Nama Holdings, a subsidiary of Moroccan alternative investment firm CDG Invest, has taken a minority equity stake in Vita Couture, an industrial platform in the clothing sector. Vita Couture provides international and national clients with a complete ‘one-stop-shop’ service covering the entire ready-to-wear clothing production supply chain.
Marula Mining, an African focused mining and exploration investment company listed on the LSE, has entered into a binding agreement with Tanzanian mining company Kusini Gateway Industrial Park to secure a 73% commercial interest in the Bagamoyo Graphite Project. The project extends over approximately 180 hectares and comprises 22 granted graphite mining licenses in Tanzania. The licenses are valid for seven years. Under the terms of the agreement, Marula will fund (undertaken in two phases) all exploration and development costs through to commencement of commercial graphite mining and processing operations.
Marsh, a subsidiary of NYSE-listed Marsh McLennan, is set to acquire a majority stake in Moroccan insurance broker Beassur Marsh. Prior to the announcement Marsh held a minority stake in the business which it acquired in June 2019. Transaction details were undisclosed.
Diamond Fields Resources (DFR) and TSX-listed company is to dispose of its Namibian diamond assets to Jean Boulle Diamond Mines. As consideration for the sale of its Namibian Concessions, DFR will receive an initial cash consideration of US$150,000, annual cash payments of $100,000 and a 1% royalty of net sales.
CFI Financial, a multi-asset brokerage firm, has acquired Egyptian brokerage firm El Mahrousa. The deal bolsters CFI’s position in the Middle East and East Africa region. Financial details were not disclosed.
The Competition Authority of Kenya (CAK) has approved two M&A transactions. It announced the approval of the proposed acquisition of a 20% stake in Credit Bank plc by Shorecap III unconditionally. Credit Bank operates in Kenya through 17 branches offering services such as personal banking insurance intermediary services, trade finance, insurance premium financing, SME and corporate banking. In a second notice, CAK approved the acquisition of a majority stake in Ranfer Teas (Kenya) by Akbar Brothers. Prior to the acquisition, Ranfer had a minority stake in the firm which exports tea to South Africa, Egypt, Pakistan, US, Europe and Sri Lanka.
Orda, the Nigerian food-tech startup has raised US$3,4 million in a seed round led by FinTech Collective and Quona Capital. The cloud-based restaurant operating system offers services to small, independent customers via access to various software features, including order management, intergradations with food aggregators and delivery platforms. Funds will be used to add more functionalities to the platform particularly around financial products.
Djamo a personal finance company based in Abidjan, Côte d’Ivoire, has raised US$14 million in equity funding. Funds will be used to expand it footprint into new markets and to scale its service offering. The round was co-led by Enza Capital, Oikocredit and Partech Africa with participation form Janngo Capital, P1 Ventures among others.
Crypto and saving platform Ejara has raised US$8 million in a Series A round co-led by London-based venture capital firm Anthemis and crypto-focused fund Dragonfly Capital. The Cameroonian fintech will use the funds to broaden its customer base in Francophone Africa.
The Competition Commission has published new rules on notifying small mergers, which could increase the regulatory burden for potential investors in South Africa and further strain the Commission’s resources.
The Competition Commission recently published the final revised Guidelines on Small Merger Notification1 (the Guidelines), effective from 1 December 2022, which state that small mergers and acquisitions in all industries may now have to be notified to and approved by the Commission if certain criteria are met.
Small mergers are transactions that do not meet the prescribed intermediate or large merger thresholds and, therefore, do not require a mandatory notification. In terms of the Competition Act, however, the Commission may require, up to six months after a small merger has been implemented, that such mergers be notified to and approved by the Commission if, in the opinion of the Commission:
• the merger may substantially prevent or lessen competition; or
• cannot be justified on public interest grounds
Why were the Guidelines revised?
When amendments were proposed to the Guidelines last year, the revisions were specifically aimed at capturing small mergers, where the merger parties operate in digital or technology markets. The Commission is concerned that acquisitions in this space often escape regulatory scrutiny because they occur at an early stage in the life of the target, before these entities have generated sufficient turnover or accumulated capital and physical assets. For example, the competition authority in the US recently reported that Microsoft, Amazon, Google, Apple, and Meta Platforms (formerly known as Facebook) engaged in 616 acquisitions between 2010 and 2019 that fell below the merger thresholds but were worth at least US$1m.
Significantly, the final version of the Guidelines obliges merger parties to inform the Commission of all small mergers that meet the criteria, not only those in the digital space.
When will firms need to inform the Commission about small mergers?
• The older version of the Guidelines has been in place for many years. The revised version still states that, if at the time of entering into the transaction, any of the firms (or firms within their groups) are:
(i) Subject to a prohibited practice investigation by the Commission, or
(ii) Are respondents to pending proceedings following a referral by the Commission to the Competition Tribunal, the Commission must be informed in writing before the implementation of the small merger.
• The Commission will, however, also require that it be informed of all small mergers and share acquisitions where the acquiring firm’s turnover or asset value alone exceeds the large merger combined asset/turnover threshold (currently R6,6bn) and at least one of the following criteria must be met for the target firm:
(i) the consideration for the acquisition or investment exceeds the target firm’s asset/turnover threshold for large mergers (currently R190m)
(ii) the consideration for the acquisition of a part of the target firm is less than the R190m threshold, but effectively values the target firm at R190m or more.
What is the procedure for informing the Commission?
Parties to small mergers which meet the above criteria are advised to inform the Commission in writing of their intention to enter into the transaction. The parties should provide sufficient detail on the acquiring and target firms, the proposed transaction, and the relevant markets in which the firms compete.
How does this development impact transactions in South Africa?
The Guidelines create an additional regulatory obligation for merger parties. They will need to assess whether they meet the criteria detailed above and if it is necessary to inform the Commission about their merger, even if the firms involved in the transaction do not meet the prescribed South African merger thresholds. This is a particularly important consideration when the merger parties operate in digital / technology markets.
The Commission has warned that it will remain vigilant in identifying small mergers that require notification. It remains to be seen whether there will be any consequences for firms involved in mergers that meet the relevant criteria but fail to inform the Commission. It is also uncertain how the thresholds should be interpreted and why the scope of the Guidelines was not limited to digital markets.
Daryl Dingley is a Partner and Elisha Bhugwandeen a Senior Knowledge Lawyer | Webber Wentzel.
This article first appeared in DealMakers, SA’s quarterly M&A publication
The recent severe floods in Nigeria, as well as record high temperatures in various parts of the world have placed the spotlight on the growing threat posed by climate change and the urgent need to ramp up investments in green energy solutions.
