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Catalyst Private Equity Deal of the Year 2022

Marylou Greig
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Catalyst Private Equity Deal of the Year 2022

The following are those deals shortlisted for the Private Equity Deal of the Year 2022. The DealMakers Independent Panel have selected these transactions from the nominations submitted by the M&A industry advisers. They are, in no particular order:

Exit by Rockwood Private Equity of EnviroServ to SUEZ SA, Royal Bafokeng Holdings and African Infrastructure Investment Managers

The waste treatment and disposal company with facilities across South Africa, Mozambique and Uganda was acquired in October by a consortium comprising SUEZ SA (51%), Royal Bafokeng Holdings (24.5%) and African Infrastructure Investment Managers (24.5%) in an exit led by Rockwood Private Equity. The transaction, one of the largest SA private equity exits in 2022, provides a strategic platform for its new shareholders and enables French utility Suez, to strengthen its position on the African continent while providing expertise and knowledge to the local waste management landscape.

Advisers to the deal were: Standard Bank, Rand Merchant Bank, Quercus Corporate Finance, Bowmans and Roodt.

Exit by Actis and Mainstream Renewable Power Africa of Lekela Power

The US$1,5 billion deal announced in July 2022 with the acquisition of Lekela Power’s assets in South Africa, Egypt and Senegal by Infinity Group and Africa Finance Corporation, represents Africa’s biggest Renewable Energy M&A deal with a combined installed generation capacity of 1.0GW and including a 1.8GW pipeline of greenfield projects. The platform was established in 2015 as part of a joint venture between Actis (60%) and Mainstream (40%). The planned exit reflects the successful culmination of the partnership which has seen Lekela become the continent’s largest pure-play renewable Independent Power Producer.

Advisers to the deal were: Citigroup Global Markets, Absa CIB, Cantor Fitzgerald, Webber Wentzel, Clifford Chance and Norton Rose Fulbright.

Exit by RMB Ventures Six and management of Studio 88 to Mr Price

The exit by RMB Ventures and current management of a 70% stake in Studio 88 for a total transaction value of R3,3 billion, marks for RMB Ventures, the end of a 9-year journey with the company. One which has seen exceptional growth, most of which has been organic growth funded by internally generated cashflows. For Mr Price, the acquisition represents an opportunity to expand into the aspirational value segment of the market.

Advisers to the deal were: Rand Merchant Bank, Investec Bank, Bowmans, Deloitte and Renmere Advisory.

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

DealMakers is South Africa’s M&A quarterly publication

www.dealmakerssouthafrica.com

Ghost Bites (BHP | Kore Potash | Spar | Woolworths)

The Finance Ghost
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Ghost Bites (BHP | Kore Potash | Spar | Woolworths)

BHP looks to China as a “stabilising force”

If detailed reporting makes you happy, this quarterly update is for you

BHP’s quarterly reports are enough to get the heart racing of any Excel enthusiast, with literally pages upon pages of detailed production disclosures.

For the rest of us who just want a vague idea of what’s going on, the key point is that production guidance for the 2023 financial year remains unchanged. There are some good bits (like record production at Western Australia Iron Ore) and some disappointing bits (Escondida copper in Chile and BHP Mitsubishi Alliance both trending to the low end of their ranges).

In some operations, unit cost guidance has been increased due to wet weather and inflationary pressures. Remember, high rainfall isn’t good news for miners, with coal mining in Queensland having been affected by this.

Here’s perhaps the most important comment of all, which I’ve decided to include in full:

Kore Potash quarterly review

If you ever fancied working in the Republic of Congo, perhaps read this first

Other than arguments with the Minister of Mines in the Republic of Congo (which included the arrest without charge of two senior employees of the company in that country), Kore Potash’s focus has been on securing the financing required for the Kola Potash Project in that country.

The SEPCO Electric Power Construction Corporation is negotiating contractual terms with Kore Potash for the Engineering, Procurement and Construction (EPC) proposal. Once this is in place, a financial proposal is expected from the Summit Consortium.

The company has $5 million in cash after investing nearly $1.1 million in exploration this quarter.

There’s never a dull moment when doing business in Africa, especially in the mining industry and especially in a country like the Republic of Congo.

Spar tries to take some of the heat off the share price

The market liked it, with a 3.9% rally

If you’ve been following the Spar updates, you’ll know that the management team is leaving amid allegations of poor corporate governance and even fictitious and fraudulent loans.

