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Not going quietly into December

The Finance Ghost
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Not going quietly into December

After staying out of the headlines for most of the last couple of months, South Africa waited until the back-end of the year to get all the attention. The team from TreasuryONE explains the rollercoaster.

In the past week, we have seen President Ramaphosa embroiled in the “farmgate,” or Phala Phala situation. We have had reports of the President willing to resign, then making an abrupt U-turn as he was convinced by senior members of the ANC and Business SA to fight the findings. We have also seen that the ANC is standing by the President, which makes the base case that the ANC elective conference will probably go as expected, but never say never.

Rand rollercoaster

What has the Phala Phala situation done to the Rand?

We saw the rand trading below the R17.00 mark last week, as we had the US Fed stating that they will be less aggressive with its interest rate hikes, and the rand tested the R16.90 level against the US dollar. After the report broke and rumours were flying about the President resigning, the rand lost almost R1.00 in one day and touched a high of R17.95 against the US dollar!

With a sense of normality in the market, we have seen the rand trading back toward the R17.30 level, but given that the US dollar is losing some ground, we can safely assume that there is currently a risk premium in the rand.

Speaking of the US dollar, we have seen the greenback trading upwards of the 1.05 level in the last couple of days. With the market expecting the US Fed to be a little less aggressive, the US dollar has started to drift higher against most currencies. Although the economic data releases haven’t been bad as of yet, with the employment data being better than expected for the last couple of months, the fact that the Fed seems happy with the trajectory of inflation gives credence to the notion that the worst of the hiking cycle is behind us and a Fed pivot could be par for the course next year.

US employment

On the data side, we have little top tier data out of the US this week, which focuses the mind on South African news and events for movements in the rand. With the storm regarding Phala Phala seemingly dying down in the market, we can expect the rand to trade within fairly narrow bands as it begins to track the US dollar again. The South African GDP number out yesterday surprised to the top side; the latest gross domestic product numbers for the third quarter of 2022 showed surprising growth of 1.6% in the quarter. The year-on-year figure is 4.1% but needs to be netted off against the low base that it was measured against from last year.

While we had our start of December jolt, especially in the rand market, we expect a period of consolidation and sideways movement before we head into the crux of the month with the ANC conference, US Fed meetings and US CPI out. Expect these events to concentrate most of the market volatility, but now that South Africa is in focus, any adverse news regarding the Presidency could send the rand running again.

Visit the TreasuryONE website to learn about market risk and other solutions offered by the group.

Ghost Bites (Absa | Capital & Regional | Fortress | Sanlam)

The Finance Ghost
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Ghost Bites (Absa | Capital & Regional | Fortress | Sanlam)

Absa is also enjoying the banking party

The third bank to release an operating update is also doing well

As recent updates by Nedbank and Standard Bank confirmed, the banking industry is a nice place to be at the moment. Demand for credit is robust, net interest margins are higher, non-interest revenue is doing just fine thanks and credit losses are under control. The net result is positive jaws, which means operating margins are expanding.

We now have a third bank in the mix, with Absa releasing an update for the ten months to October. With solid loan growth and revenue up by a mid-teen percentage, Absa seems to be doing just as nicely as the others. Both net interest income (NII) and non-interest revenue (NIR) are up by mid-teen percentages.

Within NIR and as we’ve seen elsewhere, improved insurance revenue has been a major driver, with pressure in the markets side of the business numbing that benefit.

Absa even calls its jaws “strongly positive” with a note that expenses are only up by single digits, something that certainly suggests a happy story for margins. The cost-to-income ratio has improved to the low 50s.

Pre-provision operating profit for the ten months has posted growth in the low 20s, a really strong result.

The key there is “pre-provision” as this number is before credit losses. The credit loss ratio is in the upper half of the target range of 75 to 100 basis points, so Absa is also running at acceptable levels, like the peers who recently gave updates.

With return on equity of 17%, Absa is doing incredibly well overall. This bank has come a long way.

The outlook for the full year is positive overall, with the bank pouring some water on the fire by noting that vehicle finance and personal loan impairments are likely to increase significantly as the effect of high rates works through the system.

Absa’s share price is up 25% this year and the underlying numbers support this move.

Capital & Counties brings us a property view from the UK

Property metrics continue to recover, with valuations under pressure in the industry

For the five months to the end of November, Capital & Counties reports that footfall was 11% ahead of 2021 and 90% of the equivalent period for 2019.

Supported by a strong period of letting, occupancy improved from 93.8% to 94.6%. Rent collection is nearing pre-Covid levels.

The company is aiming to improve its Adjusted Profit by more than 20% in the medium-term.

The problem facing property funds at the moment is that valuations are under pressure because of rising yields. Despite improving operational metrics, many funds are reporting a net decrease in portfolio valuations because the values are so sensitive to interest rates.

Sanity is prevailing with Fortress (for now at least)

It’s going down to the wire, with the shareholder meeting scheduled for January

In line with its regulatory timetables, the JSE formally notified Fortress of its intention to remove the company’s REIT status based on the requirements for that status not being met. Regular readers will know that Fortress has a dual-share class structure that worked well in the good times. Sadly, the pandemic wasn’t “the good times” by any means and the company is now stuck.

Fortress has lodged an objection to the JSE ruling to buy time until the shareholder meeting scheduled for 12 January 2023. At this meeting, shareholders will consider a temporary change to the company’s rules around distributions, with a view to preserving REIT status.

The important news is that the JSE will wait until that meeting before making a final decision on REIT status, which is clearly a sensible approach.

The future of Fortress will now be determined at that all-important meeting.

Karooooo’s subscriber growth is looking strong

The company has given a sneak peak ahead of results in January

In case you’ve been living under a rock or you just hate vowels, Karooooo is the 100% owner of the Cartrack business. This is a subscription business that is now growing on the global stage, an initiative that has required significant investment in sales teams and other overheads.

For the quarter ended November, Cartrack reported a 14% increase in subscribers. The rate of growth (the number of net paid additions) increased by 27%, which is certainly encouraging and reflects improved operating conditions for the company.

For full details, we have to wait until 19th January.

Sanlam numbers are under pressure

The share price fell 3% in response to an operational update

For the 10 months to October, it’s been a mixed bag for Sanlam with some substantial swings at business unit level. Diversification helps here of course, with the group result inevitably being smoother than segmental outcomes.

The Financial Services side of the business illustrates the point perfectly, down 1% overall. Within that, we see movements like a 23% increase in life insurance and a 50% decrease in general insurance! The group level result from Financial Services would be up 10% were it not for once-off items, though I always view this kind of analysis with skepticism. Most years have “once-off items” in them for the majority of companies. It’s called the risk of dong business.

With further pressure coming from lower investment market returns, net operational earnings declined 6%.

And if you’re wondering what caused all that pain in general insurance, I hope you’re sitting down and ready for a long list. One of the issues is claims inflation, as increases in premiums tend to lag inflationary increases in the costs of repair. Along with investment market volatility and all the usual South African issues (like cable theft), it’s not an easy market.

Notably, the Alexforbes life book is now integrated into Sanlam Life and has been a positive contributor to the business.

