Friday, November 15, 2024
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Ghost Bites (Steinhoff | Tharisa | Telkom)

The Finance Ghost
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Ghost Bites (Steinhoff | Tharisa | Telkom)

Why isn’t Steinhoff worthless yet?

There’s more bad news for shareholders

It really is beyond me why Steinhoff isn’t trading at zero. The creditors are essentially in the process of getting the keys to the castle, with shareholders likely to hold unlisted instruments as a best-case outcome. Yet, it’s trading at R0.53 per share, which is precisely 53 cents more than I would pay for it.

To reinforce my view that this is a donut (i.e. worthless), the latest news is that Steinhoff portfolio company Mattress Firm is no longer going to list in the US. It has withdrawn its registration statement with the US Securities and Exchange Commission (SEC), citing ongoing volatility in the IPO market.

As evidenced by layoffs at Goldman Sachs, this isn’t the time to be listing in the US market (or anywhere else, really).

It hardly matters, as the creditors will be patient and will wait for the next cycle. The brave few who plan to hold unlisted shares will be following the same thesis. The difference is that the creditors get to eat dinner first, with the shareholders lucky to get crumbs that fall off the table.

Tharisa was on the wrong side of the weather

“Unprecedented rainfall” (an annualised increase of 27%) has impacted production

In a quarterly production report dealing with the three months to December, Tharisa took a knock to both PGM and chrome output. There’s still plenty of cash on the balance sheet (net cash of over $101 million), so this was just a bump in the road.

There is some good news, like production guidance surprisingly being maintained for both PGMs and chrome. The other good news is that PGM and chrome prices have been holding up, which is obviously critical for miners.

The Vulcan Plant is on track for increased production and ground has been broken at the Karo Platinum Mine in Zimbabwe, after $31.8 million was raised for the project on the Victoria Falls Stock Exchange. And there you were, thinking that the Cape Town Stock Exchange is the most exotic place to raise capital. Trust me, there are many exchanges out there.

Drilling down into the numbers, quarter-on-quarter production fell 5.7% for 6E PGMs and 8.0% for chrome concentrates. Prices for the PGM basket and metallurgical grade chrome fell by 1.7% and 1.3% respectively on a quarter-on-quarter basis (i.e. vs. the three months ended September 2022).

Telkom and Rain have terminated discussions

Will Telkom ever find someone to dance with?

If you miss the existence of Ratanga Junction or the thrill of going to Gold Reef City in your holidays, you could always buy shares in Telkom. Take a look at this wild ride over the past year:

First, MTN was sniffing around a deal with Telkom. That eventually fell over, leaving space for Rain to get involved and irritate the Takeover Regulation Panel (TRP) in the process with poor behaviour. Having clearly hired better lawyers, things went quiet for a while.

After initial discussions but prior to any due diligence work, the parties decided to walk away from a potential deal at the moment. No further details were given.

The market seemed to like this, sending Telkom 9.3% higher on the day. With two major potential parties having walked away (for now at least), Telkom needs to find another potential way to unlock value.

Little Bites:

  • Director dealings:
    • Following the rights issue by York Timber, Peresec Prime Brokers now holds a 29.28% interest in the company. The value unlock story continues…in theory.
    • A director of Argent Industrial has sold shares worth R190k – it’s always dangerous to read too much into these trades, but load shedding must be biting these companies.
  • For those suffering from a December hangover and related memory loss, Impala Platinum released an announcement reminding the market that the only remaining condition precedent to the offer for Royal Bafokeng Platinum is the Takeover Regulation Panel (TRP) Compliance Certificate. Implats is still fighting with Northam Platinum at the TRP, helping several legal teams afford better holidays this year.
  • Labat Africa has issued more shares, this time a tranche representing 3.33% of shares in issue when the general authority to issue shares was granted. The funds are being used to expand the cannabis healthcare business and for general working capital purposes.
  • Having now appointed a Nominated Adviser (NOMAD), Kibo Energy has resumed trading on the AIM market in London.

Too much stock!

The Finance Ghost
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Too much stock!

Margins are under considerable pressure at retailers who are now dealing with a fundamental swing in supply-demand dynamics

Turnover for show, margins for dough.

I’m borrowing liberally from golf folklore to bring you that catchy intro. If you’ve played golf, you’ll know how tough it is. If you’ve been reading any retail earnings releases in recent months, you’ll also know how tough that is.

A swing in supply and demand

Towards the end of 2022, the world found itself in an environment of high consumer demand and very limited supply. As consumers were flush with cash thanks to the Fed, demand for products in a gradually reopening economy was huge. Supply chains were a nightmare thanks to congestion at ports and ongoing lockdowns in China, creating a recipe for inflation and unsustainably high margins for retailers.

The supply – demand dynamics have swung wildly over the past twelve months, with the latest Black Friday and festive season shopping trends showing that retailers are having to sacrifice margin to achieve turnover growth. Everyone has stock (and usually too much of it), an issue compounded by a fall in consumer demand as stimulus waned and energy costs put pressure on household budgets across the world.

In recent Magic Markets Premium reports, we’ve looked at Lululemon, Levi’s and Nike. These global apparel giants operate in totally different product categories, yet the theme across the board is clear: margins are under significant pressure.

Where did the margins go?

I’ve lifted this chart from our latest Magic Markets Premium report on Nike:

Source: Magic Markets Premium, company filings

Other than some seasonality in the numbers, you can see that revenue isn’t a huge issue for Nike. The company is posting reasonable top-line growth on a year-on-year basis (the right metric in a seasonal business). Sadly, gross margin appears to have bought a one-way ticket to hell, with a recent trend that you don’t need a finance degree to understand. That yellow worm is headed firmly in the wrong direction.

There is simply too much inventory in the system, which means an environment of markdowns and SALE signs across the front of every shop. Another major contributor is the return of the wholesale channel, which Nike starved of stock (their exact wording) during the pandemic. Wholesale margins will always be lower than direct-to-consumer margins that capture the full value chain, so a swing back towards wholesale creates a mix effect that is negative for margins.

This isn’t just an issue for Nike. Most retailers are experiencing either pressure on gross margin (because of markdowns to compete) or operating margin (because they have lost market share while raising prices to protect gross margins).

Many are taking pain on both levels, which is why share prices have come under pressure in this sector, particularly for companies that have been trading at clearly elevated multiples.

Lululemon is particularly interesting

Lululemon is credited with inventing the athleisure category, taking yoga pants from the studio to the local coffee shop and charging a delicious premium along the way.

It’s been fascinating to see how the recent strategy has differed to the likes of Levi’s, which focused on hiking prices to protect gross margins. One would assume that Lululemon would have more pricing power, yet the company has chosen to chase volumes and give up margins along the way.

The net profit number is all that matters of course, which is a function of revenue and margins. Hot off the pressure is updated guidance from the company on its fourth quarter numbers, which will see revenue increase by 25% – 27% on a year-on-year basis. This is ahead of previous guidance.

Sadly, diluted earnings per share is expected to be similar to previous guidance, which means that margin contraction has offset any benefit of revenue being higher than expected. Indeed, gross margin is expected to decline by 90 – 110 basis points, a huge swing from previous guidance of an increase of 10 – 20 basis points.

Lululemon has done a great job of managing costs, with selling, general and administrative (SG&A) expenses growing below gross profit growth. This has offset some (but not all) of the margin pressure.

Chasing revenue has worked for Lululemon because the company still has incredible growth potential. For a business like Nike that is already a mature business in most key markets, margins are more important than top-line growth.