Spar has moved to reassure the market, with three important points raised:

  • Allegations of discrimination against retailers were investigated by a law firm (one that I’ve never heard of) and the allegations were unfounded. Spar is in a mediation process with the retailers that lodged claims.
  • In an example of a professional services firm that I have heard of, PricewaterhouseCoopers notified Spar of a loan that is a reportable irregularity. Upon further investigations, it was found to be a an “isolated matter” that occurred five years ago with a total value of R11 million.
  • Among the significant changes to the board, the retirement of Brett Botten as CEO is “pursuant to his request to the board for an early retirement”.

Look, I would also retire early instead of dealing with this kind of pain. The announcement of a new Group CEO will be made in due course.

Is this enough to give investors confidence in the company once more? I suspect that many will wait to find out who the new CEO is before taking a longer term position.

Woolworths is continuing to deliver its turnaround

But watch out for load shedding costs and pressure on gross margin

It’s been a huge year for Woolworths, with share price growth of 27.5%. For longer term holders, the picture looks less like fancy Belgian yoghurt and more like old polony, with total growth of around 4% over five years.

Markets are all about timing. Don’t let anyone tell you otherwise.

The reason that Woolworths has done well in the past year is that the management team is doing the right things. They are reducing trading space, taking Woolworths back to its roots and reducing exposure to Australia, a country where we shouldn’t play cricket or try and own retail businesses. Country Road seems to be an exception. David Jones certainly wasn’t.

For the 26 weeks ended 25 December 2022, group turnover is up by a whopping 16.3% in constant currency terms and 18.5% as reported. There were substantial lockdowns in the base period in Australia, so this isn’t a fair indication of group performance.

A better comparison is to use the last 6 weeks of the period, in which sales increased by 8.8%. Woolworths sounds happy with Black Friday and festive season trade.

As we are seeing in many retailers, consumers have returned to bricks-and-mortar stores and online shopping has slowed down. Without a doubt, some of the changed behaviour will stick and most retailers have reported online sales that are still way ahead of pre-pandemic levels. Woolworths has highlighted the return to stores in Australia in particular, though the base effect of hectic lockdowns would be highly relevant here.

Online sales at group level now contribute 10.9% of total turnover vs. 13.7% in the prior period.

Looking deeper, Fashion Beauty Home sales in South Africa were up 11.2% and accelerated to 12% in the final six weeks. Price movement was 10.8%, so inflation helps here alongside some volume growth. Space was reduced by 2.2%, so trading density (sales per square metre) has definitely improved. Online sales in this segment grew 4.5% and contribute 4.2% of South African sales.

Food is where much of the pressure has been thanks to competitors taking a bite out of Woolworths’ customer base, especially as they trade down in search of value. This has forced Woolworths to become more competitive on price, evidenced by price movement of 6.8% vs. food inflation of 8.4%. Sales were up 5.4% on a comparable store basis, which suggests a drop in volumes. As trading space is increasing, total growth was higher at 7.6%. Online sales grew by 22.7%, now contributing 3.6% of local sales as Woolworths Dash gets some traction in the market.

The Woolworths Financial Services book is 17.2% larger, suggesting that Woolworths has been more willing to give credit. With an annualised impairment rate of 5.5% vs. 4.0% in the prior period, that willingness does come at a cost.

In Australia, Country Road Group is the business that Woolworths is holding on to and sales grew by 25.5%. Again, the base effect skews this. In the last six weeks of the period, growth was 8.5% despite trading space decreasing by 5.5%. Online sales contributed 26.1% to total sales vs. 33.8% in the comparable period.

Woolworths has agreed to sell its stake in David Jones and that deal should be completed by the end of March. With sales performance in those six weeks of just 2.3%, shareholders won’t be sad to see this one go.

The expected increase in HEPS for the 26 weeks ended 25 December 2022 is between 70% and 80%, coming in at between 285.9 cents and 302.8 cents.

The market celebrated these numbers with a jump in the share price of nearly 4.8%.

Little Bites:

  • Director dealings:
    • An associate of a director of Afrimat has sold shares in the company worth R3.85 million.
  • On the 1st of February, history will be made on the JSE when Fortress REIT Limited will no longer be a REIT. The name change is coming. The biggest question is what other changes are coming, particularly to the shareholder register? Personally, I’m not sure that losing REIT status is the end of the world here, but time will tell.
  • Shareholders have voted in favour of Aveng’s proposed sale of Trident Steel, which isn’t a surprise based on the pricing achieved.
  • Trematon owns 50% in a property in Woodstock that is being sold to a coffee shop for R16.25 million. As tiny as this deal is, it’s a small related party transaction and that means an independent expert needs to be appointed to opine on the fairness of the deal.

