Wednesday, November 20, 2024
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Forever in blue jeans, babe

From the garb of the working class to counterculture symbol and onward to wardrobe staple, nothing says “market penetration” like a pair of blue jeans.

Farmers, cowboys, rock stars, celebrities, presidents and you and I – everyone’s got at least one pair of jeans in their cupboard. They’re comfy, stylish, and go with pretty much anything. How did a singular item of clothing manage to make its way into wardrobes on every continent in the world? If you believe the popular myth peddled by Levis, jeans were invented by their founder, Levi Strauss, during the American gold rush in the late 1800s. While Levi’s isn’t lying about that story, they aren’t giving us 100% of the facts either.

Putting the blue in blue collar

Here are some quick facts about jeans to get us started. First of all, every pair of jeans in the world is made of cotton. Well, mostly cotton – in some cases, elastane or spandex is added to the fabric to create more stretch, but the dominant fibre must be cotton. All denim is created through generally the same process: cotton fibre is spun into yarn. Half of the yarn is dyed, while the other half is left white. These two yarns are then woven together in a tight pattern, which creates the hardiness that denim is known for.

While many people associate the word denim with the colour blue, denim actually refers to the type of weave, not the colour of the end product. In other words – any colour denim is as genuine as the blue kind, as long as the weave is correct.

Research shows that fabric for jeans actually got its start in two 17th century cities – Genoa, Italy, and Nîmes, France. The word “jeans” might even come from the French word for Genoa, “Gênes.” In Nîmes, weavers tried to recreate the hardy “Gênes” fabric but ended up making something slightly different, a durable twill fabric known as denim (short for “de Nîmes,” or “from Nîmes”).

The fabric from Genoa was a fustian material, similar to corduroy, and was affordable, making it perfect for work clothes. In fact, the Genoese navy outfitted all of their sailors in jeans because they could wear them wet or dry (I can’t think of a worse fate than being made to perform manual work while wearing wet jeans). Denim from Nîmes, on the other hand, was tougher and considered higher quality, and was therefore often used for smocks or overalls.

The German and the gold rush

As you can see, denim had been in production for quite some time before Levi Strauss entered the picture. In 1851, the young Mr. Strauss left Germany and headed to New York to join his older brothers, who ran a goods store there. Having quickly picked up the tricks of the trade, he set out for San Francisco 1853 to start his own dry goods business. Ever heard of selling shovels in a gold rush? From the sounds of it, that may be quite literally what Levi Strauss was doing.

Around this time, Jacob Davis, a tailor who regularly bought fabric from Levi’s store, came up with an idea. A common problem that many of Davis’ customers faced was that their pants would tear from hard wear. After being asked to mend many of these pairs of torn pants, Davis noticed that they often tore in the same places. In 1872, Davis wrote to Strauss, suggesting they team up to patent and sell clothing reinforced with rivets. These copper rivets were meant to strengthen areas that took a lot of wear, like pocket corners and the bottom of the button fly. Strauss liked the idea, and in 1873, they secured US patent No. 139,121 for their “Improvement in Fastening Pocket-Openings.”

Davis and Strauss played around with different fabrics at first, even trying out brown cotton duck, a heavy-duty material (not a waterfowl). But they quickly realised denim was a much better fit for work pants, so they made the switch. In the beginning, Strauss’ jeans were just tough pants for factory workers, miners, farmers, and cattlemen across the North American West. The jeans of this era were 100% a logistic solution for those who did hard manual jobs – accordingly, they were worn baggy and loose, kind of like dungarees without the bib. In fact, Levi Strauss didn’t even call them “jeans” until 1960 – before that, they were known as “waist overalls.”

Blue jeans and big screens

After James Dean rocked jeans in Rebel Without a Cause in the 1950s, they became a symbol of youth rebellion. By the 1960s, wearing jeans was becoming more mainstream, and by the 1970s, they were a staple for casual wear in the US. Distressed denim took off in the punk movement during the ’70s, where early punks ripped up their clothes to show their anger toward capitalism and corporate greed. Safety pins became a statement, encouraging people to resist the fashion trends that fueled big corporations.

Of course, it didn’t take long for those same corporations to catch on and start selling pre-ripped clothes with safety pins already attached, watering down the original punk message. Denim became a key part of this rebellious style, with both men and women wearing torn jeans and jackets, often accessorised with pins, badges and bold slogans. The trend resurfaced in the ’90s with grunge fashion, where loose-fitting ripped jeans, flannel shirts, and layered T-shirts became the go-to look. This anti-conformist style even helped shape the casual chic trend that carried into the 2000s.

A look to die for

In the Soviet Union, jeans were seen as the ultimate symbol of the Western way of life. “Jeans fever” officially kicked off in 1957 during the World Festival of Youth and Students. While jeans weren’t officially banned, they were hard to find because the Soviet government saw them as a symbol of rebellion. Soviet youth wanted to copy the style of Western film and rock stars, but the government resisted producing or supplying jeans, since that would mean giving in to capitalist market demands.

People went to extreme lengths to get their hands on real Western-made jeans, sometimes even resorting to violence and illegal activities. This led to the rise of black markets and the bootlegging of jeans, which became a significant part of Soviet cultural history. The US jeans brand Rokotov and Fainberg is actually named after two Soviet men, Yan Rokotov and Vladislav Faibishenko, who were executed for, among other things, trafficking in jeans.

A runway/runaway success

Today, jeans are far more than the rugged workwear Levi Strauss and Jacob Davis envisioned – they’re a global cultural staple. From casual Fridays at the office to high fashion runways, jeans have found their way into every corner of society, defying the boundaries of class, geography, and fashion trends. They have transcended their practical beginnings to become a symbol of effortless cool, rebellion, and self-expression.

However, this long-standing reign may be facing a new challenge. As the athleisure trend continues to gain momentum, more people are turning to sportswear and activewear for everyday outfits. The rise of stretchy, breathable fabrics and the appeal of comfort-driven style means that jeans are no longer the default choice for many. With yoga pants, leggings, and joggers increasingly taking centre stage, jeans may no longer enjoy the monopoly they once did in our wardrobes.

Even so, denim’s remarkable market penetration remains a testament to its staying power. While trends may shift and new contenders emerge, jeans have proven they can adapt and evolve. Whether they will continue to dominate or share space with the rising athleisure movement remains to be seen, but one thing is certain: jeans have cemented their place in fashion history, and they’re not disappearing anytime soon.

About the author: Dominique Olivier

Dominique Olivier is the founder of human.writer, where she uses her love of storytelling and ideation to help brands solve problems.

She is a weekly columnist in Ghost Mail and collaborates with The Finance Ghost on Ghost Mail Weekender, a Sunday publication designed to help you be more interesting.

Dominique can be reached on LinkedIn here.

Ghost Bites (Clientele | Fairvest | Investec | MTN Zakhele Futhi | Orion | Renergen)

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Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:


At Clientèle, perhaps its best to focus on the dividend (JSE: CLI)

IFRS 17 has severely impacted comparability of the numbers

The transition in accounting rules from IFRS 4 to IFRS 17 has been a difficult thing for life insurance groups. Comparability is severely limited in these cases, at least in the transition year itself. For example, just moving from IFRS 4 to IFRS 17 suddenly increased the net asset value at Clientèle by R2.2 billion. Despite the jump in net asset value, HEPS fell by 4% year-on-year, largely influenced by a major swing in the effective tax rate due to deferred tax assets.

TL;DR: it’s complicated.

When the numbers get this tricky, I try and look for something simple to latch onto. Cash is always a good one, so the dividend being flat at 125 cents per share is probably the best metric to consider here. I also wouldn’t ignore profit before tax increasing by 47% thanks to a solid performance from the underlying operations.

The share price has been choppy in recent times, delivering a return of only 6.7% in the past year. If you add on that dividend though, it looks vastly better, as the trailing dividend yield is a substantial 10.5%. Sometimes, the dividend is an almost immaterial component of total return. At Clientèle, that definitely isn’t the case. This is a perfect example of a company that is offering a substantial dividend and decent prospects of underlying growth.


