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Ghost Bites (AH-Vest | Altron | Brikor | Investec Property Fund | Sirius)

The Finance Ghost
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Ghost Bites (AH-Vest | Altron | Brikor | Investec Property Fund | Sirius)

AH-Vest gives details around the HEPS drop (JSE: AHL)

There is more liquidity in the sauce than in the stock

There is practically no trade in AH-Vest, so I’ll keep this brief. The maker of AllJoy sauces is suffering under load shedding, with revenue up 2.2% in the six months to December 2022 and HEPS down by 68.5%.

Gross margin wasn’t too bad, down from 37.7% to 36.6%. A 15.8% jump in operating expenses caused the drama, with shipping and distribution costs as major drivers. Higher interest rates drove a 28.8% increase in finance costs.

Working capital also came under pressure, with receivables up by 42.9% and trade payables only up by 26.3%. The company makes it sound like much of this is seasonal.

Importantly, there are major projects underway to alleviate the dependency on Eskom.

Altron: read those adjustments very carefully (JSE: AEL)

A 4.9% drop in the share price tells you what the market thought

If an announcement confuses you, one of the best signs of the real story is the market’s response to the update. You always need to check the performance of the index as well, as what you’re looking for is the movement in the company share price vs. the broader market. On a day when the JSE All Share closed only 0.2% lower, a 4.9% drop at Altron sends a message.

Within the first three lines of the “Group Overview” section of this trading statement, Altron already refers to “normalising” the “once-off adjustments” – oh dear.

There’s more corporate speak just a few lines down, with Netstar and Altron Systems Integration (ASI) implementing their “accelerated performance improvement strategies” – the company hopes that this will make shareholders feel better about EBITDA margin compression at group level.

The once-off adjustments are a joke, bluntly.

The first one is a provision of R134 million raised against an amount owed by the City of Tshwane, which is currently in an arbitration process. It’s nonsense to raise a doubtful debts provision and then imply that the entire thing is an unfortunate adjustment – if you do business with the public sector, this is part of life.

The second adjustment is even better, with R31 million in impairments of inventory pertaining to a project that ended up being smaller than in the original tender. In other words, Altron overstocked the contract and wants everyone to casually ignore that. This goes straight to cost of sales, dear Altron.

The final adjustment relates to R104 million worth of impairments on Altron Document Solutions, the sale of which fell through in this period.

It’s therefore little wonder that the market focused on actual earnings, with HEPS expected to drop by between 14% and 32%. In case you’re wondering, those adjustments imply adjusted HEPS growth of between 8% and 28%.

Looking deeper, Altron Security achieved double-digit growth in EBITDA. If you include the acquisition of LawTrust, revenue and EBITDA in that business has more than doubled. Altron Karabina grew revenue and EBITDA by double digits as well. ASI grew revenue by double digits but put in a “disappointing” EBITDA performance for the year, which in my books means EBITDA decreased year-on-year. The announcement doesn’t confirm or deny this.

In Netstar, revenue grew by double digits and EBITDA was flat, leading to the appointment of a new managing director in the business. The other businesses in the Own Platforms segment include FinTech (double-digit growth in revenue and EBITDA) and HealthTech (single-digit growth in both).

In Managed Services, revenue was up by double digits and EBITDA was “negatively impacted” by provisions – specifically the City of Tshwane issue and the tender for which there was too much inventory. I refuse to even entertain that attempt to hide real business risks as once-offs.

Finally, Altron Arrow achieved double-digit revenue growth and more than doubled EBITDA.

Overall, it sounds to me like Altron is doing well in most areas except for public sector work in Managed Services. Perhaps the market will be more forgiving in days to come, but the initial reaction was anything but positive.

The potential offer for Brikor at 17 cents per share is imminent (JSE: BIK)

Many have been caught out, with a 15% drop in the price to get to 17 cents on Monday

Nikkel Trading has now built up a stake of 34.2% in Brikor based on purchases from major shareholders at 17 cents per share. These purchases were pre-agreed with those shareholders and there is an agreement in place to take the total stake to 67.7%.

This is clearly a change of control, which necessitates a filing to the Competition Commission. This filing is expected to be made in the next few days. Importantly, a move through 35% also triggers a mandatory offer, so it’s likely that Nikkel Trading will end up with more than 67.7% in the company.

It will be interesting to see how many shareholders take advantage of this liquidity event.

Investec Property Fund releases the ManCo internalisation circular (JSE: IPF)

BDO reckons that the terms are fair to shareholders

In case you missed my previous rants about the property find and ManCo internalisations, here’s a brief synopsis:

  • A property fund has a management team, like other companies
  • Unlike other companies, the management team earns a fee based on assets under management, so the fund can never achieve economies of scale as the fees grow along with the assets
  • Unlike other companies, that management team eventually gets bought out at a fat multiple to the annual management fee, thereby “internalising” a management team that should never have been externalised to start with
  • In summary, shareholders get fleeced and the management team ends up fabulously wealthy

There have been many such examples on the JSE. The latest one is Investec Property Fund, with the circular using all the tricks in the book to make shareholders think this is a great idea.

For example, the circular quotes a R74 million saving in net management fees per annum after costs. It also highlights that the loan-to-value ratio will be largely unchanged, thanks to sales of properties to pay a big chunk of the proposed amount.

Don’t worry, dear shareholders – we plan to sell off properties to help pay the management team, rather than raise new debt for it.