We are in a tough environment for apparel retailers. Tread carefully.

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Russia – Ukraine at an impasse

Chris Gilmour
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Russia – Ukraine at an impasse

To kick off 2023, Chris Gilmour delves into arguably the most important geopolitical situation in the world today.

The Russia – Ukraine war has reached the type of impasse that is unlikely to change until at least the northern hemisphere spring.

Ukraine is a small country (relative to Russia), but it has serious backing in the form of NATO and/or the US. That backing is likely to be sustained provided a) the resolve of the Europeans remains largely intact and b) President Joe Biden’s US administration manages to keep getting large aid packages to Ukraine passed by the US Congress.

If these two factors remain in place, Ukraine should continue to punch well above its weight, as its people are highly motivated and cannot be intimidated by Russia’s terrorist tactics.

Conversely, the Russian troops really don’t want to be in Ukraine. They are fighting a war that their political masters have set for them and they don’t have anything like the motivation of the Ukrainians. Many of the troops are part of Yevgeny Prigozhin’s Wagner Group, a shadowy paramilitary force. It is widely believed that Prigozhin recruits soldiers for the Wagner Group from Russian prisons, offering inmates reduced sentences or even freedom in return for fighting in Ukraine and elsewhere.  

Common sense tells a rational fighter when to give up and surrender. But Russia is not following a rational process in Ukraine. As mentioned in this column some time ago, Vladimir Putin is attempting to plug another “gap” in Russia’s natural defences. He will not be satisfied until Ukraine is wiped off the map and re-incorporated into a greater Russia.

But he has badly miscalculated a number of factors in this war, the end result being a gradual emasculation of the Russian state.

Sanctions: slow and steady

The first point to note is that sanctions are working, albeit extremely slowly, and the Russian economy is being very slowly strangled. That process will continue, provided the resolve of the Europeans in particular doesn’t falter in 2023 and beyond. However, as demonstrated by London sanctions watchdog Moral Ratings Agency (MRA), a large number of very high profile international sanctions busting firms are still doing business with Russia.

The worst offender, according to MRA is US drugs and healthcare giant J&J, but the list also includes HSBC, Goldman Sachs, Unilever and Procter and Gamble. If past history is anything to go by, most if not all of these companies will eventually be forced to pull out properly, unable to resist the welter of moral outrage against their continued presence in Russia.

But there’s a long way to go, as demonstrated in MRA’s graphic below:

Source MoralRatingAgency.org

It’s perfectly understandable from a narrow, purely profit-motivated perspective why many of these companies persist with their Russian presence. Doing business for western firms in Russia has always been immensely profitable and a lot of companies are loathe to give this up. But the same argument could have been applied in the case of western companies operating in apartheid South Africa up until the 1980s, when most companies eventually cut ties.

If the war in Ukraine carries on long enough, a parallel commercial war of attrition will eventually force most if not all western companies out of Russia.

Military performance: poor

The second point to note is Russia’s pathetic performance on the battlefield.

At the start of this conflict, western military commanders could scarcely conceal their excitement when it became clear that the Russian army was seriously bogged down logistically in its initial attempts to take the Ukrainian capital city Kyiv. That excitement quickly turned to cautious re-evaluation, however, when they realised that a humiliating conventional defeat for Putin in Ukraine could quite easily degenerate into some sort of nuclear conflict.

There is no doubt that if properly armed with long-range rockets for their HIMARS MLRS, the Ukrainians could wipe out any Russian positions in Crimea and elsewhere. And the Ukrainians are champing at the bit for such an outcome. But the Americans are being typically cautious about supplying such long-range ordnance for fear of some degree of nuclear reprisal. Just to dimension this, if the Ukrainians possessed rockets that had even a slightly greater range, they could completely destroy the Kerch Bridge that links Crimea to Russia. By then cutting off Crimea’s water supply from near the recently re-captured city of Kherson, the Ukrainians could effectively turn Crimea into semi-desert and there’s nothing the Russians could do about it.

Where will the gas go?

Lastly, there’s the question of Russian oil and gas supplies to Europe this year and beyond. Europe currently has plenty of gas in storage to see it through this winter, but if no Russian energy makes its way to Europe this year, next winter could be problematic.

But of course, it must be remembered that Russian gas in particular is not going anywhere if it doesn’t go to Europe.

Constructing very long gas pipelines to China and India will take many years and enhanced shipments of liquefied natural gas (LNG) to these countries require port facilities in Russia that don’t currently exist. And all the while, Russia is losing valuable billions of dollars (or roubles) worth of exports that aren’t going to be made up any other way.

Outcome: a protracted negotiation?

Putin realises that he’s in a hole and would love an escape route, an offramp.

The West mustn’t lose its nerve and attempt to persuade Ukraine to accept a badly-negotiated deal with Russia. To date, the Ukrainians have recaptured 54% of the land occupied by Russia since the invasion almost a year ago. Ukrainian president Volodymyr Zelenskyy has made it abundantly clear that any peace deal will, of necessity, require a return to pre-2014 boundaries. In other words, Russia must vacate Crimea and the Luhansk region of east Ukraine. The Russians will likely stick to an old-style Soviet script of negotiation that involved demands and threats but little in the way of actual substance. Just when their opponents have been worn down mentally and psychologically, the Russians will offer a meaningless morsel that will be grabbed by a desperate West.

That type of scenario must be avoided at all costs.

However, what this means in practical terms is that the conflict will likely drag on for years until the Russian economy can no longer prosecute such an expensive exercise and will have to accept unconditional surrender, with all that this entails.

At this point, the humiliation of Russia will be complete.

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 (AYO | BHP | MAS | NEPI Rockcastle | Premier Fishing | Schroder | Transnet)

The Finance Ghost
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Ghost Bites (AYO | BHP | MAS | NEPI Rockcastle | Premier Fishing | Schroder | Transnet)

AYO gets fined again

The share price fell over 20% in response to a JSE censure and fine

The JSE has investigated a number of transactions between 2017 and 2019 that it believes have breached JSE Listings Requirements. In particular, the aggregation of related party transactions is an issue here, as the rule is that transactions with the same party must be added up and treated as one deal. This is for the purposes of assessing whether they breach the threshold for a small related party deal.

When it comes to deals, the categorisation of deals (e.g. Category 1 / Category 2) is based on a calculation that expresses the deal as a percentage of the size of the company. For related party deals, the threshold is much smaller as shareholders need to know that the terms of deals with related parties are fair.

In relation to various transactions that the JSE is unhappy with, a fine of R1.5 million and a censure have been imposed on AYO Technology.

AYO is upset about this, as the JSE previously fined the company an amount of R6.5 million for similar contraventions of the JSE Listings Requirements. More importantly for the company, a reconsideration application had been underway before the Financial Services Tribunal (FST). The company is irritated that it wasn’t given a chance to respond to the FST ruling to dismiss AYO’s application before the JSE announced this censure.

Either way, they aren’t on each other’s Christmas card lists. The right way for AYO to avoid this issue would’ve been to comply with the JSE Listings Requirements in the first place.

BHP concludes a scheme implementation deed with OZ Minerals

A four-week due diligence period has led to the desired outcome

BHP Group has moved quickly here, with the non-binding indicative proposal announcement having been released on 18 November. Approximately one month later, the due diligence has been concluded and the offer price of A$28.25 per share for OZ Minerals has been confirmed.

This puts an enterprise value of A$9.6 billion on the company and represents a 59.8% premium to the 30-day VWAP leading up to 5 August, which was when BHP’s first proposal was made.