The world’s attention has also been fixated on the Ukrainian invasion – a human crisis that has thrown into stark reality Europe’s dependence on Russian hydrocarbons and the pipeline infrastructure that delivers oil and gas to the region’s consumers.
Energy prices have skyrocketed since early 2022, highlighting the strategic and moral dilemma facing Europe’s most industrialised economies. Germany, due to its own limited natural resources, is heavily reliant on Russia for more than half of its gas, almost half of its coal, and about a third of its oil, according to Bloomberg. While already one of the world’s most advanced economies, in terms of greener energy usage, Germany has found that its renewables are nowhere near enough to sustain its population’s demands for electricity and fuel, while also powering its economy.
Like most of Europe, Germany is balancing its need for energy security and economic growth, even as it embarks on a decades-long transition to greener fuels and greater energy independence.
African Opportunity
The need for Africa to follow a just transition to greener energy and advance the development of its people is imperative. The developed world has a significant head-start. Compare Germany and Uganda. According to the World Bank, GDP per capita in Germany was $46,208 in 2020, while for Uganda it was a paltry $822. In the same year, German life expectancy at birth was 81.4, while in Uganda, it was 63.7. Likewise, in 2018, Germany emitted 8.22 metric tons (tonnes) of CO2 per person, while Uganda’s carbon footprint was just 0.143 tonnes per person. There are many statistics that reference this, and Uganda, like most other African countries, still has a long path ahead to catch up with the developed nations of the world.
It is against these disparities that Africa needs a multi-stakeholder and multinational approach to curb the climate crisis. The latest United Nations Intergovernmental Panel on Climate Change (PCC) report warns that limiting global warming to 1.5°C is looking ever more unlikely without urgent global action on drastic reductions in greenhouse gas (GHG) emissions.
Even though Africa is a minor contributor to global GHG emissions (3.8%), the climate risks for our continent are real and ominous. Not only are African countries most vulnerable to the effects of climate change, despite contributing significantly less to global carbon emissions, they face greater dilemmas than their European counterparts in meeting the legitimate needs of their people today, while transitioning to a greener, more just society.
Historically, renewables were criticised as being too expensive. However, we have seen a significant decline in their cost, due in large part, to advancements in technology, making renewables more efficient and affordable. Technological advances have increased the possibility of achieving a transition away from non-renewable energy sources, with Africa being rich in untapped renewables – solar, wind, hydropower and geothermal.
In the medium to long-term, there is an immense opportunity for Africa to produce and export green energy solutions to sunshine-poor northern climates. There are innovative opportunities with vast potential that aim to re-tool economies to run on hydrogen produced from African sunshine and wind.
Earlier this year, Anglo American unveiled the world’s biggest green hydrogen-powered truck at a platinum mine in Limpopo, South Africa. The mining giant intends to replace its existing diesel-fuelled fleet, which uses an estimated 40 million litres of carbon-based fuel a year, with green hydrogen-powered trucks. This early-stage development shows the innovative work underway on our continent, and creates room for us to be world leaders in the green hydrogen economy. President Ramaphosa called the initiative, “a gigantic leap for South Africa’s hydrogen future economy”, representing “the genesis of an entire ecosystem powered by hydrogen.”
Funding a Just Energy Transition
The International Labour Organisation and United Nations Framework Convention on Climate Change defines a just transition as, “greening the economy in a way that is as fair and inclusive as possible to everyone concerned, creating decent work opportunities and leaving no one behind.”
While Africa must join the global drive towards limiting GHG emissions, this action must be considered within the context of Africa’s just transition towards a low-carbon economy, and in a manner that recognises and addresses the deep energy deficit across African economies. The transition away from non-renewable energy will necessarily be a gradual and measured process, given widespread energy poverty across sub-Saharan Africa, where less than 50 percent of the population have access to electricity.
As the World Bank has argued, Africa’s recovery from the COVID-19 pandemic, and its medium-term development, both require a degree of openness to further investment in ‘brown’ activities. Many argue that a refusal to accept this would amount to denying Africa’s right to sustainable development. A total or immediate ban on further transitional projects in Africa to help reduce environmental pressure in much richer regions is simply unjust.
Energy, in general, underpins economic growth in emerging markets, specifically in Africa, where affordable and reliable energy access is fundamental to development. Therefore, non-renewable energy will likely remain key to ensuring energy security in many African regions requiring broad access to electricity, as well as transportation.
Africa’s growing urban populations will require a reliable and sustainable energy supply to power industrial production, electrify more households, and expand the use of transport to drive socioeconomic development. Certain countries – Nigeria, Angola, Ghana and Mozambique – produce oil and gas for international markets, thus providing foreign currency and tax revenues to develop their respective economies. It is important to objectively acknowledge the pressing need to balance all these realities as part of ensuring a just energy transition.
Having said that, Standard Bank Group’s long-term goal is clear. We will achieve a portfolio mix that is net zero by 2050. That will entail reducing our financed emissions and simultaneously scaling up our financing of renewables, reforestation, climate-smart agriculture, decarbonisation and transition technologies, and supporting the development of credible carbon offset programmes. We are already a major funder of renewable energy projects in Africa. Since 2012, 86 percent of our new energy lending has been to renewable energy, and we have not financed any new coal-fired power stations since 2009.
Responsible investment means following globally accepted environmental, social and governance (ESG) best practices like those embodied in the Equator Principles (EP) and the International Finance Corporations (IFC’s) best practice standards, both of which underpin Standard Bank’s investment portfolio. Here, responsible investors can not only support development, but can work with carefully selected clients to ensure that carbon-based energy projects are responsibly developed with the lowest possible carbon footprint. This is how Standard Bank intends to play our role in Africa.
We will finance initiatives that drive economic growth and human development across Africa. Much of this will be investments in renewable energy infrastructure and transitioning to a new sustainable economy, even as we unlock opportunities from Africa’s existing natural endowment. Every major investment must be done according to the highest ethical and governance standards.
Ultimately, just as Europe doesn’t “un-develop” itself by switching off gas, Africa cannot keep itself under-developed by forgoing all carbon-based fuel investment opportunities at the same pace as the developed global north. This would be at great social cost for the continent. Both need to transition to something better – and Standard Bank will support Africa’s just energy transition.
Kenny Fihla – Chief Executive of Corporate and Investment Banking | Standard Bank Group
This article first appeared in the DealMakers’ Renewable Energy 2022 Feature
Kenya is among the leading investment destinations in Africa. The Africa Private Equity and Venture Capital Association (AVCA) 2022 H1 report, highlighted Kenya’s remarkable growth in deal volume compared to the corresponding period last year (a 153% increase compared to 2021 H1).