Ghost Bites (Coronation | Distell | Nampak | Richemont | Steinhoff)

The Finance Ghost
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Ghost Bites (Coronation | Distell | Nampak | Richemont | Steinhoff)

Coronation increased its AUM this quarter

Hopefully they can afford to fix the sign outside the Claremont office now

While walking back from the cricket at Newlands over the weekend, I couldn’t help but laugh at the Coronation sign that appeared to be suffering from partial load shedding. With “oro” out of service, it shone “Conation” brightly to thousands of people leaving the cricket. Cue the bear market jokes.

The irritating disclosure by the company continues, with updates on assets under management still not giving any comparatives. This means I have to go digging through the SENS archives.

Here’s the recent trend:

  • 31 Dec 2022: R602bn
  • 30 Sep 2022: R574bn
  • 30 Jun 2022: R580bn
  • 31 Mar 2022: R625bn
  • 31 Dec 2021: R662bn

With AUM still a lot lower than it was a year ago (not least of all because of broader market prices), perhaps the sign will have to be patient to be fixed?

The booze cruise

We have an update on how much money Capevin and Gordon’s Gin makes for Distell

Due to the length of time it is taking to implement Distell’s transaction with Heineken International, the company was required under law to issue a revised prospectus. This is only exciting if you were one of the lawyers earning a fee to draft the thing.

The far more interesting document is the carved out historical financial information of Capevin and Gordon’s Gin, which the company has issued to give shareholders an updated view on the business.

I’ve included a screenshot of the income statement below. I think the movement between 2020 and 2022 is truly breathtaking. With a year-end of June, this is presumably because of Covid restrictions on alcohol.

Perhaps the most interesting thing is that profit before tax margin decreased from 21.7% in 2020 to below 18% in the subsequent years. I am very surprised that a much smaller version of the operation is more efficient!

Nampak: meeting adjourned

Shareholders gave this proposed adjournment unanimous support

As reported in Ghost Bites earlier in the week, Nampak is in discussions with “a number of stakeholders” regarding the way forward. We don’t know yet who the parties are, but we can speculate.

To give those discussions more time to come to fruition, the company proposed an adjournment of the meeting that would’ve seen shareholders vote on the resolutions for a proposed rights offer. The fact that 100% of shareholders in attendance at the meeting gave approval for the adjournment tells us that the rights offer is a truly horrible outcome that everyone would prefer to avoid.

The meeting has been adjourned until 8th March, so Nampak has a few weeks to try and work and miracle.

Richemont needs the reopening of China to stick

The company’s most important region has been going backwards

Richemont has reported sales growth of 8% for the quarter ended December 2022 and 18% for the nine months ended December. It would’ve been so much better had the Chinese economy been open for business.

Even in ultra luxury goods, it makes a big difference when an economy is locked down. The proof is very clearly in the numbers:

I also found it interesting to note the performance of the underlying product categories. The Jewellery Maisons (yes, this is the official term used by Richemont, dripping with caviar and 1st world problems) grew by 8% in constant currency and the Specialist Watchmakers (surely a missed opportunity to call them Timepiece Maisons?) fell by 5%.

Messy online business YOOX NET-A-PORTER (this name definitely doesn’t work alongside “Maisons”) posted a 6% drop in sales. It is now presented as a discontinued operation as Richemont is selling a controlling stake.

Steinhoff offloads some of its Pepco stake

Don’t get excited – plebs like us couldn’t get any

With Pepco (Steinhoff’s European discount retail business) having released solid results recently, Steinhoff took advantage by selling off some of its stake to institutional investors. Unless you’re in the little black book of banks like Goldman Sachs or J.P. Morgan, it’s unlikely that you were called about these shares.

This is a “private placement” which means VIP section only. The goal is for the bankers to make a few phone calls, place large blocks of shares and take a juicy fee along the way.

Pricing was finalised through the process and it happened very quickly, with the results of the offer announced just one hour after the initial announcement. I can almost guarantee that calls had already been made overnight. Steinhoff offloaded a 6.6% stake in Pepco and raised EUR315 million in the process. This reduces Steinhoff’s stake in the company to 72.3%.

Steinhoff must have liked the pricing that came through, as the original plan was to sell a 6% stake. An upsized offer means that investors were putting proper numbers down on the table. The banks definitely did their jobs here.

To be clear, the cash will flow from the investors into Steinhoff, not into Pepco. Steinhoff will use that money to help reduce debt. This is distinct from the previously announced plan to restructure the debt and leave shareholders with very little.

