Net debt jumped from R2.5 billion in September 2022 to R7.1 billion in March 2023, with Barloworld noting that the first six months of the financial year traditionally see an increase in working capital.

Debt covenants are comfortable, with EBITDA : interest cover of 5.2x (needs to be over 3x) and net debt : EBITDA cover of 1x (needs to be lower than 3x).

Famous Brands thinks load shedding hurts its revenue (JSE: FBR)

I remain convinced that Eskom is helping these fast food joints out

When my power is off from 6pm to 8:30pm and I need to eat something, I don’t mess around. As a bachelor these days, it’s vastly easier to get takeout rather than something from the grocery story. Although my weapon of choice is Kauai (Brait (JSE: BAT) is sitting on a gem there), there’s little doubt in my mind that Famous Brands is a beneficiary of load shedding. Whether this means families getting burger specials for dinner or people going to coffee shops for a warm drink and wi-fi during the day, I just can’t see how this environment is bad for top-line growth in the industry.

With revenue up 15% and HEPS up 37% in the year ended February 2023, there seems to be some truth to my view, Covid-affected base period notwithstanding.

There are some fascinating trends vs. pre-Covid behaviours. The evening sit-down trade hasn’t recovered to pre-pandemic levels, with consumers making earlier bookings at the group’s restaurants. I can only assume that lockdown babies are taking their toll here, as any parent of a little one will know. The restaurant fun ends at 6pm when you have a small human with you.

The other trend is growth in food delivery, making this a sustainable channel in which Famous Brands can focus on its own delivery alongside third-party aggregators.

We might see more of an impact of load shedding in the next financial period, with franchise partner financial relief implemented from March 2023. In practice, this means a lower royalty and marketing percentage to help franchisees with sales generated during load shedding hours. In other words, Famous Brands needs to subsidise those hours a bit to retain its appeal to consumers.

With HEPS for the year of 488 cents and a total dividend of 363 cents, the share price of R64.30 represents a trailing Price/Earnings multiple of 13.2x and a trailing dividend yield of 5.6%.

Netcare’s normalised EBITDA margin excludes diesel (!) (JSE: NTC)

Well, that’s rather optimistic

In the six months to March 2023, Netcare’s revenue has increased by 11.9% and normalised EBITDA improved by 220 basis points to 19.1%.

Here’s the outrageous part: one of the normalisation adjustments is the exclusion of diesel costs! I mean, really now? Is load shedding just a casual once-off bump in the road? How we all wish it were true!

To quantify the diesel impact, we have to consider normalised EBITDA of R2.015 billion vs. diesel costs of R67 million. In other words, including diesel costs would decrease EBITDA by 3.3%. This would mean an EBITDA margin of 16.9%, which is higher than the prior period but not as good as management would’ve liked us to focus on.

Netcare needs to deal with the reality we are all facing: load shedding isn’t about to disappear and nor are the diesel costs, at least not in the foreseeable future.

The good news for shareholders is that management is confident enough to increase the interim dividend by 50%, which means a higher payout ratio as HEPS increased by 40.4%. Thankfully, HEPS includes diesel costs!

A Premier performance (JSE: PMR)

Shareholders are being given their daily bread here

Premier has only been separately listed for a couple of months, having been split out from Brait after a long period of preparing the group to stand on its own feet. So far, so good, with a reasonably flat share price since listing (despite the negative sentiment around SA Inc.) and a trading statement for the year ended March 2023 that tells a great story.

HEPS will be up by between 32% and 42% on a reported basis, or 17% and 27% on a normalised basis. The adjustments to arrive at a normalised number include forex gains on cash and loans and a reversal of accrued withholding tax. Those are indeed unusual items, so I would go with the normalised growth rather than reported growth.

This is an impressive outcome under the economic circumstances, which of course gets the market wondering what Tiger Brands (JSE: TBS) might be managing to achieve in this environment.

Stefanutti Stocks lands an arbitration victory (JSE: SSK)

The share price closed 8.6% higher in a show of appreciation

It feels like construction companies are permanently in some form of dispute. Thankfully, this one has gone the way of Stefanutti Stocks and its shareholders, with an arbitration process leading to an award of R90.7 million excluding legal fees.

On that note, legal fees have also been awarded, so the other side is really hurting on this one.

With a market cap of under R200 million, this is big news for the company.

Spear REIT shows the value of focus (JSE: SEA)

No frills and no fuss – the way a property fund should be

As you would’ve picked up from the Balwin numbers further up, the Western Cape is the place to be right now. As a semigrant myself, I don’t for a second believe that the semigration trend will reverse anytime soon.

This is good news for Spear, with a portfolio focused exclusively on the Western Cape. Along with a sensible management style that delivers unspectacular but dependable results to investors, this has generated growth in the distribution per share of 11.31%. The loan to value ratio also decreased from 39.05% at 28 February 2022 to 36.30%, as the group has recycled capital and repaid debt at the right time.

Based on a full year distribution of 75.97 cents, the share price is trading on a trailing yield of 10.6%.

Little Bites:

  • Director dealings:
    • A director of FirstRand (JSE: FSR) has bought shares worth R3.8 million.
    • The Chairman of WBHO (JSE: WBO) has sold shares worth R2.5 million.
    • The Chief Strategy Officer at Investec (JSE: INL) has sold shares worth £329k.
    • A director of Thungela Resources (JSE: TGA) has bought shares worth R196k.
    • A director of Quilter (JSE: QLT) bought shares worth nearly £16.7k.
  • After Mast Energy Developments issued new shares to lenders who converted to equity, Kibo Energy (JSE: KBO) has seen its stake in the company drop from 57.86% to 54.91%.
  • At Jasco Electronics (JSE: JSC), the offer was accepted by holders of 19.08% of Jasco’s shares, taking CIH and the offeror to a combined stake of 74.42% in the company. With the listing being terminated on 23 May, this means that a significant minority stake is being taken into the private environment.
  • Conduit Capital (JSE: CND) is in the process of selling Constantia Life and Health Assurance Company to Affinity Financial Services for R20 million. The date for fulfilment of suspensive conditions has been extended to 30 June 2023.
  • Finbond (JSE: FGL) has renewed the cautionary announcement related to potential acquisitions in Southern Africa. Yes, the announcement references acquisitions i.e. plural.
  • Primeserv (JSE: PMV) has also renewed its cautionary announcement regarding a potential acquisition in the staffing services sector.
  • In one of the most incredible announcements I think I’ve seen on the JSE, Afristrat (JSE: ATI) distanced itself from a website called afristratpumpanddump.co.za – of course, all this did was alert basically the entire market to the existence of this website (and yes, it’s real). People out there are angry with the company.

Ghost Wrap #25 (Dis-Chem | Grindrod Shipping | NEPI Rockcastle | Telkom | Nampak | Purple Group | Investec)

The Finance Ghost
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Ghost Wrap #25 (Dis-Chem | Grindrod Shipping | NEPI Rockcastle | Telkom | Nampak | Purple Group | Investec)

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

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

  • Dis-Chem’s latest numbers, including a very concerning second half of the financial year.
  • The cyclicality of the shipping industry, with the most recent quarterly performance of Grindrod Shipping as a perfect example.
  • The appeal of property in Eastern Europe, with NEPI Rockcastle generating strong income growth in a country far away from load shedding.
  • Telkom’s gigantic impairments as this technological dinosaur tries hard to avoid an asteroid.
  • The broken balance sheet at Nampak as the company moves towards what will surely be a very painful rights offer.
  • At the other end of the rights offer spectrum, the growth story at Purple Group and Sanlam’s underwriting of the rights offer.
  • Investec’s powerful performance in the year ended March 2023, particularly in the UK.