The price is R850 million with an earn-out of R125 million based on this hotshot management team needing to grow assets under management at a rate that exceeds 2% per annum. R390 million is funded by property sales, with R260 million payable in cash up-front and R200 million then payable over two years. That covers off the R850 million fee.

The circular doesn’t point out that the effective earnings multiple on this deal is 11.5x. What would your response be if a non-property company approached you as a shareholder and asked if 11.5 years worth of management costs can be paid up-front?

BDO Corporate Finance was appointed as independent expert and they seem to think that the deal is fair to Investec Property Fund shareholders. Of course, they are basing this off a valuation of a management contract that is already in place, which is different to opining on whether the concept of a property ManCo internalisation is fair. In case you’re wondering, they’ve been paid R450k to act as independent expert here. BofA Securities is acting as Financial Advisor, pocketing a delicious R20.3 million in fees.

Holders of 54.1% of the voting shares (i.e. excluding those held by Investec) have already confirmed an intention to vote in favour of the transaction. The pigs are at the trough because institutional shareholders allow it.

Sirius believes it has met market expectations (JSE: SRE)

The share price is down over 21% in the past 12 months – I did warn you about the valuation!

I have a very simple rule when it comes to property funds: don’t buy them at a premium to net asset value (NAV) per share. It rarely works out well. Sirius was a particularly strong example during the pandemic, trading at a silly premium to NAV that never made sense to me. Here’s the pain that followed:

I deliberately included a long-term chart here because Sirius deserves credit for the clear growth trend. I also wanted to demonstrate just how daft the pandemic move was.

In a trading update for the year ended 31 March 2023, Sirius has noted a 7.7% increase in the like-for-like rent roll. This is solid, as it shows that Sirius can keep its revenue growing in line with inflation. Cash collection has been strong and occupancy rates look good.

Keep a close eye on the balance sheet, as the group is still enjoying a weighted average cost of debt of 1.9%. That won’t be the case anymore when debt is refinanced, although 90% of debt has a maturity in excess of three years. The good times will continue for a while longer.

Approximately €45 million in capital was recycled, with disposals and acquisitions of similar total value. The investment focus was in Germany whereas the disposal focus was on properties that have little potential upside.

In the interests of a balanced view, Sirius did managed to sell six properties at a 25% combined premium to book value. I would just be careful of extrapolating these disposals to the entire portfolio to justify a group premium. Remember, they will only sell properties where it makes sense to do so. The market never finds out about any offers that weren’t accepted.

Results will be announced on 5th June.

Little Bites:

  • Director dealings:
    • Des de Beer has bought more shares in Lighthouse Properties (JSE: LTE) worth almost R1.2m.
    • A director of MAS (JSE: MAS) has bought shares in the property fund worth R780k.
  • Australian courts have sanctioned BHP’s (JSE: BHG) scheme to acquire 100% of the shares in OZ Minerals. The effective date is 2 May 2023.
  • After 12 years on the board of ADvTECH (JS: ADH), Chris Boulle is retiring as chairman. He’s going to hang around until the 2024 AGM and will then move on. I was at the rather entertaining AGM around the time that Curro was trying to acquire ADvTECH and I remember seeing Boulle in action, dealing with angry people from PSG on one side and far more frightening (and angry) mothers from the schools on the other.
  • The revolving door at Luxe Holdings (JSE: LUX) continues, with the company secretary now resigning.

Ghost Bites (AH-Vest | Industrials REIT | Grand Parade | Rex Trueform | Sappi | Universal Partners)

The Finance Ghost
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Ghost Bites (AH-Vest | Industrials REIT | Grand Parade | Rex Trueform | Sappi | Universal Partners)

No joy for AllJoy from Eskom (JSE: AHL)

AH-Vest has flagged an ugly drop in HEPS

Even a big ol’ helping of tomato sauce won’t make shareholders feel better about this one. AH-Vest is the food manufacturing business responsible for AllJoy. There is NoJoy during loadshedding, with a substantial impact on food production.

Although generator capacity was increased during April 2023, the results for the six months to December 2022 were ruined. Eskom is only partly to blame here, with other factors like supply chain costs playing a role. Sadly, none of these issues have disappeared in 2023. If anything, they have worsened.

For the interim period, AH-Vest has flagged a 68.5% drop in HEPS.

And in case you’ve never heard of this company and you are now questioning your market knowledge, take solace from the fact that the market cap is only R21.4 million. There’s more liquidity in the sauce than in the stock.

Blackstone makes it formal with Industrials REIT (JSE: MLI)

The terms of a cash offer of 168 pence per share have been announced

Operating through a new entity called Sussex Bidco, Blackstone has formalised its offer to the shareholders of Industrials REIT. In practice, this means that terms have been announced.

The price of 168 pence per share is a premium of 40.6% to the one-month volume weighted average price (VWAP). The focus on becoming a pure-play UK multi-let industrial fund has paid off handsomely, attracting a substantial offer for shareholders. The independent board is very happy with the offer, agreeing unanimously to recommend it to shareholders.

Blackstone is the world’s largest alternative asset manager, with $975 billion in assets under management (AUM). Of that huge number, $326 billion is in the real estate side of the business. With a market cap of R11.1 billion, Industrials REIT is literally a rounding error for Blackstone at group level. It just shows how difficult it can be to materially move the needle in a portfolio the size of Blackstone’s.

For shareholders in Industrials REIT though, this is a cash bonanza of note.

