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What’s the shift?

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What’s the shift?

Travis Robson (CEO of Trive South Africa) takes a deeper look into meeting the needs of the modern investor.

We aren’t strangers to change. From the market crash in 2008 to the Steinhoff saga, investors have become more desensitised towards change and have adapted to the new world investing order. But what does this mean for an FSP, and how do we stay up to date with the behavioural changes we see in the lives of modern investors?

As CEO of an FSP, I’ve always believed that it’s essential to have a thorough understanding of your business and industry, which allows you to build your business and unique selling points (USPs) around the needs of your target market; something needs to set you apart from the crowd and propel you into the mind of your target market.

To get there, you first need to understand your target market.

Over the years, I have gained extensive industry knowledge through customer engagement and direct research, which led me to identify two key segments: the Alpha Trader and Investing Potential. Using these two categories, we can recognise and meet their needs.

  • Alpha Traders are the confident group of investors who constitute the largest trading segment in South Africa. Research shows that this group is not beholden to one broker and that members usually have around 2 – 3 different broking accounts, with a propensity to manage these accounts online. This group is taking control of their investment journey and is no longer relying as heavily on traditional brokers as they did in the past. As a result, these investors have impeccably high standards for the service and do-it-yourself technology their broker provides. Seeing as there is typically minimal relational activity between the brokerage and these investors, they would soon change their broker if their service needs are not being met or if they feel that the commissions and fees charged by the brokerage do not allow them to maximise their investment portfolio.
  • Investing Potential is the group of upcoming investors soon taking over or falling into the Alpha Trader group. We identified this group of investors as young, tech-savvy investors with more advanced insight and technology experience as they have grown up with the latest tech at their disposal. As these tech-savvy investors enter the market, their main focus and decision-making factors focus on pricing, quality of tech and a sense of community or partnership with their brokerage.

What Does The Research Show?

This shift in focus waves goodbye to the old tactics of ‘selling’ a product to a ‘customer’. With a wide range of brokers available and communication capabilities at an all-time high, we see the power tables turn in South Africa as consumers now have the final say in whether your product is industry-worthy.

This highlights the massive industry changes that have happened over the years. We currently see that the share dealing market is in a growth phase and are finding new entrants that are disruptive to previous traditional telephone broking environments. While these disruptors might have done a great job of serving as a gateway for new investors, there is still a large portion of investors whose needs aren’t being met entirely.

As the market has grown and segmentation occurred, execution-only broking is experiencing significant growth because increasing investment in digital platforms results in a wider product offering.

However, it’s important to remember that growing market share means growing customer segmentations. Whilst some investors use gateway brokerages to enter the market, they typically outgrow the ‘milkshake and slushie phase’ and search for a more sophisticated product that grants access to a wide range of local and global products at a competitive rate. Encapsulating these features is something that local brokers have either struggled with or offered at such a premium that a large part of the market share is not interested.

Identifying and Meeting The Need

Considering all this information we uncovered during our research, we’ve identified the following as some of the predominant ‘needs’ that the modern South African investor’s focus has shifted to:

  1. Next-generation tech that allows the investor to plan, execute and monitor their investments.
  2. A wide range of local and global products under one umbrella that’s easily accessible through the platform.
  3. Partnership or a sense of community facilitated by their brokerage makes the investor feel valued and not like just another number in the bunch.
  4. Trust in a brand with a strong reputation that is monitored and compliant with local laws and legislation.

But how does one practically add value to the modern South African investor’s life with so many different offerings up for grabs?

The simple answer is to understand that their needs are ever-changing and to keep a two-way communication flow between you (the brokerage) and your customer (the investor).

Trive South Africa has tapped into the comms flow in the investment world and built our offering around these four specific needs whilst maintaining healthy and necessary flexibility.

On a practical level, we’ve implemented the following strategies to meet the modern South African Investor’s needs:

  • Quality and Functioning of Next-Generation Tech
    Trive SA has partnered with a well-respected third-party platform provider, allowing our clients to access a multi-asset investment platform with a simple interface, quick trading options and web functionalities. Not only does this allow us to offer our clients the benefits of a fully customisable and rich trading experience, but it also empowers them to take back control of their investment journey by allowing them to choose what they would like to see and when they’d like to see it.
  • Providing a Wide Range of Products
    In today’s world, the client is spoiled with choice and as such a range of markets and instruments is essential for the client, as they would like to trade all their products on one trading portal with one provider. Therefore, Trive SA provides a one-stop shop for every client’s investment needs. From tax-free savings accounts (TFSA) to over 2800 JSE listed and offshore shares, ETF investment opportunities and leveraged products, Trive South Africa offers it all at highly competitive fees and commissions.
  • Investor and Brokerage Partnerships
    Whilst clients from ‘traditional’ brokers still value ‘personal service from the broker’, we also see an uprise in need for partnership amongst younger investors. This may be because high-standard services were inclined to good impressions, thus allowing the customers to repurchase with assured satisfaction and expectations of a similar level of service and information. For example, Trive SA has a whole Sales Trading and Research & Education Team supplying our customers with information and a two-way comms channel, positioning ourselves as their partner.
  • Building Trust and Reputation
    As a new entrant into the South African market, we understand that building a solid relationship and trust in our brand will take time and hard work. To assist with these efforts, we have taken every possible step to provide our customers with a credible, FSCA-regulated service. We can also leverage the expertise of a strong holding company, Trive Financial Holdings, based in the Netherlands.

Whilst we believe that we are stepping in to fill the gap and meet the needs of the modern South African investor, we understand that this relationship and development will be an ongoing task that will require a lot of introspection and research to ensure we’re heading in the right direction. But, with our fantastic, diverse team and the global group backing us, we believe Trive is always keeping an ear to the ground and has the resources to adapt with our investment partners.

Learn more by visiting the Trive website here.