Strategically, the most important news is that the proposed joint venture with Allianz is making good progress with regulatory approvals, with a plan to complete the deal by mid-2023.

The share price is down 14% this year.

Little Bites:

  • Director dealings:
    • Des de Beer has bought another R5m worth of shares in Lighthouse Properties
    • The CEO of Altron bought another R31.7k worth of shares
    • A director of Afine Investments clearly used some Black Friday savings to buy shares, with a purchase of just R4.4k (not a typo)
  • Anglo American is pushing ahead with a $200 million investment as part of a plan to achieve a zero emissions haulage solution. Upon completion of this deal, Anglo will hold a controlling stake in First Mode, thereby accelerating the commercialisation of the nuGen Zero Emissions Haulage System. This hydrogen-powered mine truck is technology that I’m keeping a keen eye on.
  • Tharisa announced that construction at the Karo Platinum site has officially commenced. The project is situated in a Special Economic Zone in Zimbabwe.
  • Northam Platinum has been granted an extension for the posting of the circular related to the Royal Bafokeng Platinum offer. The circular will be posted by no later than 23 December.
  • With Nampak facing serious challenges at the moment, it raised eyebrows in the market that PSG Asset Management has acquired more shares and now holds 6.23% in the company. They clearly see value amidst the troubles.
  • Raubex has appointed former CEO Rudolf Fourie as the Chairman of the Board. There’s an interesting corporate governance lesson that you can learn here. As Fourie isn’t independent as defined (due to being the ex-CEO), the board is also required to appoint a Lead Independent Director, with Setshego Bogatsu taking that role.

Ghost Bites (Glencore investor update | Schroder results)

The Finance Ghost
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Ghost Bites (Glencore investor update | Schroder results)

Glencore investor update

The mining giant is reminding investors what it offers

In a slide deck of 36 pages, Glencore has laid out what investors should be focusing on. The company picked a great day on the market to release it, as there were very few noteworthy updates.

Of course, it doesn’t take long before the presentation talks about the journey to net zero emissions and the energy sources required to achieve that. The mining industry is full focused on this.

Glencore has no shortage of coal assets, with the company talking about a “responsible decline” of the coal portfolio and 12 mine closures by 2035.

The company believes that there is a substantial supply deficit in copper over the next decade, driven by demand for renewable energy and electric vehicles, alongside the difficulties of bringing on more supply and the extent of investment required. Of course, Glencore points this out because the group owns major copper projects.

To help you understand just how big this group is, I thought this extract from the presentation would help:

Net debt is managed around a $10bn cap and the ceiling is $16bn, so there is room for using debt for acquisitions. To manage return on equity, a decrease in leverage is rectified through special dividends and share buybacks.

Finally, I couldn’t resist sharing this slide that gives the rules that Glencore applies in determining distributions to shareholders and the use of special dividends or buybacks:

To read the entire investor presentation, follow this link.

Schroder European Real Estate looks good on key metrics

Keep an eye on debt expiry in 2023, despite the low LTV in this fund

In its full year results for the period ended September, Schroder European Real Estate Investment Trust kicked off the results by pointing out that quarterly dividends have reached pre-Covid levels. That’s a big deal, when you consider what the world has been through. To sweeten the deal, there was also a significant special dividend linked to the asset management profits achieved at Paris Boulogne-Billancourt.

With a property portfolio focused on European cities, the net asset value return of 7.3% is particularly impressive in this environment. The major drivers are valuation uplifts in the industrial and DIY portfolio, along with the German office portfolio. The direct portfolio valuation has registered a like-for-like increase of 3%.

The net asset value is a lot lower than it would’ve been without the special dividend, which shows that the management team keeps shareholder value top of mind when allocating capital.

The balance sheet is strong (hence the dividends), with a loan-to-value (LTV) of 29% gross of cash and 20% net of cash. This is higher than a year ago, but that’s not a bad thing as property funds need debt to generate proper returns to shareholders. The target is actually 35% gearing, so there is room to take on more debt. The average cost of debt is 1.9%.

Around 33% of the net debt expires in 2023 and discussions are underway with lenders. It is likely that finance costs will increase from the current low levels, with the hope being that financing costs will be offset by rental indexation.

Little Bites:

  • Director dealings:
    • The family trust of the CEO of Altron has bought another R169k worth of shares
    • Value Capital Partners is still buying big chunks of shares in ADvTECH, in this case worth just under R30m
    • A director of Momentum Metropolitan has acquired shares worth R179k
  • The Naspers and Prosus buybacks are always touching on every couple of weeks, simply because they are so huge. Between 28 November and 2 December the group purchased Naspers shares worth R2.2 billion and Prosus shares worth $328 million.
  • Pan African Resources announced that the JSE has granted formal approval of its R5 billion medium-term note programme. People tend to forget that the JSE is a great place to raise debt capital, something that doesn’t get the same attention as equity delistings because individual investors can’t participate in the debt raises.

Ghost Bites (Hyprop | Metair | Murray & Roberts | Nampak | Nedbank | Oceana | Tharisa | York)

The Finance Ghost
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Ghost Bites (Hyprop | Metair | Murray & Roberts | Nampak | Nedbank | Oceana | Tharisa | York)

Hyprop reports improved trading conditions

The retail-focused property fund has released a pre-close update

With a retail portfolio in South Africa and Eastern Europe, Hyprop has been thrilled to see the return of shoppers to the malls without masks on their faces. Let’s face it – shopping with masks was no fun at all.

In a pre-close update, the company kicks off with the balance sheet and notes that 84.4% of shareholders (including yours truly) elected the dividend reinvestment plan. This represented a value of R844 million, which had to be reduced on a pro-rata basis to R500 million. There’s also strong demand for the company’s debt, with a bond auction of R785 million in November being 1.4x oversubscribed.

Around 80% of debt is hedged against interest rates, which is important as those rates are on the up in South Africa and Europe.

The group’s loan-to-value ratio is 38.2%.

Looking at the South African performance at tenant level, tenant turnover for the four months to October is 16.9% higher than the previous year. Trading density (which takes into account the trading space) is up 15.7%. Foot count is running 7.1% higher than the comparable period in 2021, so the combination of more shoppers and high inflation is definitely helping.

With a vacancy rate in October of just 1.3%, the situation looks far better than the October 2021 (2.6%) and 2020 (3.3%) numbers.

In Eastern Europe, turnover is up 8.4% year-on-year and trading density is up 8.9%. Foot count is 10.9% higher. Vacancies at 0.5% are actually higher than in October last year, when they were 0.3%. Still, that’s a low vacancy rate regardless.

The African portfolio isn’t a happy story, with Hyprop still trying to exit its investment in the Ikeja City Mall in Nigeria. In Ghana, the deteriorating economy means that a term sheet to sell the properties fell through.

Overall, it sounds like the most important parts of the portfolio are doing well.

Metair has proven its mettle

Floods, hyperinflation and supply chain challenges – it’s been quite a year

Metair has really been through the most this year. With key operations as far apart as KZN and Turkey, the group has somehow been hit by natural disasters and hyperinflation in the same year. If they didn’t have bad luck at Metier, they would have no luck at all.