Little Bites:

  • Director dealings:
    • The Group Risk Officer of Investec sold shares worth R10.8 million and a person who I would guess is his wife sold shares worth R8.6 million.
    • The interim CFO of Sirius Real Estate has sold shares worth £848k.
  • There are significant changes to the board at Novus, including the (expected) retirement of the CEO. Further announcements of replacements will be made in due course.
  • The final payment to shareholders by Etion will take place on 6th February and the delisting will be effective from the morning of 7th February.

Ghost Bites (EOH | Kibo Energy | Ninety One | Schroder REIT | Spar)

The Finance Ghost
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Ghost Bites (EOH | Kibo Energy | Ninety One | Schroder REIT | Spar)

Many wrongs make a right(s) offer

EOH says there is “significant interest” in its rights offer – but it is fully underwritten anyway!

A rights offer of R500 million by EOH isn’t fresh news. In fact, shareholders approved it back in December, with the circular due to be released on 23 January.

This was inevitable. I’ve been writing about it since I walked away from this punt at over R7 per share. EOH closed at R3.32 on Tuesday, so I’m very glad I did. It took too long to sell the underlying businesses, the prices weren’t high enough and the interest burden in the background was simply too large.

The good news is that EOH has managed to achieve a fully underwritten rights offer through a combination of boutique asset managers and investors. This doesn’t come for free, with underwriting fees of either 1.5% or 2% due to the underwriters (depending on which one you look at).

In a pre-close update for the six months ending January, the group paints a bleak picture of operating conditions in South Africa. Still, EOH believes that things will be better this year, with revenue and EBITDA for the five months ended December looking promising.

Debt at the end of July 2022 of R1.3 billion has been reduced to R1.2 billion, but it doesn’t help when interest rates have gone up and the financing cost has remained the same. This is why I felt that a rights offer was inevitable, as there is just way too much debt here. For reference, EOH’s market cap is less than half the current debt level!

Assuming the rights issue goes ahead without any problems, Standard Bank has agreed to refinance the debt in a way that EOH believes will be sustainable.

I guess that time will tell. I struggle to find anything to get excited about with EOH.

Kibo looks to synthetic oil

If they get it right, this is a new revenue stream and potentially a less risky project

Kibo Energy owns 65% of Sustineri Energy, a business that hopes to produce electricity from syngas. I’m no engineer, but “produce electricity” is a statement that I can get behind right now.

There’s an interesting change of plan here, which the company is calling an “optimisation improvement decision” – a term that made full use of the corporate thesaurus.

By focusing on producing synthetic oil instead of electricity in phase 1, Kibo believes that the project can be de-risked and made more attractive to funders. They are currently busy with a comprehensive integration study that will look at financial viability among other factors, so we don’t even know yet if this will work.

Honestly, if this gets us closer to generating electricity from waste, then I’m all for it.

Ninety One’s AUM is flat for the quarter

It’s not easy managing money in a rough market

In the asset management industry, fees are earned based on assets under management (AUM). They take the form of fixed fees and performance fees, which means that asset management firms are highly exposed to broader asset values in the market.

This would be called a “high beta” industry, as the share prices are strongly correlated with the broader market index.

With that bit of finance nerdiness out of the way, I can report that Ninety One’s AUM as at the end of December was £132.4 billion, down approximately 6.5% year-on-year. Importantly, it’s very similar to the number reported at the end of September, so AUM was flat over the quarter.

There are only two drivers of AUM: (1) asset values in the underlying portfolio and (2) net client flows. The Ninety One quarterly update doesn’t give an indication of the drivers of the AUM movement over the period, but it’s worth keeping this in mind.

Property values don’t always go up during inflation

It’s all about the market yields vs. rental levels

Property is often put forward as a great inflation hedge. The theory is that rentals should increase, thereby protecting investors.

Here’s what they don’t tell you: property values often go down during periods of inflation, as the yield demanded by investors also goes up. Value has an inverse relationship with yield, so a higher yield = a lower value on the property.

If the net operating income increases by enough to offset this issue, then it is true that investors will receive a higher dividend and will see the value of capital protected, as the rental growth can offset the yield pressure.

If net operating income doesn’t increase sufficiently, because of say economic challenges during inflation that make it hard to demand endlessly higher rentals, then the inflation hedge thesis takes a knock.

Schroder European Real Estate Investment Trust is a perfect example, with the property portfolio valuation as at 31 December taking a knock over the quarter of 3.3%. The company attributes this to “25 basis points of outward yield movement,” which in English means that yields are higher (now at 6.6% on the portfolio) and hence values are down.