Ghost Bites (Anglo American | Bidcorp | Ellies | Glencore | Harmony | MTN | Vukile)

The Finance Ghost
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Ghost Bites (Anglo American | Bidcorp | Ellies | Glencore | Harmony | MTN | Vukile)

There’s “cautious” optimism for diamond demand at De Beers

Anglo American shareholders continue to benefit from the rock that everyone wants

Diamonds. Sparkly things that have been the downfall of many. These rocks benefit from a wonderful marketing campaign by De Beers over the years, positioning them as the best way to show how much you love someone (and to what extent your credit card is part of your life).

For Anglo American shareholders, that’s just fine thank you very much. De Beers gives a solid underpin to the Anglo business, with totally different fundamentals to the other commodities in the group.

Based on the latest sales cycle, the management team was happy with consumer demand over December. Bulk diamond purchasers (or “sightholders” as De Beers calls them) have been careful with their planning for this year given the broader macroeconomic conditions. In a recession, even love gets cheaper.

Given the reopening of China, there is “cautious optimism” for diamond demand this year.

Bidcorp stuns the market – in a good way

A share price jump of over 6% was the reward for punters

Bidcorp is in the food service game, with a wide range of customers in the restaurant and hospitality industry. It’s a wonderful business model, with Sysco as a great example in the US of a similar business.

Despite all the ingredients for a disaster, ranging from consumer pressure through to high energy costs causing margin compression for restaurants, Bidcorp has been riding a wave of consumer demand in the aftermath of the pandemic. Financial pressure or not, people just cannot handle being stuck at home anymore.

After releasing a positive update in November, the momentum continued over the festive season and even into January. Europe has been having a far better winter than anyone expected, so that certainly helped. The lifting of lockdowns in China will be a major boost as well.

For the six months ended December, headline earnings per share (HEPS) will be between 43% and 49% higher year-on-year, implying a range of between 960 and 980 cents. For context, the previous record interim performance was only 714 cents per share, achieved in 2019.

The share price is now at its highest levels since being unbundled from Bidvest. I think you would be quite brave to buy this chart, with a meteoric increase of over 35% since October when the worst was expected for a European winter:

Ellies is paying top dollar to stay relevant

Or is that top rand?

Ellies has a core business has that been dwindling. The company didn’t make it a secret that alternative energy is where its future lies, an industry that Eskom is doing its very best to support.

The problem is that Ellies needed to make an acquisition in this space. With these companies currently all the rage, the risk of overpaying for an asset was always there. With a deal now announced, we have confirmation that a significant multiple is being paid.

With most industrial companies on the JSE trading at mid-single digit Price/Earnings multiples, it’s worrying to see Ellies agree to pay a 10x multiple for Bundu Power, an alternative energy (i.e. generators / solar etc.) business that is expected to make profit after tax for the year ending February 2023 of R20.4 million.

The value of net assets in the business is R48.7 million and Ellies is paying R202.6 million, so there’s a very large goodwill payment here. This means that either Ellies loves the brand (unlikely I would think) or is desperate to get a foothold in this industry (bingo).

Don’t get me wrong: it just might work. Ellies brings a distribution network and Level 2 B-BBEE status, both of which are valuable in South Africa. Perhaps more importantly, there’s a deal structuring trick that has been used here to give Ellies shareholders some protection.

Of the purchase price, only R72.6 million is payable when the deal closes. The remaining R130 million has been structured as three earn-out payments over the next three years. There would typically be earnings targets attached to these payments, though the announcement doesn’t give those details at this stage.

This is a category 1 transaction for Ellies, so a detailed circular will be released and shareholders will need to vote on the deal. If I was an investor in Ellies, I would give the earn-out structure a careful read.

Glencore’s production is higher in Q4

The fourth quarter saw sequential improvement across most commodities

Full year production numbers for 2022 were in line with revised guidance issued in October, so there were no major shocks in the final weeks of the year. Although the fourth quarter was better than the third quarter (a “sequential improvement”), the full year was a mixed bag.

On a like-for-like basis, group production fell by 7% due to abnormally wet weather. Due to a number of disposals and acquisitions, the reported percentage differs significantly from the like-for-like number.

Production challenges aside, Glencore is up nearly 40% over the past 12 months as the commodity cycle played out in its favour.

Harmony reports better production numbers

With the substantial positive momentum in the gold price, this came at the right time

Thanks to improved underground recovered grades in the second quarter, production increased vs. the first quarter of the financial year. This means that Harmony is on track to achieve full-year production guidance, which is exactly what shareholders want to see when the gold price is finally doing the right things.

All-in sustaining costs for the first half of the year were in line with guidance at below R900,000/kg. The gold price per kilogram is currently nearly R1,080,000/kg.

Since the recent lows in September 2022, the share price has skyrocketed 85%. It is nearly 14% up over twelve months.

MTN Nigeria continues to grow

As the most important African subsidiary, this is material to MTN

Nigeria is a good country when you can operate at high margins and enjoy decent growth rates. It’s a terrible place to try and extract money from, as evidenced by the challenges that the likes of Nampak and MultiChoice have been having. MTN is no stranger to those challenges, though a great run during the pandemic means that MTN’s holding company debt has been brought under control and repatriation from Nigeria is less of a key dependency.

And unlike Nampak and MultiChoice, MTN operates at exceptional margins in Nigeria that make it worth the risk. In 2022, service revenue grew by 21.5% and EBITDA grew by 22%, so margins expanded even further to a whopping 53.2%.

The company is investing just as quickly as it is growing earnings, with capital expenditure up 23.5%. The useful thing about MTN Nigeria is that there’s a strong case to be made for in-country investment, rather than trying to get all the cash back to South Africa for other purposes. This helps mitigate some of the repatriation issues.

Capital intensity (capital expenditure as a percentage of revenue) increased from 24.7% to 25.1%. This is a key ratio for telcos, as high capital expenditure is part of the game and is obviously a drag on free cash flow available to shareholders.

MTN Nigeria is separately listed on the Nigerian Stock Exchange and is up more than 18% over the past year.