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 (Dis-Chem | Nampak | Tharisa | Tradehold | Tongaat)

The Finance Ghost
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Ghost Bites (Dis-Chem | Nampak | Tharisa | Tradehold | Tongaat)

Dis-Chem: a tale of two halves (JSE: DCP)

The share price is trying to tell us something – but what?

Dis-Chem is a quality retailer in my books. There are elements of the strategy that make a lot of sense to me, like the investment in baby categories (and associated acquisitions). The problem is that the share sense has been expensive since the IPO, which is why Dis-Chem hasn’t been a good investment for those who got carried away in the IPO hype back in 2016. A share price return of around 9% in roughly 6.5 years isn’t a happy outcome!

The performance this year has been very interesting compared to Clicks, with a major sell-off in the price:

This isn’t what you expect to see from a company that just reported HEPS growth of 17.4% after growing revenue by 7.4%. There’s clearly something here that the market is worried about.

The likely culprit is the performance in the second half (H2) of the year. In the first half (H1), HEPS increased from 48.7 cents to 70.3 cents, or 64.3 cents if we exclude a property gain. The full-year number includes the gain as well, so in my view we can just subtract the H1 number from the full-year number to isolate the second half of the year that didn’t include the property gain anyway.

In other words, the H2 performance this year is 116.5 – 70.3 = 46.2 cents. In the comparable H2, the performance was 99.2 (FY22 result) – 48.7 = 50.5 cents.

Hang on. What happened here? HEPS fell by approximately 8.5% in the second half of the year after growing by 31.9% in the first half (excluding the property gain)!

Read that again if it all went over your head. Remember, companies report on the first six months and the full-year result. If you subtract interim numbers from final numbers, you can isolate second half profits. This does not work for the balance sheet, as the balance sheet is a snapshot at a point in time rather than a measure of performance over a period of time (like an income statement).

With slow like-for-like growth and all the inflationary pressures on expenses that we can imagine, this truly is a tale of two halves for Dis-Chem. If separate financial statements were required for the second half of the year vs. the first half, that story would be very obvious. In the absence of that information, we have to dig into the numbers.

The clue to take a deeper look was the share price movement, which doesn’t make sense vs. the HEPS performance even if the valuation was a bit expensive.

As an aside, I enjoyed this chart from the slide pack:

Nampak sheds another 11% (JSE: NPK)

A trading statement has laid bare the extent of the pain

Nampak has lost well over a third of its value this year. Over 5 years, the share price is down around 96%. In summary: it hasn’t been great.

It’s exceptionally difficult to get money back to the mothership where it is so desperately needed, with Nampak recognising profits in its African countries and then suffering huge forex losses to get the money back to South Africa at just about whatever rate is available.

A cocktail of forex losses and higher interest rates is deadly for a company in Nampak’s position. This is why the headline loss per share for the six months to March has come in at between -53 and -58 cents per share vs. headline earnings per share of 35.6 cents in the comparable period. Remember, headline numbers exclude the impact of any asset impairments.

If we take the impairments into account by using earnings per share instead, we find a loss of between -380 cents and -420 cents per share vs. earnings per share of 34.9 cents in the comparable period.

When the share price is just 65 cents per share, this means that the company is a dead man walking unless a substantial amount of equity is injected and the balance sheet is rectified. For existing shareholders, any rights offer would most likely be intensely dilutive and would wipe out a big chunk of the remaining value. The size of the required rights offer will be “announced in due course” by the company based on negotiations with lenders and progress made on the restructuring plan.

Tharisa’s operating profit fell by 29% (JSE: THA)

But HEPS is up and you need to assess this result very carefully

The Tharisa results need to be read carefully, as revenue is up by 0.4% and operating profit is down by 29.0%. That isn’t very unusual in this environment sadly, as inflationary pressures are causing difficulties for many companies.

The eyebrow-raiser is that HEPS is up 13.5% despite the drop in operating profit. The interim dividend is flat year-on-year despite the jump in HEPS, which is the final clue that a deeper look is required here.

When you see a big swing in HEPS vs. operating profit, the usual reason is that there have been substantial changes to the balance sheet. A classic example is debt, with net finance costs impacting HEPS but not operating profit, as the latter tries to isolate the results of the underlying businesses regardless of how they are funded.

Although net finance cost did move year-on-year, the quantum is nowhere near enough to explain the swing in HEPS.

Now you need to really go digging, particularly for the note that reconciles headline earnings to profits. Here’s what that looks like:

In this case, the comparable period included massive accounting gains on an acquisition of a subsidiary. These are reversed out for a HEPS calculation but they also don’t sit in operating profit, so that was a red herring to try and understand the HEPS move vs. the operating profit move.

Back to the income statement we go, with important highlights below:

The gain on acquisition of a subsidiary was already dealt with in the HEPS note, so that’s crossed out in red. The other yellow highlights are important. In summary, HEPS looks far better than operating profit because the share of losses from an associate are gone and the fair value changes in financial assets and liabilities went sharply in the right direction. The single biggest swing is in the value of the option held by the Republic of Zimbabwe to increase its shareholding in Karo Platinum, with the fair value of the option more than halving. I had to go digging in the notes to find that, but I didn’t want you to panic with another screenshot.

Long story short: the fall in operating profit is what I would focus on rather than the increase in HEPS. The fall was driven by a 61.4% decrease in gross profit in the PGM operations (with production and basket prices well down), mitigated to some extent by a 66.9% increase in gross profit in the chrome operations.

And there you were, thinking that can always just blindly rely on headline earnings as a measure of performance! You often can, but sometimes you can’t.

Tradehold gives guidance on net asset value per share (JSE: TDH)

There are good explanations for the large decrease

Companies that are judged based on net asset value (NAV) per share are susceptible to big negative moves that may not necessarily mean something bad for shareholders.

In particular, if assets are unbundled to shareholders or if there is a large disposal and subsequent special dividend, then the company has deliberately made itself smaller and NAV per share drops. The trick is that shareholders are holding another asset somewhere (either an unbundled company or the special dividend in cash), so the combined picture is fine.

Having said that, a disposal at a price below the value that shareholders were banking on would reduce NAV per share because the value of that asset was actually too high in the NAV calculation.

Tradehold is a perfect example of these issues, with NAV per share expected to be between R6.97 and R7.97 lower. If you adjust for the special dividend related to the Moorgarth disposal of R4.34, the drop is less nasty. Aside from the dividend, the disposal of Moorgarth hit NAV per share by R3.80. With a total impact from those two issues of R8.14 on NAV per share, this means that the ongoing operations have been a positive contributor to NAV per share in the year ended February 2023.

If you just read the NAV per share headline and nothing further, you would never pick that up.

The latest NAV per share is between R11.50 and R12.50, with the share price trading at R7.49.

Tongaat releases a business rescue plan – for a subsidiary (JSE: TON)

Creditors are set to receive 7 cents in the rand from Tongaat Hulett Developments

Read very carefully here: this business rescue plan is for a subsidiary of Tongaat Hulett, not the group company. The all-important plan at group level is due at the end of May, along with plans for two other subsidiaries.

The plan released on Friday is for Tongaat Hulett Developments, the property company that owns a substantial amount of land in KwaZulu-Natal.