Double taxation agreements (DTAs) are an important consideration for investors. Kenya currently has 14 DTAs in force. While Kenya has signed a DTA with Mauritius, the DTA is not yet in force. Nevertheless, Kenya is among the largest recipients in Africa of investments from Mauritius.
The Kenya-Mauritius DTA has faced a myriad of challenges; the DTA was subject to litigation in the High Court (the Court) for a period of six years. The Tax Justice Network Africa (TJNA) challenged the DTA in the case of Tax Justice Network Africa v Cabinet Secretary for National Treasury & 2 others [2019] eKLR. TJNA argued that the DTA conferred special rights to Mauritius-based investors by reducing withholding tax rates. TJNA further argued that companies were selling shares at the Mauritius level to avoid paying capital gains tax in Kenya, and this meant that Kenya was losing revenue. Finally, TJNA argued that the treaty did not follow the procedure laid out in law and was, therefore, unconstitutional.
The TJNA case was opposed by the Cabinet Secretary, National Treasury, the Kenya Revenue Authority, and the Attorney General, on behalf of the Government of Kenya (GoK). GoK argued that the DTA with Mauritius was meant to attract foreign investment and compared well with other African countries that have a DTA with Mauritius. GoK further argued that the treaty was ratified by Cabinet and published in Legal Notice 59 of 2014, as required by the law.
In determining the case, the Court observed that TJNA did not demonstrate how the DTA contravened the Constitution of Kenya. However, the Court noted that Legal Notice 59 of 2014 was a statutory instrument and should have been tabled in Parliament for approval as required under the Statutory Instruments Act. The Court declared the DTA void for this reason. The Court did not delve into whether the DTA was beneficial to Kenya or not.
It is important to note that certain things have changed since the case started in 2014. As an example, while Kenya and Mauritius did not have Capital Gains Tax (CGT) in 2014, Kenya introduced CGT at 5% in 2015. The Kenya Finance Act, 2022 has increased the rate to 15% with effect from 1 January 2023. In addition, Kenya and Mauritius re-signed the DTA on 10 April 2019, and the renegotiated DTA was published in the Kenya Gazette as Legal Notice 114 of 2020. The DTA is not yet in force, and the process that was initially signed on 7 May 2012 is still not complete after 10 years!
The renegotiated DTA comes with some changes, including a change on withholding tax rates. An example includes an increase in withholding tax rate on royalties from 10% to 12%, and an introduction of withholding tax on technical fees (managerial, technical or consultancy fees) at 10%. The withholding tax rates are attractive to investors based in Mauritius because the corresponding rates for investors in countries that do not have a DTA with Kenya are higher. For example, while the withholding tax rate on management fees in the DTA is 10%, the rate for a country without a DTA is 20%. The reduced rates may offer a good reason to push for the DTA to come into force.
The new DTA, however, has other changes which might make an investor want to have its coming into force delayed further. The most significant is the CGT on transfer of shares. The DTA provides that gains derived by a Mauritius resident from selling shares may be taxed in Kenya if, at any time during the past year, these shares or comparable interests derived more than 50 percent of their value directly or indirectly from immovable property situated in Kenya. In addition, gains derived by a Mauritius resident from selling shares of a Kenyan company may be taxed in Kenya if the seller, at any time during the 12-month period preceding such sale, held directly or indirectly at least 50 percent of the capital of the Kenyan company. The new changes seek to give power to Kenya to collect CGT in some instances where the sale of shares happens at the Mauritius level. The changes may not be attractive to some investors who set up holding companies (Hold Cos) in Mauritius and use such Hold Cos to transfer their underlying shares in Kenyan companies.
The new, renegotiated DTA between Kenya and Mauritius was approved by Kenya’s National Assembly on 22 December 2020, and now we await notification for it to come into force. It is not clear why Kenya is yet to notify Mauritius that it has completed procedures required by its law for the DTA to come into force.
Whether it is time for the DTA to come into force will depend on the perspective that you take. For investors who are resident in Mauritius, it is a delicate balance because, while they may want to benefit from the reduced withholding tax rates, they may not want to pay CGT in Kenya, where applicable. For the civil society in Kenya, such as TJNA, the renegotiated DTA is better when compared with the one signed in 2012, although there is still room for improvement. Other stakeholders may prefer to keep the status quo, because Kenya is still attracting investment from Mauritius even without a DTA.
Alex Kanyi is a Partner in the Tax & Exchange Control Practice | CDH Kenya
This article first appeared in DealMakers AFRICA, the continent’s quarterly M&A publication.
In this week’s edition of Ghost Global, we look at two huge brands in the media and entertainment industries: Disney and Warner Music. The products and brands have been far more fun than the share prices this year!
Disney airs its dirty laundry after investors were hung out to dry
As my portfolio confirms, things haven’t been fine and dandy in the Magic Kingdom this year. After throwing the kitchen sink and Mickey’s ears at streaming in the past year and burning billions along the way, it seems that the knives came out for Bob Chapek.
From one Bob to another, with the surprise announcement last week that Bob Iger is returning as CEO, effective immediately. This came after several Disney senior executives (including CFO Christine McCathy) informed board members that they have lost confidence in Chapek’s leadership.
Earlier this month, Chapek had announced the company’s plans of a hiring freeze, layoffs and cost cuts. It was too little, too late for the mess that had been created. Employees may have hoped that the rapid changes at the top would save them from this fate, but those dreams have been dashed. Returning CEO Iger has stated that he felt Chapek’s strategy was the “right thing to do” and that he therefore doesn’t plan to change it.
Looking at Disney’s full year earnings for the 2022 fiscal year ended 1 October 2022, there appears to be a little bit of frosting on this particular cinnamon bun. Revenue is up by 23% from last year to $82.7 billion. Net Income from continuing operations increased by 58% to $3.2 billion.
While streaming may be working out really well for Warner Music (see below), it certainly isn’t doing the same for Disney. Fortunately, the company’s Parks, Experiences and Products segment has grown revenue by 73% and operating income by a nonsensical percentage, up from $471 million to $7.9 billion. A year-on-year move like that isn’t normal obviously, but then again neither were the Covid lockdowns that killed the magic in this part of the business for many months.
Although the news of Iger’s return is probably positive overall, the share price has a lot of damage to repair. Down 38% this year, even the fairy godmother seems to have given up on turning this pumpkin into a carriage.
As for Ghost, he’s still giving the House of Mouse a chance to get it right. To find out why, you can become a Magic Markets Premium subscriber and get access to a library of research that includes reports on Disney.