The OZ Minerals board has unanimously recommended that shareholders vote in favour of the scheme, in absence of a superior proposal. As we’ve seen in some recent deals (like Gold Fields – Yamana), one can never ignore the risk of a bigger offer coming through.

It’s going to take a while for the deal to go through, with a deadline to satisfy conditions precedent of 31 August 2023.

There’s a substantial break fee of A$95 million payable by either side if they walk away from the deal, so there’s some degree of commitment that the deal will happen. Again, a break fee wasn’t enough to save the Gold Fields deal!

MAS’ pre-close update for six months to December

The fund’s largest market (Romania) is still attractive

With Europe expected to enter a technical recession in the first half of 2023, Romania’s real GDP is still expected to grow next year. Average wages in the country are largely tracking inflation, which is supportive for retail assets in the region.

MAS also has exposure to Bulgaria and Poland, so this is another great example of a Central and Eastern European property fund right here on the JSE.

Much like NEPI Rockcastle (see below), MAS has enjoyed strong trading in these regions in the first five months of the 2023 financial year. With Covid restrictions having become a distant memory, the malls are packed and people are shopping. Interestingly, footfall has recovered to 2019 levels, which perhaps reflects the different reporting period in this update vs. NEPI below.

Tenant turnover is way ahead of pre-pandemic levels, up 19% vs. 2019. Open-air malls are running at 22% ahead of 2019 levels and enclosed malls at 16%, so perhaps some psychological impact of closed vs. open spaces during Covid has stuck.

With occupancies slightly higher at 96.4% vs. 96.3% in the comparable period, things are certainly looking up.

Disposals of remaining Western European assets are progressing well, which will leave MAS as being purely focused on the Central and Eastern Europe regions.

NEPI Rockcastle’s pre-close update for the year

The shopping centres have made a “complete recovery” from Covid

With record net operating income (NOI) and tenant sales above pre-pandemic levels, NEPI Rockcastle is happy to put the nightmares of Covid to bed. Despite the tail-end of restrictions still impacting the first quarter of this financial year, NOI is expected to be 8% higher than 2019 and 18% higher than 2021.

This is despite footfall still being lower than 2019 levels, with year-to-date footfall in October coming in 12% lower than 2019 on a like-for-like basis. Although one can deduce that this means a permanent change in shopping habits, the MAS update above makes me think that this is just a timing thing, as the NEPI update includes the months at the start of the year.

Having recently announced some significant investments in Eastern Europe, the estimated loan-to-value ratio after these transactions is 36.5%, which is a very manageable level. The company is targeting a reduction below the “strategic threshold” of 35% in the next 12 to 18 months.

Speaking of the balance sheet, the group takes full advantage of the ESG movement by issuing green bonds at attractive rates, like a €500 million bond at a fixed coupon of 2% that was three times oversubscribed. Leaving aside any feel-good reasons, a rate like that is exactly why NEPI Rockcastle can justify the creation of a dedicated ESG department.

An upgrade by Fitch from BBB to BBB+ certainly helps with capital raising efforts.

The other major initiative this year was to relocate the holding company from the Isle of Man to the Netherlands.

Premier Fishing plays its own version of Squid Game

A deal to invest R95 million in squid business Talhado Fishing is on the table

Premier Fishing already holds a 50.3% stake in Talhado Fishing Enterprises and this transaction will take that stake to 80.65%. The deal structure is that Premier will invest R95 million in Talhado and the company will then use that cash to repurchase shares from Scofish, which currently holds 30.35% in the company.

Talhado is the largest squid player in the South African fishing market, with 15 vessels in the group and a cold room facility that can store up to 800 tons of squid.

Premier Fishing notes benefits of the deal like cost synergies, enhanced B-BBEE credentials for Talhado and an extensive international sales network that Premier will also look to access.

Talhado’s financial performance will hopefully improve considerably to justify this value, as the net asset value of the company is R23 million and the loss after tax for the year ended August was R1.9 million. It’s really not obvious why the valuation of the company is so high.

Schroder gives us insight into European debt terms

The impact of a rising rates cycle is clear to see here

Schroder European Real Estate Investment Trust has completed the early refinancing of the largest debt expiry in 2023, a €14 million loan secured against the Hamburg and Stuttgart office investments.

VR Bank Westerwald offered the most competitive terms, with a 4.75 year term and a margin of 0.85% above the benchmark rate (the 5-year euro swap rate). The interest rate is fixed for the term based on that margin, coming in at 3.80% per year.

The weighted average interest rate for the group has increased by 60 basis points from 1.9% to 2.5%, a reminder of how the rising interest rate cycle hits property funds.

Discussions are underway regarding the two other debt expiries in the next 12 months.

Transnet: of flying insects and delayed trains

The good news for our infrastructure is that the company is profitable

In today’s example of how some companies just can’t get anything right, Transnet released reviewed consolidated financial results “for the six moths ended 30 September 2022” – butterflies sold separately, I presume.

The results are released on SENS because Transnet has listed debt instruments. The more important consideration is that Transnet’s financial health has a direct impact on our mining companies, as infrastructure can’t be improved without money.

Revenue for these six flying creatures increased by 2% and EBITDA fell by 2.5%. The group is at least profitable now, with a profit of R159 million vs. a loss of R78 million in the comparable period. Cash generated from operations was R11.9 billion and capital investment was R6 billion.

Transnet Freight Rail remains the issue, contributing 45% of revenue and leading to Transnet not meeting the cash interest cover ratio of 2.5x that is required by lenders. A ratio of only 2.1x was achieved, with lenders thankfully agreeing to waive this covenant.

There are major steps being taken to deal with bottlenecks in the rail business. As a country, we can only hope this works out.

Little Bites:

  • Director dealings:
    • Mike Flax, one of the founders of Spear REIT, has diversified his investment portfolio by selling shares worth R38.9 million – his first sale since co-founding the group and acting as CEO between 2016 and 2018
    • The investment entity of directors of Ninety One has bought shares worth nearly £51k
    • A director of Argent Industrial has sold shares worth R120k
    • An associate of a director of Sea Harvest has acquired shares worth R66k
  • Although the JSE has approved the Northam Platinum circular regarding the offer to Royal Bafokeng Platinum shareholders, the complaint made by Impala Platinum to the TRP has now led to a delay in the TRP approving the circular. There can be no sympathy here, as Northam has certainly done everything possible to scupper Impala’s efforts. This soap opera continues.
  • In a major milestone for its exit from the Australian market, WBHO has entered into a settlement deed with Netflow Osars (Western) related to the performance guarantee obligations under the Western Roads Upgrade Contract.
  • Ellies has renewed the cautionary announcement related to the various discussions that the group is having to try and diversify its operations.
  • After a two year fixed term as Group Financial Director, Deon Federicks will retire from the board of Famous Brands from July 2023. Ms Nelisiwe Shiluvana will replace him, an internal appointment as part of the succession planning programme.
  • Pembury Lifestyle Group is trying hard to get back on track, with rezoning initiatives underway for certain properties and plans in place to try and finalise the 2019 audit and of course the subsequent years as well. There’s still a long road ahead, though.

Ghost Bites (BHP | Grindrod Shipping | Kore Potash | MC Mining | NEPI Rockcastle)

The Finance Ghost
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Ghost Bites (BHP | Grindrod Shipping | Kore Potash | MC Mining | NEPI Rockcastle)

BHP is finalising documentation for the OZ Minerals deal

The exclusivity period has been extended until 27 December

Well, whoever is working on this deal clearly isn’t having much of a Christmas holiday this year. Welcome to the world of corporate finance, where holidays are mainly just a myth designed to keep you motivated.