A new sheriff in town at Grand Parade (JSE: GPL)

When you control the company, you call the shots

With a stake of 53.65% in Grand Parade Investments after its mandatory offer, GMB Liquidity Corporation now controls the group. Gregory Bortz (spot the initials there) is the new CEO of Grand Parade, taking the top job from 2 May 2023.

What are his plans for the group? Anything is possible. Bortz seems to be heavily involved in the local horseracing industry, so he’s an interesting guy who seems to know how to mix business with pleasure. Grand Parade adds gambling stakes to his portfolio, with the food assets now out of the way.

Rex Trueform posts much stronger results (JSE: RTO)

You need to read carefully though, as acquisitions were a major contributor

When a company posts a huge jump in performance, it’s always worth checking whether there were major acquisitions. Remember, if you buy businesses whether for cash or shares, you’ll be bringing far more revenue etc. into the group. Whether or not that is actually beneficial for shareholders requires a careful read.

At Rex Trueform, the core retail business posted solid growth in revenue but also experienced a substantial deterioration in gross margin due to tough consumer conditions. Gross margin fell from 53.5% to 48.5%, so the jump in revenue was blunted to a (still useful) 16.5% increase in gross profit in the core business.

There was plenty of action in other revenue lines, with media and property acquisitions bringing new sources of revenue into the group.

The net result on HEPS is encouraging to say the least, up by 114.9% to 270.8 cents. The net asset value (NAV) per share increased by 33.4% to R18.74, so the closing price on Friday of R10.09 reflects a substantial discount to NAV.

Marcel Golding’s group is clearly making progress in diversifying its sources of revenue. You can also look at African and Overseas Enterprises Limited (JSE: AOO), part of the same stable.

Sappi will need to be stoic after sale to Aurelius fails (JSE: SAP)

A new buyer is needed for the European graphic paper mills

Perhaps the Roman-emperor inspired name was a giveaway that things might get hectic here. Aurelius has given the thumbs down to the deal with Sappi, causing the latter’s share price to drop nearly 5.8% on this news.

Aurelius was due to acquire three European graphic paper mills from Sappi. One of the conditions precedent was that the parties would agree a separation and transitional services plan. They couldn’t agree in time, so the deal has fallen through.

This leaves Sappi with three mills that it doesn’t want to own anymore. I’m sure there are a few investment bankers who are already on the phone to potential alternative buyers.

Universal Partners: no financial cavities here (JSE: UPL)

The investment in Dentex worked out beautifully

Let’s face it: dentistry isn’t sexy. In my experience, it’s downright unpleasant. The dentist is one thing, but the sadistic oral hygienist is the one to really watch out for.

Personal traumas aside, Universal Partners has proven that investing in an odd industry can sometimes work very well. It’s not easy to scale something like dentistry, so this isn’t an obvious choice for professional investors to get involved in. As astute investors know, you can find excellent returns in unusual places.

Universal Partners invested £32.3m since 2017 to build out the Dentex business. In a deal with Portman Dental Care, the company will get 94% of that investment value back in the form of a cash payout and will retain exposure to the enlarged, merged entity via shareholder loans and equity. The cash risk is off the table and the value of the investment has more than doubled over the past few years. Considering that there was a pandemic in the middle of that period that would’ve done damage to the dentistry industry, that’s impressive.

The combined business will operate over 350 practices in the UK and will have a presence in 5 European countries as well.

Little Bites:

  • Director dealings:
    • A prescribed officer of Standard Bank (JSE: SBK) has sold shares worth just over R2m.
    • An associate of a director of Ascendis Health (JSE: ASC) has bought shares worth R36k.
  • There’s more bad news at Sibanye-Stillwater (JSE: SSW). Fatalities are still a reality in mining as the operations are risky across the industry. Still, it’s unusual to read of multiple fatalities. Sibanye is dealing with a tragic incident that saw four contractors killed during the installation of a head pulley of conveyor infrastructure. A fifth contractor has been seriously injured. Naturally, a full investigation is underway.
  • Gemfields (JSE: GML) has finalised the exchange rate for its dividend. 52.56438 cents per share will be paid to local shareholders. For reference, the share price closed at R4.10 on Friday, so this is a huge yield that reflects the risk that the market is pricing into the business.
  • After being forced to postpone its analyst presentation due to the CEO suffering an accident, Metair (JSE: MTA) has announced that the presentation will take place on 20 April.

Ghost Wrap #20 (Aveng | PSG Konsult | De Beers + Richemont | Alphamin | Universal Partners | Stor-Age | Sappi | Glencore)

The Finance Ghost
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Ghost Wrap #20 (Aveng | PSG Konsult | De Beers + Richemont | Alphamin | Universal Partners | Stor-Age | Sappi | Glencore)

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

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

  • Aveng is a nasty reminder that every construction company is just one bad project away from financial disaster.
  • PSG Konsult is an excellent business, growing AUM strongly in a year that was poor for markets. As an added kicker, the dividend payout ratio is higher too!
  • Within Anglo American, De Beers noted that demand for luxury goods in China has picked up. This was echoed internationally by LVMH during the week, with an obvious read-through benefit for Richemont.
  • Alphamin reported an exceptional quarter, driven by solid production and a major jump in tin prices.
  • Nobody likes the dentist, except perhaps Universal Partners based on the returns generated in Dentex.
  • Stor-Age has put together a smart deal in the UK that optimises return on equity.
  • Sappi needs to find a new buyer for its three European graphic paper mills, after the sale to Aurelius fell through.
  • Glencore is still trying to woo the board of Teck Resources in Canada, with a revised offer still not finding favour.