In the Automotive Components vertical, the flooding at Toyota’s factory caused havoc in the middle of the year. Production levels resumed during September and stabilised at pre-flood levels. An insurance claim of R400 million has been received thus far and the final claim is under review, with a cap of R500 million. At Ford, production of the next-gen Ford Ranger commenced in mid-November and Metair subsidiaries have entered production and ramp-up phases. Costs of R475 million related to the new Ranger will be incurred in FY22, of which at least 35% will be capitalised.

Despite all these issues and delays, volume expectations over the model lives remain unchanged. The company expects OEM production volumes to be over 700,000 units from 2023, provided supply chains are stable.

To put the importance of a new model into perspective, Metair expects the revenue from the new Ford model to be R46 billion over the model life, if I interpret the announcement correctly.

In the Energy Storage business, margins were impacted by extremely high inflation in Turkey and Romania. The costs are being recovered from customers, but there was a time lag. It all comes down to this quarter, which is the most volume sensitive for the business. It’s a mixed bag of expectations, with the Turkish business expected to be 17% higher, Romania down by 15% and South Africa flat.

Hyperinflation in Turkey is a mess, requiring Metair to apply the painful and complicated hyperinflation rules in IAS29.

Looking at the balance sheet, supply chain challenges have necessitated a larger holding of inventory on the books to allow for potential shipping delays and increases in airfreight costs.

Finally, efforts to achieve a “value unlock opportunity” have not been successful, mainly due to the overall investment climate in Eastern Europe which has obviously been negatively impacted by the war in Ukraine. For now, Metair will focus on running the businesses as best it can.

This share price chart gives you a great visual of how wild this year has been for the company:

Disaster at Murray & Roberts

The Clough deal is dead and the share price has tanked

Just when there was some solid momentum in the strategy to save Murray & Roberts’ balance sheet, there’s a new disaster for shareholders in the form of a 21% drop in the share price thanks to the Clough deal falling over.

The buyer needed to put in an interim loan facility of A$30 million to avoid Clough being placed under voluntary administration. For whatever reason, the parties couldn’t agree on the terms of the loan and so the transaction has collapsed and the buyer has walked away.

With Clough in urgent need of capital, the directors have no choice but to place the company under voluntary administration in Australia. Murray & Roberts has also placed its Australian investment holding company into voluntary administration.

The only other investment in Australia is RUC Cementation, which has a net asset value of $85 million and which has not been placed into administration.

Other than the interest in RUC and a guarantee to Clough USA (related to the old buyout of minorities) of A$3 million, Murray & Roberts has no residual exposure to Australia.

Voluntary administration appears to be quite similar to business rescue, with the goal of preserving the company. That certainly doesn’t mean that any equity value will be preserved.

Green bank, green share price performance

Like the other banks, Nedbank is enjoying these trading conditions

In a pre-close update covering the 10 months to October, Nedbank noted that the company is performing in line with the guidance given during August.

Net interest income is increasing by low double digits, supported by an increase in average interest earning banking assets of mid-single digits. Solid loan growth is being experienced across the corporate, business banking and retail books. Of course, the other factor here is net interest margin (NIM), which improves as interest rates increase.

The credit loss ratio is within the 80bps to 100bps guidance provided for full year 2022. There is some pressure coming through from the corporate book, including stressed borrowers in sectors like commercial property, aviation and agriculture.

Non-interest revenue (NIR) grew by high single digits. This has been a mixed bag, with solid performance in businesses like insurance and pressure in trading income and asset management income. Due to delays in closure of renewable energy deals, there is risk of Nedbank missing guidance for NIR.

As I’ve written about before, the key metric to watch is positive jaws, as this means that margins are heading the right way. The good news is that this is indeed the case for Nedbank.

The bank is on track to beat the 2019 level of earnings and is focused on achieving a return on equity (ROE) above the 2019 level of 15% by the end of 2023. The longer-term goal is over 18%.

Nampaking another punch to shareholders

After suffering a huge knock, Nampak shareholders have taken another 8.5% smack

The market hated the news of a rights offer last week, a necessary step in giving Nampak’s balance sheet some breathing room. The market clearly didn’t like these results either, with the share price coming under further pressure.

For the year ended September, revenue increased by 21% and trading profit increased by 13%. That sounds rather good, until you read further down the income statement. Operating profit before net impairments fell by 4% to R1.2 billion, which isn’t pretty but is clearly still a large, positive number. The result was helped along by strong volumes in beverage cans and the liquid paper business.

By the time you get to attributable profit though, you’ll instead find a loss of R147 million vs. a profit of R207 million in the comparable period. Ignoring impairments, headline earnings came in at R229 million vs. R402 million in the prior year. Detractors included foreign exchange losses, higher interest rates and increased impairments.

With all this noise in the numbers, another useful metric is cash generated from operations before working capital changes. This fell by 11% to R1.5 billion.

Although Nampak managed to comply with its major debt covenants (net debt : EBITDA and EBITDA : interest), the problem is that a major facility (R1.35 billion) is repayable soon (March) and the group can’t cover that repayment without an equity capital raise. This is partially because efforts to dispose of certain assets were unsuccessful.

The proposed rights offer is for R2 billion, with the excess to be used in the business and to pay advisory fees to the bankers etc.

The share price chart makes for an unpleasant sight:

There’s nothing salty about Oceana’s earnings

Despite a stronger second half, the dividend is still slightly lower

For the year ended September, Oceana grew its revenue from continuing operations by 12% and operating profit by 11%, so margins came under a bit of pressure. The benefits of financial leverage were felt further down the income statement, with headline earnings per share (HEPS) from continuing operations up by 17% to 626 cents.

Looking at the full group, revenue was up 11% but operating profit only increased by 6% and HEPS increased by 10% to 606.2 cents. From this, you can immediately see that the discontinued operations are loss-making (group HEPS of 606.2 cents vs. HEPS from continuing operations only of 626 cents).

The dividend has come under some pressure, with a decrease of 3% to 346 cents per share. This is likely due to a significant drop in cash generated from operations which fell by 33% because of increased canned fish and fishmeal inventory levels. When the business is sucking up cash, there’s less available for shareholders. A mitigating factor was a 12% decrease in capital expenditure.

It could certainly have been a lot worse, with the second half benefitting from a normalising supply chain in key businesses and favourable fishing conditions in the US.

Keep an eye on the balance sheet – net debt to EBITDA has increased from 1.5x to 1.7x. This is due to higher working capital requirements and the transaction of USD-denominated debt at a weaker exchange rate. Gross debt reduced by 6% in South Africa and 7% in US dollar terms, so any dollar weakness will help this ratio going forward.

Tharisa announces record profits

Record output is being achieved at a time when the commodity market is strong

Mining houses can’t control commodity prices. The most they can do is control production and look to capitalise on favourable conditions. With record earnings, Tharisa has done exactly that.

For the year ended September, revenue increased by 22.7% and EBITDA was up 12.9%, with clear cost pressures despite the company’s best efforts. Net profit increased by 35.6%.

Cash conversion was under pressure in this period, decreasing by 11.1% despite the increases in profitability.