Vukile gives an update on festive trading

Vukile offers a unique combination of South African and Spanish exposure

In Vukile’s South African portfolio, footfall was higher than last year by 8%, with township and community malls outperforming the likes of regional malls. Despite the obvious issues around load shedding, trading density was up across the local portfolio by mid-to-high single digits. Trading density for grocery (+8.5%) was well ahead of clothing (+4.8%), which ties in with recent updates we’ve seen from retailers.

In Spain, the Castellana portfolio also showed improvement in all major metrics, with footfall running ahead of even pre-pandemic levels. It seems as though growth was strong across all major categories.

This bodes well for Vukile, with a share price chart that has lost momentum in its recovery:

Little Bites:

  • Director dealings:
    • A director of PSG Konsult has disposed of a sizable number of shares, worth R7.75m
    • A director of Stefanutti Stocks has bought shares worth just over R160k.
    • A director of Invicta has bought listed preference shares in the company worth R136k
  • Those interested in Kibo Energy should refer to the detailed operational update released by the company, which gives extensive details on the various energy projects in the group. Overall, management seems happy and expects to see projects achieve revenue generating status in the next 12 to 24 months.

Ghost Bites (Gemfields | Hudaco | Renergen | Sea Harvest | Shoprite | Transpaco | Vodacom)

The Finance Ghost
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Ghost Bites (Gemfields | Hudaco | Renergen | Sea Harvest | Shoprite | Transpaco | Vodacom)

Gemfields has record-high net cash on the balance sheet

There’s even some good news from Fabergé

After record combined auction and Fabergé revenues in 2022, the balance sheet at Gemfields has more net cash than ever before – $104 million, to be exact! This excludes another $55 million in auction receivables.

The group’s market cap is only R4.5 billion, so a huge chunk of the value sits in cash.

Luxury jewellery business Fabergé has historically been a financial drag on the business. It has now achieved the lowest annual funding required, which means it’s still hurting the company but is on the right path.

The market continues to value this company at a very modest multiple, not least of all because of the risks of mining in Mozambique in a region that has been dealing with terrorist activity.

Hudaco’s earnings are going up

A trading statement delivered good news for shareholders

For the year ended November 2022, Hudaco’s earnings did the right things. Headline earnings per share (HEPS) is expected to be between 20% and 24% higher year-on-year, coming in at between R19.77 and R20.37 per share.

At a closing price of R145 (flat for the day), the Price/Earnings multiple is around 7.25x at the midpoint of the earnings guidance.

The share has been range-bound for a year now, up just 6.4%. Difficult operating conditions in South Africa keep the multiples for industrial companies low, especially in light of load shedding (pun intended).

Renergen looks to the US market

The group is preparing for further equity raises

With helium production now underway, Renergen is clearly worried about whether the local market will provide sufficient capital for the next phases of development.

The plan is to potentially offer American Depositary Shares on the Nasdaq in 2023, which means that Renergen will look to tap the US market for capital. This won’t impact the local listing, though shareholders will need to approve the listing of additional shares.

The company already applied to the SEC in late 2022, so that regulatory approval process is underway but isn’t completed yet. The company has reminded shareholders that the SEC may not approve the listing, which would scupper this plan.

Sea Harvest Group: not the catch of the day

The fuel price is really hurting this business

Sadly, boats need fuel to run. That’s not great news when fuel costs have gone through the roof.

For the year ended December 2022, Sea Harvest Group expects HEPS to decline by between 32% and 35%, coming in at between 102 cents and 107 cents. The share price closed 5.3% lower at R10.47 in response to this news.

A 10% drop in hake volumes as a result of quota losses was more than offset by pricing gains thanks to firm demand for the product. Despite an effort to control costs, there was nothing that the company could do about a R240 million impact from fuel price increases. When combined with once-off acquisition costs for the MG Kailis deal and other issues like higher interest rates and load shedding, profitability could only head in one direction.

Shoprite achieves 46 months of market share gains

Shoprite is still my pick in the retail industry in 2023

For the six months ended 1 January 2023, Shoprite managed to post seriously impressive growth. Even if we exclude LiquorShop to try and adjust for the base effect of lockdowns, group sales growth was 15.6%. Even the furniture business managed to achieve growth of 8.6%, so Shoprite really has done well here.

Like-for-like growth in Supermarkets RSA was 11.1%, a really strong performance vs. a base period where like-for-like growth was 11.3%. On a two-year basis, that’s impressive. The underpin in this period was a record Black Friday and festive season, capping off 46 months of uninterrupted market share gains.

Selling price inflation was 9.4%, which means there was volume growth in the business as well. The difference between like-for-like growth and selling price inflation is volume growth.

The growth is happening across the group, with Checkers and Checkers Hyper up 16.9% and Shoprite and Usave growing by 15.1%. The group’s greatest strength is that it resonates with consumers of all income levels.

It’s not all rainbows. Gross margins are slightly down, driven by fuel price pressures in supply chain and the need to be aggressive on price to support this sales growth.

The pressures further down the income statement are a lot more worrying. For example, employee costs experienced a “notable increase” because of increases in the minimum wage, the employee incentives from government coming to an end and other factors as well.

There’s also a whopping figure of R560 million spent on diesel for generators over this period. This only covers load shedding stages five and six, which happened right at the end of the period. What does this mean for retailers if these stages become the norm?

A positive impact will be the receipt of a R245 million insurance claim, offset to some extent by an additional R90 million in the cost of cover.

The stores bought from Massmart have been integrated into the group and rebranded into Shoprite, Usave and Cash and Carry stores as required. The acquisition was effective from 9th January.

Transpaco jumps 9.6% on strong earnings

Be careful though: illiquid stocks can post big daily moves

In a trading statement for the six months ended December, Transpaco’s HEPS is expected to be between 41.3% and 48.6% higher. This is a range of between 309 and 325 cents per share for the interim period.

So, how do you work out a Price/Earnings (P/E) multiple from this update?