Warner Music sings a happy tune
It’s safe to say that the global music industry is currently experiencing a bit of a Renaissance moment. After the introduction of the MP3 in the 90s did to record sales what Yoko Ono did to the Beatles, the industry was pummeled by internet piracy and then, climactically, a full-scale pandemic, which stopped concerts and tours overnight. Whoever decided to become a record executive between 1991 and 2021 must have possessed a special kind of clairvoyance to be able to predict that the industry would recover at all.
This sudden and rapid growth has been driven largely by the popularity of streaming services such as Spotify and Apple Music. Taking into account what a subscription to Spotify costs versus the cost of a physical album, you wouldn’t think that the math adds up.
Yet, according to recent figures, streaming services yielded a total of $13.4 billion in global revenue in 2020, making up 62.1% of the music industry’s total income. The majority of this revenue comes from paid monthly or annual subscriptions, which have seen steady growth in recent years – pandemic be damned.
Enter Warner Music Group, a shining example of the good space that music is in right now. The American entertainment company and record label conglomerate has released results for its fourth quarter and financial year ended September 2022, and there’s nothing off-key here. For the full year, total revenue rose by 11.7%, though there was an extra trading week in this period which boosted Recorded Music streaming revenue. This total revenue is split between Recorded Music, which increased by 9%, and Music Publishing, which rose by an impressive 26%. Total streaming revenue increased by 9.1%.
In Q4, revenue grew by 9% as reported and 16% in constant currency. And while advertisers are slowly starting to get the message that Gen Z are not impressed by unskippable brand messages popping up in the middle of their low-fi hip hop playlists, Warner still saw 5% growth in subscription streaming, which compensated for the decline in ad-supported streaming revenue.
Underlying growth aside, share price performance still comes down to valuation. With a year-to-date drop of 20%, there’s no sweet melody for your portfolio here:
Warner Music has expressed intentions to focus on Eastern Europe as an area for growth in 2023 (and not because they manufacture ammunition, either). Ukraine is a mess of course, but the broader area saw an increase in music consumption of 20% in 2021 thanks to major economies like Poland. As a result, the company has put effort into intensifying its presence with investments such as Grupo Step and Big Idea in Poland, as well as Mascom Records in Serbia. The group has also launched the Out of Order label aimed at advancing artists in Europe and other emerging markets.
Every war needs a peace anthem, right?
The company will be appointing new CEO, Robert Kyncl, in January 2023. Kyncl is no stranger to streaming either, as he is currently YouTube’s Chief Business Officer. As one of the best businesses in the Alphabet (Google) stable, any experience from YouTube can only be helpful.
Magic Markets Premium subscribers pay just R99/month for access to a library of over 50 reports and podcasts on global stocks like these. Subscribe today and give yourself an edge in the market.
Fairvest releases its first results since the Arrowhead merger
Comparability is very limited here, so we focus on other metrics
With the merger between Arrowhead Properties and Fairvest Property concluded, the merger was accounted for as a reverse acquisition. This means that the financials are a continuation of “Old Fairvest” and cover a 15-month reporting period from 1 July to 30 September. To make it even trickier, Arrowhead has only been consolidated since January.
This makes comparability of the numbers practically impossible. The most we can look at is specific metrics in the business.
For example, a loan-to-value ratio of 38.1% is well in line with what you want to see in a REIT. Vacancies are down to 5.9% and tenant retention is 87.4%.
The pay-out ratio is 100%, so there are no issues here in passing profits onto shareholders as a REIT should. With two classes of shares, it’s notable that the distribution for the B share exceeded guidance by 4.4%.
The net asset value per A share is R13.1878 and for the B share is R5.1901. The shares are trading at R13.90 and R3.37 respectively, so the A shares are above NAV and the B shares are at a discount. Dual-share structures can get complicated, as we’ve seen in the huge problems at Fortress which is on the verge of losing REIT status.
Before investing, you would need to do detailed research into the differences between the share classes.
Mahube Infrastructure achieves modest growth in NAV
This renewables group has investments in two wind farms and three solar PV farms
Those interested in renewable energy should do more research on Mahube Infrastructure, as pure-play renewable investments are hard to come by. Although dividend income in the six months to August decreased sharply by 65.6%, this is mainly because the subsidiary company needed to redeem preference shares rather than pay ordinary dividends.
The tangible net asset value increased by just 2% to R11.18 per share, but at least that’s a move in the right direction. A dividend of 45 cents per share has been declared.
At a closing share price of R6.43, this puts the company on a discount to NAV of 42%. The interim dividend yield alone is nearly 7%. I would be nervous annualising this given the unpredictable nature of the underlying portfolio.
PBT Group hasn’t escaped the pressures of inflation
Although margins are under pressure, the technology group is still moving forward
PBT Group is one of those companies that is annoyingly good at gaining ground and then staying there. I keep waiting for the share price to drop so I can make up for previous mistakes in missing the opportunity and it simply doesn’t happen.
In the six months to September, results were pleasing on the top line, but the margin growth that is plaguing so many companies at the moment was clearly visible. Organic revenue growth was 14.5% and EBITDA inched higher by 3.2%.
The pressure on EBITDA was mostly from the international segments, where EBITDA decreased year-on-year despite an 18% increase in revenue. In South Africa (92% of group revenue), revenue increased by 16% and EBITDA was up by 10%. This means that both regions experienced margin pressure, with the situation particularly difficult in the UK and Europe.
Some of the margin pressure came from increased incentives paid to the sales team in June based on the success of the prior financial year. These are annual incentives that won’t repeat in the second half, as they are paid once per year based on the previous year’s performance. The point is that there’s a mismatch in timing between the revenue and the related incentives.
Given the prevailing market conditions, it’s likely that there are pressures beyond just the incentives. Nevertheless, the company is hinting at an improved margin performance going forward.
A quick look at the balance sheet would raise some concerns around accounts receivable, with R136.9 million in debtors at the end of the period in the South African segment. A disappointing cash conversion performance isn’t what investors want to see in this environment. In very good news, the situation has normalised after the end of the reporting period, with R115.3 million of the debtor balance collected. Investors will breathe a collective sigh of relief.
A feature of this result is the progress made on the strategy of selling non-core assets and returning the proceeds to shareholders. Net proceeds from non-core assets were R20.9 million. The group chipped in from the reserves and paid a special distribution of R31.8 million to shareholders in addition to executing R7.3 million worth of share repurchases.
There should be more to come, with R187.1 million in non-core assets still on the balance sheet at the end of September.
In the meantime, the board has declared an interim distribution of 25 cents per share.
Santam is set to change its operating model from January
Net underwriting margin and return on capital targets are still valid
Santam has provided an update to the market on its performance for the 10 months ended October.