Having entered into an exclusivity agreement with OZ Minerals Limited towards the end of November, BHP has moved quickly to conduct a due diligence and confirm the proposed cash price of $28.25 per share. The outstanding step is to finalise the scheme implementation deed, for which the parties have agreed to extend the exclusivity until 27 December.

Importantly, the boards of both companies still need to sign off on the deal. It’s entirely possible that it still falls over at this stage.

Grindrod Shipping seems to be sticking around

If you’re still holding shares, be careful of liquidity

The offer by Taylor Maritime Investments for all the shares in Grindrod Shipping has closed. The important news is that not all the shareholders accepted it, which is exactly why offerors like to use a scheme of arrangement as an “expropriation mechanism” that binds the shareholders to the outcome if the requisite voting threshold is met.

Instead, we have a scenario where Taylor has moved from a shareholding of 25.29% to 83.23%. This is an awkward level, as there is not quite enough of a free float to meet JSE Main Board requirements, yet there is enough to be irritating.

The announcement warns shareholders that a delisting may still be in the pipeline. Liquidity may become problematic in this counter, so just be careful if you are sitting on a significant holding. That bid-offer spread can become very painful.

Kore Potash seems to still have support in Republic of Congo

When African governments start with nonsense, investors need to be wary

Let’s not mess around here: we are all very aware that Africa is fraught with corruption. Right here in South Africa, corruption is practically a national sport.

I was worried when Kore Potash first started reporting on what I can only call “weirdness” from the Minister of Mines in the Republic of Congo. The Minister has expressed concern at slow progress on the project, which is a little odd as Kore Potash has made plenty of progress with the Summit Consortium in putting the money and development plan together.

The Minister also complained about the administration of the local subsidiaries of Kore Potash, which led to the company hiring lawyers for two independent reviews of the corporate affairs of these subsidiaries. The reviews will be completed in January.

In the meantime, the management team got on a plane and met the Minister in the Republic of Congo, which seems to have gone well. In the world’s most carefully worded SENS announcement, Kore Potash highlighted that the Minister expressed his “thanks for how the company responded to his most recent letter” and reiterated that the company has the support of the government to develop the project.

Well, let’s hope that will be still be the case in 2023.

MC Mining extends its marketing agreement

This is a great outcome for Uitkomst

MC Mining’s Uitkomst mine produces coal of sufficient quality to be exported, but not enough of the stuff to fill a ship on a monthly basis. This previously created a frustrating situation in which the company couldn’t access the international coal market, thereby losing out on the far higher export price vs. domestic prices.

A marketing agreement with a company called Overlooked helped address this issue. The agreement was due to expire at the end of December and has now been extended to June, with the key terms staying as-is.

The way the deal works is that Overlooked handles the transportation, stockpiling and export of coal at the port. The fee for this service is 5% of the sales price, which seems pretty reasonable to me.

Notably, this is a related party transaction as the CEO of Overlooked is also a director and substantial shareholder of MC Mining.

One wonders if there is a deal coming down the line for the company to acquire Overlooked. We will have to wait and see.

NEPI Rockcastle invests further in Poland

This is one of the biggest European shopping centre deals of 2022

NEPI Rockcastle has acquired all the shares in Forum Gdansk, a large shopping centre in Poland’s sixth largest city. With a large catchment area and an occupancy rate of 93%, the property is obviously appealing.

The purchase price is €250 million, of which €50 million is vendor financing payable by NEPI Rockcastle within three years at a fixed rate of 6.5%. The rest of the purchase price was funded from NEPI Rockcastle’s cash resources and credit facilities.

The estimated net operating income of the property is €16.5 million, so that’s a yield of 6.6% on the purchase price.

In further news related to Poland, the acquisition of the Copernicus Shopping Centre became effective as of 19 December, so this means that two high quality retail assets have been added to the portfolio.

Little Bites:

  • Director dealings:
    • An associate of a director of Ethos Capital has acquired shares worth R1.5 million
    • Although several directors of Zeda received shares in the company as part of the unbundling from Barloworld, the interesting news is that a prescribed officer bought another R449k worth of shares.
    • An associate of a director of CA Sales Holdings has acquired shares worth R199k
    • A director of Brimstone has acquired shares worth R41.4k
  • As another reminder of what a large balance sheet actually looks like, Naspers repurchased shares worth R1.3 billion and Prosus repurchased shares worth $267 million. These amounts covered just a few days of repurchases! These repurchases are being funded from a sell-down of the stake in Tencent.
  • To give some context to these numbers, Investec has repurchased shares worth R757 million since 3 October.

Ghost Bites (Bell Equipment | Equites Property Fund | Jubilee Metals | KAP | Woolworths)

The Finance Ghost
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Ghost Bites (Bell Equipment | Equites Property Fund | Jubilee Metals | KAP | Woolworths)

Ringing the Bell

A rally of over 6% in the share price tells you what the market thought of this update

After a great deal of distraction around whether the controlling family will or won’t take the company private at a suitable price, things eventually settled down at Bell Equipment.

Focusing on the operations would’ve paid off for investors, as the share price has climbed nearly 26% this year.

In a trading statement for the year ended December, the company goes a long way towards justifying that share price performance. HEPS is expected to be at least 43% higher at 420 cents, a tasty number on a closing share price of R15.40.

The performance has come from stronger market conditions, which is exactly what shareholders want to see.

To learn more about Bell, take this opportunity to catch up on the Unlock the Stock event with the Bell CEO that we hosted back in March. In this case, it really paid to pay attention:

Equites’ deal with Lidl goes back to the drawing board

The local council has not approved the proposed development

Back in October, Equites Property Fund announced the sale of land in Basingstoke, England to iconic retail group Lidl. The deal was conditional on approval being obtained from the local council for the proposed warehouse developments on the site.

After an initial refusal, Equites’ UK business (Equites Newlands Group) was also unsuccessful in its appeal process. The local council ruled that although demand justifies the development, the visual and landscape impact wasn’t going to work.

Equities Newlands is not going to continue with this transaction, recognising that it needs to go back to the drawing board and come up with a new plan for the site. As the site is carried at cost and doesn’t currently generate any income, there is no change to the distribution per share guidance.

If you want to learn more about Equites, a very recent appearance on our Unlock the Stock platform may be of interest:

Jubilee is going from strength to strength

The CEO calls it a “truly remarkable year” for Jubilee

At operational level, there’s good news from exciting metals group Jubilee. At the Roan copper operations, a water infrastructure upgrade has taken the project back to “nameplate capacity” – the level it was built to operate at. There is also technical progress being made at the Sable Refinery, with solutions being found to improve recovery of copper and cobalt from historical waste and to reduce operating costs.

The new approach at Sable is referred to by the CEO as a “game changer” and allows multiple ores to be produced at once, which is similar to what the company achieved at the Inyoni PGM plant in South Africa.

Having made huge progress in the Southern Copper Strategy in Zambia this year, the focus next year is on what the company calls the Northern Refining Strategy in that country.

I must also note that there are outstanding warrants on the company’s shares. This has nothing to do with traffic fines and everything to do with instruments that give holders the right to subscribe for new shares at a price way below the current traded price. This is dilutive for shareholders.

KAP operational update

The five months to November weren’t easy

KAP operates in tricky conditions, with a difficult South African macroeconomic environment and volatility in input costs. With diverse operations, the group generally wins some and loses some, with a net outcome that hasn’t been enough to get the share price out of a stubborn recent trend.