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 (Aveng | BHP | Delta | PSG Konsult | Schroder | Steinhoff | Tharisa | Tradehold | Vunani)

The Finance Ghost
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Ghost Bites (Aveng | BHP | Delta | PSG Konsult | Schroder | Steinhoff | Tharisa | Tradehold | Vunani)

Aveng drops with a vengeance (JSE: AEG)

Look away now if you hold shares – they tanked nearly 20% on Thursday

The construction industry really isn’t for me. It feels like watching 30 Seconds to Disaster on repeat, with any one of the projects ready to cause huge damage to shareholders if something goes wrong.

In Aveng’s business McConnell Dowell, the Batangas LNG terminal project in Southeast Asia has been a major headache. The project commenced during the pandemic and the associated disruptions were severe.

Despite best efforts to finish the project, the client has now called on the project guarantees in the amount of R528.9 million. McConnell Dowell’s bankers have settled the amount and in turn, the bank has been paid R123 million thus far with another R123 million payable at the end of June. The remaining balance is the subject of discussion with the bankers re: payment terms. This minimises the impact on liquidity, with working capital still supported.

This doesn’t mean that the pain is over in this project, as it still needs to be finished. The loss provision on this contract is large enough that McConnell Dowell is expected to report an operating loss for the year ending June 2023. This will also cause Aveng to report a loss.

With the sale of Trident Steel underway and expected to be completed in the current financial year, Aveng’s balance sheet is ok. This is just an impact on the income statement, arguably an acceleration of losses rather than new losses.

Has the market overreacted here? I just can’t bring myself to invest in this industry either way.

OZ Minerals shareholders say yes to BHP (JSE: BHG)

The target company has a strong slant towards copper

Transition metals are all the rage at the moment, evidenced by Glencore’s ongoing attempts to seduce Teck in Canada. Those attempts have been unsuccessful thus far, with BHP having far more luck in Australia.

Shareholders of OZ Minerals have voted in favour of a 100% buyout by BHP, giving the latter access to a mining business with various copper-gold and copper-nickel mines in Australia and South America.

Delta offloads another five properties (JSE: DLT)

This includes a Category 1 deal, which is a pain to implement

Delta Property Fund has made some more progress in its attempts to save the balance sheet. It’s a slog, with the net proceeds from these disposals only reducing the loan-to-value ratio by 30 basis points, from 58.2% to 57.9%.

Delta has agreed to sell four properties to DMFT Property Developers for R50.8 million. A valuation back in August 2022 suggested a value of just over R67 million for the properties, so that’s a significant discount. This is a Category 1 transaction that will require a shareholder vote.

In a separate, much smaller deal, a property in Potchefstroom is being sold to Enkai Investment Holdings for R21 million. The value on the books was R20 million, so the premium to book is odd but useful. This is a Category 2 transaction, so there’s no shareholder vote.

This barely scratches the surface of what Delta needs to achieve, but at least it’s something.

PSG Konsult grew solidly in FY23 (JSE: KST)

The dividend payout ratio has increased as well

PSG Konsult is clearly getting its distribution right, with assets under management up by 13% in the year ended February 2023. This is against a backdrop of tepid performance in the JSE ALSI, leading to much lower performance fees this year vs. the prior year.

Due to the weak market conditions, recurring HEPS only increased by 5% despite the strong growth in assets. The floods in KZN also had a negative impact on HEPS, with PSG Insure down 4% despite a strong reinsurance programme to cushion the blow.

With a strong balance sheet, the group could repurchase shares of R415.9 million this period and increase the upper limit of the payout ratio to 60% from the previous 50%. This was good enough to drive dividend per share growth of 13%.

Schroder’s property value moves lower again (JSE: SCD)

Yield movements keep offsetting rental growth

Investors like to assume that property prices increase when inflation goes up. That isn’t necessarily true, as the properties are valued based on the returns they can bring to investors. When inflation is higher, so too are required rates of return (usually). This is a downward force on property values, often more than offsetting the benefit of rental increases.

We can see this again in the valuation of the Schroder portfolio, which lost -1.3% in the quarter ended March. The net initial yield for the portfolio valuation moved 25 basis points higher to 6.2%.

The loan-to-value ratio as at 31 March was 31% based on gross asset value and 23% net of cash.

Steinhoff: reality is setting in about the value (JSE: SNH)

I’ll say it again: the value is zero

Steinhoff has published a draft restructuring plan, a critical step under the Dutch Bankruptcy Act. The place is very much being run by and for the creditors now, with numerous warnings given to shareholders that the shares are worthless.

Despite this, there has been lots of trade in Steinhoff in recent months. It is now down at 20 cents per share, with far more offers than bids in the market. Those bids are surely going to dry up very soon.

Tharisa reports a mixed quarter of production (JSE: THA)

Chrome is up and PGM output is down

For the second quarter, Tharisa reported a 5.7% increase in chrome output and a 19.7% drop in PGM output, both measured vs. the first quarter i.e. on a sequential basis.

Pricing tells a similar story in favour of chrome, with PGM average prices down 13.9% sequentially and chrome up 20.6%. At least the right metal was mined at the right time!

Unfortunately, full year production guidance has been dropped by 10%. This isn’t what shareholders want to see, but at least the second half of the year should be better than the first half.