In conventional insurance, gross written premium growth was 8%, proving that any reputational damage during the pandemic has been successfully managed by the group. Due to numerous weather-related disasters in South Africa and high claims inflation (an inflationary increase in premiums lags the increase in underlying costs), the net underwriting margin is below the bottom end of the target range of 5% to 10%. Steps have been put in place to amend this situation heading into 2023.
The investment return on insurance funds has been volatile as one might expect, with improved performance since June as Santam put steps in place to steady the ship. With such a strong recent rally in the local market, the company would’ve been better off without the zero-cost collar to hedge performance. Hindsight is always perfect, of course.
Looking at the Sanlam Emerging Market partner business, investors are reminded that Santam entered into an agreement in May to sell its 10% interest in the SAN joint venture to Allianz Europe. Regulatory approvals are expected to be obtained by mid-2023.
In India, Shriram General Insurance suffered lower sales, but an improved claims experience and higher investment returns on insurance funds took the net performance into the green.
Santam is making operational changes with effect from 1 January, with the biggest change being to the multi-channel business that will be restructured into three business units to focus on distribution channels.
The company has reiterated the targets of a net underwriting margin of 5% to 10% and a return on capital target of 24%. A target isn’t the same as guidance.
Little Bites:
Director dealings:
A non-executive director of KAP Industrial has bought shares worth nearly R100k
The former CEO of Cashbuild has sold shares and now owns 4.48% of shares in issue
A director of a major subsidiary of Santova has sold shares worth R373k
The family trust of a director of Curro has sold shares worth nearly R8.1 million
A long-standing director of Invicta has bought R414k worth of the company’s preference shares
In very good news for Stefanutti Stocks (with a 13% jump in the share price in response), a dispute related to a project in Zambia has attracted an arbitration award in favour of the 50-50 joint venture that Stefanutti Stocks was part of for the contract. The award is for 510 million Zambian Kwacha, which just so happens to be worth 510 million Randelas as well! Although this is a final arbitration award and the decision is final, there is a risk of the award being set aside on procedural grounds. Still, the market clearly likes this and with good reason.
Anyone who followed the Ascendis Health battle in recent times will remember shareholder activist Harry Smit. At the AGM of the company, his re-election as a non-executive director was voted down. Smit’s journey as a director of Ascendis has come to an end.
PGM and chrome business Tharisa has extended its fixed income note offer to raise $50 million for the Karo Platinum Project. To accommodate institutional investors in the final approval process, the deadline has been kicked out by a week and a half and the offer closes on 9 December.
AYO Technology released results for the year ended August. Revenue increased by 3% and the headline loss improved by 10% to 60.25 cents. This group never lets a loss get in the way of a good dividend, declared a dividend of 60 cents per share (up 100% vs. the prior period). You can go do some digging for yourself on why that might be the case.
At an extraordinary general meeting, shareholders of Gemfields approved a general share buyback programme of up to $10 million. With all the hassles in Mozambique, this is an encouraging show of faith by the board and the shareholders in the balance sheet.
After a mandatory offer made by GMB Liquidity Corporate to the shareholders of Grand Parade Investments, GMB now holds a stake of 48.97% in the company excluding treasury shares. It’s worth noting that Value Capital Partners (VCP) has disposed of shares in the company worth nearly R205 million, which means VCP no longer holds any shares in the company.
If for some reason you want to see the sheer extent of paperwork that goes into a merger on the London Stock Exchange, you can find all the documents (including the newly released supplementary prospectus) for the Capital & Counties / Shaftesbury merger at this link.
Property development and holding company Acsion Limited renewed its cautionary announcement related to a potential delisting and cash offer. No indicative value of the offer is given in the announcement. The company also released results that indicated a 34% increase in revenue and a 72% increase in HEPS. Net asset value per share has grown by 13% and the loan-to-value is only 7.3%, which tells you that this is a developer rather than a REIT that has much higher gearing and focuses on rental properties. With a net asset value per share of R22.8006 and a share price of just R6.17, the discount to NAV is huge.
Europa Metals has announced a 19% increase to the indicated mineral resource and a 14% increase in grade following a successful 2022 drilling campaign. This compares “very favourably” with the company’s mineral resource estimate announced in October 2021.
African Dawn Capital has released results for the six months ended August. Revenue increased by 17.6% to R7.3 million and the loss is also R7.3 million, an unusual set of numbers for several reasons. This obscure (and tiny) company was also loss-making in the comparable period.
There’s been a change in approach in Chrometco’s business rescue process, with the practitioner deciding to proceed with the accelerated sales process rather than the restart of the underground mining operation.
Sable Exploration and Mining released a trading statement for the six months ended August. The headline loss per share is expected to be between 50 cents and 61 cents, which is between 38% and 68% worse than the comparable period’s loss of 36.30 cents per share.
A pre-close update shows promising improvement in some key metrics
In a pre-close update related to the six months ending December 2022, Attacq highlighted higher collection rates and occupancy rates in the South African portfolio. This is obviously good news.
The client retention rate is much higher, which is also good news, although negative reversions have deteriorated from -3.1% to -5% (which means new leases are still cheaper than old ones).
Trading density has increased by 18.5% as the impact of inflation and improved retail conditions work through the system.
In October, turnover reached 122.8% of 2019 levels despite footcount still running well below those levels. The footcount vs. turnover trend is in line with what I’ve seen in most property funds.
The fund is recovering 68% of diesel costs for load shedding in the retail portfolio and 84% in the commercial (office) portfolio. The full cost is being recovered in the industrial portfolio.
Looking at the balance sheet, the gearing ratio has increased from 37.2% at the end of June to 38.7% at the end of September. 74.6% of debt is now hedged vs. 84% in June and the total weighted average cost of debt has increased from 9.4% to 9.6%.
This has been a rollercoaster year of note for the share price:
Capital Appreciation Group jumps on earnings
A 9.7% jump on strong volumes marks a huge reversal in market sentiment
After Capital Appreciation Group spooked the market with the GovChat announcement, the release of detailed results seems to have settled the jitters.
In the six months ended September, revenue grew by 22.5% and growth outside South Africa was particularly high, albeit off a small base. There are now 22% more point of sale terminals in the wild, with a total estate of over 315,000 terminals.
With substantial investment in expenditure to drive growth, trading profit only increased by 2% and EBITDA was flat. This means a 600 basis points reduction in EBITDA margin to 25.6%, which is still an attractive level. If you’re wondering where the expense growth was, the appointment of 81 new staff members (excluding the 23 Responsive employees acquired with that company) will give you a clue.
Headline earning per share (HEPS) ignores the GovChat impairment and increased by 4.4%.