Fairvest expects to exceed distribution guidance for the B shares (JSE: FTA | JSE: FTB)

Key metrics are moving in the right direction

Fairvest has released an update dealing with the trading period that ended in August. This is a pre-close update, as the financial year ends in September.

With 69.1% of revenue coming from the retail sector, Fairvest’s exposure is mostly in the right place. They are sitting with 18.8% of revenue in the office sector and 12.1% in industrials.

They also have a 5% stake in Dipula (JSE: DIB).

Between March (the interim period) and August, vacancies decreased from 4.7% to 5.3%. Rental reversions (the rate on new leases vs. the expired lease) were positive 4.3%, which is also higher than the interim period at 3.1%. This has contributed to the happy news that Fairvest is expected to exceed the guided distribution per B share of between 41.5 cents and 42.5 cents.

Even the office portfolio is heading in the right direction, with vacancy rates down from 12.6% in the interim period to 10.7% at the end of August. They’ve been working hard on that portfolio and I think the work-from-home trend is well and truly dead for most companies.


Investec expects HEPS to be rather flat in the interim period (JSE: INL | JSE: INP)

The UK business underperformed the local business

Investec has released a pre-close trading update dealing with the five months to August. In both countries of operation, the UK and South Africa, the period was impacted by uncertainty ahead of elections. Since then, it’s been a story of improved activity and an expectation of reduced rates that has now materialised.

For the six months to September, Investec expects pre-provision adjusted operating profit to be between 6.7% and 12.9% higher. This was assisted by an improvement in the cost-to-income ratio, as revenue growth was ahead of costs. Both net interest income and non-interest revenue seemed to do well, although trading income was down year-on-year. It’s interesting to see Investec highlight that although there was decent demand for loans out there, they also saw elevated repayments in a higher interest rate environment. Perhaps the biggest operational highlight was that funds under management in Southern Africa increased by 10.7%.

Unfortunately, HEPS will be -1.4% to +3.5% vs. the prior period, so that’s a pretty flat performance at the mid-point. One of the reasons for the flat HEPS performance is the cost of corporate activity and other strategic actions, along with the amortisation of intangible assets related to the Rathbones business combination in this period. Remember, HEPS may exclude impairments but it doesn’t exclude amortisation.

The credit loss ratio is around the upper end of the through-the-cycle range of 25 basis points to 45 basis points, with a fairly consistent credit position vs. the end of the previous financial year.

Looking deeper, the Southern African business achieved growth in adjusted operating profit of at least 15% compared to the prior period. The credit loss ratio is below the midpoint of the through-the-cycle range of 15 basis points to 35 basis points. Return on equity should be close to the upper end of the 16% to 20% target.

The UK business has a far less compelling year-on-year story to tell, with adjusted operating profit down by between 5% and 11%. The credit loss ratio is above the guided range of 50 basis points to 60 basis points, with specific impairments having been suffered. Return on tangible equity is between 13% and 14%, within the target range of 13% to 17%.

This means that group return on equity is between 13% and 14%, within the target range of 13% to 17% but at the lower end of it. Group return on tangible equity came in between 15.5% and 16.5%, which is in the middle of the 14% to 18% target range.


MTN moves forward with the proposed extension to the B-BBEE deal (JSE: MTN)

If shareholders don’t approve the extension, there is very little value in the scheme

As previously announced, MTN is looking to extend the MTN Zakhele Futhi scheme by a period of three years. This is quite simply to buy time for the MTN share price to hopefully recover, creating more equity value in the B-BBEE scheme. There is a great deal of debt in the scheme (like in most B-BBEE deals), with the recent pressure in the MTN share price leading to a situation where the B-BBEE scheme was underwater for a while and due to expire worthless.

Thankfully, a recent uptick in the MTN price has put the scheme back in the green, but not by much. I agree with MTN that it is not in the best interests of the B-BBEE shareholders to allow the scheme to expire in November as was originally the plan. If shareholder don’t vote in favour of the extension, the current MTN share price suggests that each MTN Zakhele Futhi shareholder would only receive R3.51 in value once all the MTN shares are sold and the debt is settled.

With MTN Zakhele Futhi currently trading at R10, the market is clearly pricing in a successful extension.

The circular with the details of the extension and the notice of the general meeting can be found at the bottom of the page at this link.



Orion has released its detailed annual report (JSE: ORN)

The company has had an incredibly busy year

Orion Minerals has released full details for the year ended June 2024. Enthusiasts of junior mining will enjoy working through the full report. Orion gained a lot of respect from me this year for choosing to include retail investors in its capital raise. Far too many listed companies just run off to institutions when they need money.

The group’s main activities relate to the Prieska Copper Zinc Mine and the Okiep Copper Project. At the former, they are busy with the development of key infrastructure to support mining operations. At the latter, they are earlier in the process with the current priority being to complete the bankable feasibility study this year.

There is a third project that is even earlier in the process called the Jacomynspan Nickel-Copper-PGE project. They are in discussions with potential users of the metal vapour powder products that they think can be produced from that project.

With trial mining underway at the Prieska Copper Zinc Mine, this was a hugely important transition period for the company.


Renergen has resumed LNG production (JSE: REN)

Annual maintenance has been completed

Production at Renergen is always a contentious issue, considering just how long it took for the helium production to come online. You can almost hear a sigh of relief when there’s good news around the operations, as many shareholders are still licking their wounds.

The good news is that the annual maintenance of the entire plant is now complete, with the plant started earlier this week and LNG production resumed. The helium module is being started and will be brought down to temperature to recommence filling. Perhaps the important nuance here is that they haven’t actually started filling helium again just yet.

Importantly, the maintenance was managed entirely by Renergen’s internal team rather than any OEM contractors.


Nuggets:

  • Director dealings:
    • The group company secretary of Sun International (JSE: SUI) has sold shares worth nearly R1.7 million.
  • Wesizwe Platinum (JSE: WEZ) released a trading statement dealing with the six months to June. HEPS will be between 1.40 cents and 13.32 cents vs. a loss of 59.63 cents in the comparable period. When the guided range is that wide, you can see that they are at a point where the layer of profits is terribly thin. The increase was mainly due to unrealised forex gains on foreign loans.
  • SAB Zenzele Kabili (JSE: SZK), the B-BBEE structure linked to AB InBev (JSE: ANH), has released earnings for the six months to June. This was the scheme where nobody wanted to listen to sensible views during the pandemic. Even the directors tried to tell the market to stop buying shares so far above the value of what they were actually worth. Due to the level of debt in the structure vs. the performance in AB InBev, here’s what it looks like when investors choose to mistrust experienced views and the numerous analysts who were quoted in the media trying to warn people to stop buying this structure at crazy levels:

Ghost Bites (Bytes Technology | Clientele | Discovery | Lighthouse Properties | Mustek | Powerfleet | Remgro)

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Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:


Bytes is growing, but just watch those margins (JSE: BYI)

The market liked this update, with the price closing 9.5% higher

Bytes Technology has released an update for the six months ended August 2024. The highlights are that gross invoiced income and adjusted operating profit grew by 13.5%, with the market showing its appreciation for that number. The net cash position at the end of the period was £71.5 million. This is after paying £35.3 million in dividends.

They are generally more cash generative in the second half of the year than the first half, so keep that in mind when results come out on 15 October.

But perhaps the bigger thing to keep in mind is that gross margin has been a pressure point in recent periods and that seems to have continued over these six months, with gross profit only up by 9%. That’s well below the growth in gross invoiced income, which is precisely the challenge.


Clientèle’s numbers aren’t as bad as they thought (JSE: CLI)

Accounting changes are having a major impact here

Clientèle has released an updated trading statement dealing with the year ended June 2024. Their first trading statement noted an expected drop in HEPS of between 33% and 53%. The updated number is a drop of between 30% and 35%, so they’ve ended up right at the bottom of that initially guided range. That’s a good thing, I guess.

Much of this is because of the significant changes to accounting rules in this space thanks to the introduction of IFRS 17. Without that impact, earnings would not differ by more than 20% to the comparable period.

Detailed results are due for release on Friday 20th September, so we will shortly have full numbers.