100% of the portfolio leases are subject to indexation, which (once again) in English means that rentals will increase with inflation. The company believes that this will mitigate further value declines.

The latest loan-to-value for Schroder is 32% based on gross asset value and 22% net of cash.

Wholesale changes at Spar

After a disastrous few months, the management team is out

The governance at Spar has a smell that would embarrass the fish section after Stage 6 load shedding on a boiling hot summer’s day. Change is finally upon us, with big news at board level.

Graham O’Conner is retiring at the AGM and will not make himself available for re-election. That’s the right choice, as I somehow doubt that the vote would’ve gone in his favour based on current investor sentiment.

CEO Brett Botten is also on his way out after less than two years in the job.

There are also changes in independent directors, including the appointment of Pedro da Silva. If that name sounds familiar, it’s because he ran Pick n Pay South Africa for a short time. Dr Shirley Zinn has also joined the board, bringing loads of experience from other listed boards. Dr Phumla Mnganga is stepping down as an independent director after 17 years.

Little Bites:

  • Director dealings:
    • An entity related to Adv JD Wiese (Christo Wiese’s son) has acquired preference shares in Invicta to the value of R2.98 million
  • Delta Property Fund just can’t catch a break. After announcing the sale of a property in Kimberly in December for R22.1 million, the deal has fallen through as the purchaser couldn’t put the money together. Back to the drawing board they go.

Ghost Bites (Merafe | Nampak | Omnia)

The Finance Ghost
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Ghost Bites (Merafe | Nampak | Omnia)

Merafe releases a production update

Guess what? Load shedding doesn’t help.

Mining is the toughest game on the planet, yet in some ways the simplest as well. You need to produce a commodity and you need to sell it based on an observable market price. Production is in your control and the pricing isn’t.

It all comes down to operational efficiencies and reliability, something that Eskom really doesn’t assist with. In the quarter ended December, Merafe’s attributable ferrochrome production fell by 5% year-on-year. Despite this, the full-year production number is 1.3% higher than last year.

Merafe’s share price has been on a wild ride over the past year, something that mining investors are only too accustomed to. The 52-week high is R1.96 and the 52-week low is R1.03!

Investing in South African mining will either give you a strong stomach or a heart attack.

What is being packaged at Nampak?

An adjournment of the extraordinary general meeting means that something is brewing

For a clue as to what might be happening at Nampak, we can look back to an announcement on 11 January regarding an acquisition of shares by Peresec, taking them to a holding of 6.12%.

Unless the stockbrokers at Peresec are planning to learn a lot about bottles and cans, I suspect that they are holding those shares for someone else. The obvious candidate is A2 Investment Partners, the activist investment group that enjoys running into a burning corporate building to see if it can be saved.

This is all just speculation, of course.

For now, the official word from Nampak is that a motion will be proposed at the meeting on 18 January to postpone it to 8 March.

Having lost two-thirds of its value in the past year, Nampak’s investment story is broken and so is the balance sheet. There’s clearly a strategic investor poking around the place, so we will have to wait and see what happens.

The share price only closed 2.4% higher on this news.

Omnia exits Umongo

The call option for the remaining 9% has been exercised

There are all kinds of tricks and mechanisms that find their way into deal structures. Call options are a great example. A call option is an agreement that gives the holder the right (but not the obligation) to buy a particular asset at a predetermined price.

This is a nifty thing, which is why the party that writes the option (grants it to the holder) doesn’t do so lightly.

As part of the disposal of 81% in Umongo Petroleum, Omnia granted a call option relating to the remaining 9% that it held in the company. This option has now been executed and Omnia has received R93 million in cash, which the company says is at the top end of the purchase price that was payable. This is because some call options have a price calculation mechanism rather than a set price.

Little Bites:

  • Director dealings:
    • The company secretary of Investec has sold shares worth R691k
  • Buffalo Coal has announced the final discharge of the Investec loan, with a payment of around R32.6 million and a royalty payment of R2.5 million.
  • Sable Exploration and Mining has announced a delay in the release of the circular for the PBNJ Trading and Consulting offer. An extension has been granted until the end of January due to delays in receiving approval from the South African Reserve Bank.
  • Acsion Limited has renewed the cautionary announcement related to a potential cash offer and delisting of the company.
  • In case you are still holding your breath for the release of financial statements by Oando PLC, the company hopes to release its 2020 financials (not a typo) by 28th February. It will take until August for the reporting to be fully caught up (in theory).