The cash generative quality of the business certainly comes through in this result, supporting interim dividend growth of 13.3% and a 20.1% increase in cash available for reinvestment. Finance income increased by 53.2% as a result of a higher cash balance and increased interest rates.
Looking deeper, the Payments division grew revenue by just 1.4% and experienced a 5.4% decline in EBITDA. The Software division grew revenue by 75.4% and EBITDA by 57.1% but one must remember that there was a major acquisition in this division.
This chart does a great job of showing that the revenue pressure in the Payments division was mainly due to a slow-down in terminal sales vs. a monumental period last year:
The group outlook is “cautiously optimistic” for the Payments business as supply chain challenges start to disappear. The Software division is enjoying a strong pipeline. The group balance sheet has more than enough cash to fund any acquisitions that the business may come across.
Going forward, investors will hope for a happy ending of some kind for GovChat and margin improvement in the Payments division, with revenue growth in Software continuing to do well.
Crookes Brothers suffers a collapse in profitability
An operating profit is more than offset by fair value losses
The accounting rules for agriculture businesses are quite different to other companies. The requirement to recognise fair value movements in biological assets can cause spectacular swings in the numbers.
When it comes to revenue and operating profit, the Crookes Brothers numbers don’t look too terrible. Revenue is up by 1% and operating profit is down 37% but is still a positive R82.5 million. The problem is that fair value losses of R99 million (only slightly lower than last year) smash that number into oblivion, taking the group into a headline loss.
Looking at cashflow is always useful in a situation like this and that doesn’t tell a great story either, with cash generated from operations down by 61% to nearly R29 million.
Unsurprisingly, no interim dividend has been declared.
It’s the end for Etion: a value unlock story of note
Etion will leave the JSE after delivering major returns to recent shareholders
As the next step (but not quite the final one) in the value unlock process that commenced in 2020, Etion will repurchase almost all of the ordinary shares in the company and will then be delisted. The repurchase price is 55.58 cents per share, slightly above the traded price before this announcement. All public shareholders will be able to exit in full, with one shareholder (a related party) remaining to wind up the company.
After the delisting, there will be an “agterskot” payment to shareholders. Much like “lekker,” the Afrikaans language has delivered us a word that is hard to beat. This means a contingency payment to be made at a later date provided certain conditions are met.
It’s not the biggest agterskot in the world, mind you. The value of 55.58 cents per share equates to R313.7 million and the agterskot will be a maximum of R17 million, net of taxes.
Since 2020 when the value unlock was announced, the return is about 8x!
Vukile boasts positive reversions in SA and Spain
The tide seems to be turning for property funds
With its share price up by around 15% this year, Vukile is reporting promising metrics across both major portfolios.
In South Africa, rental reversions swung into the positive which is a big deal, as many funds are still in the red. With trading densities up 7% and net operating income up 4%, the like-for-like valuations increased by 3%.
In Spain, the Castellana portfolio has put in a solid performance with net operating income growth of 7.5% and positive reversions of 4.6%. Remember, this means that new leases are being signed at a rate that is 4.6% higher than the lease being replaced (on average).
Looking at the balance sheet, 87% of group interest-bearing debt is hedged. The loan-to-value has been maintained at 43%.
The interim dividend of 47.32 cents is up 16.8% on the corresponding period. Funds from operations was 80.8 cents per share.
The group outlook is upbeat with a note of caution, with guidance for the full year unchanged.
Little Bites:
Director dealings:
There are only three certainties in life: death, taxes and Des de Beer buying shares in Lighthouse Property (this time worth R660k)
An associate of a non-executive director of Grand Parade Investments has sold shares worth R24.5 million
A trust related to a director of FirstRand sold shares worth R18.3 million to acquire units in a unit trust – this sounds to me like some clever wealth management structuring but I’m not 100% certain.
Tharisa released a trading statement for the year ended September. Fully diluted HEPS is expected to be between 7% and 9% higher than the prior year. If you’re wondering why the trading statement was triggered, it’s because EPS is expected to be between 41% and 44% higher.
The offer by Taylor Maritime Investments for all the shares in Grindrod Shipping was accepted by holders of 73.78% of the maximum potential issued share capital of the company.
Capital & Counties Properties (Capco) and Shaftesbury are in the process of a recommended all-share merger, which means the companies need to give each other permission to pay dividends. Capco’s dividend is 1.7 pence per share, covering the six months to December.
In similar vein to the issues experienced in Nigeria, MTN Ghana is at risk of losing subscribers because of the need to register SIM cards. From 1 December 2022, those who haven’t completed stage 2 of the process (the biometric capture) will be barred from the network. MTN will communicate the impact to the market on 2 December. The group share price shrugged off this news.
In the nine months to September, Buffalo Coal Corp’s revenue jumped by 33% and the loss decreased by 97%. This means that there was still a loss for this period, although the third quarter actually reflects a small profit of R2 million. With a year-to-date loss of under R1.5 million, it looks like the full year just might sneak into a profit. The company has also appointed a new CEO.
The JSE has censured a former director of AEEI and the former CFO of AYO Technology. There are various reasons for the censure, with the overall theme being poor application of financial controls.
Herman Bosman will step down as CEO and financial director of RMB Holdings will effect from 1 December. Brian Roberts (current CEO of RMH Property) will take over as group CEO and Ellen Marais (current company secretary and financial manager) will take the reins as financial director.
City Lodge doesn’t want you to skimp on your summer
Since the end of September, the share price has jumped 39%!
The City Lodge operating update really tugs at the heartstrings in an effort to keep driving demand for travel, reminding us that people are “experiencing life while nurturing relationships which had suffered” during lockdowns. Few would argue that this isn’t true.
International flights are almost at pre-Covid levels and many companies have returned to offices. This is driving demand for domestic leisure travel and City Lodge is loving it, with the food and beverage offering making a difference in a post-Covid world.
Year-to-date occupancies are at 56.5% and some months have even exceeded the equivalent 2019 levels. November occupancies are 60% thus far, with the outlook for December decidedly positive. To add to this happy story, room rates are up 9.5% on the prior year and similar to 2019 levels.
The group has R300 million in debt and a positive bank balance of R226 million.
Sadly, despite operating metrics being back to 2019 levels, the share price may never get back there after having to do highly dilutive equity issues just to settle the B-BBEE structure and shore up the balance sheet during lockdowns:
Invicta posts a sharp jump in earnings
The offshore operations now contribute more than 35% of group profits
For the six months ended September, Invicta managed to grow revenue by 7.2%. That’s good going, but not as impressive as the gross margin performance that saw a 190 basis points expansion to 32.5%. In this environment, any increase in margins is a great result for investors as it demonstrates pricing power in the business.