Discovery delivered a much better set of numbers (JSE: DSY)

Discovery SA and Vitality were the stars

We already knew that these numbers would be good, as Discovery released quite a detailed update dealing with the year ended June 2024. Full results are now available for those who want to really dig in.

The numbers look a lot better than usual at Discovery, with normalised headline earnings up by 15% at group level. Without the normalisation, headline earnings is up by 7%. The really strong contributions came in from Discovery SA and Vitality Global, with normalised profit from operations up by 16% and 57% respectively. Sadly, Vitality UK was down by 14%.

Return on embedded value is an important metric for insurance businesses, a bit like return on equity for banks. Discovery managed a 13.2% return, which is a decent outcome. Discovery’s embedded value per share is R166.95 and the current share price is R159. This similarity is no coincidence, as the return on embedded value is pretty close to the cost of equity for a group like this. In other words, investors are happy to pay only a slight discount to embedded value per share for the returns that Discovery is currently generating. This is much like a bank trading at close to its net asset value per share.


Lighthouse Properties had an excellent day of capital raising (JSE: LTE)

We’ve reached that point in the cycle where property groups can raise a fortune in a matter of hours

I’ve written before in Ghost Bites that one of the best analytical tools for the property sector is to look at which companies are raising capital. When the best funds are able to raise in oversubscribed bookbuilds, things are getting better. When the really marginal funds are able to raise, you’re probably at or near the top of the cycle and it’s time to go.

Lighthouse is one of the former, so news of an oversubscribed capital raise is positive in my books. The first announcement in the morning suggested a raise of roughly R500 million in equity to support the growth ambitions of the group, with the recent focus being on Iberia. By late morning, they announced that the raise would be increased to R1 billion, such was the level of demand from institutional investors.

Finally, at lunchtime, they announced that R1 billion had been raised at R7.85 per share, a discount of 3.1% to the closing price on 18 September. They say that it was still oversubscribed at this level, but R1 billion was already double what they were planning to raise.

Times are good again in the property sector – especially for the advisors like Java Capital who make a fortune from property capital raises.


Mustek’s HEPS is even worse than initially guided (JSE: MST)

And the dividend for the year is down 90%

In what can only be described as an awkward situation, Mustek released an updated trading statement for the year ended June 2024 at 08:15 and then released full earnings at 09:40. The problem is that the initial trading statement that came out just over a week ago indicated a massive drop in HEPS of between 70% and 80%. The final drop was 82.1%. That’s so close to the guided range that I can’t believe that a last-minute trading statement added much value to the market – especially coming out just before full results anyway!

Either way, it was a very poor year for a number of reasons, some of which were way outside of Mustek’s control (like the sudden disappearance of load shedding). Revenue fell 16% and gross profit margin dipped from 13.9% to 12.2%, so net profit never really stood a chance. The dividend fell 90%, so even the dividend payout ratio decreased vs. the previous year.

Going ahead, they describe themselves as being “cautiously optimistic” – and when your earnings just collapsed, the market is looking for something stronger than cautious optimism.

Still, the share price has been on a wild ride in recent years and is a strong beneficiary of the impact of GNU optimism on local sentiment:


Powerfleet announces a major acquisition (JSE: PWR)

They are buying Fleet Complete for $200 million

Powerfleet is listed on the Nasdaq. One thing you need to know about US-based listings is that they don’t make disclosures very simple. The SENS announcement for this deal is closer to being the introduction to a legal agreement than a helpful disclosure to shareholders. Nonetheless, we persevere.

Long story short, Powerfleet is buying a Canadian business called Fleet Compete for $200 million. They are paying for it through issuing $15 million in stock and the rest in cash. Of the cash amount, $60 million is being funded by a private placement of shares and $125 million is coming from a senior term loan facility with FirstRand.

Another important point is that they are actually raising fresh equity to the value of $70 million, which means they will have $10 million left over for general corporate purposes and working capital.

If you want to learn anything about the company they are buying, you need to go through to the EDGAR filing rather than the SENS announcement. The presentation can be found here, showing that Fleet Complete is a $105 million revenue business that will add significantly to Powerfleet’s current revenue of $300 million. Fleet Complete runs at an adjusted EBITDA margin of 24% vs. 20% at Powerfleet, so it will also uplift the group margin.


Heineken Beverages continues to hurt Remgro (JSE: REM)

What started as an exciting deal has turned into a real mess

I’m usually not one to focus on HEPS when looking at an investment holding company like Remgro, as the accounting rules inevitably lead to weird distortions. This is because some companies get consolidated, while others are accounted for as associates. Smaller stakes don’t even hit the income statement, other than their fair value movements.

Having said that, it’s hard not to notice the mismatch between HEPS falling by 18.8% and the intrinsic net asset value (INAV) per share increasing by 1%, with the dividend up 10%. To add to this fruit salad of numbers, earnings per share (EPS) fell by 86.9%, impacted by impairments.

The biggest impairment is in Heineken Beverages. Sadly, the aftermath of the Distell deal has turned into reason to have something stronger than just a beer. Before the deal, Distell contributed profits of R751 million to Remgro. After this deal, Heineken Beverages contributed a loss of R297 million, partially offset by Capevin’s positive R65 million. It’s little wonder that there’s a multi-billion rand impairment here.

Across the various corporate actions in the group, including the big stuff like the Mediclinic deal as well as smaller deals, there’s a negative impact on headline earnings of R766 million this year vs. a positive impact in the comparable year of R581 million. They give a useful waterfall chart showing the sources of major impacts on headline earnings:

I’ll still never understand what the excitement was around buying Mediclinic. In this period, Mediclinic’s revenue was up 5% and adjusted EBITDA was down 2%. Does that sound like a great use of capital to you?

Another unfortunate outcome this year was CIVH, with a loss of R75 million after a profit of R206 million last year. They blame higher finance costs and the levels of competition in the market. At least one of those things is only going to get worse from here.

The food businesses did well, like RCL Foods (which more than doubled its headline earnings contribution) and unlisted business Siqalo Foods with an increase of 31.4%. Another winner as you might have seen in the chart is OUTsurance group, with those excellent numbers having recently been featured in Ghost Bites. Honourable mentions must also go to Air Products (up 18.9%) and TotalEnergies, which saw the earnings contribution jump quite spectacularly from R54 million to R553 million. Much of that swing is due to stock revaluations. Still, without those revaluations, TotalEnergies was up 84% thanks to better refining results.

As you can see, the volatility at individual investment level is quite something to behold. It’s no different when it comes to INAV, despite such a small move at group level. The pain in Heineken Beverages was offset by the valuation increase in OUTsurance, just as one quick example. Still, the share price is down slightly over 12 months despite the improved sentiment around South Africa, so that really tells you something.

The INAV per share is R251.01 and the current share price is R145.83, so that’s a meaty discount of 42%. This is roughly in line with the usual discount at which Remgro trades.


Nuggets:

  • Director dealings:
    • The CEO of Sun International (JSE: SUI) has disposed of shares worth R10.8 million as part of a “rebalancing exercise” of his personal portfolio. The announcement notes that this concludes the rebalancing, with the sales representing 13.5% of his current holding in the group. The group company secretary sold shares worth nearly R1.5 million.
    • A prescribed officer of WBHO (JSE: WBO) and his spouse sold shares in the group worth a total of R6.4 million.
    • There’s another purchase of shares by the CFO of Metrofile (JSE: MFL), this time to the value of nearly R62k.
  • Omnia Holdings (JSE: OMN) has presented at the RMB Morgan Stanley Off Piste Conference and has made the presentation available at this link. It’s a pretty useful overview of this interesting group that has operations in agriculture, mining, chemicals and manufacturing and supply chain. They are still trying hard to use global comparative companies to justify an uptick in the valuation though, an approach that I’ve never been comfortable with. Big offshore companies trade at higher multiples for a reason.
  • Grindrod (JSE: GND) also participated in the RMB Morgan Stanley conference and their presentation (available here) has a lot of pretty pictures. Interestingly, it notes that the internal rate of return on the deal to acquire the remaining 35% in the Matola Terminal is expected to exceed their risk hurdle rate of 16% despite the valuation multiple being paid. It does help that there’s quite a big cash balance in the terminal, which obviously adds to the value.
  • Hulamin (JSE: HLM) has also released its presentation from the same conference. It goes into quite a bit of detail, showing exactly which products will be expanded or discontinued going forward.
  • There are some changes to the board at Jubilee Metals (JSE: JBL). Neal Reynolds is resigning as CFO and Riaan Smit has been named as internal replacement. On the non-executive side, Dr Reuel Khoza will be joining the board. He has immense experience across numerous institutions in South Africa, so that’s quite a win for the group.
  • As part of the major corporate activity at Kibo Energy (JSE: KBO), which includes a reverse takeover, the group is required to sell its Kibo Mining (Cyprus) subsidiary. This is because the counterparty in the reverse takeover doesn’t want those assets. It’s therefore an important step that Kibo has signed a sale and purchase agreement with Aria Capital for that subsidiary. Shareholders will need to approve the disposal, along with the various other planned transactions at the group.
  • For those who are closely following Ascendis Health (JSE: ASC), Alpvest Equities has sold its interest in the company and Kingston Kapitaal has acquired a stake of 6.1% in the group’s equity.