The company reports in dollars and releases a press release based on rands, so the correct way to report the dividend is in dollars. At 7 US cents per share, the dividend is lower than 9 US cents in the comparable period.

Strategically, construction at the Karo Platinum Project in Zimbabwe has commenced and funding is well underway, with a goal of doubling Tharisa’s output in less than 24 months’ time.

York Timber taps the market

The company will raise R250 million through a heavily discounted rights offer

With a current market cap of R860 million, York Timber’s raise of R250 million is substantial. The share price has lost around 32.5% of its value this year, with only a 2% drop in response to the news of this capital raise.

The good news in this rights offer is that the money isn’t being raised to pay back the banks, as has been the case with most recent capital raises on the JSE. Instead, the capital will be used to procure more timber externally and invest in manufacturing plants, thereby allowing the harvesting age on the escarpment plantation to increase from 20 years to 23 years.

The company believes that this will enhance shareholder returns in the medium- to long-term. That would be nice, as York has historically struggled to give much love to shareholders.

The underwriter is A2 Investment Partners, the activist investment that has been involved in York for a while now. The underwritten portion is expected to be somewhere between R111 million and R160 million, subject to A2 not breaching the 35% threshold and needing to make a mandatory offer. An underwriting fee of R4.78 million will be paid to A2 for this.

The dilution for any shareholders not following their rights is substantial, with a 33.87% discount to the 30 day volume weighted average price. This is a renounceable rights offer, which means shareholders that don’t want to follow their rights can sell the right (known as a “nil paid letter”) on the open market.

Whatever you do, either follow your rights or sell the right. You’ll find it in your broker account on 4 January. If you do nothing, you will lose money.

Little Bites:

  • Director dealings:
    • At Lighthouse Properties, directors seem to be nothing if not consistent. Mark Olivier is the latest director mopping up shares on a regular basis, this time worth R715k. Of course, you won’t be shocked to learn that Des de Beer bought another R2.25m worth of shares
    • In an unusual trade that I assume is a hedge, a director of Ascendis has sold CFDs on the company’s shares with a total value of around R143k
    • A group of directors of Ninety One are part of an investment vehicle that invests in shares in the company, with the latest example being a purchase worth around R9.1m
    • A non-executive director of Sibanye-Stillwater has sold shares worth R237k
    • A non-executive director of Stefanutti Stocks has purchased shares worth R275k
    • A director of Afrimat has bought shares in the company worth R47.5k
  • Sygnia jumped 9.8% after releasing results for the year ended September. Despite assets under management and administration falling by 3.8%, revenue increased by 9.7%. HEPS is up 12.1% and the total dividend per share increased by 55.6% to 210 cents.
  • Alexander Forbes has released results for the six months ended September. Although operating income from continuing operations increased by 8%, profit from operations fell by 9% because of lower-than-expected market performance and higher operating costs. HEPS from continuing operations fell by 15%. The discontinued operations are doing well ironically, with group HEPS up by 11%. The interim dividend of 15 cents per share is 25% higher than in the prior period. In further bad news for the Sandton property market, Alexander Forbes is targeting a smaller footprint with lower rates that could achieve a 350 basis points reduction in the cost-to-income ratio.
  • Sabvest has executed a small investment in Valemont Trading, a business that produces a range of products for the pet market. The company is also the largest manufacturer and distributor of bird seed and related feeder products in the country. Sabvest has acquired a 39.3% equity interest and will also provide additional loans to execute an acquisitive growth strategy. Sabvest doesn’t play silly games, so keep an eye on this space as a platform for growth in this market. The deal value wasn’t announced.
  • BHP Group is still dealing with the legal fallout of the Fundão Dam collapse in 2015. With legal proceedings underway in Brazil, there is now a claim in the English courts that BHP is disputing due to the existing proceedings in the country where the disaster happened. BHP and Vale each held 50% of Samarco, the owner of the dam. As Vale hasn’t been named as a defendant to the claim in England, BHP had to file a “contribution claim” with a view to Value contributing to any damages that may be payable under a ruling in that country.
  • With Vodafone Group Chief Executive Nick Read stepping down at the end of December, there was some chatter on FinTwit about whether the local CEO might be promoted to the role. At this stage, that’s pure speculation. Still, Vodacom felt the need to announce this change of management at the global mothership.
  • Glencore has reached an agreement with the DRC over the company’s past conduct. The DRC will be paid $180 million in settlement. I would just love to know where that money will go.
  • Lighthouse Properties has successfully raised R50 million at an issue price of R6.50 per share. This is the same as yesterday’s closing price and in line with where it has been trading for the past few days.
  • Jasco Electronics is a rather obscure company with a market cap of just over R50 million. It makes no sense for a company of that size to be listed, so I’m not surprised that a cautionary announcement has now been released regarding an intention to make an offer by Community Holdings, the company’s major shareholder. The idea would be to subsequently delist the company as well. The offer price of 16 cents per share is a 4% premium to the 30-day volume weighted average price (VWAP).
  • Most of the shareholders in Datatec elected to receive the special dividend in cash (R2.63bn) rather than in scrip (R137m).
  • Grindrod’s special dividend of 55.9 cents per ordinary share has received approval from the SARB.
  • At Oasis Crescent Property Fund, unitholders of 32.3% of units elected to receive the cash distribution and the rest elected to receive additional units instead (like a scrip dividend).
  • Marshall Monteagle has released a trading statement for the six months to September, reflecting a headline loss per share of $0.069 vs. a profit of $0.072 in the prior period (which isn’t directly comparable because of a change in year-end). The company attributes this to declines in stock market valuations that have subsequently reversed.
  • If you’re curious about the process of business rescue, then following Tongaat at the moment will be of interest to you. The next step is for shareholders to vote on the remuneration of the business rescue practitioners in a vote to be held on 9 December.

Was Powell right about inflation?

The Finance Ghost
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Was Powell right about inflation?

As we enter the final month of what has turned out to be a horrible year for markets, it’s perhaps worth re-examining the perceived root causes of higher inflation and interest rates and how these may change globally and locally next year. Chris Gilmour digs in.

US Federal Reserve chair Jerome Powell was quite correct in his basic assumption that inflation caused by the reaction to the Sars-CoV-2 pandemic would only be “transitory”. He correctly forecast that, as consumers started enjoying the lifting of restrictions such as lockdowns, they would go on spending sprees and spend their accumulated savings. But eventually those savings would run out, shortages would disappear and inflation would subside.

So far, so good.

Source: Bureau for Economic Analysis, Gilmour Research

The above graph shows US personal saving as a percentage of disposable income, which reached a recent high of over 25% but which is now at less than 5%. There’s nothing left from this source, so had this been the only source of higher inflation, Powell’s assertion that inflation was only transitory would have been completely correct. But there were many other factors, affecting both the US specifically and the rest of the world via seriously debased currencies.

For example, supply chains out of China were badly disrupted as a direct result of the pandemic. Semiconductors stopped being manufactured in Asia almost completely and didn’t restart until well into the recovery stage of the pandemic. This resulted in massive shortages of everything that used silicon chips in their manufacture, including automobiles. A crazy situation arose, whereby second-hand (“pre-owned” in car dealer-speak) vehicles were selling for more then new vehicles, simply because they were available and new vehicles weren’t.