Here’s an overview of how the businesses are doing:

  • PG Bison is enjoying “robust demand” and all plants operated at capacity
  • Restonic suffered far-less-appealing “subdued demand” and struggled with operating profit margin pressure as well, which is typical when revenue isn’t doing as well as hoped
  • Feltex saw an improved revenue performance as new vehicle assembly volumes picked up, which in turn improved the operating margin
  • Safripol’s profitability declined vs. the prior period due to lower raw material margins and production volumes
  • Unitrans lost a major food contract but still put in a “stable performance” and posted margins that remain below the long-term guided range of 8% – 10%
  • Newly-acquired DriveRisk is running below expectations because of the dollar strength, with related pricing adjustments to customers still to take place

The group is putting in a big effort to mitigate the impact of load shedding and to reduce reliance on Eskom, with construction of a 10 MW PV plant at Safripol Sasolburg completed in November and a 4 MW PV plant approved during this period for PG Bison Boksburg.

Woolworths closes a painful chapter

The sale of David Jones has been announced after much speculation

After exceptional destruction of shareholder value under previous CEO Ian Moir, current CEO Roy Bagattini and his team have been doing their utmost to steady the ship at Woolworths.

Having joined the group in February 2020 – displaying an uncanny ability to start under the worst possible circumstances – Bagattini has taken Woolworths back to basics and back to a share price level not seen since 2018:

The latest step in fixing the group is to offload David Jones, the horrendous investment that tarnished Moir’s career. The buyer is Anchorage Capital Partners, an Australian private equity fund. The fact that this is a voluntary announcement tells you how tiny it has become in the Woolworths context. It wasn’t always this way, so a huge amount of value has been lost forever.

The deal excludes the flagship property in Bourke Street, which Woolworths will retain and lease to David Jones on a long-term basis.

The important thing is that around R17 billion worth of liabilities relating to David Jones will be removed, which will allow the balance sheet to be tilted towards the right activities. Of course, this also gets rid of a distraction for the management team.

The Country Road business in Australia remains core to the group, so this isn’t a complete retreat from the land of kangaroos and broken shareholder dreams.

Little Bites:

  • Director dealings:
    • The family trust of David Hurwitz, CEO of Transaction Capital, has disposed of shares worth R36.4 million to reduce debt to an institutional lender – he could’ve sold them a LOT higher earlier this year
    • Dr Christo Wiese isn’t one to do things in half-measures, buying single stock futures on Shoprite shares with a strike price of R242.14 and a value of R726 million
    • The investment entity of the management team of Ninety One has bought shares worth £92.5k
    • A director of Argent Industrial has sold shares worth R675k
    • The company secretary of Afrocentric has disposed of shares worth R126k
    • Des de Beer bought more shares in Lighthouse, this time worth R125k
    • The interim CEO of Hulamin has acquired shares worth R15.4k
    • An associate of Piet Viljoen has acquired shares in Astoria worth R12.3k
  • Those of you who are particularly interested in climate change and associated Net-Zero targets will find it interesting to learn that Mondi is among the first packaging and paper companies with validated Net-Zero targets. The Science Based Targets Initiative (SBTi) has assessed and approved the targets.
  • In another sad reminder that mining remains a dangerous industry, Harmony reported a loss of life following a seismic incident at the Kusasalethu mine in Carletonville.

Inadequate infrastructure expenditure in the developed world

The Finance Ghost
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Inadequate infrastructure expenditure in the developed world

No rest for the wicked here, as Chris Gilmour unpacks the relative levels of infrastructure development in the emerging world vs. the developed world.

One of the areas that differentiates the developed world from the emerging world is the commitment to infrastructure development. The old developed world is largely stuck with aged, creaking infrastructure that hasn’t moved in line with increased population size, whereas the developing world, as proxied by countries such as China and Malaysia, tends to have far greater commitments to infrastructure development across the spectrum.

And the world’s largest economy, the USA, has one of the world’s worst infrastructural deficits.

Rectifying this situation with a much greater commitment to decent infrastructure spend is “good” investment and reaps all sorts of benefits over time. But neglecting it, even for a few years, can have catastrophic results.

The last really big federal project that the US government embarked upon (apart from NASA’s space program of the 1960s and 1970s) was the interstate freeway system that was constructed in the US from the late 1950s through the early 1970s. Since then, there has been very little of any consequence, and this is obvious to any non-US traveller arriving at the tawdry JFK airport in Queens in New York City. And the road leading into the city from the airport is buckled and mangled, a reflection of the poor maintenance it receives. The bridges across the East River are ancient and only the (relatively) recently constructed Verrazzano Bridge connecting Staten Island and Brooklyn is less than 50 years old.

US utility companies often struggle to keep the lights on and so-called “brownouts” occur, whereby voltage reductions are deliberately put in place to conserve electricity.

According to a fairly recent study by the highly respected American Society of Civil Engineers (ASCE), deteriorating Infrastructure and a growing investment gap will reduce US GDP by $10 trillion in 20 years. In a hard-hitting report released last year, the ASCE said that “Infrastructure inadequacies will stifle US economic growth, cost each American household $3,300 a year, cause the loss of $10 trillion in GDP and lead to a decline of more than $23 trillion in business productivity cumulatively over the next two decades if the U.S. does not close a growing gap in the investments needed for bridges, roads, airports, power grid, water supplies and more.”

As a percentage of GDP, Gross Fixed Capital Formation (GFCF) in the US is a relatively low 21%, which places the US not much higher than Russia in the league table of infrastructure spend:

Source: World Bank / Gilmour Research

The UK (at 17%) is even worse and South Africa is a very low 13%.

Between now and 2039, the ASCE report estimates that nearly $13 trillion is needed across 11 infrastructure areas: highways, bridges, rail, transit, drinking water, stormwater, wastewater, electricity, airports, seaports and inland waterways. With planned investments in infrastructure currently totaling $7.3 trillion, that leaves a $5.6 trillion investment gap by 2039.

This gap has to be filled, and soon!

We are probably entering a new era in state spending globally, one that is going to be funded by substantially higher taxes. The party has been going on too long, with low taxes and little or no decent infrastructure spend. The end result is inevitable – decay and destruction of existing infrastructure.

Not long before he left office, Donald Trump signalled that his administration was intent on spending large amounts of money on new infrastructure. But it’s debatable that he fully grasped just what this would have entailed in terms of higher taxes.

Americans have become used to paying very little tax over the years and it will take a brave president to reverse that situation. But that is precisely what needs to happen.

Britain is in a similar position and if anything, its infrastructure deficit is even worse. A classic example is the rail network. Largely privatised from the late 1970s onwards, much of the rolling stock still appears to date from that era and even earlier. One of the biggest problems facing infrastructure development in the UK is a) the authorities’ obsession with mega-projects and b) concentrating almost all infrastructure development in London and the south-east of England. Some of these are vanity projects such as Crossrail in London, although the most recent large bit of infrastructure development relates to the new nuclear power plant at Hinkley Point in Somerset.  

One of the things that struck me about the state of unreadiness of the developed world when the Sars-CoV-2 virus struck was the lamentable state of hospital and associated infrastructure. This was in stark contrast to how developing countries such as China attacked the situation, building pre-fabricated 1,000-bed hospitals from scratch in a matter of days. But if we use Britain as a proxy for the developed world, its infrastructure was found to be wanting, with the National Health Service (NHS) hospitals at or near breaking point most of the time. To be fair, the authorities did convert other buildings into so-called “Nightingale” hospitals but these were never used. But if we go back in time to 1968-72 with the Hong Kong flu pandemic or 1957 with the Asian flu pandemic, both of these events were easily coped with using existing hospital infrastructure.