You have to be careful of doubling this result, particularly given the tricky conditions that everyone is operating in at the moment. Also, doubling an interim number means you are actually looking at a forward Price/Earnings multiple rather than a trailing multiple.

Ideally, you want to use the last twelve months’ numbers, which is what LTM stands for on trading systems.

The manual way to do this is to take the prior year’s HEPS and subtract the prior interim period’s HEPS from that number, thereby isolating the second half of the prior year. You then add it to this interim period to arrive at HEPS over the last twelve months.

The FY22 result was 475.5 cents and the interim number was 218.8 cents, so the second half of the year (H2) saw HEPS of 256.7 cents.

Adding it to the current guidance for H1 of FY23 gives us a range of between 565.7 cents and 581.7 cents in HEPS over the last twelve months. At the midpoint and using the latest closing price of R28.51, that’s a Price/Earnings multiple of just under 5x.

And there we go – now you know how to work out a LTM P/E multiple! Those acronyms aren’t so hard, once someone explains them.

Vodacom: profits almost certainly under pressure

The quarterly update gave no details on profits, but we can reliably guess…

Vodacom’s quarterly update is 17 pages long. A quick CTRL-F for the word “profit” reveals just one mention, in the disclaimer of all places. We know that the telecoms companies are taking strain at the moment thanks to energy backup costs related to load shedding, so this spells trouble in my books.

Another clue about profitability lies in normalised revenue growth of just 4.7% for the group. This excludes the transformative Vodafone Egypt deal, with those numbers consolidated in December. Revenue in South Africa grew by 5%, which we know is well below many of the inflationary input costs. It’s very unlikely that operating margins went in the right direction.

Speaking of the Vodafone Egypt deal, it was worth R43.6 billion and is the largest in Vodacom’s history. They have pyramids in Egypt and they hopefully also have electricity.

MTN gets all the credit for being a FinTech play, but Vodacom is holding its own in that space, with a 30.6% increase in financial services revenue to R2.6 billion. That’s still small compared to group revenue of R30.7 billion, but it makes a meaningful contribution. M-Pesa is Africa’s largest mobile money platform by transaction value, processing $366.7 billion over the past 12 months.

Capital expenditure is a major focus point, as telecoms businesses have a reputation for generating sub-economic returns for shareholders over a long period of time. This is due to the need to continuously upgrade the network to stay ahead of technological developments. In South Africa, capital expenditure increased by 15.6% year-on-year vs. revenue growth of 5.0%.

Can you see the problems yet?

I can, yet the share price is down just 2% in 2023. It trades on a trailing dividend yield of 6.3%. I suspect that “forward dividend yield” is a term that Vodacom investors will learn about in 2023, but perhaps I’m wrong here.

Little Bites:

  • Aveng announced that its subsidiary Moolmans has entered into a new five-year contract with manganese mining company Tshipi é Ntle, valued at around R7 billion. Significant investment is required against this contract, including major yellow earthmoving equipment that would certainly get Toddler Ghost very excited and screaming “DIGGER!” at every opportunity. Moolmans has been servicing this client since 2011.
  • In a quarterly activities report, Southern Palladium reminded the market that drilling results to date have been in line with expectations, with some results coming back even better than expected. Phase 1 drilling is underway and the company has $14.2 million in cash.
  • MC Mining’s quarterly activities report looked at pressure on production from geological conditions and load shedding. It was also an important period for the balance sheet, with a A$40 million rights issue completed. The focus is on the financing of the flagship Makhado Project.
  • Orion Minerals also released a quarterly report, recapping a period that saw a major funding package signed with Triple Flag Precious Metals Corp. Off the back of that, terms have been agreed with the IDC and definitive agreements are being negotiated. There is now sufficient funding for trial mining at Prieska.
  • Accelerate Property Fund has more related party weirdness than a hillbilly annual convention. To help clean that up, there’s now a R50 million rights offer. The company already trades at a huge discount to NAV, yet the rights offer is is at a discount of over 31% to the 30-day VWAP. This has been fully underwritten by “U Big Investments” for a juicy fee of R2.5 million.
  • Zeder has completed the deal to sell its stake in Agrivision Africa, which means that the company has now received the R160 million selling price in cash.
  • In news that should shock absolutely nobody, Trustco has missed its own deadline of publishing its annual financial statements by 31 January. The auditors are apparently still finishing their work. The company hasn’t given any guidance regarding a new release date.

Brunswick Deal of the Year 2022

Marylou Greig
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Brunswick Deal of the Year 2022

With just a few weeks to go until the ANSARADA DealMakers Annual Awards, the following deals have been shortlisted for the Brunswick Deal of the Year 2022. The DealMakers Independent Panel have selected these deals from the nominations submitted by the M&A industry advisers. They are, in alphabetical order:

Mediclinic International take private

The offer by Remgro and MSC Mediterranean Shipping (MSC) to Mediclinic shareholders owning the remaining 55.44% stake, provided Mediclinic shareholders with an exit premium of 50% on the six-month average price at the time, valuing the offer at £2,05bn (R41,85bn). In terms of the offer, by special purpose vehicle Manta Bidco, they would receive 504 pence (R102.06) per share in cash, plus the declared final dividend of 3 pence per share.

Local Advisers: Standard Bank, Morgan Stanley, Rand Merchant Bank, Webber Wentzel, Bowmans and Cliffe Dekker Hofmeyr.

PSG Group restructuring, unbundling and delisting

The ever-increasing discounts at which investment holding companies trade marked the catalyst for a transaction which would pursue a value-unlock initiative for shareholders through a restructuring of a nature not seen before in South Africa; one involving six JSE-listed companies, two of which were dual-listed. The value of R115.59 per share was unlocked for exiting shareholders, representing a 41.3% premium to the closing price on 28 February 2022, amounting to c. R22,54bn.

Local Advisers: PSG Capital, Tamela, Cliffe Dekker Hofmeyr, BDO and Deloitte.