Notably, the Karo Mining project seems to be on schedule.

Looking to the balance sheet, Tharisa has cash on hand of $205.8 million and a net cash position of $106.8 million. There’s no shortage of liquidity here.

Tradehold to change its name (JSE: TDH)

If shareholders approve it, that is

Tradehold’s primary investment is the industrial and logistics property portfolio held in Collins Property Projects.

To reflect this strategy, the group is looking to change its name to Collins Property Group. The new ticker would be JSE: CPP. Not only is the name changing, but Tradehold also wants to become a Real Estate Investment Trust (REIT).

The downside of this is a lack of capital flexibility, as REITs are cash flow treadmills of note. The positive is that it will be easier to attract institutional shareholders who benefit from the REIT tax regime.

The circular for this shareholder vote has now been made available to shareholders.

The old guard is back at Vunani (JSE: VUN)

This is a strange announcement

Back in 2020, Butana Khoza was promoted from head of Vunani Fund Management to Vunani Group CEO. Ethan Dube vacated the CEO role and became Executive Deputy Chairman.

In a SENS announcement that can’t stop glowing about the strategic progress made over that period, the company then goes on to explain that the positions will now revert to the old way.

In other words, Butana Khoza is back to running VFM and Ethan Dube returns as Group CEO.

Surely if great progress has been made, the sensible thing isn’t to revert to the combination that got the group to a tough space initially?

Little Bites:

  • Director dealings:
    • Des de Beer bought more shares in Lighthouse (JSE: LTE) worth R7 million.
    • The CEO of Old Mutual (JSE: OMU) has bought shares worth just over R3 million.
  • With the TRP having concluded its investigation into Extract Group, EnX Group, Zarclear Holdings and African Phoenix Investments, there will be a few mandatory offers coming. The investigation was based on whether certain parties obtained control over these companies, which would then trigger a mandatory offer. After a detailed investigation (because it’s really not as simple as it sounds), the parties need to make mandatory offers. That’s also not as simple as it sounds, as most of these aren’t even listed anymore. With R680 million on the table in potential offers, there’s quite an egg to unscramble here.
  • With the release of revised pro-forma numbers, AEEI (JSE: AEE) indicated its latest estimate of the financial effect of unbundling the stake in AYO (JSE: AYO). Passing the AYO hot potato to shareholders helps AEEI, driving a pro-forma swing from a headline loss of -37.16 cents to share to headline earnings of 22.16 cents per share.
  • Chrometco (JSE: CMO) is currently suspended from trading, which means the company needs to give a quarterly update on its progress to remedy this situation. With the business rescue plan for Black Chrome Mine scheduled for a vote at a creditor meeting on 18 April, the company hopes to move forward with appointing auditors and clearing the reporting backlog.

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

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

Exchange-Listed Companies

The results of GMB Liquidity’s November 2022 offer to Grand Parade Investments minority shareholders has closed, with an uptake of just 4.49%. Shareholders holding 21,107,480 PGL shares accepted the R3.33 per share offer. GMB Liquidity’s stake in the company has increased to a controlling 53.65%.

Stor-Age Property REIT is to acquire a 10% equity stake in a joint venture which has acquired the four property Easistore portfolio. The £4,4 million investment has been made along side Nuveen Real Estate which will hold 90% of the joint venture, providing Stor-Age with the opportunity to partner with the global investment manager. The company has the right of first refusal should Nuveen wish to exit any of the properties or portfolio.

Delta Property Fund is in the process of concluding the disposal of four office properties to DMFT Property Developers. The properties situated in Kimberley, Bloemfontein, Klerksdorp and Polokwane for a cash consideration of R50,8 million. The disposals are a category 1 transaction and so require shareholder approval. In a separate agreement Delta is to dispose of a property in Potchefstroom Central to Enaki Investment Holdings for R21 million.

Impala Platinum has concluded agreements to acquire a further 2.94% stake (8,543,294 shares) in Royal Bafokeng Platinum, resulting in an aggregate stake of c.44.48%.

Glencore has amended its unsolicited proposal to the Board of Canadian miner Teck by introducing a cash element to the all-share acquisition of Tech by the company followed by a demerger of the combined coal business. Teck shareholders would now own 24% of MetalsCo and US$8,2 billion. Glencore is also prepared to offer a combination of cash and/or CoalCo shares (up to a 24% stake) if all Tech shareholders were to elect shares rather than cash.

Wilson Bayly Holmes-Ovcon’s 2006 B-BBEE ownership transaction (Akani 1) is due to expire and will be wound up. The company proposes to establish a new scheme (Akani 2) and has entered into agreements with three trusts to whom it will issue 4,500,000 WBHO shares at a price of R0.01 per share. The shares, which will be held in a SPV, will be allocated as follows: 90% held by the BBESI Trust (employees of WBHO below a certain skill level and have been employed for five years), 8% by the ASI Trust (employees above a certain skill level) and 2% by the ADB Trust (for the benefit of black women, youth and those living in rural and under-developed areas).

Unlisted Companies

Agri-tech startup FarmTrace, a cloud-based farm management tool has received a significant equity investment from Secha Capital and Hassium Capital. The undisclosed sum will be used to grow the company’s capacity and bring about a next wave of farming cost savings, yield and efficiency improvements as the company serves more farms, more products as it grows its footprint.