Not only is the equity in this subsidiary worthless, but even unsecured creditors have lost everything. “Secured” creditors hardly do any better, expected to receive 7 cents in the rand. In other words, they lose 93% of the debt owed by the company. If the company had gone into liquidation instead of business rescue, secured creditors were estimated to only receive 2.5 cents in the rand.

The important lesson here is that “rescue” is a relative term. Some companies emerge from a business rescue with the brands in one piece and a new owner. Other processes are simply a better outcome for creditors than would’ve otherwise been possible in a liquidation. Either way, you don’t ever want to be an equity holder when a company goes into business rescue.

Little Bites

  • Director dealings:
    • In a rather unusual announcement, Michiel le Roux (ex-CEO and chairman) has bought shares in Capitec (JSE: CPI) worth nearly R4.5 million and a prescribed officer in the bank sold shares worth R1.39 million. I have no position in Capitec, but when the incredibly wealthy director is buying a position that is small as a percentage of total wealth vs. an officer in the bank selling a chunk amount, I tend to maintain my bearish view on Capitec in the context of its valuation and broader SA pressures right now.
    • Although an associate of a director of Santova (JSE: SNV) bought shares worth nearly R93k, the much more important news was a sale of shares by a director worth nearly R4.3 million,
    • In an encouraging sign for Transaction Capital (JSE: TCP) shareholders, Sabvest Capital (JSE: SBP) – the investment vehicle of director Chris Seabrooke – has bought another R1.4 million worth of shares at a volume-weighted average price of R7.09. I would ideally like to see more director buying from other directors as well before I add further to my position.
  • For the budding geologists among you, Europa Metals (JSE: EUZ) has released drilling results at the Toral project. This is the 2023 drilling campaign being run by Europa Metals and Denarius Metals Corp. You’ll be thrilled to know that Hole TOD-043 is both thick and well-mineralised. That’s about all I can tell you really, other than a comment that the CEO sounds happy with the “robust” nature of the resource.
  • Utterly obscure company CAFCA Limited (JSE: CAC) released results on Friday. With a market cap of R43 million and almost no trade in the stock, you haven’t been missing out if you’ve never heard of this cable manufacturer based in Zimbabwe. The company reports in Zimbabwean dollars, so there are numbers on the balance sheet running into the billions. Sadly, the paper in the annual report is worth more than the currency.

Ghost Bites (Afrimat | Coronation | Datatec | Grindrod Shipping | Investec | Investec Property Fund | Netcare | Purple Group | Sanlam)

The Finance Ghost
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Ghost Bites (Afrimat | Coronation | Datatec | Grindrod Shipping | Investec | Investec Property Fund | Netcare | Purple Group | Sanlam)

A slowdown in economic activity hits Afrimat (JSE: AFT)

HEPS came under pressure from the industrial minerals and construction materials segments

Although Afrimat’s group revenue increased by 4.9%, operating profit fell by 13.3% and operating margin declined from 23.7% to 19.6%.

Some of this is due to increased operating activity and associated costs at Jenkins and Nkomati, with those mines expected to reach steady state in the coming year. With a drop in iron ore prices and those ramp-up pressures on margin, the Bulk Commodities segment reported a drop in operating profit of 15.6%.

There isn’t much that Afrimat can do about iron ore prices, or the reality of starting up new operations. Sadly, there also isn’t much that the company can do about broader South African economic activity. With electricity supply disruptions and a slowdown in economic activity, Industrial Minerals saw operating profit fall by 41.9% and Construction Materials dropped by 17.7%.

The Future Materials and Metals division is interesting but still very small, with revenue of R25.2 million and start-up losses of R11.4 million.

The total dividend for the year of 150 cents per share is 19.4% lower than the prior year. This is a larger drop than the decrease in HEPS of 15.7%.

Even Afrimat, with all its diversification and track record of excellent management, isn’t immune from the pressures out there.

Coronation flags a loss based on its key metric (JSE: CML)

The tax troubles are temporary, but painful

Some coronations are full of pomp, ceremony and old-fashioned traditions that surprisingly still manage to draw huge crowds in the UK. Others are full of tax troubles and disappointing numbers, at least for now.

Coronation’s internal metric used to measure performance is fund management earnings per share. It excludes mark-to-market impacts and forex effects on investment securities held. On that measure, Coronation expects a decrease of between 102% and 112% in the six months ended March. This is a loss of between 4.3 and 25.8 cents per share.

If the impact on investment securities is included, then HEPS will drop by between 89% and 99% to between 2.0 and 21.9 cents per share. In this case, the market moves went the right way. It’s just a real pity about the tax.

IFRS 2 charges take Datatec into the red (JSE: DTC)

The share-based remuneration costs have severely hurt the numbers

Datatec reported a headline loss of 9.3 US cents per share for the year ended February, a number that bears little resemblance to the story at operational level.

The performance of Westcon International has been very strong in recent years, leading to a significantly higher valuation for that division and a large IFRS 2 charge based on share-based remuneration plans. So large, in fact, that it is responsible for the group reporting a loss. Yes, this is highly unusual.

Looking at numbers that are perhaps a better reflection of underlying performance, revenue from continuing operations increased by 13% for the year in dollars. That’s more like it. This excludes Analysis Mason, which was sold during the year for a profit on sale of $109.9 million.

Aside from the performance at Westcon, Logicalis International also did well with a much better second half in the Latin America business.

If the IFRS 2 charge conveniently wasn’t there, underlying earnings per share would be 29.5 US cents per share. This is the metric that the board will use in considering a cash dividend for the year.

Grindrod Shipping’s vessel revenue halves year-on-year (JSE: GSH)

If you needed further proof that shipping is cyclical…

During the pandemic, shipping companies made more money than they could count. In the latest quarter, Grindrod Shipping just reported a loss. Here’s what that journey looks like on a share price chart:

If we dig into the details, we find that revenue fell year-on-year from $110.3 million to $76.8 million. That isn’t quite the entire story, as vessel revenue fell from $110.2 million to $52.8 million. This is because the sale of vessels is recognised as revenue, so you need to strip that out in my opinion to see what is really going on.

To give a better sense of just how significant the drop in shipping rates has been, Handysize TCE (the way of measuring daily rates in this industry) was $9,491 per day in this quarter vs. $22,201 per day in the comparable quarter. The trend is similar in other shipping sizes.

When you combine this with pressure on operating costs from the likes of lubricating oil, the profits disappear as quickly as they arrived. Gross profit fell from $40.7 million in Q1 2022 to $7 million in this quarter.

The company fell from a profit of $29 million to a loss of $4.3 million in this quarter.

Investec achieved a juicy increase in HEPS (JSE: INL)

This is a case study in the joy of positive JAWS

For some reason, I’ve not really seen the JAWS ratio make its way outside of banking. Even Investec doesn’t seem to use the term in the SENS announcement dealing with results for the year ended March 2023. Having spent time working in a different local bank, I can tell you that JAWS is a major focus area for the traditional South African banks.

It’s simple, really. JAWS measures the difference between the growth rates of income and expenses. If those JAWS are pointing the right way, then margins go up. If expense growth is outpacing income growth, margins go down.

At Investec, the latest period reflects revenue growth of 14.6% and operating cost growth of just 9.5%. The net result? A 28% increase in pre-provision adjusted operating profit. Although the credit loss ratio increased to 23 basis points (still below the through-the-cycle range of 25 basis points to 35 basis points), HEPS was 25.3% higher.