But that phenomenon has now run its course and second-hand cars are now approximately 13% lower in price than they were a year ago, according to the Manheim Used Car Index in the US. So there’s another factor that is no longer contributing to inflation:

Source: https://publish.manheim.com, Gilmour Research

The two main input costs that contributed most to inflation around the world – fuel and food – are abating rapidly in US dollar terms. The oil price as proxied by Brent crude is back where it was in January this year, before the start of the war in Ukraine. And food prices, according to the UN Food & Agricultural Organisation (FAO) are similarly in steep decline in US dollar terms.

It’s important to understand the dynamic affecting fuel and food prices in currencies other than the US dollar, however. As the dollar has surged in value, thanks to generally rising US interest rates, most other global currencies have declined in response. Thus commodity prices in these currencies haven’t shown the same declines as those in dollar terms and that situation will prevail for as long as the dollar remains strong.  

Another factor contributing to inflation, via the creation of an artificially tight labour market, is the continuation of the Great Resignation. At both ends of the socio-economic spectrum in countries with high degrees of social welfare spending is the phenomenon post-pandemic of people deciding that they’ve had enough of working. At the upper end of the spectrum, people on so-called “final salary” pension schemes (called defined benefit in SA) are retiring early, deciding to vasbyt until their pensions become payable and in the meantime live frugally off savings. At the lower end of the spectrum, people are deciding to stop working altogether and rather just live off state benefits.

The net result is the same: there is a shortage of people to fill vacancies in these countries and that situation could persist for some time. This is a structural problem, rather than a cyclical event.

And in similar vein, the onshoring of manufacturing back to the US and away from China and other parts of far east Asia is also a structural shift. Many countries have decided that it’s more important to be able to rely on continuity of supply than to make lowest price for manufactured products the main criterion.

So for a number of years, expect structurally higher inflation in manufacturing processes than would otherwise have been the case, until these countries reach similar levels of output and productivity as China currently offers.

The good news is that both inflation and interest rates are likely to peak in 2023. Of course, the bad news is that by then the world will be in recession.

Views on how deep that recession may be differ markedly among top economists. Mohamed El-Erian of Allianz remains pretty bearish on the outlook for interest rates, while superbear Jeremy Grantham of GMO is maintaining his stance that a bubble is about to burst. While I respect Grantham’s analytical skills hugely, he is usually wrong on the markets, at least when it comes to timing. And of course arch-bear Nouriel Roubini of NYU Stern is persisting with his doom-laden outlook. In my experience, when all the merchants of doom are predicting pretty much the same thing, chances are it will turn out nothing like that.

Let’s wait and see.

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 #4 (Sasol | HCI | City Lodge | Nampak | Standard Bank | Property (Vukile / Attacq / Fairvest / Emira / Resilient) | Premier)

The Finance Ghost
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Ghost Wrap #4 (Sasol | HCI | City Lodge | Nampak | Standard Bank | Property (Vukile / Attacq / Fairvest / Emira / Resilient) | Premier)

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

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

  • Sasol’s disappointing trading update and the impact on Omnia
  • HCI’s excellent recovery year
  • City Lodge’s celebration of summer
  • Nampak’s broken balance sheet that needs a large rights offer
  • Standard Bank’s continued enjoyment of these economic conditions
  • Some trends seen in several property updates (Vukile / Attacq / Fairvest / Emira / Resilient)
  • The cancellation of the Premier IPO

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 | Industrials REIT | MTN | Premier | Tiger Brands)

The Finance Ghost
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Ghost Bites (Aveng | Industrials REIT | MTN | Premier | Tiger Brands)

Aveng releases the Trident Steel disposal circular

This disposal is part of a strategic review process that began in 2018

Aveng is a construction group that once spawned a legion of devoted retail traders and investors who called themselves the Avengers, such was their belief in the story. If that isn’t a sign of the frothiness that was found in the market last year, I don’t know what is.

Underneath all this is a serious company, one that is now selling off the Trident Steel business. The proceeds of this transaction (if shareholders give the green light) will settle all of Aveng’s legacy debt in full, putting the company in a net cash position (rather than a net debt position).

Including this amount, the proceeds from non-core asset disposals since 2018 add up to R1.8 billion (net of transaction costs).

The value of the net assets of Trident Steel is R413 million and the profit after tax in the last financial year was R93 million. The purchase price is just under R691 million.

The buyer is a special purpose vehicle backed by private equity investors and the management of Trident Steel. For a period of one year, Aveng will help facilitate B-BBEE empowerment in the new entity through a 30% stake that is subject to call option structures.

If you are interested in learning more about how these corporate finance deals work and what the paperwork looks like, you’ll find the full circular at this link.

Industrials REIT: income up and valuations down

Welcome to the world of property valuations, where “cap rates” matter

The process to value a property is similar to valuing a company, actually. It all comes down to cash flows and a required rate of return.

Property is arguably a lot simpler, as there are contractual cash flows under a lease agreement and the costs of maintenance etc. can be reliably estimated.

Judgement is needed in identifying the correct cap rate, which is the rate applied to those cash flows to work out the value of the property. The cap rate is a bit like the return that a shareholder would want based on that property, so you work backwards from the income and the required return to get to the value.

Properties are extremely sensitive to cap rates, which is how Industrials REIT management to grow its income and suffer a valuation decrease at the same time during the six months to September.

With the company’s Industrials Hive leasing platform working well, there have been eight consecutive quarters of over 20% in average growth in rent at lease renewal or new letting. For the portfolio as a whole, like-for-like annual passing rent was 4% and occupancy reduced marginally from 93.6% to 93.8%.

The interim dividend is up 3.7%.

Despite the positive movement in these metrics, the portfolio value decreased 4.3% and the net tangible assets decreased by 7.4% on a per-share basis.

The loan-to-value is only 26.5% (low for a REIT) and there is no refinancing required until 2025.

In combining all these metrics, the accounting return for the six-month period was -5.4%.

The share price is quite illiquid, so a 13% move on Friday may not be a reliable indicator of the market’s response to this news. After that jump, the share price is down 27.5% this year.

MTN quantifies the loss of subscribers in Ghana

Regulators have pulled the plug on subscribers who didn’t complete a registration process

We’ve seen this before: regulators prescribe a SIM registration process and subscribers don’t comply. Eventually, the regulator issues a directive to terminate services to those who haven’t registered. The latest example is in Ghana, where customers were required to link a card (stage 1) and then capture biometric data (stage 2).

Fingerprints are apparently hard to come by, with a decent chunk of subscribers who decided that stage 2 was too much hard work. An “emergency services only” status on the cellphone screen might provide some much-needed encouragement to get the admin sorted.

MTN Ghana had 22.1 million subscribers that completed stage 1, of which 16.4 million completed stage 2. This means that 5.7 million subscribers were cut off this weekend.