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

Weekly corporate finance activity by SA exchange-listed companies

Marylou Greig
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Weekly corporate finance activity by SA exchange-listed companies

Following PBT’s disposal of its investment in Payapps in March this year, shareholders will receive a special distribution of R0.75 per PBT share in addition to a further R0.75 per share in the form of a capital reduction distribution. The resulting total distribution of R1.50 per share equates to R156,9 million to be paid out to shareholders.

Tradehold is proposing to change its name to Collins Property Group, subject to shareholder approval. Tradehold’s primary investment focus will be its portfolio of industrial and logistics properties held through its subsidiary Collins Property Projects. In due course, the company will apply to the JSE for classification as a Real Estate Investment Trust.

A number of companies listed on one of South Africa’s Stock Exchanges have initiated share buyback programmes and each week update shareholders. They are:

South32 has increased its share repurchase programme by c. $50 million in anticipation of a stronger outlook for commodity prices in the second half of its financial year. This will enable the company to return $158 million to shareholders before September 2023. This week the company repurchased a further 1,665,680 shares at an aggregate cost of A$7,14 million.

Glencore this week repurchased 11,040,000 shares for a total consideration of £51,46 million. The share repurchases form part of the second phase of the company’s existing buy-back programme.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 3 to 6 April 2023, a further 1,783,398 Prosus shares were repurchased for an aggregate €126,87 million and a further 351,220 Naspers shares for a total consideration of R1,15 billion.

Two companies issued profit warnings this week: Nu-World and Zeder Investments (due to the unbundling of KAL).

Three companies issued or withdrew cautionary notices: Finbond, Primeserv and Chrometco.

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

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

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

DealMakers AFRICA

Nigeria’s sovereign wealth fund, The Nigerian Sovereign Investment Authority and Vitol have completed their carbon removal and abatement project JV, CarbonVista. The deal was first announced in July 2022.

Amethis and the Diot-Siaci Group have acquired an undisclosed stake in Moroccan insurance brokerage group ASK Gras Savoye. Financial terms were not disclosed. Apart from Morocco, the group has a direct presence in 11 countries in West and Central Africa.

Tech-enabled, scheduled mass transit company Shuttlers as announced a US$4 million Series A raise led by Verod-Kepple Africa Ventures. Existing investors VestedWorld, SheEquity, CMC21 & Also and Echo VC also participated in the equity round.

Uganda’s Pearl Dairy is awaiting a decision from the IFC on a US$35 million senior loan package. The company is looking to expand its capacity in Kenya and Uganda, which includes the acquisition of a packing plant in Kenya ($21 million) and the refinancing of an existing Standard Chartered Bank loan ($14 million).

Development Partners International and Amethis have co-invested in Egyptian pharmaceutical manufacturer, Marcyrl Pharmaceutical Industries. Financial terms were not disclosed.

The battle for Egypt’s Paints and Chemical Industries Company (Pachin) is still ongoing. With two offers already on the table from Eagle Chemicals and National Paints, Compass Capital is said to be preparing its bid. The company submitted a non-binding offer to acquire between 51% and 90% of Pachin in January. Two other contenders have already pulled out of the race – Universal Building Materials and Chemicals (Sipes) and Saybad Industrial Investment, who withdrew their offers after the board rejected them as undervaluing the firm.

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

Infrastructure development: the catalyst to unlock growth on the African continent?

Siyabonga Shandu
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Infrastructure development: the catalyst to unlock growth on the African continent?

Africa accounts for an estimated 12% of the world’s population, yet only contributes approximately 1% to global gross domestic product and around 2% to world trade1. A central obstacle to transformative economic growth and development of the continent is the lack of quality sustainable infrastructure.

The African Development Bank estimates that the continent’s infrastructure needs amount to US$130 to $170 billion a year, with a financing gap in the range of $68 to $108 billion.2 These infrastructure needs are expected to increase over the next few decades, as Africa’s population is projected to reach 2,4 billion by 2050 (2022: 1,4 billion).3

Therefore, a great need (read: opportunity) exists for investments into African infrastructure, especially for the development of power, transport, ICT/digital, and water and sanitation infrastructure, which have been identified as critical to help drive Africa’s economic growth and improve business productivity and competitiveness. This will, in turn, help to deliver significant developmental impacts across the region, thereby reducing unemployment and inequality, and alleviating poverty.

INFRASTRUCTURE TRENDS

In developing the continent’s infrastructure to meet its growth requirements, several trends4 should be considered, which include, among others:

• Rapid urbanisation. The abovementioned growth in Africa’s population is coinciding with rapid urbanisation; it is expected that 59% of the continent’s population will be urban by 2050.5 In order to meet this trend, significant infrastructure development will be required.

• Increased need to mobilise private funding to support infrastructure development. Governments across the continent, impacted by rising debt burdens driven by the ongoing effects of the COVID-19 pandemic, are embracing private capital for infrastructure investments, and changing legislation to encourage greater participation by private institutions. This has resulted in an increased appetite from global investors who are seeking greater growth opportunities with enhanced, risk-adjusted returns, which Africa could provide. However, like Botswana, Ghana and Rwanda, other African countries need to create the correct investment environment and policy certainty to take advantage of this.