With a geographical lens, Southern Africa grew adjusted operating profit by 14.6% and the UK business grew by 30.5%.

Return on equity has increased from 11.4% to 13.7% and the net asset value has remained flat despite the distribution to shareholders of the 15% stake in Ninety One, along with other dividends and share buybacks.

Strategically, the group will hope that combining Investec Wealth & Investment UK with Rathbones plc will create a stronger franchise in the UK in the wealth management space.

The dividend payout ratio is largely consistent year-on-year, so the dividend per share is 24% higher.

The share price is up more than 18% in the past year.

Investec Property Fund is a lot less juicy than the bank (JSE: IPF)

The decline in distributable income per share is in line with guidance

These results are further proof of my irritation with property “ManCos” and how they are little more than a glorified way to rip off shareholders. The management teams of property companies obviously play a substantial role in results, but they are ultimately managing a stream of cash flows and they are beholden to macroeconomic challenges that are always blamed for tough results.

Do they deserve an asset management fee for this rather than a salary and bonuses? Do they really behave like fund managers with a broad mandate, or do they behave like operational managers in the same way as executives in other sectors do? I think my view on it is obvious.

For the year ended March, Investec Property Fund reported a drop in distributable income per share of 2.8%. The weighted average cost of funding in Europe was part of the problem, with rates now capped and limited further risk over the next 2.5 years. Those hedges don’t come for free, I might add.

The loan-to-value ratio of 43.4% looks high. The target is 35%, so capital will need to be recycled to lower debt.

The guidance for FY24 is low single digit growth in distributable income per share. It’s far more exciting to be in the ManCo than on the shareholder register, I’ll tell you that much.

Netcare reports a significant jump in earnings (JSE: NTC)

The post-COVID normalisation continues

For the six months to March 2023, Netcare expects to report HEPS that will be between 39.8% and 41.4% higher. The management team likes to use adjusted HEPS to measure performance, with that metric up by between 31.0% and 32.4% – a lower growth number but still substantial.

In absolute terms, adjusted HEPS will be between 46.1 cents and 46.6 cents.

The last interim results that had no COVID impact were for the six months to March 2019. Sadly, that was before the implementation of IFRS 16, which arguably had an even larger impact than the onset of COVID right at the end of the 2020 interim period.

To give you context, I’ll thus mention the interim 2020 HEPS of 79.0 cents. As you can see, we are still running well below those levels. This explains the share price:

Purple Group confirms the terms of the rights offer (JSE: PPE)

Sanlam is underwriting the offer at Purple level and following its rights in EasyEquities

As the management team has been saying for a while, Purple Group needs to raise capital for the growth ambitions of EasyEquities. The company wants to replicate its model in other markets where the metrics look appealing in terms of potential user numbers, like Kenya. Efforts in the Philippines have already been underway for a while now.

The pricing for the offer has been announced as 81 cents per share, a discount of 31.87% to the 7-day VWAP. This rights offer will increase the number of shares in issue by 9.25%.

With Sanlam willing to underwrite the offer at that price, it gives a good idea of where an institution on the inside sees value in the shares. It also gives final evidence of just how ridiculous things had gotten at nearly R3.50 per share at the start of 2022.

Aside from Sanlam’s underwriting, shareholders with 27.12% of shares in issue have provided irrevocable commitments to follow their rights in full.

Sanlam will earn a 2% underwriting fee for the pleasure. This is standard market practice, as the reward for Purple Group is that the capital raise has effectively been derisked. The money will be raised – it just depends from who.

PLEASE NOTE: if you are a Purple shareholder, you will receive letters of allocation in your brokerage account on 29 May. If you don’t want to follow your rights and put in more money, you would be very silly not to try and sell the letters, as they will be worth something on the open market (likely close to the prevailing market price less the rights offer price). In other words, if you do nothing at all, you are likely to suffer a loss in value.

Across almost the entire business, Sanlam is stronger (JSE: SLM)

It’s little wonder that they are being such a supportive partner to Purple Group

In the first quarter of 2023, Sanlam reported a 25% improvement in the net result from financial services and a 38% jump in operational earnings. New business volumes are up at group level and even where there are pressures on volumes (like in the life business), value of new business margin has improved.

It was only the Investment Management business that reported a year-on-year drop in profits, down 2% as reported and 8% in constant currency. Sanlam notes a substantial once-off in the base, without which the result would’ve been 11% higher. At the other end of the spectrum, we find the Credit and Structuring segment as the biggest winner, up 45% as reported and 37% in constant currency.

As noted in the Santam update earlier in the week, the Allianz transaction is expected to close in the second half of 2023. It’s been a busy period of corporate finance for Sanlam (including deals with Absa and AlexForbes in the past couple of years), underpinned by solid numbers.

Little Bites:

  • Director dealings:
    • A number of associates of Piet Mouton have bought shares in Curro (JSE: COH) worth nearly R6.6 million.
    • A senior executive of Capitec (JSE: CPI) has sold shares worth R5.6 million. The share price has fallen 35% in the past year and I expect that to continue in this environment.
    • Sabvest Capital (JSE: SBP), the investment entity of Chris Seabrooke who sits on the Transaction Capital (JSE: TCP) board, has bought another R700k worth of shares in the embattled company. The price paid was roughly R7.00, so this helps bring down the average in-price.
    • GMB Liquidity (the entity related to the new CEO of Grand Parade Investments – JSE: GPL) bought another R147k worth of shares in the company.
    • A director of Thungela (JSE: TGA) sold shares worth R106k. The share price has lost nearly half its value this year as coal prices have come off!
    • An associate of a director of Ascendis Health (JSE: ASC) bought shares worth R49k.
  • Newpark REIT (JSE: NRL) has almost no liquidity, so the results only earn a spot in Little Bites on an otherwise busy day. The numbers look fantastic, with this tiny REIT (it only owns four properties, including the JSE building) growing net asset value per share by 5.68% and HEPS by 26.5%, with the dividend up by 43%. The total dividend for the year was 67.12 cents per share, a trailing yield of 14.9% on the current price of R4.50 – if you can get shares at that price.
  • Kibo Energy (JSE: KBO) seems to be trying quite hard to use SENS as a public relations machine rather than an investor information platform. One of the announcements on Thursday was about an agreement to establish a joint technical committee – exciting, isn’t it? The other was a lot more detailed, with a joint venture agreement between Mast Energy Developments and a new consortium regarding gas peaker plants. That consortium will inject £33.6 million into the joint venture and Mast Energy will contribute assets.
  • At its AGM, ADvTECH (JSE: ADH) noted that the business has maintained positive momentum and is trading in line with expectations. Importantly, R245 million of tertiary debtors outstanding at year-end have been collected and system issues have been largely resolved.
  • Industrials REIT (JSE: MLI) is hoping to avoid having to publish another set of annual results. The scheme to take the company private is planned to have an effective date of 21 June 2023. Results would’ve been published on 9 June, but the deadline is the end of June. In other words, the company may get away with being private before the deadline, so there may not be another set of annual results released publicly.
  • AYO Technology (JSE: AYO) released further details on the repurchase and settlement agreement with the PIC. The repurchase of shares for R619.4 million was paid and settled at the end of March, reducing cash from R1.1 billion to R491 million. The company is also engaging with the JSE regarding how to implement the Government Employees Pension Fund’s option to sell another 5% in AYO back to the company at the higher of R20 per share or the prevailing 90-day VWAP. The option is valid for up to three years.
  • The sale of a property by a subsidiary of Novus Holdings (JSE: NVS) for R125 million has met all conditions precedent and will now be implemented.
  • Chrometco Limited (JSE: CMO) is suspended from trading and is in business rescue. The meeting of creditors scheduled for 16 May has been adjourned based on a court application issued by the Sail Minerals business rescue practitioner. These companies fighting is like one of those drunken bar fights between two blokes who both should’ve left to go home hours ago.
  • Another JSE zombie is Union Atlantic Minerals (JSE: UAT), suspended from trading and needing to finalise audits going back to 2021. There are negotiations underway with a potential investor to try and rescue the thing, with loans being advanced to the company to get its house in order.