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

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Exchange-Listed Companies

After several months of negotiations, Capital & Regional (C&R) has received a possible £147 million cash and share offer from NewRiver REIT. Under the terms of the offer, C&R shareholders would receive 31.25 pence in cash and 0.41946 NewRiver REIT shares for each C&R share held. The offer implies a value of 62.5 pence per C&R share, based on the closing price per NewRiver REIT share of 74.5 pence on 22 May 2024 (being the last day before the offer period commenced). This represents a premium of 21% to the closing price of a C&R share of 51.5 pence on that date, a 21% premium to the three-month average price of 51.7 pence and an 18% premium to the six-month average price of 53.0 pence. On conclusion of the transaction, C&R shareholders would own c.21% of the issued ordinary share capital of NewRiver REIT. Growthpoint Properties which holds a 69% stake in C&R valued, in terms of the deal, at c. £100 million (R2,3 billion) has undertaken to vote in favour of the scheme. Following a strategic and capital allocation review C&R has been identified by Growthpoint as a non-core asset. NewRiver REIT has until 26 September 2024 to make a firm offer.

Grindrod, through its wholly-owned subsidiary Grindrod Mauritius, has acquired the remaining 35% interest in Terminal de Carvão da Matola (TCM) from Vitol Holdings II, a vehicle ultimately owned by employees of the Vitol Group. TCM owns a dry bulk terminal in Maputo which is operated under a sub-concession to the Maputo Port Development Company and has the capacity to receive cargo by rail and road. The asset is strategic, enabling Grindrod to provide cost-effective and efficient integrated logistics solutions for cargo flows. The purchase consideration for the remaining stake is US$77 million with an initial payment of $55 million and a deferred $22 million paid in 16 equal quarterly instalments. The deal represents a category 2 transaction for Grindrod and does not require shareholder approval.

Powerfleet, a global leader in the artificial intelligence of things (AIoT) software-as-a-service (SaaS) mobile asset industry, has acquired Fleet Complete a provider of essential fleet, asset and mobile workforce management solutions across North America, Australia, and Europe. The $200 million acquisition will be financed through a mix of cash, shares and a senior secured term loan. Part of the payment will be funded by a private placement of Powerfleet’s shares amounting to $70 million, which also be used for general corporate purposes. An additional $15 million will be raised from a private placement of shares to an existing shareholder of Fleet Complete. Powerfleet successfully acquired MiX Telematics from minority shareholders in October 2023.

Europa Metals announced two proposed deals this week. The European focused lead, zinc and silver developer signed a conditional agreement to acquire Viridian Metals Ireland which includes the Tynagh brownfield project in Ireland. The transaction would constitute a reverse takeover (RTO) and remains dependent on a number of conditions. The share has been suspended on the LSE until such time as more information is available to shareholders. In addition, the company will need to raise additional funds to fund the cost of the proposed transaction. Further, Europa Metals has agreed with Denarius Metal Corp to dispose of the Toral Pb, Zn, Ag project for a sale consideration of C$3,5 million in equity. Denarius will issue 7 million shares at an issue price of C$0.50 per share. Together with the RTO of Viridian Metals, the deals will create a new platform for Europa.

Financial services group Finbond, through its wholly owned subsidiary Finbond Group North America, has signed an agreement to acquire an additional 27.78% interest in Americash and CreditBox.com. The transaction increases Finbond’s shareholding to 90.57%. The businesses are engaged in owning and operating a consumer lending business that operates online and at various physical locations, predominantly in South Carolina, Wisconsin and Missouri. There are 18 branches and online offerings in total, offering instalment loans up to US$2,500. The purchase consideration of $1,65 million (R29,2 million) is payable in cash.

Kibo Energy PLC has announced a deal with ESGTI AG, a Swiss company, to acquire a diverse portfolio of renewable energy projects across Europe and Africa. The projects include wind and solar generation, agri-photovoltaics and technology development – 36 development projects spanning 15 countries from early stage to under construction with a target of 20 Gigawatts generation capacity within six years. Subject to a due diligence, Kibo will pay €400 million. Part and parcel of the deal is the sale by Kibo of its subsidiary Kibo Mining (Cyprus) (KMCL). This has now been announced with its sale to Aria Capital Management. KMCL contains the legacy coal assets and the company’s waste-to-energy and biofuel projects in sub-Saharan Africa. Kibo’s 19.52% shareholding in Mast Energy Developments, currently held through KMCL, will not be included in the KMCL sale. The reverse takeover is expected to be accompanied by a share consolidation of the share capital in the ratio of 1 share for every 5,000 shares held and a placing to raise €30 million by the vendor. Kibo now has six months to undertake a Reverse Takeover, failing which the company will be suspended.

Metair Investments is to dispose of its Turkish operations to Quexco, a US diversified private holding company with interests in the lubricants industry. Metair Turkiye forms part of Metair’s Energy storage vertical and operates as the Mutlu Group which manufactures and trades energy storage products and solutions, including lead-acid batteries, and lithium-ion batteries for use in mobile applications as well as in the telecoms, utility, mining, retail and materials/product handling sector. The disposal consideration of US$110 million (R1,95 billion) is payable in cash. The disposal of the Mutlu Group which Metair acquired in 2013, will unlock significant value to shareholders, reduce its debt and is in line with the company’s strategy to focus on the sub-Saharan African sector in the automotive component manufacturing space.

Texton Property Fund via its UK subsidiary will dispose of the property 20 Pease Road, North West Industrial Estate in Peterlee. The industrial property has been acquired by a subsidiary of LSE-listed Urban Logistics REIT PLC for a disposal consideration of £8,3 million. The deal is a category 2 transaction.

In July last year, Choppies Enterprises’ distribution arm made a BWP28 million acquisition of a 76% stake in Kamoso, a Botswana-based company running retail and distribution. The acquisition included loss-making Mediland, a distributer of diagnostic medical equipment, consumables and pharmaceutical products. In a related party transaction, Choppies will dispose of Mediland to Directors V Sanooj (Choppies) and S Senwelo (Mediland) for BWP100. In addition, they will take over Mediland’s existing revolving credit facility obligations of BWP 40 million, to be settled over a period of five years.

Mustek acquired a 70% stake in CyberAntix, a SOCaas company offering state-of-the-art implementation of managed cybersecurity services for R8 million. The deal was effective from 12 September 2024.

Unlisted Companies

Campari Group has completed the acquisition from ODC (BidCo) of a 14.6% minority stake in Capevin, the South African holding company indirectly owning 100% of CVH spirits. The purchase price of £69,6 million was paid in cash.

Xero, a global small business platform headquartered in New Zealand, has acquired South African company Syft Analytics, a reporting and data analytics software and interactive financial reporting tool.

Metier, a private equity firm, has through its Sustainable Capital Fund II acquired Mertech Marine. The acquisition is part of its strategy to invest in sustainable and resource-efficient infrastructure in Africa. Mertech Marine, a local company, specialises in the recovery, recycling and repurposing of undersea cables. Financial details were not disclosed.