In many companies, we’ve see pressure on the balance sheet as inflationary issues cause a big jump in working capital. Although Invicta has certainly felt the working capital pressure, an increase in cash generated from operations of just under 3% is also an impressive outcome for shareholders.
As a further driver of shareholder value, the company repurchased 4.4% of its ordinary shares and 5% of its preference shares in the past six months. Net debt to equity is at 23%, which the group is happy with. This implies that there is more room to make attractive capital allocation decisions.
Group HEPS increased by 42.6% and HEPS from continuing operations was 52.3% higher. The net asset value per share increased by 16.8%.
It’s worth noting that these numbers were assisted by the acquisition of KMP on 1 January 2022. With reference to a group revenue number of R3.83 billion, KMP increased revenue in the RPE segment from R198 million to R470 million. That’s a material contribution and continues Invicta’s history of being quite happy to make significant acquisitions.
The goal is to have 50% of group earnings outside of South Africa by 2026. The current contribution is around 35%, so more offshore deals are likely to come in the next few years.
For those who were familiar with Invicta before the group was restructured, segments like “Bearing Man Group” would ring a bell. Those days are over, with a new segmental breakdown in place:
As you can see, the winds of change have certainly blown under CEO Steven Joffe. With results like these, shareholders (like me) aren’t going to complain.
A nutritional circus
Nutritional Holdings never fails to deliver entertainment
With its listing suspended since May 2021 and the company fighting for its survival from liquidation, the end can’t be far away for Nutritional Holdings in one way or another. To add insult to extensive injury, the JSE has now imposed a censure on the company.
The JSE has highlighted examples where the company “failed to comply with several important provisions of the Listings Requirements” – not good, but hardly surprising if you’ve been following this company with your popcorn in one hand.
For example, in February 2021 the company announced that it was disposing of Nutritional Foods. The very next day, it announced that the company will be placed into business rescue instead. Then, in May of the same year, the company announced that the company had not been placed into business rescue. Shareholders should’ve been told immediately, not three months later.
The list goes on.
The JSE found that in the Cannacrypt initial coin offering (an astonishing few words in a row that remind us of how stupid 2021 was), the company made it sound like the coins were backed by Nutritional Holdings as a JSE-listed company. In reality, the coins were being issued by a company that isn’t even an associate of the company, let alone a subsidiary. There are also issues related to the interim financial statements for the six months ended August 2020 and the lack of renewal of a cautionary announcement in 2021. The company has also neglected to provide the JSE with monthly progress reports regarding its suspension.
Short of someone driving to the JSE’s head office and setting the reception area on fire, I’m not sure what more a company can do to deserve to have its listing terminated. Instead, the JSE has imposed a public censure on the company. It feels like far too small a punishment for the reputational damage this company did to the market.
Reunert jumps 7.5% after releasing results
The market (and the FinTwit community) seemed to like what it saw
Thanks to growth in all three segments at Reunert, the segmental operating profit increased by 16%. This was an impressive result off revenue growth of a similar percentage, as it shows that the group was able to maintain its margins in the year ended September.
The year wasn’t without its challenges, with supply chain dynamics and chip supply shortages hurting businesses like Nanoteq, Omnigo and Nashua. This also impacted the cash flows of the group, as investment in working capital was necessary. We are seeing this story play out across so many listed companies.
The pressure further down the income statement from equity-accounted investees (which swung into a loss) is part of why attributable profit only grew by 6% and HEPS by 9%. The final dividend was 8% higher.
Looking deeper, Electrical Engineering grew revenue by 13% and operating profit by 17%. ICT grew revenue by 4% and operating profit by 6%. Applied Electronics pumped out revenue growth of 27% and operating profit growth of 64% in a strong recovery.
The announcement also touches on the attractive renewable energy ecosystem within Reunert, the acquisition of Etion Create for R202 million and the progress made to redeploy funds from Quince into other initiatives.
Standard Bank’s strong momentum continues
The announcement includes those two magic words: positive jaws
Positive jaws has nothing to do with sharks and everything to do with margins. In the banking industry (where I cut my teeth after varsity), jaws refers to the difference between percentage growth in revenue and percentage growth in costs. If revenue is growing faster than costs, you have positive jaws because margins are going up.
Like this: < (get it?)
Dorky finance terms aside, I wrote right at the beginning of 2022 that an environment of inflation and higher rates would be good for banks, at least initially. With the Standard Bank share price up 26.4% this year, that was a good call.
Inflation helps because corporate balance sheets get a larger. A bigger balance sheet gets funded by a mix of debt and equity, so this creates demand for lending by banks. With higher prevailing interest rates, the bank also earns more on each rand that is loaned to corporates.
In the ten months to 31 October, Standard Bank achieved double-digit net interest income growth. Non-interest revenue growth was also strong, thanks to transactional activity, trading revenue and insurance earnings.
Although cost growth was higher than expected, the strong revenue growth plus the group’s initiatives around costs meant that positive jaws was achieved. Yes, margins are higher.
Critically, credit impairment charges were higher vs. the comparable period but the expectation for the full-year credit loss ratio is that it will be in the lower half of the through-the-cycle target range of 70 to 100 basis points. This means that the bank expects to lose between 0.7% and 1% of every rand loaned to clients.
Return on equity is above the cost of equity (15.1%) and is higher than the number achieved in the first six months of the financial year (15.3%). By 2025, the bank is aiming for return on equity of between 17% and 20%.
Zeda will be separately listed from 19 December
The abridged pre-listing statement is now available
Barloworld will be distributing its stake in Zeda to Barloworld shareholders in the next few weeks. Because the company essentially inherits the Barloworld shareholder register, 58.42% of issued shares will be held by public shareholders.
Zeda operates the Avis and Budget brands across South Africa and 10 other sub-Saharan African countries. There’s more than just car rental here, with products including vehicle mobility solutions, fleet management and leasing solutions in addition to the car rental operations that most people would be familiar with.
For example, the leasing business focuses on corporates, SMMEs and public sector entities and the average lease duration is 45 months. There are also 14 Avis retail branches that sell vehicles in the car rental business or leasing business that have been identified for de-fleeting.
The fleet size is 33,000 vehicles across the businesses and the leasing businesses manages an additional 215,000 vehicles. The car rental business has estimated market share of 38% and the full maintenance leasing component of the leasing business has market share of nearly 22%.
With revenue of R7.67 billion for the year ended September and EBITDA of nearly R2.2 billion, the group has managed to emerge from the pandemic in good shape. The lockdowns forced the business to become as efficient as possible, with those learnings likely to benefit investors for years to come.
It will be interesting to see how this business performs on the JSE!