• Increased focus on sustainability and the environment. There is an increased call, amplified by the COVID-19 pandemic, for governments to build back better with the right kind of environmentally and socially friendly infrastructure, ranging from renewable energy and public transport to improved internet connectivity. In addition, governments across the continent are supporting initiatives that encourage more funding for infrastructure projects that would support Africa’s transition towards net-zero emission objectives. The spectre of climate change and the increasing number of extreme weather events point to the importance of investing in climate resilience, aimed at successfully coping with and managing the impacts of climate change while preventing those impacts from growing worse. Many African countries, like Kenya, do not have the legacy of coal and can therefore embrace green energy.

• Growing focus on ICT and digital infrastructure. ICT is increasingly becoming a driving force for how infrastructure is planned, delivered, operated and maintained, and as a means of leapfrogging traditional infrastructure constraints. Smart grids, for example, will increase energy efficiency and the uptake of renewable energy, and digitalisation is creating new opportunities in the services sectors, while increased mobile connectivity and communication infrastructure assists in improved financial service offerings. Rwanda is an excellent example of an African country focused on ICT and digital infrastructure development.

• The African Continental Free Trade Area Agreement (“AfCFTA”) will boost regional infrastructure development. There is a growing demand for large, regional projects which will allow countries and investors to take advantage of the economies of scale offered by the AfCFTA, drive intra-African trade, and gain access to new African and international markets.

KEY INTERVENTIONS

While not an exhaustive list, the following key interventions could help drive the continent’s infrastructure development:

(i) Mobilising greater pools of private sector capital towards commercially viable, large-scale infrastructure projects. While the availability of private-sector funding is a consideration, attention should also be given to better matching this capital with viable projects. Greater focus should be placed on improving the commercial viability of projects, including the mitigation of political, currency, and regulatory risks, and by increasing the deal flow of bankable projects.6

(ii) Increasing the number of commercially viable projects. Larger upfront investment is required to develop projects from concept to bankability. This will ensure that the most feasible projects are correctly prepared through the delivery of quality feasibility studies and commercial plans. This is expected to increase the number of commercially viable projects that are funding-ready. This will require greater collaboration by governments with financial institutions that can offer them critical skills in areas such as planning, transaction support and risk allocation.

(iii) Focus should be placed on developing infrastructure projects that have greater development impacts. Governments and investors should focus on developing projects that can drive greater developmental impacts, such as addressing issues of high unemployment, inequality, and the alleviation of poverty on the continent. Focus should also be placed on projects that deliver on the environmental, social and governance objectives of the continent.

If you are an investor wishing to invest in African infrastructure or in companies that are likely to benefit from African infrastructure development, a prudent first step would be to find a trusted adviser who is familiar with the African business landscape, to help navigate any potential pitfalls en route to future success.

1.https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Energy-and-Resources/dttl-er-power-addressing-africas-infrastructure-challenges.pdf
2.https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/2018AEO/African_Economic_Outlook_2018_-_EN_Chapter3.pdf
3.https://www.africa50.com/fileadmin/uploads/africa50/Casablanca_Finance_City_Africa_Insight_Report_on_Infrastructure.pdf
4.https://www.africa50.com/fileadmin/uploads/africa50/Casablanca_Finance_City_Africa_Insight_Report_on_Infrastructure.pdf
5.https://www.hoover.org/research/africa-2050-demographic-truth-and-consequences
6.https://www.mckinsey.com/capabilities/operations/our-insights/solving-africas-infrastructure-paradox

Siyabonga Shandu is an Associate Director | PSG Capital

This article first appeared in DealMakers AFRICA.

DealMakers AFRICA is the continent’s quarterly corporate finance publication.
www.dealmakersafrica.com

What constitutes financial assistance for purposes of section 45?

Thandiwe Nhlapho and Brian Jennings
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What constitutes financial assistance for purposes of section 45?

The Supreme Court of Appeal set aside an indemnity agreement for failure to comply with financial assistance requirements.

Section 45 of the Companies Act 71 of 2008 (Companies Act) is one of the most applied sections in commercial practice, particularly in financing transactions. Given the wide application of the section, there has often been debate about which transactions or actions constitute “financial assistance” and are, therefore, subject to the requirements of s45. The Supreme Court of Appeal (SCA) in Constantia Insurance Company Limited v The Master of the High Court, Johannesburg and Others (512/2021) [2022] ZASCA 179 (13 December 2022) recently laid the debate to rest.

Facts

The appellant, Constantia Insurance Company (Constantia) issued various performance guarantees to secure the obligations of Protech Khuthele Proprietary Limited (Protech Khuthele (Guarantees) owing to third parties. Protech Khuthele was one of the six subsidiaries wholly-owned by Protech Khuthele Property Investments (Protech Investments), which in turn was wholly-owned by Protech Khuthele Holdings Limited (Protech Holdings) (together they constituted the Protech Group).

In return, Protech Holdings and its subsidiaries, represented by its CEO, undertook in favour of Constantia to indemnify and hold it harmless from and against, among other things, any demands, liabilities or payments payable by Constantia under the Guarantee to third parties (Indemnity). The effect of this was that each of the companies in the Protech Group undertook this obligation.

The Protech Group, including Protech Khuthele went into liquidation. Various third-party creditors made demands on Constantia in terms of the Guarantee. At the meeting of creditors of Protech Investments, Contantia unsuccessfully called on Protech Investments to indemnify it in respect of the demands under the Indemnity, which amounted to some R182m, to secure Protech Khuthele’s obligations (Claims).