Nestlé (East and Southern Africa) is to dispose of its Cremora business to French-owned Lactalis SA. The move is in line with Nestlé’s strategy to focus on industries with robust development prospects. Financial details were undisclosed.

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

Weekly corporate finance activity by SA exchange-listed companies

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Lighthouse Properties announced an equity raise targeting c.R500 million to be implemented through an accelerated bookbuild process. Due to strong demand, the company increased the amount of the equity raise to R1 billion. A total of 127,388,535 shares were successfully placed at R7.85 per share representing a 3.1% discount to the closing price on 18 September 2024. Following the issue of the new shares, the company will have a total of 2,023,353,689 shares in issue. During 2024 Lighthouse acquired three Iberian malls and will use the capital raise to proactively manage its liquidity to be positioned for further value accretive opportunities as they arise.

Spear REIT successfully concluded a vendor consideration placement, raising R457,75 million. The company placed a total of 50,302,197 new shares at an issue price of R9.10, reflecting a discount of 1% to the 30-day VWAP on 13 September 2024. The proceeds of the placement will be used to partly settle the purchase consideration of R1,15 billion for the Western Cape property portfolio acquired from Emira Property Fund in April this year.

OUTsurance has announced the payment of a special dividend to shareholders of 40 cents per ordinary share.

This week the following companies repurchased shares:

South32 announced in its annual financial statements released in August that it would increase its capital management programme by US$200 million, to be returned via an on-market share buy-back. This week 803,837 shares were repurchased for an aggregate cost of A$2,58 million.

In line with its share buyback programme announced in March, British American Tobacco this week repurchased a further 320,873 shares at an average price of £29.40 per share for an aggregate £9,44 million.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 9 – 13 September 2024, a further 2,455,339 Prosus shares were repurchased for an aggregate €79,46 million and a further 198,018 Naspers shares for a total consideration of R699,8 million.

Four companies issued profit warnings this week: Texton Property Fund, Metair Investments, Choppies Enterprises and Mustek.

During the week, two companies issued cautionary notices: Choppies Enterprises and Europa Metals.

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

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

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DealMakers AFRICA

Alternative asset management firm, BluePeak Private Capital has invested US$25 million in Robust International to contribute to the expansion of Robusts’ processing capacity in its main operating markets including Nigeria, Côte d’Ivoire, Burkina Faso and Mozambique. Robust is a pan-African processor and exporter of agro-commodites with a focus on cashew nuts and sesame seeds.

Kofa Technologies and PASH Global are expanding Kofa’s battery swapping network in Ghana through a Special Purpose Vehicle (SPV) backed by a £2,35 million commitment from Shell Foundation (co-funded by the UK Government through its Transforming Energy Access platform). The expanded battery network is targeting a deployment of 6,000 batteries and up to 100 swop stations across Ghana.

Egyptian edtech, Farid has secured US$250,000 in pre-seed funding from Saudi businesswoman Amal bint Abdulaziz Al-Ajlan, to expand its educational platform and enter Saudi Arabia and the UAE markets.

Goodwell Investments, via uMunthu II, has announced an undisclosed investment in Ugandan technology-focused financial services company Agent Banking Company of Uganda (ABC). This is Goodwell’s first investment in Uganda.

Shorooq Partners has led a US$2 million pre-seed funding round in Egyptian fintech SETTLE. Other investors include El Sewedy Capital Holding, Acasia Ventures, and Plus VC. The company will use the funds to accelerate its move into the global market.

Regfyl, a Nigerian anti-money laundering compliance startup, has raised US$1,1 million in pre-seed funding. Investors included Techstars, RallyCap Ventures, DCG Expeditions, Africa Fintech Collective, Musha Ventures and several angel investors.

The International Finance Corporation has announced that it is providing Marifala Gallery Sarlu (Marifala) with a loan of up to US$13 million to help Marifala construct a modern industrial complex to consolidate and expand its operations. The scaling of operations will help create jobs and increase access to good quality and affordable furniture in Guinea.

Sultan Ventures, a US-based Venture Capital firm has acquired Acasia Group, an Egyptian angel investment syndicate and incubator. Financial terms were undisclosed.

EYouth and a number of Egyptian businessmen, including Mohamed Farouk, Ahmed Tarek, Mustafa Abd Ellatif and Mokhtar Ahmed, have launched NextEra Education, an initiative aimed at modernising the educational landscape in Egypt with an investment of US$42 million (EGP2 billion). NextEra will focus on embedding AI into educational processes, ensuring personalised, cutting-edge learning experiences that prepare students for the future workforce.

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

Is your non-variation clause the ultimate legal safeguard?

You may be curious about the answer to this question. The answer is, fortunately or unfortunately, the often frustrating answer to many legal questions: it depends. In the world of commercial contracts, a non-variation clause, often nestled among what is colloquially known as ‘boilerplate terms’, promises stability and predictability, and is seen as a bedrock provision, ensuring that any changes to an agreement meet specific and predefined criteria.

However, a recent Supreme Court of Appeal (SCA) judgment in the case of Phoenix Salt Industries (Pty) Ltd v The Lubavitch Foundation of Southern Africa (Phoenix case) has cast a spotlight on the true extent of protection offered by such a clause, particularly whether a non-variation clause precluded a gratuitous waiver of a right by one party in favour of another. This judgment challenged the strength of non-variation clauses which are not drafted cautiously.

The principle behind a non-variation clause is straightforward: once parties agree that their contract cannot be altered without meeting certain conditions, no amendment is valid unless those conditions are satisfied. But what happens when one party decides to waive a right, voluntarily abandoning a benefit or privilege that they would otherwise enjoy? The SCA’s decision emphasised the significance of intent, conduct of parties to an agreement, and surrounding factors in contrast to its written terms, clarifying non-variation clauses’ limits and the importance of careful drafting and context.

Synopsis of the facts

In the Phoenix case, Phoenix Salt sought repayment of a loan from Lubavitch, pursuant to a loan agreement concluded on 12 August 1994, and in terms of which Golden Hands Property Holdings (Pty) Ltd (Golden Hands) stood as surety and co-principal debtor with Lubavitch. Golden Hands further concluded a sale agreement with Lubavitch, whereby Lubavitch would transfer certain immovable property to Golden Hands for a purchase price equal to the loan. These properties were to be developed with proceeds ceded by Golden Hands to Phoenix Salt as repayment of the loan. A portion of the loan was repaid, with the balance remaining outstanding for approximately two decades until 25 July 2017, when Phoenix Salt demanded repayment of the outstanding balance of the loan. Lubavitch contended that Phoenix Salt waived its rights to enforce a repayment of the balance of the loan, whilst Phoenix Salt asserted that it did not waive such right, and that even if it did waive such right, the waiver is not valid as it is precluded by the non-variation clause contained in the loan agreement.

Non variation clause versus a waiver clause

The principle of a non-variation clause is that once parties to a written contract agree that the contract cannot be altered unless certain formalities are met, no amendment to the contract will be valid unless the prescribed formalities have been met. The usual formalities are reducing the amendments to writing and demonstrating your assent to the amendments by signing.

A waiver is a voluntary abandonment of an existing right, benefit or privilege which the party would otherwise have enjoyed. A waiver requires an element of intention, in that the abandonment must be deliberate and can either be an express indication of intention to abandon, or through conduct which clearly indicates a lack of intention to enforce such right.

In the Phoenix case, the SCA agreed with the High Court’s view that Phoenix Salt waived, through verbal statements made to Lubavitch and other conduct, the right to bring a claim to enforce the repayment of the balance of the loan. Having said that, the SCA went on to consider whether the non-variation clause in the loan agreement precluded Phoenix Salt’s waiver. The non-variation clause did not make specific reference to a waiver, but merely stated that “no addition, variation or cancellation” may occur without the signed written consent of both parties. The implied interpretation derived from the judgment is that if a non-variation is too specific, then any item that is not explicitly stated would be covered by the protection afforded by the non-variation clause. Conversely, if a non-variation clause is too general, it may fail to adequately protect the parties from variations (such as a tacit waiver) which a party may assert have amended the agreement. It would have been interesting to learn of the Court’s views, had Phoenix Salt pleaded a revocation of the waiver in the alternative to its assertion that it did not waive the right to claim a repayment of the loan, if found to have waived its rights, as was the case.