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

Kibo Energy subsidiary, Mast Energy Developments (MED), has concluded a Heads of Terms agreement with regards to a joint venture with a new institutional investor-led consortium. Under the agreement, the institutional investor will inject all the required investment capital into the JV with an expected total of £33,6 million with no funding contribution required from MED which will provide the required projects into the JV. The projects, a portfolio of gas peaker plants with a combined generation output of c. 50 MW to be developed and/or acquired, are expected to be income generating within the next 12 months.

Dis-Chem Pharmacies is to acquire a 63,000m³ distribution centre in Gauteng for a purchase consideration of R502 million. The acquisition will increase its warehouse space by 75%.

Bayobab (MTN) and Africa50, an infrastructure investment platform headquartered in Morocco, have signed a partnership agreement to develop Project East2West, a terrestrial fibre optic cable network connecting the eastern shores of Africa to those on the continent’s west. The partnership will invest up to US$320 million connecting ten African countries over the next three years. The project will offer substantial improvements in data traffic for internet services providers, mobile network operators and hyperscalers operating in the affected countries. It is expected to cut latency by up to 65% on the east-to-west route.

In November 2021 Vodacom and Community Investment Ventures (57%-held by Remgro) announced a deal in terms of which Vodacom disposed of its FTTH and FTTB assets plus transmission assets into a new vehicle InfraCo holding CIVH assets including Vumatel and Dark Fibre Africa. Vodacom has a 30% stake in InfraCo which has since been renamed Maziv. The transaction’s longstop date has been extended to 30 November 2023. The deal remains subject to the approval of the SA competition authorities. The 180-day period within which Vodacom is entitled to exercise the VC Call option to increase its stake by a further 10% will expire on 30 September 2023.

Unlisted Companies

Draslovak a.s., a global leader in cyanide-based chemical specialities and agricultural chemicals, has acquired South African-based Blue Cube Systems for an undisclosed amount. Blue Cube develops, builds and sells real-time mineral analysers for application in mineral beneficiation processes.

Digital technology specialist e4 has been acquired by a consortium of private equity investors led by private equity fund manager Infinite Partners and including diversified financial services group, 27four. Financial details were undisclosed.

Port443, a South African cybersecurity startup, has secured undisclosed funding from investment firm Iziko2.0 with supporting funding from RMB Ventures. The investment will be used to expand Port433’s footprint into the Middle East and Africa region.

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

Richemont has proposed a special dividend of CHF1.00 per ‘A’ share/10 ‘B’ shares. The dividend will be payable following the AGM scheduled to take place on September 6, 2023. In addition, the company has announced a new programme to buy back up to 10 million ‘A’ shares representing 1.7% of the issued share capital of the company. The shares will be held in treasury together with the 4 million ‘A’ shares currently held in treasury to hedge awards to executives and employees.

Mediclinic International’s shares will be suspended on JSE and NSX on May 25, 2023, following the company’s acquisition announced in August 2022. Manta Bidco, a joint venture owned by Remgro and MSC Mediterranean Shipping, acquired the remaining 55,44% stake in the company from minorities in a £2,05 billion transaction.

Purple Group has advised it intends to raise a maximum of R105 million from shareholders by way of a renounceable rights offer. A total of 129,629,630 will be offered at a subscription price of R0.81 per Rights Offer share. Shareholders holding shares equating to 27.12% have committed to follow their rights in terms of the offer and Sanlam Investment Holdings has agreed to underwrite the Offer. The funds will be used to fund the expansion needs of 70%-held Easy Equities which will be raising R150 million for its needs. The remaining R45 million will be funded by Easy Equities’ shareholders Sanlam which holds the remaining 30% stake.

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:

Gemfields has repurchased 1,729,550 shares at a price of R3.45 per share which will be held as treasury shares. Following the repurchase, the total number of ordinary shares in issue is 1,218,586,612.

Calgro M3 has repurchased a further 5,198,000 shares for R14,78 million representing 3.71% of the issued ordinary share capital of the company. A further 18,89 million shares (7.03%) may be repurchased in terms of the General Authority granted.

Nedbank has cumulatively repurchased 15,784,216 shares representing 3.1% of the companies issued share capital. 9,595,526 shares have been delisted and cancelled with effect from Monday 8 May, 2023 while application has been made to the JSE for the delisting and cancelation of a further 4,178,925 shares.

Lewis has repurchased 1,765,939 shares, representing 3% of the company’s issued share capital. The shares were repurchased at an aggregate cost of R83,4 million between October 31, 2022 and May 11, 2023.

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 1,867,780 shares at an aggregate cost of A$7,55 million.

Glencore this week repurchased 14,700,000 shares for a total consideration of £63,87 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 8 to 12 May 2023, a further 2,735,903 Prosus shares were repurchased for an aggregate €177,97 million and a further 573,864 Naspers shares for a total consideration of R1,81 billion.

Five companies issued profit warnings this week: KAP, Stefanutti Stocks, Dipula Income Fund, Telkom SA SOC and Coronation Fund Managers.

Five companies issued or withdrew a cautionary notice: Premier Fishing and Brands, Attacq, African Equity Empowerment Investments, Pembury Lifestyle and Chrometco.

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

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

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

DealMakers AFRICA

Zydii, a Kenya-based digital training solutions provider, has received pre-seed funding from DOB Equity, Kua Ventures, Kaleo Ventures and NaiBAN. The funds will support the company’s growth plans by expanding its suite of solutions for upskilling the African workforce.

Morocco-based B2B e-commerce platform for fast moving consumer goods Chari, has secured a second round of investment from Plug and Play to help it scale its business. The investment amount was undisclosed.

M-KOPA, an asset financing platform providing access to life improving productive assets such as smartphones, solar home systems and electric motorbikes to underbanked individuals, who are able to pay for them via digital micropayments, has secured new funding. The capital injection includes US$55 million in equity and over $200 million in debt. The funding – purported to be one of the largest combined debt and equity raises in African tech, will enable M-KOPA to double the size of its customer base in existing markets, extend its financial services offerings and product sets.

Figorr, a Nigerian-based technology company that develops Internet of Things-powered solutions to support the last-mile delivery of perishable goods, has secured US$1,5 million in seed funding. The round was led by Atlantic Ventures with participation from Vested World, Jaza Rift and Katapult. The company provides real-time tracking, cold chain advisory services and data to stakeholders in various sectors such as pharmaceutical manufacturers and agricultural companies. The funds will be used for the roll out of a risk management platform that will provide data that will make it easier to insure perishable and temperature sensitive goods on the continent.