The liquidators of the Protech Group disputed the Claims on the basis, among others, that the Indemnity in respect of the Guarantees constituted financial assistance by Protech Investments to Protech Khuthele within the meaning of s45 and that the requirements thereof were not complied with; namely, the board of directors satisfying itself of the solvency and liquidity test and that the terms under which financial assistance was proposed were fair and reasonable (Board Consideration).

The SCA Decision

In an appeal to the SCA, the court had to decide, among other things, whether the Indemnity constituted “financial assistance” as contemplated in s45 of the Companies Act. In interpreting s45, the court found that:

• All the matters included by s45(1)(a) (and excluded by s45(1)(b)) fall within the primary meaning of financial assistance and concluded that the matters mentioned in s45(1)(a) are exhaustive of the meaning of financial assistance.
• S45(2) applies to both direct and indirect financial assistance. Protech Investments (and not Protech Khuthele directly) put its property at risk through the indemnity to ensure that Constantia provided the Guarantees. Thus, Protech Investments indirectly secured the obligations of Protech Khuthele within the meaning of s45(1)(a).
• The fact that the solvency and liquidity of the Protech Group was considered by the audit and risk committee of Protech Holdings clearly did not meet the requirements of the Board Consideration contemplated in s45.
• Non-compliance with the ex post facto notices contemplated by s45(5) would not render a resolution or an agreement to provide financial assistance void.

The court ultimately found that despite that there may have been compliance with the requirement for a special resolution of shareholders by Protech Holdings authorising the CEO to execute the Indemnity on behalf of Protech Holdings and the members of the Protech Group, there was no board resolution evidencing the Board Consideration by Protech Investments and, as a result, the Indemnity was void in terms of s45(6) and the Claims had to be expunged.

Going forward

This judgment will be a reminder to parties entering into financial transactions that:

• what constitutes financial assistance for purposes of s45 is a closed list;
• the requisite board resolution under s45(3) must be passed by the directors of the company granting financial assistance at each instance and not at group level;
• non-compliance with the Board Consideration will result in a transaction being void; and
• the question is not whether there could have been compliance with the Board Consideration at the time, but rather, whether there was, in fact, compliance.

Thandiwe Nhlapho is a Senior Associate and Brian Jennings a Director in Corporate and Commercial | Cliffe Dekker Hofmeyr.

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

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

Ghost Bites (Brikor | De Beers | Stor-Age)

The Finance Ghost
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Ghost Bites (Brikor | De Beers | Stor-Age)

What’s brewing at Brikor? (JSE: BIK)

Nikkel Trading is nearly at mandatory offer level

Against the backdrop of brick-making business Brikor reporting a 100% drop in HEPS for the six months ended August 2022 (not something you’ll see every day), the share price has lost around 45% in the past year.

With a market cap of R142.5 million, this company really is ripe for a takeover bid.

Nikkel Trading is coming, having entered into agreements with major Brikor shareholders to acquire over two-thirds of the company’s shares. This was announced back in March, so it’s not a surprise to see another announcement that Nikkel Trading’s stake has increased.

This investor now holds 34.2% in Brikor, so the mandatory offer that was alluded to in March is right around the corner. A mandatory offer is triggered once a stake moves above 35%.

De Beers sales in line with expectations (JSE: AGL)

The third sales cycle brings more good news for Anglo American

De Beers really is a fantastic business within Anglo American. The sales cycles are hard to understand though, as I’m never sure how comparable a particular sales cycle in 2023 would be to the same cycle in 2022.

For this reason, I tend to focus on the CEO commentary. In the latest sales cycle (worth $540 million), De Beers sounds happy as sales were in line with expectations. Encouragingly, there are positive trends in demand for diamond jewellery, especially in China where a relaxation of travel restrictions is coming through in consumer confidence.

This is an important read-through for all luxury brands, as China is a huge market.

Stor-Age is doing clever deals in the UK (JSE: SSS)

The company is taking just a 10% stake in four properties and will manage them as well

For Stor-Age to create shareholder value, the company needs to find ways to enhance its yield. One way to do this is to manage properties, not just acquire them. This introduces an element of capital-light earnings, which would go a long way towards injecting some excitement into the share price.

The latest deal in the UK is a good example. Stor-Age is acquiring a 10% interest in a joint venture that is buying four Easistore properties as its first deal. The 90% partner is Nuveen Real Estate, a global investment manager with a whopping $154 billion in assets under management. There’s a very good chance of further deals down the line for this joint venture if the initial acquisition is a success.

Here’s the kicker: the properties will be branded and managed by Storage King under its third party management platform. Storage King is Stor-Age’s brand in the UK. This is why the forecast pre-tax yield on investment is 15%, with Stor-Age contributing £4.4 million (including transaction and rebrand costs).

This deal takes the Storage King portfolio to 39 properties by the end of the year.

The group is still investing locally as well. The development and expansion pipeline of 11 properties is as even a split as you can get: 5 in SA and 6 in the UK.

Looking a bit deeper into this deal, the debt funding is being provided by Natwest in the form of a £41 million five-year bullet facility (i.e. only interest is paid until maturity). There is also considerable room for value creation at property level, with occupancy at the largest property as low as 63.6%. The other properties vary from 84.8% to 93.1%.

Little Bites:

  • Bytes (JSE: BYI has announced the appointment of Sam Mudd as an executive director of the group. Sam is currently the MD of Phoenix Software, a subsidiary of the group. Her CV is a wonderful throwback, with extensive experience including a stint at WordPerfect! If you were around before Microsoft absolutely dominated with its Office suite, you might remember that name.
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