The SCA specifically noted that, in the interpretation of contracts, the extent to which a written agreement is binding may be negated by the parties’ conduct in implementing the agreement, relevant facts, circumstances, and contextual framework of the contracting parties.

Key takeaways

When drafting an agreement, boiler plate clauses must be reviewed with the same vigour as clauses containing key commercial terms and, if appropriate, updated, having regard to the commercial terms, identity of the parties, relationship of the parties, and/or other acts or omissions typically prevalent when building business relationships, such as suspension, relaxation, indulgence or extension.

Furthermore, the wording of a contract cannot be divorced from its contextual framework, which will play an important role in the interpretation of such contact. A party may have difficulty relying on a written agreement in order to claim ‘agreed’ rights when they have consistently acted contrary to their rights or obligations in the agreement. Similarly, a party may have difficulty enforcing rights or compliance with obligations when they have consistently condoned non-compliance.

Gabi Mailula is an Executive, and Asanda Lembede and Nina Gamsu are Candidate Legal Practitioners in Corporate & Commercial | ENS.

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

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

Unlocking the African natural resources sector

The African continent boasts a rich history of mining, for which South Africa has led the charge for the past century and a half – but this may be changing. The continent’s mining sector now faces a crossroads.

As global demand for resources soars, junior and mid-tier miners tend to be the ones who are undertaking exploration in the rest of Africa; however, in South Africa, exploration activity has generally stagnated.

Here’s a closer look at the challenges and opportunities.

Stalled growth in South Africa

Traditional mining giants in South Africa have undergone substantial restructuring over the past decade or so, and divested of many non-core assets. These assets have been acquired by the smaller domestic players, who are focused more on operational value unlock than the discovery of new large-scale resources. These mining giants have become more globalised in their approach, with operations concentrated around scalable projects. This has shaped the direction of exploration.

In South Africa, there is a lack of exploration for new deposits, which is a key factor hindering growth in the domestic resource sector.

Emerging opportunities

In the rest of Africa, a different picture has emerged, with renewed interest in elements like lithium, uranium, copper, gold, and other historically underexplored commodities. These hold immense potential, especially those required for the energy transition and clean technology sectors.

However, the traditional discoverers of these projects are no longer the global diversified mining companies. The rise of mid-tier miners and Chinese conglomerates signifies a shift in who is driving exploration and resource extraction across Africa (excluding South Africa).

The mid-tier miners are often nimbler, more adaptable to changing market conditions, and tend to chase those future-focused commodities. However, they often do not have access to the required capital, and are reliant on commercial banks, strategic equity partners and private equity funding to develop these assets.

Investment imbalance

In recent times, investment in copper assets was focused on South America, and Australia and Brazil for iron ore. However, as global demand for copper grows, renewed interest in the copperbelt is emerging.

One of the key issues obstructing Africa from unlocking its mineral wealth is the lack of developed infrastructure capable of handling the volumes of equipment, consumables, material and ore to be moved between the mine and the ports. There is a general lack of developed infrastructure once you move away from coastal regions in Africa, where projects are often separated from the coastal regions by jungle and dense bush.

China’s Belt and Road Initiative – a global infrastructure development strategy adopted by the Chinese government in 2013 to invest in more than 150 countries and international organisations – has funneled billions of dollars into African infrastructure projects, often tied to securing access to mineral resources. However, there remains a need for significant investment in infrastructure development across the continent.

Perception vs reality

Negative narratives often dominate discussions around African mining, obscuring the continent’s diverse investment opportunities. Images of conflict zones and environmental degradation often overshadow the progress being made in areas like governance and transparency.

Focusing solely on regional risk overlooks the unique landscape of individual countries, where there are success stories to be found, like Botswana’s transformation into a major diamond producer and exporter, demonstrating that responsible mining can contribute to economic development.

It is important that boards and investors carefully consider new investment jurisdictions on an objective basis, free from perceptual bias. Perception should be taken out of the mix, and the focus should be on the realities. There is a lot of ‘pure perception’ driving incorrect decisions, resulting in missed opportunities.

Political instability

Investors require a stable and predictable political environment to justify the substantial upfront costs of developing mining projects.

Frequent regime changes and ideology-driven policies create uncertainty for long-term investments in some African countries. This is particularly problematic in the West African region, where coups have become a worrying trend. However, in some instances, coups have resulted in an improved environment, more focused on investment and the introduction and application of good policy.

Beyond the project

Investment decisions require careful consideration of several factors beyond the project itself. The political environment, legislation (application and consistency), and the ability to repatriate capital are all crucial aspects to evaluate.

Safety for investors and employees, along with infrastructure development (especially outside Southern Africa), are crucial factors. Reliable access to electricity, water and transportation links are essential for mine construction and operation.

M&A in the mining sector

Junior and mid-tier miners from Australia and Canada are presently leading exploration and development of key projects on the continent. These companies are often more willing to take calculated risks on new discoveries in Africa.

Future M&A activity will likely focus on these players, unless major diversified producers make a significant shift towards Africa. These junior and mid-tier miners become the classic M&A targets as they progress their projects up the value curve and search for capital to bring the project to account. Major mining companies are likely to gain a foothold in Africa’s emerging metals space through the acquisition of these companies.

To ensure that South African companies are not missing opportunities in their own backyard, it is critical that boards objectively assess new investment opportunities based on a country’s specific mineral endowment, not just perceptions of the operating environment. A thorough evaluation of the technical/operational merits, political climate and investment framework is essential.

A balanced scorecard approach is needed, weighing project merits against potential jurisdictional risks, compared to alternatives. This will allow investors to make informed decisions that maximise returns while mitigating risks.

The bottom line

Africa has the potential for a significant mining boom, but overcoming these challenges and attracting responsible investment is critical.

By focusing on exploration, policy transparency, infrastructure development, and crafting an attractive investment climate, African nations can unlock their true resource potential and share in the benefits of their resource endowment.

Ian Ballington is a Senior Transactor and Willie Hattingh is Head of the Mining and Resources Advisory | RMB.

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

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

Ghost Bites (Capital & Regional | Choppies | Grindrod | Hammerson | Metair | Raubex | Southern Sun)

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Capital & Regional finally has news on the NewRiver offer (JSE: CRP)

At this point though, it’s still only a “possible” offer

This has been going on for a while now, with various extensions to the PUSU (Put Up or Shut Up) deadline. We finally have some idea of what an offer might look like, with each Capital & Regional shareholder able to receive 31.25 pence in cash and 0.41946 NewRiver shares, assuming the offer goes ahead. They stress that this is only a “possible” offer, so don’t count your money just yet.

If it goes ahead at this price, it’s a premium of 21% to the closing price before potential deal announcements started going out. It’s also a premium of 21% to the three-month VWAP. This isn’t an amazing premium by any means, justified perhaps by the fact that Capital & Regional shareholders would have 21% in the enlarged vehicle, so they aren’t losing all their exposure to the assets in the business they currently own. The fact that everything seems to be around the 21% mark is purely a coincidence!

As this is a partially equity-based deal, the rest of NewRiver is therefore important in this deal. Shareholders will need to get comfortable with that UK-based portfolio. The combined retail portfolio would be worth nearly £0.9 billion, with a particular focus on resilient tenants focused on essential goods.

Unsurprisingly, the announcement also notes potential cost synergies that the deal would achieve. That’s good news for shareholders and bad news for back office staff, with an estimated £7.3 million in savings. Something that is unusual though is the reference to “dis-synergy” – income that they think they would lose as part of the deal. This will offset some of those savings, as will the various transaction costs.

Another important term of the deal is that Capital & Regional shareholders would receive their interim dividend for the six months to June, as well as the interim dividend to be declared by NewRiver for the six months to September. If the deal isn’t done in time for the NewRiver dividend, there would instead be an additional dividend declared by Capital & Regional.

NewRiver has until 26 September to turn this possible offer into a firm offer. The critical point here is that Growthpoint as the controlling shareholder in Capital & Regional is in support of these terms, so I think there’s a good chance that the terms won’t change by much (or at all).