The harsh fact of the matter is that health bureaucrats the world over believe that most healthcare problems can be solved via the application of technology, such as virtual doctor appointments etc.

The reality is that they can’t.

So, infrastructure development is likely to be a big factor in future high-level spending priorities if for no other reason than that existing infrastructure really is at the end of its tether. It will be interesting to see how this is paid for ultimately, over and above by higher taxes.

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 #6 (MTN + Telcos | Steinhoff | Alviva | Mpact | PBT Group | Shoprite – Massmart | Grand Parade)

The Finance Ghost
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Ghost Wrap #6 (MTN + Telcos | Steinhoff | Alviva | Mpact | PBT Group | Shoprite – Massmart | Grand Parade)

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

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

  • Why the telecoms companies sold off so sharply last week (with a focus on MTN)
  • Steinhoff’s horrible news for shareholders and another crash in the price
  • A firm intention announcement for Alviva to be taken private at R28 per share
  • Mpact’s planned investment of R1.2 billion in Mpumalanga to support fruit exports
  • PBT Group offloading its B-BBEE preference shares to Sanlam Investment Management
  • Shoprite getting the green light to buy (most of) the cash & carry stores from Massmart
  • The board of Grand Parade Investments advising shareholders to accept the offer from GMB

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 (Accelerate | DRA Global | Grand Parade | Harmony | Implats – Northam – RBPlats | Mondi | MTN | Steinhoff)

The Finance Ghost
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Ghost Bites (Accelerate | DRA Global | Grand Parade | Harmony | Implats – Northam – RBPlats | Mondi | MTN | Steinhoff)

Accelerate isn’t really accelerating

Interim results for the six months to September reflect a mixed bag

Accelerate Property Fund’s share price is down 9.9% this year and the company is still trading at a huge discount to Net Asset Value (NAV) per share. The NAV is R5.00 and the share price is R1.00, so I wasn’t joking by describing it as huge.

With significant exposure to the office sector, Accelerate is suffering with substantial group vacancies. The vacancy rate has actually worsened from 17.3% to 19.9% based on gross lettable area. The bulk of the vacancies are in B- and C-grade office space and low income industrial space.

In such a difficult market, watch out for the weighted average lease expiry, which has moved from 5.9 years to 3.9 years. You want to see short-dated expiries in a booming market, not an ugly one where the last thing a landlord wants to do is renegotiate with a tenant.

In terms of debt, the loan-to-value (LTV) has improved from 48.5% to 42.1% but the interest cover ratio has gotten slightly worse (1.9x vs. 2.0x). Keep a close eye on this, as Accelerate has agreed with lenders to temporarily reduce the interest cover ratio covenant to 1.7x.

Due to the dividend reinvestment alternative offered to shareholders in July, the NAV per share has fallen from R6.20 to R5.00.

Overall, the fund remains under pressure and issues like load shedding certainly don’t help. It’s not easy to fill new space in this environment, so the vacancy rate at the newly redeveloped Fourways Mall is slowly coming down.

To try and improve the balance sheet, there are still non-core properties worth R566 million that are earmarked for sale. Disposals of R255 million (not included in the previous number) have been signed, which would drop the LTV by 170 basis points and reduce fund vacancy levels by 3.7%.

As was the case last year, there is no interim distribution by the company. The fund annoyingly doesn’t disclose distributable income per share, but a quick calc based on 1.224 billion shares in issue and distributable income of R110.6 million suggests distributable income per share of around R0.09 for the interim period.

With a share price of R1.00, that’s a yield of 18%. Is that enough to justify the risk?

An unusual use of treasury shares

DRA Global has raised almost R93 million by placing treasury shares

This is quite technical, so try follow as best you can.

If a listed company repurchases shares, it can do so in one of two ways. They can either be repurchased by the listed company itself (in which case the shares are cancelled) or by a subsidiary, in which case the shares still exist but the group effectively holds shares in itself.

There are other ways for a subsidiary to end up holding shares in its parent company. In all such situations, those are called treasury shares.

Usually, you hear nothing more about them. In the case of DRA Global though, the company has placed the treasury shares with Apex Partners and raised nearly R93 million in the process. This makes Apex a 8.54% shareholder in the group through a single deal.

As treasury shares were used, there is no change to the number of shares in issue, as this wasn’t an issuance of fresh shares.

Offer for Grand Parade is fair and reasonable

The board has recommended that shareholders accept the mandatory offer

With GMB Liquidity Corporation having breached the 35% ownership threshold in Grand Parade, a mandatory offer is triggered. The price in this case is R3.33 per share and shareholders can choose whether to accept it or not. This is different to a scheme of arrangement where a shareholder vote binds all shareholders to the outcome.

KPMG was appointed as independent expert and the firm has concluded that the offer price is both fair and reasonable to shareholders, which is a little unusual in mandatory offers. This means that the offeror (GMB) isn’t necessarily getting a great deal. If it was a good outcome for GMB, the offer would be determined as unfair (too low relative to fair value) but reasonable (higher than or equal to the current traded price).

On this basis, the independent board has recommended to Grand Parade shareholders that they accept the offer.

Harmony concludes the Eva Copper deal

This is a major strategic milestone for Harmony

In a deal that was first announced in October 2022, Harmony will now count Eva Copper as a group subsidiary and will hand over R3 billion for the pleasure. This is being funded through available cash and revolving credit facilities, with the company noting that it is comfortably within debt covenants even after this acquisition.

As South Africa’s largest gold miner by volume, there are two sources of diversification for Harmony in this deal: metal (this is a copper asset) and geographical (it is in Australia).

The company is busy reviewing the existing feasibility study. They will now focus on finding the most effective way to execute the project and finance the capital requirements to bring the mine into production.

There’s just one hurdle left for Implats

Well, one regulatory hurdle at least

The Impala Platinum (Implats) vs. Northam Platinum saga continues, with the companies locked in an ugly battle for Royal Bafokeng Platinum. A few lawyers have significantly improved their bank balances thanks to this fight.

With the latest extension to the longstop date, the offer period would’ve been open for over 12 months. If you think that large M&A deals happen quickly, you are horribly mistaken.

The final outstanding condition for the Implats offer is the issuance of a Compliance Certificate by the Takeover Regulation Panel. It took a lifetime to get Competition Tribunal approval for the deal, so the company was no doubt hoping for a speedy resolution of this outstanding item.

Alas, Northam has accused Royal Bafokeng Platinum of non-compliance with the Takeover Code, which in turn has resulted in delays to the issuance of the all-important Compliance Certificate.

Just to add further spice to the story, Implats has previously complained to the TRP about elements of Northam’s firm intention announcement, so it seems likely that Northam won’t be allowed to issue its offer circular until this is sorted out.

The elephant in the room has nothing to do with the regulatory process. No, Implats has a bigger problem – it has been outgunned by the Northam offer, so it doesn’t seem likely that the Implats offer in current form would be good enough to get the desired outcome. Implats reserves the right to increase the offer, so let’s wait and see what happens.

Mondi sells more Russian assets

This is unrelated to the proposed disposal of the large Mondi Syktyvkar assets

Mondi has agreed to sell its three Russian packaging converting operations to the Gotek Group for around €24 million at current exchange rates, though the deal is denominated in rubles (RUB 1.6 billion).