Ghost Stories #4: An in-depth trading experience (Travis Robson, CEO Trive South Africa)

The Finance Ghost
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Ghost Stories #4: An in-depth trading experience (Travis Robson, CEO Trive South Africa)

Trive South Africa offers a gateway to the JSE and global markets.

Providing an in-depth online trading experience, Trive exists to empower progression. You can simply and securely trade and invest in JSE and US stocks and leveraged products, or invest in tax free savings accounts.

In this episode of Ghost Stories with Trive South Africa CEO Travis Robson, we cover:

  • An overview of Trive’s global business and the international perspective that the group is bringing to South Africa.
  • The extent of the group’s investment in South Africa and the significant team that has been built in Trive South Africa, a show of faith in our economy and the strength of our financial markets.
  • The focus on both technology and customer service to provide more sophisticated traders and investors with the potential to take their wealth beyond its current levels, particularly by finding the right mix.
  • A discussion on the broker landscape in South Africa and what is needed to attract, retain and develop retail stockbroking clients.
  • The unplanned creation of the Trust Trive with Travis hashtag – a tongue-in-cheek response to a business that genuinely wants to create a trusted brand in the market.
  • Lessons learnt while building a startup within an international organisation.
  • The benefits of bringing different cultures and backgrounds to a business.
  • The concept of a “Trive Tribe” and the trading and investment community being built around the business, combining the best of Trive’s trading technology and its telephone broking / research offering.
  • The reasons why people trade and invest, which often go beyond the financial incentivisation – for so many, the markets are a hobby and a great love, confirmed by Travis’ extensive research in our local market.
  • The risk of gamification in trading platforms.

Listen to the discussion below:

For more information on Trive South Africa, visit the website at www.trive.co.za or check out their social media pages (@trive_sa).

Trive South Africa (Pty) Ltd is an Authorised Financial Services Provider, FSP number 27231.

The resilience of SA retailers

Chris Gilmour
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The resilience of SA retailers

In a market that is ultimately a hybrid of emerging and developed characteristics, South African retailers continue to demonstrate resilience in the face of huge challenges. Chris Gilmour explains.

January has started off well for the JSE All Share Index (ALSI), reaching an all-time high last week, mainly on the back of higher commodity prices.

This underlines the view that the South African equity market is still predominantly driven by commodities, even though the mining industry itself is a relatively small contributor to GDP. The rest of the market outside of mining stocks hasn’t really moved much, though this is to be expected, given that household consumption expenditure (HCE) is in the doldrums and that is by far the biggest GDP contributor at over 60%.

And with HCE and GDP generally not forecast to do very much this year, there seems little reason to get excited about consumer stocks generally and retail stocks in particular. But as with everything in life, the devil is in the detail and there may be some surprises from the strangest of places as 2023 unfolds.

Much of the rationale behind South African retailing’s place on the global retailing map redounds to South Africa’s perceived position as somewhere between an emerging and a developed economy. In 1990, as Nelson Mandela was released, the ANC and other liberation movements were unbanned and the first tentative moves toward democracy were made, there was understandable impatience among local investors. Many were firmly of the opinion that foreign money would come flowing in almost immediately to the JSE and when that didn’t happen, they were crestfallen.

It took quite a few years post-1990 before foreigners starting eyeing up SA as an emerging market destination and even then, it was only pocket money that came our way. The big money was going into countries in eastern Europe, South America and Turkey and of course emerging Asia.

Are we really an emerging market?

I had the privilege of taking a veteran US emerging markets specialist called Joe Williams of Batterymarch (Now Legg Mason) around Cape Town in the mid-90s, meeting the CEOs of companies such as Rembrandt Group (now Remgro), Pepkor and Pick n Pay. He and his sidekick Cam Huey were suitably impressed with these companies and at the end of the trip as I was driving Joe back to the airport to catch a plane back to the US, I innocently asked how he thought SA stacked up in comparison with other emerging markets.

He let out a huge belly-laugh and said “Chris, South Africa is NOT an emerging market; it’s a developed economy with high unemployment!”

I was a bit non-plussed by that remark, but it has stayed with me all these years. And on reflection he was absolutely correct. SA rarely if ever managed to squeeze any decent growth out of its economy, even before Eskom went into terminal decline. And South African institutions – be they banks or accounting bodies, or the JSE, or industrial companies or retailers-are world class and have been for decades. They are not emerging, they are right up there with the world’s best.

A year of so later at an investment seminar I asked Mark Mobius of Templeton the same question. He phrased his response differently, saying that SA was a hybrid between developed and emerging. Very diplomatic and in its own way, equally true.

What does this have to do with retailers?