The rights issue at Choppies has led to a sharp drop in HEPS (JSE: CHP)

This is another reminder of why the number of shares in issue makes a difference

Choppies has released a trading statement dealing with the year ended June 2024. Although profit after tax from continuing operations is up by between 3% and 13%, the reality is that HEPS from continuing operations is down by between 16% and 26% because there are many more shares out there after the rights issue.

Choppies also notes that the Zimbabwe business is loss-making. If you exclude it, profit after tax was up by between 16% and 26% as well. I would ignore that completely though, as Zimbabwe is not even a discontinued operation. Every company looks better if you leave out the ugly bits.


Grindrod will become the sole owner of the Maputo dry bulk terminal (JSE: GND)

The remaining 35% in the business is being acquired

Grindrod has been telling a positive story around the Mozambique port infrastructure for a while now, assisted greatly by the deterioration in the South African infrastructure. That’s how capitalism works: the money follows the path of least resistance. If that path happens to be further away but more reliable, then so be it.

Grindrod currently holds 65% in Terminal de Carvão da Matola Limitada (TCM) and will be increasing that to 100% through the acquisition of 35% from Vitol Mauritius. This will give Grindrod complete control over this sub-concession to the Maputo Port Development Company’s main port concession, which means it can offer customers an integrated logistics solution with a pit-to-port theme. It sounds good to me.

The deal price is $77 million, with $55 million up-front and $22 million paid over sixteen equal quarterly instalments. Interestingly, if Grindrod sells any of the newly acquired shares within 12 months of the closing date, there’s an additional component of up to $15 million that would be paid to the seller. I doubt very strongly that Grindrod plans to flip this asset but you never know.

The asset has a net asset value of $116 million and achieved profit after tax of $9.2 million. The deal price implies a total value of $220 million, which is a pretty chunky number relative to the underlying financials. There are a large number of conditions precedent to this transaction, so it’s going to take a while.


Hammerson has unlocked more capital with a major disposal (JSE: HMN)

The interest in Value Retail is being sold for £600 million

Despite the name and the usual connotation for the word “value” in the retail world, Value Retail is a developer of luxury shopping destinations in the UK, Europe and China. Hammerson is selling its substantial minority stake in the fund to L Catterton, which Reuters reports is a private equity firm backed by LVMH. The LVMH link makes sense in the context of the luxury angle to the properties.

Hammerson is getting £600 million from the deal, giving them quite a piggy bank to help with strategic priorities across the group. There’s been some other positive recent momentum in the group, like an upgrade to the credit rating.

The management team describes this step as the delivery of a turnaround that was announced three years ago. If this share price is what a completed turnaround looks like, then thank goodness I haven’t been an investor in this company:


And now for the bad news at Metair (JSE: MTA)

They must have announced the Turkish deal first to soften the blow

Metair has released a trading statement for the six months to June that reflects a significant swing into losses. HEPS of 43 cents in the comparable period is just a distant dream now, with a headline loss per share of between 2.7 cents and 3.3 cents in this period.

Revenue was largely flat year-on-year, which is actually not bad when you consider the underlying pressures in the business. Sadly, due to the levels of debt in the business and the impact of borrowing costs, net finance costs increased by a nasty 45%.

At Hesto, one of the South African businesses accounted for as an associate (as Metair doesn’t control that business) revenue was up 7% and EBIT (Earnings Before Interest and Taxes) managed to cover finance costs. In other words, it sounds like they are working hard there just to feed the bankers.

In the Automotive Components Vertical, which excludes Hesto, revenue is down 14% and EBIT margins are between 5.5% and 6.0% vs. 6.8% in the comparable period. When you consider the extent of revenue pressure, that EBIT margin performance isn’t bad. They were clearly very strict on costs.

In the Energy Storage Vertical, which includes the Turkish business as well as the South African battery business and the operations in Romania, the segment could only manage break-even at EBIT level. That’s not helpful when there is so much debt in the group.

These challenges are why the market reacted so positively to the news of the Turkish business being sold, as Metair could desperately do with the capital for the purposes of reducing debt. Group EBIT margin was just 1.5% to 2.0% for this period vs. 4.2% in the comparable period. The deal to sell in Turkey is literally a life saver.


A bumper period at Raubex (JSE: RBX)

This group is just going from strength to strength

Raubex has released a trading statement for the six months to August 2024. With the share price up 170% over five years, the momentum has continued into this period with growth in HEPS of between 45% and 55%.

It sounds like the strong performance is happening across the board, with the Construction Materials, Roads and Earthworks and Infrastructure divisions all being noted as performing in a “more than satisfactory” manner – based on the group HEPS growth, I think we can all agree on that.


Southern Sun has put in a solid profit performance, but revenue growth was subdued (JSE: SSU)

Certain base effects and other issues led to an uninspiring revenue performance

Southern Sun hasn’t given us a revenue growth rate for the six months to September 2024, but they’ve told us enough to know that the top-line performance isn’t going to set your hair on fire. For the first five months of the financial year, occupancy has been 57.1%, which is 120 basis points ahead of 55.9% in the comparable year. Average room rates are only up by 1.7% though, so they are having to be aggressive on price to get the uptick.

There are some good reasons for this, like the BRICS Summit in the base period that gave a huge boost to accommodation in Sandton. They also closed two major hotels in this period for refurbishment. Finally, there’s been a slowdown in demand from the public sector.

Although revenue hasn’t done much in this period, HEPS is expected to be at least 20% higher than the comparative period. This is thanks to the substantial reduction in debt levels (and thus savings in finance costs), along with the positive impact of share buybacks.


Nibbles:

  • Director dealings:
    • There’s yet more selling of Bell Equipment (JSE: BEL) shares by members of the Bell family. This time, there’s a sale at R40.90 per share worth R105k and a sale at R39 per share worth R975k.
    • An independent director of Sibanye-Stillwater (JSE: SSW) has acquired shares worth R91.7k.

Ghost Bites (Capital Appreciation | Europa Metals | Hyprop | Metair | OUTsurance | Sanlam | Texton | York Timber)

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Capital Appreciation is still a tale of two divisions (JSE: CTA)

The software division is dragging them down

Capital Appreciation has released an update for the six months to September 2024. The recent trend in the group has been positive for the payments division and negative for the software division. It seems to be more of the same here.

The payments division secured a couple of important multi-year contracts that will add substantially to the existing estate of payment terminals already out there. There are 357,000 devices out in the field and these contracts could add another 200,000 devices over three to five years. These devices generate revenue for Capital Appreciation on an ongoing basis, so growing the installed base by this extent is very positive indeed. The benefit will only be felt in periods to come though, with a fairly subdued narrative related to this six-month period under review.

Notably, the trend within the business has been to see more annuity income rather than up-front fees, as clients are looking to lease terminals rather than purchase them. This provides a useful income base for the group but it does come with working capital considerations as well.

Another growth driver is the decision by the South African government to deprecate the 2G and 3G networks in 2027, driving another round of investment in devices.

In the software division, they are struggling with overcapacity, which is a nice way of saying that they have too many expensive people and not enough work. They are choosing to hang onto the people though, hoping for an uptick in demand and finding other uses for them in the development of group intellectual property. I’m really not sure how much longer they can carry a team this size though, so improvement does need to come through. Profitability in this division is down year-on-year for the six months.

In other news, GovChat’s exit from business rescue has resulted in minor operating expenses and limited expected credit loss provisions.

The group also announced the retirement of the group CFO at the end of this calendar year. Sjoerd Douwenga, ex-CEO and CFO of Metair, will take over as CFO.


There’s a lot going on at Europa Metals (JSE: EUZ)

The group is going to look completely different in future

There’s basically no liquidity in Europa Metals, so the share movement (or complete lack thereof) in response to these updates isn’t a fair reflection of the economics. In a liquid stock, there would be plenty of activity after announcements of a major disposal and a reverse takeover!