The affected subscriber base sounds huge but presumably these customers aren’t terribly active, which is why they didn’t bother to register in the first place. Despite the large percentage of the subscriber base in terms of subscriber numbers, the affected subscribers only represent 3% – 4% of MTN Ghana service revenue and less than 1% of MTN Group service revenue.

The MTN share price is down by 2% in the past week or so.

Just when we got excited about a new listing…

The listing of Premier has been pulled from the market

Sad news: FMCG group Premier is no longer going to be separately listed on the JSE. After such a long process to prepare the business for listing and all the costs incurred along the way, Brait has blamed the current situation in South African capital markets for the cancellation of the listing.

Brait said that the listing received a “significant amount of investor interest and support,” which makes it sound like it would’ve gone ahead were it not for the huge uncertainty around President Ramaphosa and the impact that this has had on consumer confidence. Brait points the event of the “last 48 hours” and how they were not supportive of a successful IPO.

Here’s the most interesting thing: Brait will still unlock R3.5 billion through the sale of shares in Premier to underwriters Titan and RMB. Despite this, Brait’s share price fell 7.4% on this news.

A Tiger’s tail of two halves

Margin initiatives in the second half were highly effective

Tiger Brands had a horrible start to the year, with a lag in recovering cost inflation and a significant impact on profitability. Supply chain issues certainly didn’t help.

My bearish view on the company turned out to be spectacularly incorrect. In the second half of the year, Tiger made huge leaps in recovering margin and executing other important initiatives to restore profitability.

Full year revenue from continuing operations was 10% higher, with price inflation of 11% and a volume decline of 1%. The Exports and International segments achieved margin growth that was offset by challenges in the local business.

Excluding the impact of the civil unrest and a product recall, gross margin was maintained at 30.3%. That’s a big result after gross margin in the first half of the year was down at 29.2%. It may not sound like much of a difference, but over 100 basis points is a substantial change in margin.

Operating income increased by 53% to R3.4 billion, which includes insurance proceeds of R218 million linked to last year’s product recall and R166 million of civil unrest. Those costs were R647 million and R85 million last year respectively, so you can see the extent of a swing when these unusual costs were in the base and once-off income sits in the current result. Excluding these impacts in both periods reveals an increase in operating income of 10% and an unchanged operating margin of 9.6%, which gives a much fairer reflection of performance.

Helped along by a R1.5 billion share buyback that reduced shares in issue by 1.9%, HEPS from continuing operations was 51% higher to 1,702 cents. With the product recall and civil unrest excluded, it would’ve increased by 11%. Again, this is the “right” view on performance.

A final dividend of 653 cents has been declared, taking the total dividend for the year to 973 cents. This is an 18% increase on the prior year.

After a rollercoaster year of note, the share price is up 5% this year. Over 6 months, it has jumped by nearly 33%!

Little Bites:

  • Director dealings:
    • Adrian Gore has sold a meaty number of Discovery shares, with three tranches for a total of R29.6 million
    • Two directors of Telkom have collectively disposed of shares worth R993k
    • The family trust of the CEO of Altron has bought shares worth R353k
    • In what appears to have been a bad mistake, Richemont has corrected an announcement that was made in November about a director being granted shares worth over R32.6m when in fact the director had sold shares worth that value
    • Des de Beer has bought another R342k worth of shares in Lighthouse and another director has mopped up R196.5k worth of shares in the company
    • Value Capital Partners (which has board representation at ADvTECH) has bought shares in the company worth R6.8 million
    • A non-executive director of Stefanutti Stocks has bought shares worth R254k
    • An associate of the CEO of Spear REIT has bought shares worth R38.5k
  • With much ongoing uncertainty about the future ownership of the company, Royal Bafokeng Platinum has been operating with an interim CFO. This contract has been extended to the end of June 2023, as there are now two offers in the market with Implats and Northam Platinum fighting over the company.
  • There’s a significant director appointment at Sasol, with green energy expert Andreas Schierenbeck appointed to the board. The focus here is on decarbonisation opportunities through the green hydrogen value chain.
  • Property development company Visual International Holdings has released results for the six months ended August. There was almost no revenue because of slower than expected approvals for projects. In that context, a loss for the period of R3 million isn’t surprising. This could be the most obscure company on the JSE, with a market cap of just R8 million!
  • I take it back immediately – Sable Exploration and Mining with a market cap of R2.2 million could take that award. With no revenue being generated in this group either, the net loss of R2.4 million for the six months to August is higher than the market cap!

Ghost Bites (Emira | HCI | Murray & Roberts | Nampak | Sasol)

The Finance Ghost
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Ghost Bites (Emira | HCI | Murray & Roberts | Nampak | Sasol)

Emira pre-close update

The property fund has updated the market on the four months to October

In the local portfolio, Emira’s vacancies improved from 5.3% to 5.0%, with an 81% retention rate on leases. The problem is that tenants still hold the power, with negative reversions of -7.7% (a big improvement from -15.2% in the year ended June). Remember, a negative reversion means a new lease concluded at a lower rate than the old lease.

Retail vacancies were 3.1%, office vacancies improved by 150 basis points to 13.5% and industrial vacancies improved slightly to 2.6%. Negative reversions are being felt across the portfolio, with office being the worst at -12.6% (as one would expect). Emira also holds one residential property (The Bolton) with a vacancy rate of 2.1%.

The fund is in the process of disposing of its investment in Enyuka for R638.6 million, with Competition Commission approval still needed.

In terms of the indirect portfolio, Emira now holds 68.11% of Transcend Residential Property Fund after making a general offer to all shareholders that closed in October.

The portfolio in the US consists of 12 equity investments in open air retail centres. Vacancies improved from 4.5% to 2.6% and 10 of the 12 investments are expected to pay dividends.

At group level, the loan-to-value has increased from 40.5% to 44.5% because of the additional investment into Transcend and the consolidation thereof.

HCI records a huge jump in profits

The interim dividend is back after a strong period of recovery

For the six months to September 2022, Hosken Consolidated Investments (HCI) benefitted from a strong recovery in segments like Hotels and Gaming as the pandemic subsided. As diversified as the group is, there are still individual segments that are major contributors to profits.

In the context of R902 million in group headline earnings for this period, Gaming was the largest contributor at R304 million (vs. R157 million last year) and Coal Mining was next up with R224.5 million, a huge jump from R85 million in the comparable period.

The third largest segment is Hotels, which swung wildly from a loss of R62.8 million to a profit of R123.6 million.

When your biggest investments are in tourism, entertainment and coal mining, it was pretty hard not to have a good time in 2022 vs. 2021.

At group level, headline earnings per share (HEPS) increased by a spectacular 312% to R11.154 and the net asset value per share is up to R198.11. The share price of around R172 is thus a discount to NAV of over 13%.

The interim dividend is back, with a dividend of 50 cents per share for this period.

Murray & Roberts says bye-bye, Bombela

Murray & Roberts disposes of its interest in the Bombela Concession Company

If you’ve been following the Murray & Roberts story, you’ll know that huge changes are underway. The Australian business (Clough) is being sold and now there’s a deal for the company’s stake in the Bombela Concession Company (the holder of the concession agreement with the Gauteng Provincial Government to run the Gautrain).