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

Down but not out: SA M&A to tread water until year end

Matthew Eb and Itumeleng Molefe
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Down but not out: SA M&A to tread water until year end

After a relatively strong year in 2021, mergers and acquisitions (M&A) activity dropped off in 2022, both in South Africa (SA) and around the world.

While we expect activity to remain muted in the near term, we expect a pickup towards the end of this calendar year as key drivers of activity fall into place.

Overall, the SA investment case outlook is beset with challenges: power outages, political uncertainty, and an increasing cost of living pressure for consumers. Against this backdrop, SA will struggle to deliver meaningful levels of growth, particularly as traditional European trading partners navigate recession and geo-political upheaval.

However, where investor uncertainty and operational challenges for management teams will continue to curtail M&A activity, we expect acquirers, or buyers, to take advantage of opportunities created by such turbulence.

As seen in recent years, multinationals tend to take a long-term view on South Africa and the sub-Saharan African region and, we believe, will continue to make material acquisitions in select sectors, acquiring quality earnings and operations at relatively attractive valuations.

Investors are recognising inching progress on structural reforms in the economy, supporting their longer-term investment decisions. Examples include Heineken’s acquisition of Distell, which recently received final regulatory clearance; Remgro and MSC’s acquisition of Mediclinic, which also just received approval from the Competition Tribunal, subject to various commitments; and the acquisition of EnviroServ by a SUEZ-led consortium.

This year should see a slightly more positive equity capital markets environment and increased equity issuance, which is supportive for M&A activity. EOH’s rights offer and the successful listing of Premier Foods in March 2023 is indicative of more positive sentiment in this regard.

In terms of private capital availability for M&A, financial sponsors and family offices continue to have large amounts of capital available for deployment. Globally, financial sponsor “dry powder” is almost three times what it was in 2015. Inevitably, this will translate into increased levels of M&A activity in SA and across Africa.

We see several trends driving M&A:

• Public to private deals – conditions remain strong for the trend of de-listings from the JSE to continue (down to 288 at the end of 2022, from 312 in 2019). We see this being driven by opportunistic buyers taking advantage of low trading multiples on the JSE, or existing shareholders taking the businesses out of the public domain with a view to making structural changes to unlock value over time.

• Consolidation – we will continue to see consolidation as a key driver of M&A. In periods of economic downturn and pressure on margins, large sector players take the opportunity to acquire market share from smaller, less resilient ones, or expand into adjacent sectors. Large corporates, which are also well-capitalised relative to pre-COVID-19 times, have recently refined their capital allocation strategies. They are now clearer on their “core” focus areas for investment and primed to execute on growth opportunities.

• M&A activity variation by sector:

  • We expect to see low levels of activity in consumer-facing sectors continuing through this year as management teams manage the price/volume balance to maintain margins. However, we believe that the major consumer groups in SA will spend time assessing options to unlock value for shareholders, which will support activity into 2024. RCL FOODS’ announced disposal of Vector Logistics in March 2023, as part of its broader managed separation process, is an example of a major consumer group delivering on an announced value creation strategy.
  • Other sectors, such as financial services, will continue to be active. Sanlam’s acquisition of the remaining 62% stake in BrightRock Insurance and acquisition of control of AfroCentric are recent examples of large players consolidating market share and leveraging their platforms. Sanlam and Allianz have also agreed to combine their current and future operations across Africa (ex-SA) to create the largest pan-African non-banking financial services entity on the continent.
  • In the resources sector, healthy balance sheet positions, enabled by attractive commodity prices paired with corporate diversification strategies, should be supportive of M&A-led growth opportunities. Thungela’s announcement in February 2023 of its acquisition of Ensham coal mine in Australia is an example of SA mining players with healthy balance sheet positions acquiring assets that offer geographical diversification opportunities.
  • ESG commitments and South Africa’s energy challenges are driving M&A activities in the energy sector, demonstrated by significant levels of investment into renewable and independent power generation opportunities. Seriti’s establishment of Seriti Green and its acquisition of 100% of Windlab Africa in December 2022, as well as Anglo American’s partnership with EDF Renewables – to form Envusa Energy – are just two examples of the high levels of long-term capital being allocated to the sector.
  • Healthcare in South Africa is seeing increased levels of deal-making as mid-tier healthcare players continue to emerge across the sector and raise capital for growth. IFC’s pending investment into Lenmed is a good example. Meanwhile, the larger players are driving their diversification strategies (Life Healthcare’s recent announced acquisitions of East Coast Radiology in February 2022 and TheraMed Nuclear in March 2023).
  • In the technology, media and telecommunications (TMT) sector, we see potential consolidation opportunities in South Africa, and fintech acquisition opportunities in the rest of Africa.

Investors will continue to take a cautious approach to M&A in Africa, and buyers will continue to look carefully at M&A options, requiring potential targets to have a proven track record of capturing consumer growth. Gaining a level of comfort in the regulatory and FX environment are also key criteria before investing. Outside of South Africa, Egypt, Nigeria and Kenya are attracting strong investor interest, and we see activity levels gradually increasing, with potential for a major jump in activity from the latter part of the year and into 2024.

Matthew Eb is a Senior Transactor and Itumeleng Molefe a Transactor for Corporate Finance | RMB.

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

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

The Energy Boom – with Trive South Africa

The Finance Ghost
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The Energy Boom – with Trive South Africa

The team at Trive South Africa gets us closer to the energy companies that are moving markets – of both the fossil and renewable variety!

Local has not been that lekker when it comes to sources of energy, but whether you are on the fossil front or part of the go-green brigade, there is no denying that energy demand has been booming across the globe.

Big on Oil

After the resurgence of Crude Oil in 2022, it is no wonder that most investors have placed renewables on the back burner for now, despite central authorities’ best efforts to drive renewables. Even the world’s most famous investor, Warren Buffett, has been placing big bets on oil, with energy making up around 14% of his portfolio. The Oracle of Omaha stated that the world would depend on fossil fuels for years, which is quite interesting, as oil prices have fallen substantially from their 2022 highs.

Despite lower oil prices in 2023, the transition away from fossil fuels is anticipated to take longer than expected, as most companies needed to be more ambitious when setting goals to reduce their carbon emissions. Adverse weather conditions will also force more countries to rely more on fossil fuels in 2023, delaying the energy transition, per an EIU whitepaper.

Sasol Limited (JSE: SOL)

Locally, the diversified energy and chemicals company Sasol Limited has not only felt the brunt of the volatility in the oil market, but its greenhouse emissions are under scrutiny as well. The use of fossil fuels still seems high in the pecking order, despite Sasol’s plans to “Be Green” by 2050.

Recent lower oil prices could be a short-term positive for Sasol, as it determines the value of the energy company’s products. However, curbing emissions will need some heavy lifting from the company. Some have already called its net zero plans unrealistic, and the financial services group Old Mutual, a 3% stakeholder in Sasol, has also raised concerns.

The latest products and sales metrics for the nine months ended 31 March 2023 indicated higher production volumes at Secunda for Q3 FY23 than the previous quarter. Operational challenges at the Natref refinery negatively impacted run rates in Q3 FY23, while the Chemicals business showed overall demand and supply still below historical levels. The energy group expects that there will be more volatility across pricing and demand for the rest of 2023.

The chart below shows a double bottom formation, but the price action needs to close above R240.00 (black dotted) and then R255.81, a resistance level (solid redline). The price action could potentially see lower levels if the Crude Oil market sees oil prices move lower in the future. 