Sanlam Allianz joint venture

The deal announced in May 2022 was almost two years in the making, and valued in excess of R33bn. The combined African operations of Sanlam and global integrated financial services group, Allianz creates the premier pan-African, non-banking financial services entity, operating in 27 countries across the continent, with positions strengthened in 12 overlapping countries. The ambition is to be a ‘Top 3’ insurance company in all chosen markets.

Local Advisers: Standard Bank, J.P. Morgan, Webber Wentzel, Bowmans and PwC.

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

www.dealmakerssouthafrica.com

November was strong for discretionary retail

Chris Gilmour
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November was strong for discretionary retail

Chris Gilmour digs into the Stats SA November release and finds some surprising numbers.

StatsSA never fails to surprise me with its monthly releases and November 2022 was no exception. The rational person in me was expecting to see a really dull November, given the rising interest rate background. I was expecting to see another big yawnfest of a Black Friday/Cyber Monday at month end. I was completely wrong!

Discretionary retailers in the clothing, footwear, textiles and leather (CFTL) and household furniture and appliances (F&H) had an exceptionally strong month. It will be instructive to observe how December retail sales pan out, given the strength of November’s sales.

The best performing category in November was F&H at 6% year-on-year, closely followed by CFTL on 5.9%. We must bear in mind that November 2022’s figures are being compared against November 2021’s figures, which would also have a relatively strong “Black Friday” component built into them, so it’s not as if there some sort of weak base effect at play.

Far from it, in fact, which makes the November 2022 figures all the more interesting, especially as they arise during a period of sustained rising interest rates.

Source: StatsSA; Gilmour Research

Both of these discretionary categories are depicted in the above graph, which shows that they are both quite volatile, though rarely do they dip into negative territory.

Some of the JSE-listed alternatives

From a JSE perspective, it’s difficult to draw any meaningful conclusions. There is only effectively one furniture retailer left on the JSE – Lewis Group – and its share price languishes at somewhat less than half of its 2018 peak.

The CFTL retailers have had a very mixed picture, with Truworths enjoying a very belated surge after years of doing nothing, while Mr Price and The Foschini Group are demonstrating the benefits of investing through the cycle. But even here, there doesn’t appear to be an appetite for either of them.

Perhaps Truworths is worth having a look at, as its trading pattern is not only the best of the listed CFTL retailers but TRU is also the cheapest share of this universe, on a P/E ratio of only 8.5 vs 10 for TFG and 12.2 for MRP.

What is happening in credit sales?

At the most recent Monetary Policy Meeting of the SARB held on 26 January 2023, an interest rate hike of 25 basis points was announced. This is a lot lower than the string of 75 basis point hikes that have preceded this and probably signals a peak in the repo rate.

While this is a glimmer of good news for the embattled South African consumer, we must bear in mind that rates can stay at these elevated levels for quite some time, so any real relief may be some way off yet. In recent trading updates from discretionary retailers such as Lewis and Mr Price, it is noticeable that credit sales have increased faster than cash sales, suggesting that consumers are losing their fear of credit.

This is fascinating, as rejection rates for new credit applications have actually increased, according to the National Credit Regulator. This seems counter-intuitive as far as the rational person is concerned and yet the figures do suggest that this is indeed the case:

Source: NCR. Gilmour Research

The wooden spoon goes to…

The worst performing sector in November continued to be hardware, paint and glass, a DIY home improvement proxy. There are no signs of a turnaround in this dismal sector, even after many months of secular decline.  So, no respite for Cashbuild shareholders:

Source: StatsSA; Gilmour Research

This article reflects the independent views and opinions of Chris Gilmour, which are not necessarily the same as The Finance Ghost’s opinions on these stocks. For equity research on South African retail and other stocks, go to www.gilmour-research.co.za.

Ghost Bites (Advanced Health | Alphamin | Capital & Counties | Italtile | Nampak | Pan African Resources | Pepkor | Spar | Tongaat)

The Finance Ghost
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Ghost Bites (Advanced Health | Alphamin | Capital & Counties | Italtile | Nampak | Pan African Resources | Pepkor | Spar | Tongaat)

Advanced Health wants to leave Australia

There’s progress in the deal to sell PresMed Australia

Back in December, Advanced Health told the market that it had agreed with a consortium of management and medical shareholders, alongside a major private equity backer, to sell its 56.44% stake in PresMed Australia for R522 million. The proceeds will be used to settle debt and support the working capital requirements of Advanced Health’s South African operations.

BDO Corporate Finance has been appointed as independent expert, with that report due to be included in the circular that will be distributed to shareholders. Another important step is that the TRP has been provided with the proof of funds for the consortium, a requirement under takeover law.

The various conditions need to be met by no later than 30 April, so things are heating up in this transaction. Irrevocable undertakings have been received from holders of 68.23% of the share capital of Advanced Health, so the deal looks to be in with a good chance of success.

Record tin production at Alphamin

Margins are juicy even with tin prices under pressure

Alphamin mines around 4% of the world’s tin, a little factoid that the company reminds us of in every announcement.

For the year ended December, the group achieved record tin production of 12,493 tonnes, up 14% from the prior year. In the fourth quarter, production of 3,113 tonnes was ahead of guidance of 3,000 tonnes.

The estimated EBITDA for the full year of $222 million is also a record.

The tin price moved severely over the year, with the average price for the full year at $30,636/tonne and the Q4 price at $21,436/tonne. The current price is around $30,000/tonne, so there’s been a significant recovery in the price this year, which is encouraging for the ongoing development of the Mpama South project.

Importantly, the EBITDA margin in Q4 (when prices were low) was a meaty 41%. When mining goes well, it really goes well!

The full year dividend was CAD$0.06 per share (roughly R0.78 per share). At a share price of R13.00, this isn’t an example of a mining business on a high dividend yield.

The group had net cash of over $109 million on the balance sheet as at the end of December.

Capital & Counties updates the market on 2022

London’s West-End is experiencing strong demand

In a story that we are seeing from the European property funds overall, Capital & Counties has confirmed that rental demand at properties is strong but valuations are going sideways because of higher yields being demanded by investors.