The loss on the disposal is €70 – €80 million at current exchange rates, so that’s a significant loss as a direct result of the geopolitical conditions we find ourselves in.

Much like the disposal of the Mondi Syktyvkar business (which is far more important as the deal is approximately 10x larger than this one), approval will be needed by the Russian Federation’s Government Sub-Commission for the Control of Foreign Investments.

I’m very pleased that I don’t have to be the Western suit-and-tie who attends that meeting.

MTN pre-close update

A 7% drop in the share price tells you what to expect here

Ahead of financial year-end (December), MTN has updated the market on trading conditions. These have been ugly in the final quarter of the year, reflected in the share prices of telecommunications companies that have come under pressure.

The group’s most important markets are South Africa, Nigeria and Ghana. Recent inflation rates across those markets are 7.5%, 21.1% and 50.3% respectively. That’s not easy.

Another issue that isn’t easy to manage is lack of availability of foreign currency, a problem that is plaguing a number of South African companies with African investments. Where companies need to get cash out of places like Nigeria, they are being forced to do it at “parallel rates” that are far less favourable than the theoretical market rates.

MTN Group has upstreamed R17.3 million in the 11-month period to November, including R6.5 billion from Nigeria. Holding company leverage ratios are flat vs. the Q3 levels.

Energy costs are a major consideration. Although MTN’s energy bill represents 5% – 7% of group costs, load shedding also puts a capital expenditure burden on the group as it needs to upgrade its towers. We’ve seen this coming through in Vodacom’s numbers as well.

Despite group revenue growth of 14.8% in the 11-month period to November, group EBITDA margin deteriorated since the last update in September. This is because of the pressure in the South African business, where revenue growth has slowed to 3.2%.

In Nigeria, service revenue grew by 21.3% and EBITDA margin was broadly in line with the 53.6% reported in the third quarter results.

The announcement does give an update on Ghana but mainly in terms of subscriber numbers, which have been topical recently as MTN was forced by the regulator to remove unregistered subscribers in that country. Of the 5.7 million subscribers that were initially barred at the end of November, 20% have been restated.

There is some good news in the fintech side of the business, where revenue is up 13.6% vs. the 12.9% reported in Q3. The ongoing build out of the agent and merchant network is contributing to this acceleration. More good news is that the Ghanaian government is planning to decrease the e-levy on electronic transactions from 1.5% of value to 1.0%.

A managed separation of the fintech business is underway and is expected to be completed in the first quarter of 2023.

Despite the obvious pressure on free cash flow, the dividend guidance of at least 330 cents per share for FY22 remains in place. The group also believes that it is still making solid progress in driving return on equity towards 25%.

Steinhoff: the end is nigh (for ordinary shareholders)

You can either lose all your money or almost all your money

Well, there we have it. The show is over at Steinhoff, with the creditors holding the keys to the business. The share price fell 64% on Thursday and I’m not sure why it didn’t fall further.

Again, I am thankful that I got out of this thing at the start of the year. For those who have been caught up in this pain, I truly feel sorry for you. It’s a hard lesson in understanding that no matter how interesting the underlying operations are (like Pepco in Europe), the holding company balance sheet is critical.

I won’t go into the technical details of the debt restructure. All you really need to know is that if shareholders vote in favour of the proposed restructure, the lenders will hold 100% of voting rights and 80% of the economic interest, leaving 20% behind for existing shareholders in the form of a new equity instrument that the group envisages will be unlisted.

If shareholders don’t vote in favour of the proposal, the lenders will own everything.

That’s it. Simple as that. Goodnight and goodbye, Steinhoff shareholders.

Little Bites:

  • Director dealings:
    • The interim CEO of Hulamin has bought shares worth R363k
    • A director of Mediclinic has sold shares worth R10.5 million, so he didn’t hang around for the payment by Remgro and friends under that offer
    • A non-executive director of British American Tobacco has acquired shares worth $81.5k
    • Des de Beer has bought another R551k worth of shares in Lighthouse Properties
    • JD Wiese has bought preference shares in Invicta worth R7.9 million
    • The investment entity of the management team of Ninety One has bought another £56k worth of shares
    • The company secretary of Impala Platinum has sold shares worth R971k
    • An associate of a director of Vukile has sold shares worth R1 million as part of a communicated plan to the market to reduce its debt with Investec
  • Mergers and acquisitions / major transactions in shares:
    • In another example of a failed B-BBEE structure (one that ends up “underwater” because the equity value ends up being lower than the outstanding debt), Redefine needs to restructure its empowerment trust because of a deficit of R1.9 billion. It’s a double-whammy of bad outcomes, as the executive incentive scheme (in which executives borrow money to buy shares) is also underwater. Borrowing money to buy shares is ALWAYS dangerous, even in property companies where there is supposedly a reliable yield.
    • Sable Exploration and Mining Limited noted that PBNJ, which is currently making a mandatory offer for the shares in the company, now holds a stake of 45.5% in the company.
    • Sebata Holdings has agree to sell its 55% stake in Freshmark Systems for R24.75 million. The profit after tax for the year ended March was R3.9 million, so that’s a decent P/E multiple for such a small company. Perhaps they will now have enough money to fix their website?
    • As part of a B-BBEE deal that was put in place way back in 2007 by Italtile, there have been tranches of repurchases of shares from Four Arrows Investments. The final tranche is now taking place, with a repurchase of shares at R11.51 per share. The deal value is over R77 million and the price is based on 83% of the 10-day volume-weighted average price (VWAP). The Italtile share price is under pressure at the moment based on prevailing consumer conditions.
    • The former CEO of Cashbuild has agreed to sell a large block of shares to the company in a specific repurchase transaction. With the share price having fallen 25% this year, it’s probably not a bad time for the company to effectively be investing in its own shares. This is a substantial deal worth over R194 million, representing around 4% of all shares in issue by the company. A circular will be issued to shareholders and they will need to approve the proposed transaction.
    • The scheme of arrangement for the delisting of OneLogix has been approved by shareholders and will go ahead once other outstanding conditions have been met.
    • After receiving shares in Mast Energy Development as partial settlement for an outstanding debt, Kibo sold shares worth nearly £240k to realise some of the stake in cash. Kibo now holds a 57.86% stake in Mast.
    • As part of its ongoing strategy to reduce the stake in Tencent and repurchase its own shares, Prosus has sold further shares in Tencent and now owns 26.99% in the Chinese tech giant.
  • Earnings:
    • South Ocean Holdings, a business that has nothing to do with fishing and everything to do with manufacturing electrical cables, has released a trading statement for the year ended December 2022. HEPS is expected to be 46% lower, coming in at 19.76 cents. The company blames the usual issues facing our industrial firms, like rising input costs, load shedding and Transnet.
  • Notable board changes:
    • Freshly unbundled group Zeda has announced that Lwazi Bam has been appointed as Chairman of the Board. As the ex-CEO of Deloitte Africa, he brings huge experience to the board.
    • Spar has announced the appointment of Mike Bosman as the Chairman of the Board, which means that Andrew Waller will resume his role as Lead Independent Director. With extensive experience on other listed boards, shareholders will hope that Bosman’s appointment will go some way towards improving the governance smell currently found at Spar.
    • The Chairman of the Board of Hyprop has stepped down to become the CEO of investment firm Arise. The new Chairman is Spiros Noussis, who was formerly the joint-CEO of NEPI Rockcastle.
    • Texton is on the hunt for a new CCFO after Pinny Hack resigned from the company.
    • Orion Minerals has appointed Peet van Coller as its new CFO. This comes off the back of successful capital raising activities with Triple Flag Precious Metals and the IDC, which are now in final implementation stages.
  • Housekeeping:
    • Nampak’s proposed rights offer is so huge that a share consolidation is being proposed as part of the deal, just to allow the rights offer price to be fixed at a practical level. This is literally a step to avoid Nampak becoming a penny stock with an extremely low share price that would make it difficult to trade.
    • If you are a shareholder in Industrials REIT, you should refer to the announcement released on Friday regarding the choice between a cash or scrip dividend.
    • Emira Property Fund, Transcend Residential Property Fund and Castleview Property Fund are all changing their year-end to March to simplify the group reporting structure. Castleview is the majority shareholder in Emira and Transcend is controlled by Emira.
    • Kaap Agri Limited is looking to change its name to KAL Group Limited, with an expected implementation date towards the end of February.
  • Progress reports by suspended companies:
    • In a quarterly progress report (a requirement when a listing has been suspended), Afristrat set out the numerous issues that the company has been dealing with. These range from the lack of an auditor through to legal action in Botswana against the management team who allegedly stole from the business. To add to this horrific situation, there is also a liquidation application underway that the company is trying to defend in court. In case you’re feeling bad about your festive season and you want something to make you feel better, go read the detailed announcements to see what this company is dealing with.
    • Similarly, Conduit Capital released a quarterly progress report. With the major business in the group placed under liquidation, nobody is quite sure what (if anything) is left. The company is prioritising the conclusion of the audits of the remaining insurance companies in the group, so that should bring some clarity once released. I doubt it will be an answer that delivers much good news for shareholders.