The buyer is Intertoll International Holdings and there are two different stakes that collectively deliver a shareholding of 50% in Bombela. The price for both stakes is R1.386 billion, which makes this a Category 1 transaction for Murray & Roberts. Whenever you see this, it means that a circular will be sent to shareholders and that they will need to vote on the proposed deal.

With the concession set to terminate in 2026, the buyer is effectively mopping up a few more years of cash flows. This clearly isn’t a strategic stake for Murray & Roberts and the sale helps the company inject some much-needed equity into the balance sheet.

The proceeds from sale (if the deal goes ahead) will be used to settle the recently announced term facility that was part of the group’s debt restructuring.

To give an idea of valuation, Murray & Roberts received R185 million in ordinary dividends in the past year and the fair value of the effective interest was measured as R1.4 billion. Unless I’m misunderstanding, there must be some pretty lofty assumptions about a recovery at the Gautrain in order to justify this fair value on a concession that only has four years left to run.

If shareholders vote in favour of the deal, that risk will belong to Intertoll rather than Murray & Roberts.

Nampak: when bad balance sheets happen to good people

If you know any Nampak shareholders, give them hugs today

Sometimes, a company’s balance sheet is simply too far gone to be saved. Despite the best efforts of the management team and the staff, the interest on the debt just ends up eating the profits and any remaining equity in the structure.

In that situation, the keys to the business slowly start to slip into the hands of the banks. This only ends in one of two ways: business rescue or an equity capital raise. If the capital raise fails (as happened with Tongaat), then business rescue is the outcome anyway.

For poor Nampak, even a really good effort by the team wasn’t enough. Between the pressures of inflation and difficulty in extracting cash from Africa, it was always going to end this way. The market seemed to be caught by surprise though, with the share price losing a third of its value shortly after the announcement!

Notably, the company is still profitable at headline earnings per share (HEPS) level, with expected HEPS for the year ended September of between 33 cents and 37 cents. Although this is a decrease of between 41% and 47%, at least it’s a positive number.

So, where do the problems lie if the company is profitable?

The problem is the timing of repayment of debt, with Nampak needing to refinance R1.35 billion by the end of March. That’s not the kind of amount that you find by accident under your pillow.

The company is going to ask shareholders for permission to proceed with a rights offer of up to R2 billion in the first quarter of 2023. It’s not all bad news, with R1.35 billion to repay lenders, R350 million to upgrade a beverage can line in South Africa, R150 million to provide “operating flexibility” (i.e. working capital) and R150 million for the costs of the refinancing and rights offer.

Ultimately, the expansion into Africa funded by US dollar denominated debt has proven to be Nampak’s downfall. With operations across 10 African countries and a general lack of liquidity doing the rounds, managing the treasury function is a nightmare. When large levels of gearing are added to this, the results are clear to see.

There’s a worrying read-through here for MTN shareholders like me, with shortages of foreign currency in Nigeria continuing to be a major problem. Nampak has suffered substantial net foreign exchange losses. This isn’t great for MTN but in my opinion it’s even worse for MultiChoice, as MTN is at least still a growth company in Nigeria that needs to self-fund an in-country expansion. In other words, I see MultiChoice as being under more pressure to upstream cash than MTN, especially now that MTN’s balance sheet looks better.

Rest assured, the volatility is far from over and that applies to any country with exposure to Nigeria in particular.

Sasol drops 4.5% after releasing a trading statement

The HEPS range has been left wide open

The minimum HEPS growth to trigger a trading statement is 20%, and this is exactly the growth rate that Sasol has given, leaving the trading statement wide open for interpretation. It doesn’t help that the announcement talks about other adjustments and valuations on the balance sheet that will impact HEPS and cannot be reliably estimated.

The concern for investors is the operational update for the Secunda coal value chain, with problems in October and November impacting the outlook for the remainder of the year as well. With load shedding and rainfall causing many difficulties in the coal value chain, there is a downstream impact on the chemicals value chain. To add to the mix, there are also the usual problems at Transnet and the declaration of force majeure on the local supply of ammonia in November.

In the international business, Sasol talks about the delivery of “steady performance” and gives examples of operating challenges that were addressed.

Across all Southern African activities except for gas production, production guidance has been revised lower.

A further update will be provided in January.

Little Bites:

  • Director dealings:
    • In addition to Des de Beer buying another R659k worth of shares in Lighthouse, another director has bought shares worth R136k
    • The CEO of Life Healthcare’s South African business has acquired shares in the company worth R746k
    • A director of a major subsidiary of PBT Group sold shares worth nearly R2.4 million. Also in PBT Group, two directors sold a combined R26.1 million worth of shares to Pulsent OH, PBT’s B-BBEE partner. The acquisitions were funded with 60% third-party debt which has been guaranteed by PBT Group
  • Resilient REIT released a pre-close update for the year ending December. In South Africa, reversions for renewed leases were positive 3.4%, which is strong. Leases with new tenants were on average 17.2% higher than the outgoing tenants. To add to the happy news, vacancies fell to 1.7%. After an accelerated solar and battery rollout, Resilient now produces 15% of its own energy requirements. Resilient has also acquired a 3.94% interest in Hammerson.
  • Lighthouse Properties released an operational update for the third quarter of 2022. Vacancies are below 4% across the portfolio and footfall is still 6.7% below 2019 levels. Also, after receiving a scrip dividend from the company, Lighthouse has confirmed that it now owns 22.82% of Hammerson.
  • In a voluntary performance update, Ethos Capital confirmed that net asset value (NAV) per share has decreased by 0.6% in the quarter ended September, coming in at R10.60. This is if you include Brait at its own NAV per share. If you use the Brait share price instead, the NAV per share has decreased by 1.4% to R8.37. MTN Zakhele Futhi was one of the pressure points in the portfolio. Importantly, Ethos is planning to partially realise the stake in financing solutions business Optasia, which contributes 31% to Ethos’ NAV as the largest investment. A new investor in Optasia is taking a 17.4% stake and Ethos will dilute from 8.7% to 7.4%, banking cash proceeds of R165 million in the process that will be used to reduce debt and possibly fund a share buyback program. This excludes the option structure granted to the purchase. Based on the increased valuation in Optasia, Ethos achieves a times money return of 3x and this uplift isn’t reflected in the NAV per share, which would increase by R0.73.
  • In line with the extensively communicated timetable, Fortress has announced that the JSE sent communication to the company noting that Fortress has not submitted a compliant REIT declaration and that the JSE intends to remove REIT status for Fortress. There is an objection process set out in the listings requirements. With the shareholder meeting to potential save the day just around the corner in January, the clock is really ticking now.
  • MTN Group announced that the Turkcell litigation has been dismissed with costs. This is important, as Turkcell was seeking substantial damages from MTN based on allegations of impropriety in the award of the first private mobile telecommunications licence in Iran. The High Court of South Africa has dismissed the action by Turkcell’s subsidiary EAC with costs, bringing an end to this overhang for MTN.
  • MC Mining announced that the IDC has extended the date for repayment of the R160 million loan and interest, as well as the draw-down date for the R245 million for the Makhado hard coking coal project, to 30 June 2023. The Makhado project facility remains subject to the IDC confirming due diligence and credit approval. The IDC has a 6.7% equity stake in that project.
  • Way back in October 2021, Sanlam announced a deal with Absa that would see Absa Financial Services exchange its investment management business for a shareholding in Sanlam Investment Holdings. The deal closed on 1 December 2022 and this takes Sanlam Investment Holdings’ assets under management, administration and advice of over R1 trillion.
  • AB InBev is in the process of settling up to $3.5 billion worth of its USD notes. In simple terms, this means that the company is reducing debt. With various tranches of notes existing in the market with different maturities and costs, the company has created a priority list for the repurchases. That list is about to come in handy, because debt holders have tendered far more than the offer cap: $7.24bn worth of USD notes and £852 million worth of GBP notes!
  • Delta Property Fund has agreed to sell the Capital Towers property in Pietermaritzburg for R65.55 million. The net proceeds of R57 million will be used to reduce debt, which will improve the loan-to-value ratio by 30 basis points to 57.6% – a level that is still far too high. Vacancy levels will reduce by 80 basis points to 33.1%. The property was recognised at R47.1 million as at the end of August and registered a net operating loss of R0.9 million in the six months ended August. The painful news is that because of JSE aggregation rules and the prior deals done with the buyer, this transaction is a Category 1 deal that requires a circular and shareholder vote. That’s an expensive and time consuming process.
  • Salungano released a trading statement for the six months ended September. There’s a huge swing in earnings from HEPS of 20.69 cents to a headline loss of between 18.60 cents and 22.30 cents.
  • African Equity Empowerment Investments (AEEI) reported a 0.24% drop in revenue and a 68% deterioration in the headline loss per share. The total headline loss is a whopping R182 million off a revenue base of R2.3 billion. In case you’re prepared to use management’s view of normalised headline loss instead, that’s only R12.5 million.
  • Acting as independent expert, BDO Corporate Finance confirmed that Sun International’s acquisition of 7.8% in Grand Parade Investments from Value Capital Partners was fair to shareholders of Sun International. This is a requirement for a small related party transaction (deal value between 0.25% and 5% of market cap) on the JSE.
  • After a substantial share repurchase of R16 million, 4Sight Holdings reduced its shares in issue by 19%. The company is also in the process of redomiciling from Mauritius to South Africa.
  • There have been five investigations by the FSCA into the trading activities of shareholders of Trustco Group (i.e. not the operations of the company itself). The company announced that the FSCA had notified Trustco that four of the investigations are closed. This means that one is still open.