Little Bites:
Director dealings:
A prescribed officer of Impala Platinum has disposed of shares worth just over R1 million.
A director of Spear (not the CEO this time) has bought shares worth R118k for a minor child – it’s always encouraging seeing this.
A director of a subsidiary of Novus sold R41.5k worth of shares at R4.15 and then bought shares worth R4.2k at R3.80 the very next day. I can’t recall ever seeing a director playing the spread like that! To make it worse, no clearance to deal was obtained. I suspect there was an awkward meeting about this.
Huge Group released results for the six months ended August. The company now puts itself forward as an investment holding company with nine portfolio investments, an entirely different accounting regime that is based on fair value movements rather than consolidated profits. The portfolio is valued at R1.54 billion and there is R209 million in interest-bearing debt. The group earned R32.5 million in investment income and R13.7 million in management fees. The positive fair value movement on the portfolio was R53 million. With net asset value per share of R9.39 and a share price of R2.32, the discount to NAV is…huge.
Sibanye-Stillwater has approved the implementation of the Keliber project and has begun construction of the Kokkola lithium hydroxide refinery. The capital expenditure for Keliber has been approved as €588 million, with the refinery as the first step. The project is located in the colourfully-named Central Ostrobothnia region of Finland, one of Europe’s most significant lithium-bearing areas. The financial model suggests a 20% IRR that could increase to 27% if long-term forecast prices for lithium hydroxide by SFA Oxford are accurate. Sibanye holds an 84.96% stake in Keliber.
Regular listeners to the Magic Markets podcast will be familiar with the AnBro team. The Dynamic Compound Portfolio is listing on the JSE on 29 November as a UBS Actively Managed Certificate, which allows investors to gain exposure to the portfolio. You can listen to the podcast about this portfolio at this link (and remember to always do your own research – nothing you read here is financial advice!)
Nictus Limited has a tiny market cap of R33 million. It’s getting even smaller, with the share price closing lower after reporting a headline loss per share of between 1.74 cents and 2.32 cents for the six months ended September.
YeboYethu (Vodacom’s B-BBEE investment scheme) recorded a loss in the six months to September because of the decline in the Vodacom share price. That’s a paper loss. The more important point is that debt is lower by R428.6 million with a further R343 million reduction planned once the dividend from Vodacom is received. An interim dividend of 70 cents per share has been declared.
Visual International Holdings released a trading statement for the six months to August. The headline loss per share has improved by 24.2% but is still a loss of 0.72 cents.
September retail sales data still doesn’t reflect the shopper distress that is reasonably expected in this environment. Chris Gilmour wonders when the bad numbers will come.
It’s becoming increasingly difficult to rationalise what’s happening to retail sales growth, especially in this high interest rate environment. The latest print (September) is admittedly something of a lagging indicator, but nevertheless it is not as yet showing the kind of shopper distress that might reasonably be expected as interest rates rise. And it may just be that when the full impact is finally felt, it will be quick and severe, along the lines so eloquently described by Ernest Hemingway when he went bankrupt.
In “The Sun Also Rises,” Hemingway describes the bankruptcy process as being gradual and then sudden.
Already in the really big-ticket areas of housing and automobiles, there are plenty of examples of distressed sales. And as always happens in economic cycles, the largest areas of consumer outlay take the biggest hits early on.
Retail has thus far proven to be incredibly resilient, even without the benefit of enhanced consumer credit, but that surely can’t last much longer. The recent decision by the SA Reserve Bank’s MPC to hike the repo rate by 75 basis points rather than 50 basis points came as something of a surprise.
All of the narrative from the governor, Lesetja Kganyago, leading up to the MPC meeting on November 24 suggested that interest rates had peaked and that a 50 basis point rise rather than 75 basis points should be expected. Two members of the MPC indicated a preference for a 50 basis points rise rather than 75 basis points. The repo rate is now above the rate prevailing before the start of the pandemic:
It’s becoming quite apparent that the main reason for the continued hiking of interest rates in SA is to ensure that the country keeps attracting flows of foreign money, thereby underpinning the level of the rand, rather than attempting to choke off any locally-induced inflation.
Only Brazil has a higher real bond yield than SA and there are a number of other countries vying for attention in this regard. For as long as SA offers juicy real yields to foreigners, the money will continue to come in. As the US takes the lead in hiking interest rates, expect SA and other countries to do the same.
The difficulty with the StatsSA figures in recent months has been that favourable base effects have often clouded the situation, making retail sales growth appear artificially better than it otherwise might be.
Compounding this conundrum is a host of seemingly good results from many JSE-listed retailers. One retailer in particular, The Foschini Group (TFG), stands out in this regard. It’s taking big market share away from virtually all of its competitors, especially among lower income consumers. Thanks to highly visionary quick response manufacturing capability, TFG is gradually producing more and more product in SA and away from China and the far east. Its acquisitions appear to be better than any other group, even including those of Mr Price, and its excellent performance in Australia is proving to be a natural rand hedge. Even its operations in the UK, which lagged badly thanks to major coronavirus lockdowns in the UK, appears to have turned around.
And yet, the TFG share price is still languishing at around 50% of its peak from over four years ago.
The September retail sales figures threw up a veritable potpourri of data, much of which was difficult to rationalise. This was especially true of the food retail categories, one of which showed a large slump in sales, admittedly from a very high base in July. Clothing, footwear, textiles and leather (CFTL) continues to show strength, notwithstanding that this is definitely a discretionary category. However, both CFTL and furniture & household (F&H) are showing signs that they may be running out of steam.
Home improvement or DIY, as proxied by StatsSA’s hardware, paint & glass category, continues its dismal decline, deep in negative territory. For a brief period in July, it appeared as if some sort of recovery was underway but that was merely the base effect of July 2021 making itself felt.
We need to watch retail sales growth over the next few months, especially during the critically-important months of November (Black Friday) and December (Christmas). With the consumer coming under further sustained pressure, it’s difficult to see how these periods can be anything other than muted.
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.
Welcome to Ghost Wrap. It’s fast. It’s fun. It’s informative.
In this week’s episode of Ghost Wrap, we cover:
RFG Holdings’ peachy year, which included the acquisition of Today Pie
The grand scale on which Prosus incinerates cash from Tencent
A reminder of how tough the poultry industry is, courtest of Quantum Foods
Fortress REIT’s collision course with an unpleasant place in the history books
Mr Price’s market share pressures, particularly in the Homeware segment
Telkom’s skewed perception of what “next generation” products are
Pepkor’s incredible cellphone market share and adventure in South America
Bidcorp’s remarkable numbers at a time when its clients are under loads of pressure
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.
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