If you’ve ever run a valuation in your life, you’ll know that a 19 basis points move to a yield of 4.07% is significant. This can offset some really juicy underlying tenant demand.

Net debt at Capco has increased from £599 million to £622 million, with net debt to gross assets increasing from 24% to 28%.

The proposed merger with Shaftesbury is expected to close during the first quarter of 2023.

Italtile: it still hurts

The share price seems to know this already

Unless you’re a hedge fund manager looking to add to your short book, Italtile really hasn’t offered much since the middle of the pandemic. As people returned to work and interest rates went crazy, the thought of spending money on holidays (or even petrol) started to take preference over any plans to renovate the bathroom.

In a trading statement, Italtile has guided that headline earnings per share (HEPS) for the six months to December 2022 will drop by between -8.1% and -5.5%, coming in at between 77.1 and 79.3 cents.

The share price was flat on the day, with a recent downward trend clearly visible in this chart:

Nampak is doing its best, but it isn’t enough

The rights offer has dropped from R2 billion to R1.5 billion

Despite revenue growth of 20% in the three months to December 2022, Nampak’s operating profit is down because of foreign exchange losses.

I’ve beaten this drum many times: running a relatively low margin business with a complicated African treasury is exceptionally hard. Of the cash transfers in the period of R452 million, 68% was from Nigeria at a “significant cost to operating income” – i.e. transferred at a rate that is far more onerous than the quoted rate in the market, due to shortage of foreign currency.

Here’s another view on why operating in risky jurisdictions should only be attempted with very juicy margins:

For those with dodgy eyes, it says that Nampak makes only R474 million in trading profit from jurisdictions with lower foreign exchange risk and R907 million from jurisdictions with higher risk. By the time the forex losses are factored in, the latter number has plummeted to R398 million.

The sad thing is that trading profit increased by a higher percentage than revenue, so all the pain is being felt due to either forex losses or issues further down the income statement (higher net finance costs as well as a higher effective tax rate that have both negatively impacted net profit).

The management team has been focused on the balance sheet and rightly so, unlocking a net working capital and liquidity improvement of R500 million. For this reason, the proposed rights offer has decreased from R2 billion to R1.5 billion.

Interestingly, Nampak notes that the operations can handle load shedding up to stage 4, with anything beyond that level causing trouble. I think we can all relate to that.

A new equity funding package is being negotiated with the lenders who require Nampak to execute a rights offer with net proceeds of at least R1.35 billion. A number of shareholders have pushed against the order of events, saying that the terms of the funding should be finalised before the rights offer is launched.

Nampak has committed to give details of the funding package before the rescheduled extraordinary general meeting on 8th March.

Pan African Resources drops more than 6% after an update

Production came under pressure in the first half of the year

For the six months ended December, Pan African Resources managed to make significant progress on its renewable energy strategy. Aside from solar projects, there was also the issuance of a $47.3 million sustainability-linked bond that will help fund the Mintails project.

The problem lies in the production numbers, not the strategic initiatives. Load shedding and difficult weather conditions put the business under pressure, particularly at Barberton Mines. Production for the period fell by 14.6%, a significant drop from what was admittedly record production in the prior year.

Despite this, production guidance for the full year has been maintained. There’s a big catch though: this guidance is “subject to consistency in Eskom’s electricity supply” – and this probably explains the share price drop.

Investors will also take note of a significant jump in net debt, which is attributed mainly to capital expenditure and the payment of a dividend.

Pepkor is flattered by Avenida, with SA businesses under pressure

The company joins the Mr Price WhatsApp group of like-for-like pain

With Pepkor adding its voice to the retail sales updates over the festive period, we now have a proper overview of what happened in the sector. Revenue increased by 6.5% at group level, but we have to dig deeper to really unpack it.

The number to look for is like-for-like sales, particularly with the major acquisition of Avenida in these numbers. Sure enough, like-for-like fell by 1.4%. This is despite 70% of stores being able to trade with backup power, so there’s more to the festive retail story than just load shedding.

The poor result in clothing was driven by Ackermans, where like-for-like sales nosedived by 8%. That’s a really ugly outcome in an inflationary environment of around 5%, implying that volumes fell by approximately 13%.

Across Mr Price and Pepkor, along with cash vs. credit sales at Lewis, we now have pretty clear evidence that lower income earners are being hammered by current economic conditions. Still, that’s not the only reason for the pain. At Mr Price, I think that the brand isn’t resonating with customers anymore. In Ackermans, Pepkor admits that the merchandise mix wasn’t aligned to the brand promise of “unbeatable value” – and in fashion, that’s a major issue. Markdowns have been implemented, which means gross margins are going to take strain.

There’s some hope in January at least, with the back-to-school rush driving strong sales at Pepkor’s core value brands. This is a necessity though, with parents likely making sacrifices elsewhere to afford school clothes.

The rest of the group posted positive like-for-like growth, with Avenida up 6.8%.

The DIY / building material format within the group performed decently in the broader economic context. The Building Company managed to grow 1.8%. The performance has deteriorated in January, with general iffyness around load shedding not helping matters.

I can’t help but wonder how Pick n Pay Clothing is performing in this environment. One of the best success stories to come out of Pick n Pay in recent years, the value-driven offering has resonated with customers and taken market share. We don’t get to see detailed numbers unfortunately, as the division gets bundled into the broader (and much larger) Pick n Pay business.

A management band-aid at Spar

The group is casting the net wide for a new CEO

With the…sudden retirement of the CEO of Spar, the company has found itself without anyone at the helm. As a temporary measure, non-executive chairman Mike Bosman will now become Executive Chairman (and Spar even uses capital letters here to make this significant upgrade even clearer). He has resigned from the board of AVI after 13 years to make sure he can deliver this role.