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

Murray & Roberts (M&R) is to sell its stake in the Bombela Concession Company (BCC) to Amsterdam-based Intertoll International. M&R will dispose of its 33% stake in BCC together with the Murray & Roberts BCC Financing Company which holds a further 17% stake in BCC for a total purchase consideration of R1,39 billion, payable in cash.

Following the conclusion of its strategic plan to unlock shareholder value, Etion will proceed with the repurchase of all ordinary shares in the company (excluding those shares held by Garlotrim) by way of a scheme of arrangement for a cash scheme consideration of 55.58 cents per share for an aggregate purchase consideration of R313,72 million. Following the delisting of the company from the AltX Board of the JSE, scheme participants will receive an agterskot payment, the total amount of which is equal to a maximum of R17 million.

A consortium (Newco) of commercial cane growers have submitted an expression of interest to acquire certain assets of Tongaat Hulett which is in business rescue. The proposal to acquire operating mills, refinery, animal feeds and brands aims to ensure the survival of farming operations linked to Tongaat’s operations in the North Coast of KwaZulu-Natal. Funding arrangements are still to be secured.

Unlisted Companies

Bushveld Energy, a subsidiary of Bushveld Minerals, a South African vanadium producer and energy storage provider, has disposed of its 51% stake in VRFB to London-based Mustang Energy. VRFB is a 50% shareholder in Enerox, an Austrian-based vanadium redox flow battery manufacturer. The transaction, valued at US$19,4 million, will be settled by the issue of 79,4 million new Mustang shares to Bushveld Energy.

South African end-to-end information and communications technology company Redwill ICT has acquired Opentel, a local fibre and wireless internet service provider (ISP).

Chariot, an African focused transitional energy company, has formed a joint venture through a 25% stake in a new SA electricity trading company Etana Energy. Other shareholders include Nerua Group (49%), H1 Holdings (21%) and Meadows Energy (5%). Etana Energy has been granted an electricity trading licence by the NERSA.

Local healthtech startup LIQID Medical has secured R30 million in investment from the SAB Foundation. A medical device development company, LIQID Medical will use the funds to further the development of three core devices (OptiShunt, iPortVR and iFlow) which offer clinically effective, cost-saving and quality-of-life-improving solutions for glaucoma.

Investment Fund for Developing Countries (IFU), a Development Financial Institution owned by the Government of Denmark, has exited its investment (in the form of loan capital) in local blubbery exporter United Exports.

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

In its trading update for the year, Nampak announced a proposed capital raise of up to R2 billion during the first quarter of 2023. The group’s current debt package and the US Private Placement funding are due to mature in December and May 2023 respectively. This requires the group to refinance its debt package before the end of March 2023 if management is to put in place a simplified and more robust capital structure and so deliver on its growth strategy.

Lighthouse Properties is offering shareholders up to R50 million in new Lighthouse shares. The company will list up to 7,575,757 new shares with the purpose of providing the company with additional liquidity primarily for capital expenditure at its shopping centres.

A2X Markets is set to welcome three new listings. Woolworths will list on 2 December, Truworths International on 5 December and Hyprop Investments on 7 December 2022.

Rand Merchant Investment Holdings will officially change its name to OUTsurance Group under the new JSE code OUT from commencement of trading on Wednesday 7 December 2022.

The JSE has censured suspended Nutritional Holdings following the company’s “failure to inform the market of price-sensitive information without delay [and] failed to apply the highest standard of care in disseminating information to the market.”

As part of its capital optimisation strategy, Investec Ltd acquired on the open market a further 1,194,773 Investec Plc shares at an average price of 499 pence per share (LSE and BATS Europe) and 1,450,228 Investec Plc shares at an average price of R102.81 per share (JSE). Since October 3rd the company has purchased 9,50 million shares.

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:

Glencore this week repurchased 13,351,854 shares for a total consideration of £72,67 million. The share repurchases form part of the second phase of the company’s existing buy-back programme which is expected to be completed by February 2023.

South32 has this week repurchased a further 1,828,308 shares at an aggregate cost of A$7,21 million.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period November 21 – 25, a further 3,693,220 Prosus shares were repurchased for an aggregate €213,56 million and a further 716,371 Naspers shares for a total consideration of R1,76 billion.

British American Tobacco repurchased a further 684,561 shares this week for a total of £22,88 million.

Nine companies issued profit warnings this week: Mantengu Mining, Mahube Infrastructure, Crookes Brothers, Nictus, Visual International, Sable Exploration and Mining, African Equity Empowerment Investments, Nampak and Salungano.

Four companies issued or withdrew cautionary notices. The companies were: Finbond, Acsion, Brikor and Chrometco.

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

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