Ghost Mail (Adcorp | Alviva | Brimstone | Ellies | Mpact)

The Finance Ghost
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Ghost Mail (Adcorp | Alviva | Brimstone | Ellies | Mpact)

Adcorp to shut down allaboutXpert Australia

No buyers could be found, so voluntary administration comes next

As noted in recent results, Adcorp has been dealing with significant issues around profitability in the allaboutXpert Australia business. This is a non-core operation, so Adcorp wasn’t about to distract management and take risks with the balance sheet to fix it.

Efforts to find a buyer for the business have been unsuccessful, so Adcorp has elected to place the group into voluntary administration.

This business contributed under 1.7% of Adcorp’s revenue in the interim period and is clearly not financially lucrative, so shareholders are probably better off from this decision.

It’s “firm intention” time for Alviva

A jump in the share price of 10.3% was an early Christmas pressie for shareholders

After a cautionary announcement released back in June, a consortium of investors and some members of the Alviva management team will be making an offer to buy all remaining shares in the company.

This will be proposed as a scheme of arrangement, which is an expropriation mechanism that is used to apply the outcome to all shareholders provided the 75% approval is obtained.

The price of R28 per share is a premium of 45% to the volume weighted average price before the expression of interest was submitted in June.

This is effectively a take-private by the existing B-BBEE partners in Alviva who currently hold 18.7% in the company. If it goes ahead, this deal would position Alviva as a majority Black-Owned ICT company.

Brimstone voluntary NAV disclosure

The intrinsic NAV per share is down 11.7% over nine months

As an investment holding company, intrinsic net asset value (INAV) per share is the measure that most investors would use in assessing Brimstone. As is typical in these companies, the share would then trade at a discount to INAV per share for various reasons ranging from head office costs through to performance (or lack thereof) of underlying investments.

In the past couple of years, Brimstone has traded at a discount of roughly 45% to 55% of INAV. When the market pushes the risk-off button, the discount inevitably widens.

A major driver of the discount is that the bulk of the group’s value is derived from other listed companies that investors can access directly. Of the gross value of R5.1 billion, a significant R3.6 billion is attributed to the investments in Oceana and Sea Harvest. There are other investment holding companies on the JSE that trade at much smaller discounts, not least of all because they hold private assets rather than stakes in other listed companies.

As a technical point, investment holding companies generally don’t provide for capital gains tax on large stakes in listed companies, as there are income tax relief provisions available when unbundling stakes like these. An unbundling would be the likeliest realisation of value. In contrast, capital gains tax provisions are raised on smaller investments with the goal of the INAV then reflecting an after-tax view on the company.

Brimstone’s INAV has decreased by 11.7% over nine months.

Ellies: a group in transition

From satellites to “smart infrastructure”

With a loss after tax in the six months to October of R34.9 million, the winds of change need to blow at Ellies. In fact, the hurricane of change is needed, because losses have accelerated sharply.

In the past year, the net asset value per share has dropped by 36.9% and the share price doesn’t look much better to be honest.

With the Manufacturing segment closed, only the Trading and Distribution segment remains. With various cost-saving initiatives being implemented in the core operations, Ellies is also in the process of trying to raise capital to execute strategies in alternative energy, water storage and harvesting, connectivity and smart home technology.

It’s easy to play buzzword bingo of course. The real test lies in implementation, something that Ellies will need to prove to the market beyond the progress already made in alternative energy products. Eskom does a great job of helping with demand in that product category.

The balance sheet is starting to look rather weak, so Ellies needs to move quickly with these strategic changes.

Mpact to invest R1.2 billion in Mpumalanga

This investment is being driven by growth in the export fruit sector

With everything going on in South Africa (and especially load shedding), it’s easy to become despondent and forget that we still have a very strong private sector. We also have pockets of excellence that can compete on the global stage, like our fruit exports.

The downstream impact of a successful industry is that companies invest in the supply chain, creating jobs and driving the economy forward. A great example is Mpact’s R1.2 billion investment project at the Mkhondo Paper Mill in Mpumalanga. This mill focuses on semi-chemical fluting, a virgin containerboard grade that is used in cold-chain applications due to high strength, moisture resistance and durability.

The project is expected to be completed in 2025 and should produce an internal rate of return in excess of 20%.

It will be funded by Mpact’s existing operations and some debt, which would lead to borrowings peaking in 2024.

Little Bites:

  • Director dealings:
    • A prescribed officer of ADvTECH has sold shares worth roughly R1.45 million
    • An associate of a director of Ethos Capital has acquired shares worth over R430k
    • In a useful reminder that many JSE directors have borrowed money to buy their shares in the listed companies, a director of Equites has pledged more shares to Investec under a loan agreement
    • A prescribed officer of Spear REIT has sold shares worth R365k
  • Marshall Monteagle announced interim results for the six months to September. Group revenue from continuing operations increased by 53% and profit before tax on trading and property operations increased by 77%. But due to losses on revaluation and sales of investments, the group slipped into a net loss position.
  • As part of the broader deal with Allianz in Africa, Sanlam Emerging Markets has redeemed shares held by Santam. This results in a payment of R126.5 million to Santam. Notably, Santam retains its economic participation rights in the general insurance investments in India and Malaysia.
  • Southern Sun announced that the sale of the Southern Sun Ikoyi Hotel in Nigeria has met all conditions precedent, which means that the deal has closed and that the sales proceeds were received.
  • In a related party transaction that is an important part of Sea Harvest’s supply chain, the supply agreement with the Vuna Companies has been extended for a further three years. Brimstone is a shareholder in both companies. Although this isn’t a related party transaction as defined under JSE rules, the company hired an independent expert anyway and the expert has confirmed that the terms are fair.
  • As Nampak’s share price continues to plummet, Allan Gray has sold more shares and now holds 14.6484% in the company. That’s about 14.6484% too much.
  • The CEO of AYO Technology has retired and a successor will be named in due course.
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