With the…sudden retirement of the CEO of Spar, the company has found itself without anyone at the helm. As a temporary measure, non-executive chairman Mike Bosman will now become Executive Chairman (and Spar even uses capital letters here to make this significant upgrade even clearer). He has resigned from the board of AVI after 13 years to make sure he can deliver this role.

Bosman will have his hand held sweetly by the Board Chairman’s Committee, to “strengthen governance” in the aftermath of a really embarrassing period for the company. Lead independent director Andrew Waller will be the chair of that committee.

While Spar fights to regain any level of respect in the market, the search for a new CEO is underway and the company hopes to make an announcement within three months.

The CEO of Tongaat heads for the exit

But the business rescue practitioners are running the show now anyway

Things seem to keep getting worse at Tongaat, with CEO Gavin Hudson retiring from the top job. He joined in the aftermath of the accounting irregularities and tried to steady the ship, but a cocktail of a pandemic, civil unrest and floods made it an almost impossible task.

Tongaat is in business rescue and the plan is expected to be published before 28 February, with the company’s “core team of executives” working with the business rescue practitioners.

The reality is that Hudson’s departure probably doesn’t make a huge difference at this stage, as the business rescue practitioners are in charge of the company’s affairs.

Little Bites:

  • Director dealings:
    • A trust linked to directors of Ninety One has acquired shares worth around £86k.
    • A director of Mustek has sold shares worth around R875k
    • It’s such a tiny amount that it probably doesn’t matter, but an associate of a director of Ascendis Health bought shares worth nearly R4k
  • Safari Investments is currently under offer from Heriot REIT at a price of R5.60 per share. Before the latest block trade, Heriot and its concert parties collectively held 40.7% of the total Safari shares in issue. After a deal with SA Corporate Real Estate Limited (also at R5.60 per share), Heriot and its concert parties now own 47.1% in Safari.
  • Trustco doesn’t seem to be getting anywhere in court. After the High Court dismissed Trustco’s review application regarding the JSE’s decision around Trustco’s financial statements, the company applied for leave to appeal to the Supreme Court of Appeal. This application was dismissed with costs. I’m no lawyer, but I assume they will give up now.

Gig workers need financial solutions that address income volatility

Sponsored Content
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Gig workers need financial solutions that address income volatility

By Duma Mxenge, Business Development Manager at Satrix

The global move to a gig economy has accelerated in recent years as workers exit formal employment in favour of flexible freelance work or take on freelance assignments in addition to their main jobs. In fact, online platform Statista expects gig workers to gross over USD455 billion globally in 2023.

With this economy growing so rapidly, asset managers and financial advisers need to think smart when developing and recommending financial solutions to this growing market segment. Most importantly, we must remember that gig workers’ earnings may vary wildly from one month to the next.

Income volatility and inadequate savings to pay for unexpected expenses stand out as the main financial challenges facing South Africa’s gig workers, described by Oxford Languages as “individuals who do temporary or freelance work, often as independent contractors engaged on an informal or on-demand basis”.

Many traditional investment products are designed with those in formal employment in mind. For example, retirement annuity products and pension funds assume that clients can afford a fixed monthly contribution, plus an annual increase. These products can present difficulties for gig workers due to their uncertain earnings.

In additional, research by the United States based Commonwealth (assisted by Green Dot, Gig Wage and Steady) found that most gig workers had no savings for emergency expenses, observing that financial ‘blows’ of USD1,000 to fix a vehicle or make up a rent payment were often insurmountable. As such, the starting point for a gig-worker-appropriate financial solution is a product that allows for irregular cash savings and gives workers access to that money in the event of an emergency.

Although cash savings can be accumulated in a bank account, it makes sense for gig workers to consider money market funds that allow them to earn ‘better than bank’ interest rates while avoiding the price uncertainty that goes hand-in-hand with stock market investments. As the gig worker accumulates sufficient savings and his or her earnings become more stable, the adviser may suggest lump sum or once-off investments in a range of discretionary investment products.

South African gig workers can choose from hundreds of collective investment schemes such as unit trusts and exchange traded funds (ETFs), which allow them to build a savings portfolio with exposure to any asset class, both locally and offshore.

An individual with volatile income should not neglect saving for retirement. After building an adequate emergency fund, equivalent to around six months of average income, the gig worker can begin contributing to a retirement annuity offered by one of the country’s Linked Investment Service Providers (LISPs). Retirement annuity products are also available on the SatrixNOW investment platform. These retirement annuities are balanced funds and they allow flexibility in contributions introducing gig workers to a highly-regulated retirement fund industry.

The gig economy carries significant risks and a high level of uncertainty. This uncertainty makes it difficult for gig workers to choose investment products for housing emergency funds or securing retirement. Satrix believes that gig workers should approach financial advisers to assist in managing uncertain cashflows, and over time build the necessary exposure to savings, retirement funds and discretionary investments.

Asset managers and financial advisers can work together to ensure that gig workers benefit from sound financial advice and the investment returns on offer to appropriately match the needs of the client.

Satrix is the leading provider of index-tracking investment products and exchange traded funds (ETFs) in South Africa, with over R160 billion in assets under management invested in the range of ETFs, index-tracking unit trusts, life pooled and segregated portfolios that are specifically tailored for client-specific mandates or retail funds.

It pioneered index investing in South Africa, launching the flagship Satrix 40 ETF as the first locally listed ETF in November 2000. The business services the institutional, intermediary, and individual investor markets. Satrix has proven expertise in risk management, portfolio analysis and index construction.

A core part of the Satrix purpose is to drive the democratisation of investments for all South Africans, where SatrixNOW, the no-minimum amount online investing platform, is a key enabler to provide access for South Africans to “Own the Market”.

For more info on ETFs, unit trusts and retirement annuities, visit the Satrix website.