Chevron Corporation (NYSE: CVX)

Chevron, the US multinational energy corporation, has been a favourite amongst billionaire investors over the last year as fossil fuel needs have been going strong for a while. Chevron’s dominance in one of the world’s most prolific oil fields, the Permian Basin, could see interest in Chevron for years to come.

Looking at the energy and chemicals corporation’s latest Q1 report card, sales and other operating revenues were 7% lower than the prior year’s first quarter, which recorded revenues of $52.3bn. The revenue decline was primarily driven by lower commodity prices, with crude oil prices down 12.37% year-to-date and a drop in total output, down 3% from a year ago to 2.98 million barrels of oil and gas per day.

Despite Chevron’s top line slide, its bottom line gave an upbeat performance as adjusted earnings were reportedly up 5% from a year ago. Driving the optimistic bottom line was the standout performance in Chevron’s refinery business. Margins were higher for Chevron’s refined petroleum products, leading to a five-fold increase in the unit’s income to $1.8bn.

The world’s number one investor, Warren Buffett, is rarely wrong when picking winning stocks. Is his recent 20% offload of Chevron stock a concern or precursor of things to come?

Diving into the chart below, we can see the share price jumped higher from the incline trendline (lower black dotted), which could potentially see a 12% increase if market believes that the fundamental value could be as high as $180.80 a share (green line).

The Renewable Chapter

The decarbonisation drive has been taking a back seat globally after the massive run in commodities of late. Still, with soaring demand and long-term incentives, renewables are not to be ignored.

Governments and industry role players are exploiting cleantech trends to achieve a net zero effect for the future. With the influx of renewable energy demand, the growth projections were dampened by rising costs, supply chain constraints, inflation, rising interest rates, and cross-border trade, which are some of the headwinds facing the industry globally.

The rush to find alternative sources of energy locally has seen renewable energy and alternative sources of energy pushed to the forefront as the fear of a grid collapse intensifies.

Renergen Limited (JSE: REN)

The local renewable energy front-runner, Renergen Limited, has also been making headway despite the current dismay of its shareholders. The local natural gas and helium producer boasts one of the world’s largest and richest helium reserves at the Virginia Gas Project (VGP); let that sink in.

The Global Helium Market was worth $7.9 billion in 2022. According to estimates, this market is projected to grow at a compounded annual growth rate (CAGR) of 7.2% and reach $12.8 billion by 2029. Renergen recently stated that they expect to secure additional equity capital to finalise the construction of the Virginia Gas Project, hinting to current shareholders that their present stake may experience dilution in the short term. The financials showed a 1.2% year-over-year decrease in revenue for the six-month period that ended on 31 August 2022. Cash outflows used in operating activities decreased by 13.6% year-over-year, marking a slight decrease in cash used in operations. Moreover, property, plant and equipment investment increased by 114.6% year-over-year to R226 million.

Despite the reinvestment and spending outlook on Phase 2, which could deliver substantial energy to the South African economy, the company is also developing hydrogen fuel cells. This bodes well for the decarbonisation drive and increasing revenue prospects for delivery trucks and the mining sector. Looking at Renergen’s chart, we can see the share price finding support at the R17.39 level (red line), which will be watched closely for another leg lower.

Brookfield Renewable Partners LP (NYSE: BEP)

Brookfield Renewable Partners has been steadily building its renewable energy portfolio, which includes wind, solar, energy transition and hydro, for some time now. While solar power and wind farms rake in all the attention, its hydro business might be one to watch.

As the world approaches decarbonisation, Brookfield Renewable Partners’ hydro segment provides the grid with steady emissions-free energy to roughly 6 million homes. Brookfield has 222 hydroelectric facilities, which produce around 8 gigawatts of power, and these assets contribute around 49% of the company’s cash flow.

The renewable energy conglomerate’s recent first-quarter earnings beat Wall Street’s expectations which saw the share price rise. Revenues were up 17% year-over-year, beating consensus by some margin, while losses per share improved to $0.09 in Q1 from $0.16 a year before. Funds from operations per unit (FFO) became a focal point as it beat consensus and indicated robust hydro generation across the portfolio, increased realised power pricing and contributions from growth. The Hydroelectric segment, which investors should watch, increased by 26%, while the wind segment decreased by 14%.

The share price could possibly see more upside if the $31.76 share resistance is crossed, which could potentially lead to a significant overhead resistance at $32.82. For the bear case, if the $31.76 resistance is not breached, the $29.48 support becomes a focal point.

Where to next?

Global macroeconomic factors will weigh heavily on the previously surging energy market during 2023, with global energy consumption only estimated to grow by 1.3%. Despite the best efforts of OPEC+ to cut production to try and stabilise falling oil prices, global recession fears continue to weigh on oil prices. According to the EIU, renewable energy consumption will surge by about 11%, with Asia leading the way, but investment will weaken due to various macroeconomic factors.

Sources: Bloomberg, Deloitte, S&P Global Commodity Insights, WallStreet Journal, Engineering News, Economist Intelligence, International Energy Agency (IEA), Energy Information Administration (EIA), Sasol Limited, Chevron Corporation, Renergen Limited, Brookfield Renewable Partners, Matthew DiLallo, Reuters, Koyfin, TradingView.

For more from Trive South Africa and to learn about the trading and investment platform, visit the website.

Ghost Bites (De Beers | Dipula | enX | NEPI Rockcastle | Ninety One | Santova | Telkom | Tsogo Sun Gaming)

The Finance Ghost
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Ghost Bites (De Beers | Dipula | enX | NEPI Rockcastle | Ninety One | Santova | Telkom | Tsogo Sun Gaming)

Is De Beers the canary in the luxury coal mine? (JSE: AGL)

The commentary on diamond sales is a helpful read-through into luxury demand

De Beers isn’t a big enough component of Anglo American to drive the share price by itself. For that reason, updates on diamond sales are very useful in giving us a sense of luxury demand and not necessarily useful for anything else.

Even the sales numbers themselves don’t mean much, as sales cycles aren’t directly comparable in absolute terms because of seasonality etc.

I skip straight to the management commentary. The last cycle included bullish commentary from management around demand in China. The latest cycle? Not so much. The CEO of De Beers has flagged a “slower pace of recovery in consumer demand from China than was widely anticipated.”

Although I wouldn’t put diamonds in the same league as other luxury goods because of the traditional association with weddings (thankfully nobody expects a Louis Vuitton engagement present), this is something that should be noted with luxury sector companies trading at such high levels.

Dipula grows its NAV by 7% (JSE: DIB)

The per-share numbers have been impacted by a share capital restructure

In June 2022, Dipula Income Fund achieved what the artist formally known as Fortress REIT could not: a restructure of its capital to collapse a dual share class structure into a single class. Through a scheme of arrangement, A shares were repurchased and more B shares were issued. This has a significant impact on the numbers per share, as Dipula specifically reported on the A shares and B shares in the prior period and now only has B shares.

So for the six months to February, it makes more sense to look at group level numbers.

In that period, Dipula grew net property income by a humble 1% and NAV by 7%. There are some fancy balance sheet swings in NAV linked to derivatives and the infamous “other” line that all investors fear in an set of financials, so I would focus on the increase in property value of 4.9% as a better indication of year-on-year improvement.

Although tenant retention has improved across the types of property, Office vacancies are up from 17.3% as at February 2022 to to 27.4% as at February 2023. The loan-to-value ratio sits at 36.9%, slightly higher than 36.7% a year prior.