So, what does this have to do with the outlook for retail stocks in the current years and beyond? Well, South African retailers have first world management but the ambient economy mimics emerging market conditions because of the chronically high rate of unemployment. Self-service checkouts, a feature of many British, American and European supermarkets, are not used in South Africa because of the fear of union resistance, not because of technological incapability. South African food retailers are among the most efficient in the world and that is reflected in their paper-thin operating margins.

It’s difficult to see how the retailing industry can get much more efficient in 2023 and beyond.

In food and drug retailing, the emphasis is going to be on price. And this is where the unlisted retailers may do better than the listed ones. Unlisted banner groups such as EST Africa support a broad range of independent FMCG and hardware retailers all round the country and their hefty buying power allows them to compete head-on with the listed giants. But they have a much lower overhead structure, which allows them to be able to sell their products at keener prices than the listed FMCG players.

And in discretionary retailing, too, the emphasis will be on price. But it will be increasingly difficult to increase volumes in a high interest rate environment. Those discretionary retailers that have elected to adopt an aggressive expansionary through-the-cycle approach, such as Mr Price and TFG, will show growth, but it will be largely acquisition-driven.

Another feature that may aid discretionary sales is enhanced use of credit. This is a very sensitive subject and banks and retailers are keen to ensure that their credit books stay in good health and don’t deteriorate while at the same time looking for ways to increase turnover. Already a number of clothing and furniture retailers have exhibited enhanced cash:credit sales ratios in their recent trading updates, a marked divergence from trend.

This is happening at a time when rejection rates for credit applications are rising:

Source: www.ncr.gov.za, Gilmour Research

As the next graph illustrates, household debt/household income has been declining for a number of years. Recent surveys by FNB/BER suggest that consumer confidence is improving and that consumers are more inclined to spend again. If this is the case and higher degrees of credit can be advanced in a responsible manner, discretionary consumer spending may be aided to an extent:

The unknown factor is the extent to which rotational power cuts (load shedding in Eskom-speak) will impede retail sales this year and next. The really scary aspect of all of this is that there is no plan to reduce load shedding from government. It appears to be impotent, as the utility lurches from one crisis to another.

At the time of writing, Eskom had applied a continuous stage 6 and there were rumours that stage 8 was being contemplated. Some of the discretionary retailers such as Mr Price and TFG have installed some serious battery backup capability and by financial year end will have 70% of their stores “immune” to the impact of load shedding. But food retailers require far greater power input for refrigerators for example and only a few of them are adequately prepared for a prolonged escalation in power cuts.

So, one can add another string to the bow of SA retailers: world’s most resilient. One can only imagine how brilliantly these retailers would perform under more “normal” economic conditions with a stable power supply.

But that’s another story for another time.

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 Wrap #7 (Steinhoff | Mondi | Telkom | MTN | Tharisa | Murray & Roberts)

The Finance Ghost
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Ghost Wrap #7 (Steinhoff | Mondi | Telkom | MTN | Tharisa | Murray & Roberts)

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

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

  • Steinhoff’s updates on Mattress Firm and Pepco
  • Mondi closing the acquisition of the Duino mill in Italy
  • Telkom and rain deciding to walk away from a potential day
  • MTN received a very ugly letter from tax authorities in Ghana, which is definitely not going to be good news for the share price
  • Tharisa dealing with high levels of rainfall that have negatively impacted production
  • Murray & Roberts releasing the circular for the sale of the stake in Bombela Concession Company

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 (MTN | Murray & Roberts)

The Finance Ghost
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Ghost Bites (MTN | Murray & Roberts)

Another African nightmare for MTN?

There’s never a dull moment when doing business in Africa

There are three certainties in life: death, taxes and African governments trying to fleece multinational organisations for money. We are used to this in Nigeria, a country in which MTN has a long and often painful history. Just when we thought the troubles were behind MTN, the FOMO has become too much for Ghana and that government has decided to have a go.

This isn’t a small issue, either. MTN’s subsidiary in Ghana has been issued with a tax assessment which infers that MTN under declared revenue by around 30% over the period of 2014 to 2018. It seems outrageous that this could be true. Unsurprisingly, MTN Ghana “strongly disputes” the assessment, which was based on methodologies like call data records, recharges and other data.

How much are we looking at here? Well, the Ghanaian government has issued an assessment for $773 million. That’s a lot of money.

The announcement came out after the market closed on Friday, so I’m expecting some pain in the share price when it opens on Monday. I still believe in what MTN is doing in Africa and I’m a shareholder. Sadly, these sorts of issues are a reality when operating in high growth, risky markets.