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

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

Ghost Wrap #9 (Renergen | The Foschini Group | Truworths | Clicks | Lewis | Astral Foods | ArcelorMittal)

The Finance Ghost
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Ghost Wrap #9 (Renergen | The Foschini Group | Truworths | Clicks | Lewis | Astral Foods | ArcelorMittal)

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

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

  • Renergen finally becoming a helium producer.
  • The Foschini Group releasing impressive numbers over the festive season.
  • Truworths giving the market a positive surprise with its growth.
  • Clicks showing solid retail growth, with question marks over the wholesale performance.
  • Lewis demonstrating that lower income consumers are clearly under pressure, with strong credit sales and a drop in cash sales.
  • Astral Foods reminding the market that poultry is perhaps the toughest industry around.
  • ArcelorMittal showing a resilient performance (by its standards) in tough operating conditions.

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 (Grindrod Shipping | Industrials REIT | Lewis)

The Finance Ghost
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Ghost Bites (Grindrod Shipping | Industrials REIT | Lewis)

Grindrod Shipping looks for synergies

The company is working closely with Taylor Maritime Investments

After the recent corporate action, Taylor Maritime Investments is the proud owner of 83.23% of the shares in Grindrod Shipping. The company is still listed, so the shareholders who stayed behind will now participate in a journey of (hopefully) value creation as the companies explore synergies.

The companies are looking for efficiencies across insurance, commercial management, technical management and corporate activities. There is also a plan to reduce debt on Taylor’s balance sheet, which would give the company more firepower to support Grindrod Shipping.

There’s already a deal in place to sell a vessel to free up some cash, though the announcement doesn’t give an indication of the selling price.

This is a highly cyclical industry, as evidenced by the share price chart:

Industrials REIT is enjoying rental uplifts, but vacancies are down

In a quarterly update, the company gives a mature view on things

Industrials REIT – a fine example of a company that “does what it says on the tin” – is still enjoying an environment that is favourable for industrial properties. High demand and limited supply means that incredible uplifts in rent can be achieved when leases are renewed.

How much? Try a 31% average uplift on for size! It’s even better for new lettings rather than renewals, with an average uplift of 36%.

Of course, these growth rates are not applied mid-lease, so the entire portfolio certainly isn’t growing at these levels. Like-for-like rents were up 5% for the portfolio over the past 12 months.

Despite the company highlighting strong demand, occupancy actually fell by 0.4% this quarter. That’s not as small a move as you think, as the percentage is measured based on the entire portfolio.

To help with occupancy, the company has its own leasing platform in the UK that has boasted a 15.4% increase in visitors year-on-year. There is obviously a dedicated sales team as well. An efficient leasing strategy helps keep costs down, with 73% of leases contracted through Industrial REIT’s short-form digital “smart leases” (as the company likes to call them).

Although the company notes that the trading environment may become more difficult this year, they also believe that attractive acquisition opportunities may become available. That makes sense, as the best deals are to be found when things get tough. At that stage, companies with strong balance sheets can pounce. The company is sitting on its cash for now, with no new deals during the quarter.

In some cases, the opportunity exists to take an active asset management approach. Simply, this means buying a fixer-upper. A recent project near Edinburgh is expected to achieve a yield on cost of 17.7%. Bearing in mind that this is measured in GBP, that’s a proper yield!

Is Lewis a good barometer for consumer health?

If so, we are going to be in trouble soon

Over the past week or so, we’ve had a flurry of updates from clothing and homeware retailers. These are semi-durable goods, which means they aren’t as necessary as the bread in your shopping basket but they are also a much easier purchasing decision than a new car or TV.

With Lewis, we take a big step into the world of durable goods. To feel confident about these major purchases, consumers need to believe that everything is going to be alright. Whether they buy on cash or credit, there’s still a significant difference in the psychology behind these decisions vs. clothing or especially food.

In the nine months to December, Lewis could only increase sales by 2.0%. Inflation, higher interest rates, growing unemployment and load shedding are all major factors here, with same-store sales barely inching upwards by 0.4%.

If you dig deeper, you’ll find the really scary statistics: credit sales over the nine-month period increased by 16.8% while cash sales declined by 13.5%. That’s a worrying outlook for South African consumers. Credit sales contributed 58.3% of total sales, well up from 50.9% in the comparable period.

If that’s not enough to concern you, the trend over the period might just do it. In the three months to December, sales fell by 1.1%. Credit sales were 17.3% higher and cash sales were whacked by 20.7%, with a net sales result that is in the red.

Once other income is taken into account, total revenue was up 2.8% over the nine-month period.

The silver lining is that collection rates are strong, so those credit sales are working out for the time being. Collection rates came in at 82.7% this quarter, up from 79.7% in the comparable quarter. The trend is going in the right direction in this metric, as the nine-month collection rate is 82.0%.

Whilst it certainly helps to see collection rates improving as credit sales increase, it’s also important to remember that the collection rate is more of a lagging indicator. What really matters is whether collection rates will stay strong this year. With consumers clearly under pressure, that’s the risk that the market didn’t like, with Lewis dropping 2.3% on a trading day that was generally poor for retailers on the JSE.

The other risk lies in what could be happening to profitability, as the announcement only dealt with sales. With rampant inflation, that sales growth number doesn’t sound high enough to avoid margin compression.

Little Bites:

  • Director dealings:
    • The CFO of Naspers has sold shares through an option scheme worth R92.4m. That’s not a typo.
    • The CEO of Sirius Real Estate has bought shares in a self-invested pension (a structure you find in the UK) to the value of £21k.
    • A prescribed officer of Alexander Forbes has sold shares worth nearly R84k.
  • If you are wondering what’s going on at Steinhoff, the agenda for the AGM will be published on 2 February and a circular with full details of the balance sheet restructuring will be published on the same date.
  • The meeting to approve the scheme of arrangement at Alviva was approved by a strong majority of shareholders, with around 94% voting in favour of the deal that will see Alviva taken private.
  • In a sign of the times, there were two updates on SENS regarding business rescue processes. One was Rebosis, announcing an extension to the deadline to publish a business rescue plan (now 17 February 2023. The other was Basil Read, which noted that the company is currently operating steadily despite the obvious economic challenges.
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