There’s juicy HEPS growth at enX Group (JSE: ENX)

The industrials group has posted a positive set of numbers

Other than in the headlines related to the recent Takeover Regulation Panel investigations into activities in the company’s shares, you may not have heard much about enX. The company operates in the fleet, equipment and petrochemicals industries, so it sits at the heart of the South African economy. This perhaps makes it even more impressive that HEPS is up.

There are no more discontinued operations in this period, so we can just look at continuing operations. Revenue is 22% higher and HEPS has increased by 32%. As net finance charges came down year-on-year (which helps HEPS), just looking at those two numbers hides the fact that operating profit before tax was only 5% higher. This means that there was underlying margin pressure in the operations.

The group sounds happy with the balance sheet even after paying substantial special and ordinary dividends to shareholders, which led to a large increase in net debt since August 2022.

And as a final note on this company, here’s today’s reminder that no matter what crisis is going on out there, someone is making money:

NEPI Rockcastle gives a first quarter update (JSE: NRP)

Even on a like-for-like basis, net operating income has jumped sharply year-on-year

At a time when South African property funds are taking strain from load shedding, NEPI Rockcastle shareholders are enjoying exposure to Eastern Europe. In the first quarter of 2023, net operating income jumped by 27% year-on-year and 17% on a like-for-like basis (i.e. excluding acquisitions).

This has been driven by a strong performance in the malls. Tenant sales are up 25% year-on-year, with a 14% rise in footfall and most of the rest coming from a higher spend per visit.

Retail vacancies have fallen to 2.4%, with the management team highlighting that international retailers have taken an interest in the region based on growth being achieved in the retail sector.

The loan-to-value ratio looks comfortable at 34.7%, below the company’s “strategic threshold” of 35%.

And even without the pain of load shedding in that region, NEPI Rockcastle has cleverly raised “green” funding and is investing in solar PV projects at the malls.

With guidance of full-year growth of 11% in recurring distributable earnings per share, it’s hard to find fault with this performance. The share price has climbed 15% in the past year.

Ninety One sees HEPS drop by 15% (JSE: N91)

Asset management firms tend to be highly geared to equity market performance

How does an asset manager make money? Simply, they charge a combination of fixed fees (based on assets under management – AUM) and performance fees (also linked to AUM but only applicable when markets do well).

When markets perform poorly, there’s a double dose of pain. AUM drops and performance fees evaporate. When markets do well, the reverse happens and profits are great, although asset managers tend to reward staff more than shareholders even in those scenarios. It’s an industry-wide issue for investors.

The year ended March 2023 wasn’t a happy time for equity markets around the world. It’s therefore not surprising that Ninety One’s average AUM fell by 3% and total AUM fell by 10% year-on-year. Of concern is the net outflow number of £10.6 billion, as outflows represent a decision by clients to walk away from the products.

HEPS has fallen by 15% and the dividend per share is down by 10%, so the payout ratio increased.

Although market prices have improved thus far in 2023, the outlook statement is still cautious. It helps at least that Ninety One carries no debt, so shareholders are the beneficiaries of any profits, rather than bankers.

Santova adds another 4% to the share price (JSE: SNV)

Be very wary of sharp upward moves like we’ve seen at Santova recently

Santova is a solid company. As small caps on the JSE go, the company has done exceptionally well at punching above its weight and generating returns for shareholders. The share price is up more than 193% in 5 years!

Still, I have a rule about never chasing a chart that looks like this:

Big upward moves like that tend to pull back, although not always of course. If we knew what a price would always do, then we would all have yachts on Instagram.

Santova might be linked to the shipping industry, but not with yachts. The company falls into the broader supply chain industry, with freight forwarding and other services (and not just regarding ships). For the year ended February, that was a fun place to play, evidenced by a 22.1% increase in HEPS to 154.83 cents.

The net asset value (NAV) is R7.51 per share and the share price closed at R9.45. Although NAV is little more than a guideline in most sectors, I become a little nervous when companies trade at a significant premium to NAV unless we are talking about a manufacturing business with depreciated assets that are still operating. An exception is where a company generates return on equity far in excess of the cost of equity, which is the return required by shareholders.

Another important point is that although Twitter tends to get excited about the proportion of cash on Santova’s balance sheet and the quantum relative to the market cap, this is a working capital intensive business and they need a lot of cash to operate. The company is in a solid position, but don’t assume that all the cash on the balance sheet is sitting around waiting for a special dividend.

There isn’t even an ordinary dividend, with Santova electing to reinvest everything in the business instead. This says a lot about the growth prospects, which is why the valuation has run higher.

Telkom: a R13bn company with a R13bn impairment (JSE: TKG)

Telkom has shed over 43% of its value in the past 12 months

Value investing is a tough game. There are companies that are cheap for a reason, often due to market emotions or sheer apathy, creating opportunities. Then there are companies that are cheap because the underlying business units are rubbish, creating a value trap that is tough to explain to your friends.

“I lost money on Telkom.”

“But what were you expecting?!? Everyone hates using Telkom!”

Common sense is often a better analytical tool than reading the numbers in detail. With a 15.6% drop in the share price in response to a trading update, Telkom shareholders won’t want to read these numbers.

For the year ended March, Telkom is going to recognise an impairment across the business of approximately R13 billion. After yesterday’s sell-off, that’s approximately equal to the group market cap!

Even if we strip out this non-cash charge and ignore the restructuring cost related to a 15% headcount reduction across the group, normalised HEPS fell by 60% to 80% this year.

Telkom is a technological dinosaur that is trying to migrate to new technologies in an economy that is making this incredibly difficult to achieve.

You know what happened to the dinosaurs, right?

Tsogo Sun Gaming flags a jump in HEPS (JSE: TSG)

In today’s accounting LOL, one of the drivers is “hedge ineffectiveness”

For the year ended March, Tsogo Sun Gaming welcomed many customers back to its properties for nights of gambling, drinking and generally doing things that nobody was allowed to do during the pandemic. It’s not surprising to see a solid uptick in HEPS vs. a base period that still had the impact of lockdowns.

With HEPS up by between 34% and 42%, the company has grown into the share price rather than grown the actual share price in the past year. You could always range-trade this share rather than go to any of the casinos:

The hotel management contract cancellation had a negative impact on HEPS, as the company expected. The funnier update (just because of how it reads) is a R57 million after tax benefit from “hedge ineffectiveness” – if a hedge isn’t going to work out as a hedge, it may as well work out as a trading profit!

Little Bites:

  • Director dealings:
    • A director of Ninety One (JSE: N91) has bought shares worth £19.3k.
    • A director of a subsidiary of Sappi (JSE: SAP) has bought shares worth just over R190k, an interesting play as you don’t often see dealings in Sappi and the cycle has turned against the company, driving a large sell-off in the shares.
    • A director of KAL Group (JSE: KAL) has bought shares worth R50k.
  • There isn’t much liquidity in tech microcap ISA Holdings (JSE: ISA), with a market cap of just over R210 million. In a further trading statement, the company guided HEPS for the year ended February of between 12.95 cents and 15.05 cents, an increase of between 23.3% and 43.3%. The shares trade (occasionally) at R1.25 per share at the moment.
  • Sygnia (JSE: SYG) seems to be intent on recycling executives. After outspoken founder and CEO Magda Wierzycka returned to the top job, we now have Niki Giles returning as Financial Director after serving in that role between 2015 and 2017 and subsequently leaving Sygnia in 2018.
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