Let’s start with the disposal of the Toral Project to Denarius Metals. It’s not an exit from Toral for Europa though, with the deal being to sell 100% in Europa Metals Iberia (the subsidiary that holds Toral) for CAD3.5 million, settled by the issuance of shares in Denarius to Toral. In other words, this transaction gives Europa exposure to the rest of the Denarius projects in Spain and Columbia.

In a separate announcement, Europa delivered the news that Viridian Metals Ireland will be injecting its assets into Europa in a reverse takeover. You can go years without seeing any reverse takeovers, yet you can see two in the same week like we’ve seen this week on the JSE (the other is Kibo Energy). There are still numerous regulatory hurdles to get over of course, but the idea here is that Europa would then be the vehicle housing the Tynagh Pb/Zn/Cu/Ag project in Ireland, along with the various assets in Denarius (including Toral after that deal concludes).

If both deals go ahead, Europa will suddenly have a far more interesting portfolio of assets, achieved virtually overnight!


Hyprop’s dividend is back (JSE: HYP)

There’s a decrease in distributable income though

After Hyprop had a small panic around its interim results with the potential impact of the Pick n Pay troubles, it’s nice to see that the dividend is back. It’s smaller than before though, coming in at 280 cents per share and thus 6.4% lower than the previous year. This is because distributable income per share fell by 8.6%.

The interesting thing is that net operating income from the properties themselves increased by 61%, so the pressure was felt below that line. The properties have a good news story to tell, with improvement in key metrics in both South Africa and Eastern Europe.

Below that, the first challenge is that the net interest expense jumped by 27.9%. If you eyeball the actual numbers, the jump in finance costs of nearly R240 million offset a big chunk of the roughly R315 million uplift in operating income. We then get to the next problem for distributable income per share: the number of shares in issue. Property funds love dividend reinvestment programmes as they are basically miniature rights issues. With the number of shares in issue increasing by around 5.8%, the modest uptick in earnings after finance costs was no match for the number of people sitting at the table waiting to eat those profits,

They expect distributable income per share to be between 4% and 7% higher for the year ending 30 June 2025. There’s some positive momentum there at least.


Metair isn’t very Istanbullish on Turkey (JSE: MTA)

The Turkish business is being sold and the market likes it

Metair, also known as the unluckiest company on earth, is simplifying its exposure and therefore giving itself one less place to get hurt by the fickle finger of fate. The business in Turkey is being sold to Quexco, a private holding company with a number of industrial assets (mainly lubrication) across several regions.

Metair’s Turkish business is focused on batteries, not lubricant, although the end customer for the batteries is the automotive sector and perhaps that’s where the synergies lie. With a loss for the year ended December 2023 of R70.6 million and net assets of R2.9 billion, I don’t think Metair shareholders care too much about whether Quexco is doing a smart deal here. They are just happy to see it go for R1.95 billion, unlocking a substantial amount of capital to reduce the debt in South Africa.

There are material adverse change clauses in the agreement related to incidents like earthquakes, floods, military attacks or other acts of God, which in most cases would be a formality but based on Metair’s luck you actually just never know. Hopefully nothing will happen while the deal is being finalised!

This is a Category 1 deal, so Metair shareholders will need to vote on it. Value Capital Partners have already given their support to the deal and they hold 19.64% in Metair. I think the market has already voted with its feet on this one, with the share price up nearly 10% in late afternoon trade.


Investors are getting plenty OUT with this special divi (JSE: OUT)

OUTsurance is doing really well

OUTsurance is putting in some strong numbers at the moment, with normalised earnings for the year ended June up by 20.3%. Cash quality of earnings is extremely high, with the ordinary dividend up 29.4% and a special dividend of 40 cents on top of the ordinary dividend of 174.4 cents. For reference, the special dividend in the comparative period was 8.5 cents.

Normalised earnings growth has been excellent across the board. OUTsurance SA grew 17.4%, OUTsurance Life 47.9% (admittedly off a much smaller base) and Youi Group (the Australian business) 12.8%. OUTsurance Ireland is the startup that they are currently incubating, so it’s not surprising to see the losses there climb from R56 million to R180 million. Before you get worried, remember that OUTsurance has a track record of global expansion in the good old fashioned way: hard work and market penetration rather than fancy acquisitions that make bankers rich and shareholders poor.

They call the Irish strategy a “disciplined scale-up” – and in these numbers, you can see the benefit of that approach at OUTsurance over the past couple of decades.

The share price closed more than 8% higher.


Sanlam’s deal for Assupol has met all conditions (JSE: SLM)

The deal worth over R6.5 billion is going ahead

In February this year, Sanlam announced the intention to acquire all the shares in Assupol through a scheme of arrangement. In case that didn’t work, a standby offer was also on the table. They didn’t need the offer in the end, with the scheme being approved by shareholders and the scheme becoming unconditional.

The original price of R6.5 billion was subject to adjustments related to dividends and an escalation rate. The final price is therefore R6.57 billion, payable in cash to Assupol shareholders.

That’s good news for Assupol and Sanlam shareholders, but not such great news for the Cape Town Stock Exchange which now loses one of its precious few listings.


Another UK disposal at Texton – and confirmation that distributable income has dropped (JSE: TEX)

The fund has reduced its direct property exposure in the UK substantially

Hot on the heels of a recent announcement regarding the disposal of a UK property, we have yet another disposal by Texton. This time, it’s the North West Industrial Estate in Peterlee, which is well-tenanted but in a less-than-ideal location.

The price on the table is £8.3 million and the buyer is a REIT listed on the London Stock Exchange. Texton had valued the asset at £7.9 million as at 30 June 2023. That valuation is more than a year old, but at least the disposal is for a higher amount.

Included in the announcement was a trading statement that noted an expected decrease in distributable income of between 14% and 24% for the 12 months ended June 2024. This helps explain why they are reducing exposure and trying to simplify things.


York Timber swings into profits – but watch the cash (JSE: YRK)

The biological asset valuations are a regular source of volatility in earnings

Due to accounting rules, York Timber recognises fair value moves on the trees in the ground before they are cut down and sold. Whilst it would be unreasonable to ignore an asset that is quite literally growing every day, it does also lead to a volatile story in profits and a mismatch between earnings and cash.

Given York’s historical difficulties, I always think that earnings excluding those fair value moves are the important thing to focus on, along with cash generation.

For the year ended June, York expects to swing from a headline loss of 75.89 cents to HEPS of between 28.22 cents and 32.02 cents. They also disclose core earnings per share excluding the biological assets adjustment, with that number deteriorating from a loss per share of 8.04 cents to a loss of between 10.61 and 11.01 cents. That’s a negative move of between 32% and 37%!

Another important disclosure is EBITDA before fair value moves, which fell by between 15% and 20%. Finally, cash generated from operations is expected to be 75% to 80% lower than the comparative period, a particularly worrying trajectory.

Much like its earnings, York’s share price has been all over the place in the past few years.


Nibbles:

  • Director dealings:
    • I’m not sure who the seller was in this off-market deal, but Carl Neethling of Ascendis Health (JSE: ASC) bought R19 million worth of shares at 80 cents per share.
    • Johan van der Merwe (yes, of ARC fame) is a non-executive director of Attacq (JSE: ATT). He sold shares in Attacq worth R6.6 million.
    • A director of Bell Equipment (JSE: BEL), who also happens to be a member of the Bell family, sold shares worth R1.98 million. Given the recent attempted scheme of arrangement, the price is important here. They were sold for an average price of R39.58, which is well below the R53 at which the same family tried to buy out all remaining shareholders. Odd.
    • The CFO of Metrofile (JSE: MFL) bought shares worth R322k. That’s a bullish signal, although the recent results were anything BUT bullish.
  • Labat Africa (JSE: LAB) began its quarterly update in an unenviable way: “First and foremost, the company wishes to reassure its shareholders and stakeholders that Labat remains a going concern.” That’s all good and well, but it’s also an ongoing concern that the shares are suspended from trading because the 2023 and 2024 audits haven’t been concluded. They are still trying to appoint new auditors to get it done.
  • Sebata Holdings (JSE: SEB) has appointed joint chief executive officers, with the current CEO and interim CFO becoming non-executive chairperson. There’s no mention made of the appointment of a full-time CFO.
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