Before you are tempted to suggest that MTN should pack it in and focus on South Africa, I would remind you that our cellphone towers currently stop working after about 2.5 hours of load shedding and our economy’s growth rate is slower than the annual egg-and-spoon race at your local frail care centre.

This isn’t an easy industry.

Murray & Roberts releases the Bombela circular

The embattled construction company is selling the Bombela Concession stake to Intertoll International

At the beginning of December, Murray & Roberts gave the market a glimmer of hope by announcing the sale of the stake in Bombela Concession Company for up to R1.386 billion. The purchaser is Intertoll International, a leading European investor in motorway concessions and related operations.

Nevermind a toll on the roads or railways – the economy has taken its toll on Murray & Roberts, with the company facing a liquidity crunch that needs to be dealt with urgently. The proceeds from this deal (assuming shareholders approve it) will be used to reduce debt and improve the state of the balance sheet in general.

Going forward and with Clough in Australia now placed into voluntary administration after a deal to try and sell that company fell through, Murray & Roberts will have two business platforms: Mining (a global business) and Power, Industrial & Water (focused on sub-Saharan Africa).

Murray & Roberts hopes to be able to deliver earnings growth from FY24 onwards, with the company acknowledging that this would be off a low base.

Here’s an ugly share price chart to make you feel better about your bad choices in tech stocks:

Little Bites:

  • Director dealings:
    • The CEO of Stor-Age has sold shares worth over R2.75 million, with the proceeds used to settle loan obligations to Stor-Age in terms of the old share purchase and option scheme for executives of the company
    • The financial director of Zeda (the mobility group unbundled by Barloworld) has acquired shares in Zeda worth over R150k
    • An associate of a director of Huge Group has acquired shares worth just over R20k

Ghost Bites (Mondi | Steinhoff – Pepco)

The Finance Ghost
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Ghost Bites (Mondi | Steinhoff – Pepco)

Mondi completes the Duino mill deal

The deal was first announced in August 2022

Mondi is a good example of a JSE-listed company that has a significant international footprint. This footprint is growing, with the acquisition of the Duino mill in Italy now completed.

The total deal consideration was €40 million, so this is a very small deal in the context of Mondi’s market cap of over R146 billion.

This is a strategic deal for Mondi’s efforts in Central Europe and Turkey, as the mill is close to two important export harbours. There will be many changes at this mill, with plans to convert the existing paper machine to produce high quality recycled containerboard.

The estimated investment required for this project is €200 million, which is 5x the size of the acquisition price. This is a solid example of a company buying a base to work from.

Pepco: a window into Europe

The latest quarter is a reminder of what Steinhoff could’ve been

Pepco is owned by Steinhoff. It’s a great business. Sadly, it sits far down in the group structure, with a ton of debt sitting above it at group level. For that reason, the creditors are rubbing their hands in glee about this business, with shareholders set to be squeezed out.

Nevertheless, Pepco is a really useful barometer for the state of play in Europe, particularly in value retail. This means retail formats aimed at lower income shoppers who are highly price sensitive. In other words: most people.

In the three months ended December (the first quarter of this financial year), revenue was up 27% on a constant currency basis and 24% as reported. There’s a major effort underway to increase the store footprint, evidenced by like-for-like growth coming in at only 13%, well below the total growth (but still impressive). The difference between reported growth and like-for-like growth is the new stores that were added in the past year.

The excitement is firmly in the Pepco format, with growth up 19.7% on a like-for-like basis vs. only 4.4% at Poundland Group.

The growth in the footprint isn’t slowing down. There are currently 4,066 stores in the group and the rollout plan is for 550 net new stores in this financial year (including those opened in the quarter just reported on).

When growing quickly, the challenge is always (1) not going bankrupt from running out of cash and (2) maintaining margins. Holding company Steinhoff has already nearly achieved the first outcome, so hopefully lightning won’t strike twice. This leaves us with margins, which need to be watched closely. It takes a while for new stores to ramp up to the desired level of profitability, hence why EBITDA is only up “mid-teens” at a time when revenue is growing in the mid-20s, a clear example of margin contraction.

Investors (also known as the people Steinhoff owes money to) will be looking for margin expansion to come through as the store rollout matures.

Little Bites:

  • Andrew Waller (a name you may recognise from Grindrod) has bought shares worth R1.68 million in Spar. He is a non-executive director of the retailer.
  • York Timbers has clarified the extent of the shareholding of A2 Investment Partners. The activist investment group owns 11.12% in the company directly and controls a further 20.2% via Peresec.
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